The Movie Business Book

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Introduction

by Jason E. Squire

This book is all about the business side of movies. Spawned over a century ago, motion pictures matured in one generation into a complex mixture of art and commerce, capturing the imaginations of worldwide audiences and having a profound impact on behavior, culture, politics and economics.

At its simplest, the feature film is the arranging of light images to win hearts in dark rooms. At its most complex, it is a massive venture of global commerce, a vast creative enterprise requiring the logistical discipline of the military, the financial forecasting of the Federal Reserve, and the gambling instinct of wildcat oil drillers, all harnessed in private hands on behalf of the telling of a story. The profit motive is at work here, but the formula that attracts audiences is as speculative, uncertain and elusive as can be.

To the new reader, a warm welcome.

To the returning reader, there have been profound changes in the movie business since our last time together.

The theatrical market has shifted from a profit center to a loss leader.

The industry is in transition from analog to digital. This changeover is complete in postproduction. A growing number of movies are also being shot digitally, and digital projection can be found in major cities while distributors and theatre owners continue to debate its value.

The biggest change since our last visit is that movies are no longer stand-alone amusements. Rather, they are an important piece in a complex mosaic of marketing and reincarnations into a variety of products, each using the movie's title or brand. The ideal product mix based on one project would flow through various divisions of one of the global entertainment companies that today control the studios: through movies, home video, television, books, music, video games, toys and other consumer products. On a more realistic basis, every movie is a prototype that of course does not lend itself to such crossover. But that won't stop efforts at synergy, which will succeed or fail due to the whims of the marketplace. At its core, any movie investment is speculative, high risk, and at the mercy of customers.

The simple choice of going to the movies in theatres faces more competition than ever, because it involves leaving home. Think about all the alternative recreational choices out of the house: sports (playing or watching), exercise, concerts, shopping, dining, museums, sightseeing or just plain lounging, among others. Now consider all the choices that keep customers at home: the Internet (for surfing, chatting or commerce), video games, studying (for business or school), eating, watching TV or DVDs, reading, listening to music or just "a quiet evening at home." With these competing pressures in place when targeted audience members decide what to do some evening, it's no wonder that movie marketing costs — spent to induce one specific choice out of a cluttered marketplace — are growing exponentially.

A related issue is time. Time is finite, but the alternatives to fill it are infinite. A movie usually takes two hours of one's time. With competing recreational choices inside or outside the home often delivering similar value in less time (or in smaller, more controllable portions), movies are under more pressure than ever before.

A motion picture is an extremely perishable commodity. It lives and has value as long as it is on people's minds or in their frame of reference. The public's perception of an average movie's value decreases as access to it increases and as it ages. A successful movie can remain in theatrical release for six months or more, while a failure can be gone from theatre screens in two weekends, as an impatient audience goes on to the "next big thing." After the theatrical run, movies are sold as home videos, producing revenue that can meet or exceed their box office grosses. Later, movies enjoy rejuvenated value each time they are sold in libraries of product, reaching new audiences in other countries.

There is worldwide interest in opening weekend box office grosses, much like the tracking of a weekly horse race. (What product outside popular culture trumpets weekly sales figures to the press?) But now and then, savvy reporters claim some numbers are bogus. Moviegoers enjoy following these races because of their emotional investment in movies they've seen and because of the high stakes involved. Industry trackers pay special attention to the second weekend's percent change and to ultimate box office performance because those numbers might foreshadow the accumulated commercial value of each title. In addition, some after-theatrical deals, such as for television licensing, are often pegged at a percentage of box office gross.

The life cycle of a motion picture consists of orderly revenue streams built into calculated time frames or "windows." Theatrical exhibition is first, but not necessarily the most lucrative; home video has that honor for the most popular titles. The theatrical marketing campaign is expensive because it conveys a movie's image, which becomes linked to the product throughout its exploitable life around the world. In the United States, early weeks of a theatrical run will call for an after-overhead formula of some 90% of box office gross returned to the distributor, while later weeks, if the picture has staying power ("legs"), will find the exhibitor receiving a growing share of revenue as the product ages.

The next major revenue stream, some four to six months after theatrical, is home video, once the movie has disappeared from neighborhood theatres. The distributor's share can be substantial in this market, and the product can enjoy a long shelf life, having made the leap from theatres into the home, from being licensed by distributors and experienced by customers to being sold by distributors and owned by customers.

The picture ages further before it is available to the millions of subscribers of home pay-cable or satellite services, the next big revenue stream. Revenue to the distributor from this market is based on a formula geared to subscriber fees.

Another contractual time frame generally passes before the movie can be shown on network broadcast television; or on a basic cable network; or on an ad hoc broadcast network of TV stations created to show a library of, say, one studio's recent films; or in a group of films sold in a TV syndication package to a syndicate of local stations for a certain number of runs over a period of years. The picture has decreased in value because of its exposure, and revenue is turned over to the copyright owners based on negotiated payments triggered by each run.

Pictures originating as made-for-network (broadcast, cable or pay) television movies are subsequently licensed via domestic television syndication as further product for local TV station libraries, and are also sold, usually in packages, to different countries. Movies originating as made-for-video product premiere in video stores and can enjoy lucrative life spans in subsequent revenue streams all over the world.

Markets outside the United States follow this same general pattern; the global entertainment business is based on the American model. Each country's rollout is dictated by territorial owners of distribution rights and the sophistication of home technology. Naturally, some pictures will experiment with the pattern, shifting sequence because of specific deals, or perhaps returning to certain formats as revivals because of their uniqueness, depending on what the market will bear. For instance, in the U.S., The Rocky Horror Picture Show pioneered the concept of weekend midnight showings and still enjoys a cult following; and a version of A Christmas Carol can always be found on a local TV station around that holiday.

Like any business, the motion picture business exists to make money. Comparisons can be loosely made to other industries: production encompasses research, development and manufacturing; while distribution can be compared to wholesaling and exhibition to retailing. But there the comparisons end, because the public's demand and use of entertainment products such as motion pictures are unlike the demand and use of any other product. In no other business is a single product fully created at an investment of tens of millions of dollars, with no real assurance that the public will buy it. In no other business does the public "use" the product and then take away with them (as Samuel Marx observed in his book Mayer and Thalberg) merely the memory of it. In the truest sense, it's an industry based on dreams, and the service that is rendered is entertainment, leaving — at its best — an afterglow of warm emotions and recollections.

A note about "business." The very word puts some people off. When applied to movies, it once conjured up conflicts pitting West Coast against East Coast, the creative community against the business community, art against commerce. That's all changed. The motion picture professional learns early to mix the creative and business sense out of self-defense.

There continues to be no magic formula for a commercial movie, but patterns emerge, emulating prior successes. Buzzwords come and go. When franchises are in vogue, an increasing number of branded sequels results, all containing a form of insurance that audiences will want to return to the familiar. Branding is relatively new to the movie business, derived from the consumer products industry, and box office results encourage the trend. But there are still edgy movies being made, especially in the independent arena: The Blair Witch Project, Memento. And in the studio arena: Three Kings, Adaptation.

In earlier days, as the industry grew, studios were vertically integrated production/distribution/exhibition factories. By the late 1940s, the U.S. Department of Justice concluded that this structure was a monopolistic restraint of trade, and forced divorcement of exhibition in order to enhance competition. This landmark divestiture of theatres by studios encouraged the growth of independent exhibitors. Forty years later, legal overseers deemed that the climate had changed, and permitted certain studios to buy or invest in theatre chains.

The movie industry defies strict analysis from a traditional business point of view because of the uncertainties involved in making and marketing the product. What are the hallmarks of the movie business? That movies are a collaborative medium; every picturemaking experience is different; there are no hard and fast rules; financing is an enormous crapshoot; an entire investment is made before anyone knows if the product is marketable; many essential choices spring from intuitive leaps; most successful practitioners possess a personal mix of creative and business sense; judgments frequently rely on relationships and personalities; decisions are often made with a long lead time, making it harder to anticipate audience trends; and as far as profits are concerned, the sky's the limit.

It is a cyclical industry, difficult to chart, rooted in creativity and intuition, involving narcissism and greed, capable of dismal losses and euphoric profits, engaged in an ongoing seduction of the paying audience. The single universally acknowledged marketing tool — favorable audience word of mouth — cannot be controlled. As distribution executive Peter Myers once noted, it is a supremely democratic form of entertainment, where customers vote for one movie over another by simply putting down hard cash.

The high risk inherent in the movie business points to why conservative capital has historically shied away from investing, although control of motion picture companies has always been attractive to a broad spectrum of players. Industry observers insist that "It's not a business," as a shorthand for explaining its unpredictable elements, while movies continue to attract creative entrepreneurs and artists who are devoted to this most valuable and influential national resource and export.

At its core, the industry can be reduced to competing for the work of creators in a limited talent pool that shifts based on audience acceptance. The list of producers, directors, writers, actors and others who have earned an industry following is very exclusive. Energies are intensely spent daily to compete for this limited talent pool and to create new entries into it. Movies struggle in a cluttered marketplace for the attention of targeted, youthful audience members whose own attention spans are contracting. And the stakes are higher than ever.

Some history: The 1970s witnessed a shift from regional television advertising to national network buys, ushering in the national release pattern. That decade also witnessed a redefining of box office potential, with breakout successes such as Jaws and Star Wars underscoring the newly discovered value of branded merchandising, book publishing and recorded music sales.

The 1980s were the boom years of home video and cable, and their increasing revenue streams were used as cushions for higher budgets. Studio distributors built divisions devoted to home video to organize something they had never done before: selling movies directly to customers who could actually take them home. Those distributors that had music divisions used them as a model, since both home video and music involve selling packaged goods via retailers. The decade also witnessed continual escalations in costs for movie production and marketing.

The 1990s saw movie companies absorbed by vast media conglomerates taking a global view. Titanic became the highest-grossing picture worldwide while serving as a poor business model, going so far over budget that the initiating studio was forced to take on a rival studio partner. International export markets generated increasing revenue, and the most popular English-language movies were making more money outside the United States than inside. At the same time, a surge of acquisitions resulted in half of American studio ownership resting in overseas hands.

After the turn of the century, a new era of uncertainty emerged. Entrenched entertainment companies were staring into the future represented by the Internet, a nirvana promising direct-to-customer commerce. But the movie industry's exploration of this new, interactive pipeline into the home was slowed by the serious threat of piracy. As of this writing, it's too early to tell whether piracy can be circumvented when people pay for movies on the Web, or to what extent a new revenue stream can securely develop, but it sure is exciting to follow the progress of this new frontier.

The most influential of these changes can be broken down in chronological order: network TV advertising, Star Wars, home video, the continuing cost spirals, globalization and the Internet.

Through the 1960s, motion pictures were released regionally and advertised with a mixture of local newspaper and local television campaigns. Then, a distribution company named Sunn Classics began experimenting with national network television advertising for the regional release of family pictures. That move to saturation-level national TV advertising indirectly led to the escalating costs of today's movies.

When studios recognized the cost-efficiency of network television buys, that expenditure forced the simultaneous blanket national release of certain pictures. Over the years, with the advent of theatre multiplexes, print runs escalated from 500 to 8,000 or more for the most commercial product to maximize audience access, generate heat, make the most money in the shortest period of time (reducing interest costs on capital needed for the production and marketing of the product) and discourage piracy. With more wide releases, the die was cast, and advertising and print costs would continue to rise.

Massive studio releases leave less room for independent distributors, whose aggressive, niche-marketing approach to specialized films are the last link to the kind of grassroots, hands-on distribution that can be traced back to the beginnings of the industry. In today's movie business, these independents compete with studio-owned indie-style distribution labels, making it even more difficult to secure and maintain screens, and their story is also represented in the pages of this book.

Star Wars rewrote the economics of the movie business. This landmark picture, released by Twentieth Century Fox in 1977, not only broke through the upper limits of grossing potential via repeat business, but also redefined worldwide income in book, music and merchandising sales. When the dust cleared, brand-new businesses had been established that changed the profile of movie economics by generating substantial revenue in other media. With Star Wars, product merchandising went through the roof. The success of a variety of movie-related books solidified the publishing offshoot of movie tie-ins; and soundtrack albums sales came into their own, proving that an orchestral score could shoot to the top of the charts. Other well-known franchises would follow, but at the time there was nothing — nothing — like the economic impact of Star Wars.

Once upon a time, you couldn't own movies, and if you were lucky enough to see them on TV, you couldn't decide when. This stemmed from the long-held industry sensitivity over product ownership. Movies were licensed, never sold, until "the home-video revolution." That term has become a cliche, but the impact of home video on the movie business was nothing short of revolutionary. It has expanded the movie-watching aesthetic, added new household appliances — the VCR and the DVD player, among others — to popular culture, and changed in-home viewing from passive to active. In less than ten years, home video grew from an infant market to a serious revenue stream. Studios at first resisted this new technology, much as they had resisted television. They waited on the sidelines as young upstart companies begin reaping enormous sums before testing the waters themselves.

Today, every studio has a home-video division, and every household with a video camera and computer is an instant studio. Since filmmaking is a natural form of expression, anyone can learn its aesthetics by simply shooting and viewing the results. When instinctive corrections are made in the next try, the language of film is being adopted. On household screens, personal home movies have become interchangeable with major motion pictures. Relatives and friends are seen on the same screen as movie stars.

Feature films have never been more accessible. Home video has changed people's moviegoing habits and increased the numbers of movies we see. The question is no longer whether to see a movie, but whether to leave the house to see one.

For distributors, the home-video numbers are enormous. A turning point occurred in 2000 when Universal's hit The Mummy grossed more in its first week of U.S. home-video release than in its first week in theatrical. This pattern continues for the most popular movies, with home video outgrossing theatrical.

Since the 1980s, a dual cost spiral has evolved — the upward trajectory of production budgets and marketing costs. Increased production costs were being rationalized to allow for the shooting time needed for the kind of complicated visual effects audiences were responding to. Another reason was to pay the higher salaries negotiated for certain key artists by their agents, who had taken on a proprietary role in dealmaking. Increased marketing costs were being rationalized as benefiting markets that followed theatrical release, especially home video.

The other, more seductive culprit was home video itself, with ever-increasing revenue promising to offset a significant percentage of negative cost. This gave a false sense of security to movie executives who were approving higher budgets in light of a seemingly ever-expanding cushion. But by the end of the 1980s, home video values had stopped growing, having stabilized into a mature market. In contrast, studio picture budgets continued to rise at alarming rates. The press would report annual market-share statistics, accompanied by studio bragging rights, with little regard to the true measure of financial success, which is profitability. Tension between market share and profitability continues to this day.

By 1990, high-risk, high-reward picturemaking was supposedly warranted in light of the potential global return from theatrical, home video and other revenue streams. Meanwhile, agents continued to achieve more money for their clients, while the audience hungered for ever more impressive filmmaking. Once certain levels of artist compensation were reached (gross multiples instead of net, for example), there was no turning back.

Today, outlays for mainstream studio product, whose mass audience expects "tentpoles" of entertainment during the summer and winter holidays, continue to escalate. Shooting days are more costly; advertising is more costly; mistakes are more costly. It's more of a crapshoot than ever, at a table restricted to high rollers. Strategies to reduce expenditures inevitably follow (some are expressed within the pages of this book), but short-term solutions have found movie companies either restructuring, merging or being purchased by larger international parents to achieve financial security. Costs simply can't continue to rise at their current rate. It's a continual spiral, with management hoping that no implosion occurs on its watch.

By the beginning of the new century, vast media empires, intent on delivering content in any new method that technology and customer convenience would allow, had bought studio distributors and their valuable movie libraries. Entertainment, like most industries, had gone global. For their part, the studios were looking for deeper-pocketed parents to help them survive lean periods. News Corporation had bought Fox; Sony had bought Columbia; Viacom had bought Paramount (and later CBS); AOL was merging with Time Warner; Ted Turner had bought New Line, which became part of AOL Time Warner; and soon Vivendi would take over Universal. Then, Time Warner dropped "AOL" from its name, and General Electric's NBC merged with Vivendi Universal to become NBC Universal. Only Disney remained its own master, while buying Miramax and ABC. And these relationships will no doubt shift in the near term.

Most parent companies came from successes in other businesses. For example, Sony was known for its primacy in consumer electronics, News Corporation for newspaper and magazine publishing. A visit to the corporate Web sites of Walt Disney, Viacom or Time Warner shows how active they are in nonmovie, entertainment-related businesses. This is increasingly essential for any player to offset cash-flow uncertainty, the between-hits periods that are the downside of the movie business. But with each conglomerate takeover, motion pictures play a smaller and smaller role in relation to other sources of revenue. Top movie executives, who would have been company owners a generation ago, are middle managers of global media empires today.

Actually, the movie business has always been an international business. The pantomime of silent films was a universal vocabulary easily exported with title cards conforming to the local language. But the coming of sound created dialogue barriers that, along with issues of politics and economics, curtailed the growing film industries until after World War II. Then, a flourishing of artistic expression in countries including those in western Europe and Japan — coupled with tourism and the natural curiosity that goes with it — created a cultural appetite that led to the vibrant business of importing and exporting motion pictures and later television programming.

In the United States, the studios were fully financing pictures and distributing them worldwide. But in the 1960s and 1970s, in a new global approach, entrepreneurs such as Joseph E. Levine and Dino De Laurentiis raised money by combining financing from different countries, in exchange for distribution rights divided among those countries. Today, American studios have taken on partners to share increasing risk. These partners are often entrepreneurs who have bargained with territorial distributors to bring equity financing to the table, offsetting half of a studio's risk on selected movies in exchange for distribution rights in those same territories.

Around the world, countries support movie industries whose product roughly divide into three types. The first is domestic, which simply doesn't travel. The second, suitable for export because of its content and style, is made available through sales organizations to a global market in a variety of formats. The third is the high-priced, mass-market English-language movie often laden with stars, crafted as a global entertainment.

The system of buying and selling movies for import and export is based on supply and demand. Variables such as currency fluctuation, government regulation, frozen funds, local taste, censorship and piracy come into play. The highlights of this commerce are film festivals and selling markets worldwide.

The global industry will expand as countries stabilize politically. A popular entertainment industry can develop and thrive only within a democratic society with a large middle class. After all, leisure-time purchases are made from discretionary income — not money used to pay for essentials — by members of a solid middle class who have embraced entertainment as part of their recreational lifestyle.

Although issues of market potential, investment regulation, film content and audience taste vary around the world, the basic business skills applied to commercial moviemaking remain the same. In developing a screenplay, action may be rewritten to conform to budget; in dealmaking, all parties must be protected; in securing funds, ingenuity prevails; in production, creativity is influenced by pressures of time and money; in distribution, imaginative selling is required; and in exhibition, the anxiety of anticipating public response is universal. Because the product requires the spending of huge amounts of money, it is up to lawyers, accountants and agents to apply formulas and intuition to reduce odds and construct frameworks of responsibility and recourse on behalf of financiers and creators.

The World Wide Web represents the gold ring of commerce, the ability to reach customers directly in their homes on a global basis. In a single decade, people have moved from computer novices to sophisticated Web surfers and online purchasers. Most computer owners can recall an information epiphany, when a fact or outcome could be learned immediately on the Web, or an e-commerce epiphany, whereby a hard-to-find product was easily purchased without leaving home.

The movie industry is on the verge of translating this ease of access and use to movies. But the music industry's experience of customers downloading music in what amounted to piracy was such a financial disaster for the music business that it forced change in its business model. How will the Internet affect movies? Stay tuned.

We are in an era of media transition, with business models transforming.

In music, the traditional business model is being replaced by a Web-driven consumer revolution of downloading and file sharing. The industry response has been slow but encouraging, with the creation of value-added CDs, for example, offering the customer perks unavailable through file sharing.

In television, broadcast networks are on the decline, with cable networks emerging and growing in ratings, shifting emphasis from broadcasting to narrowcasting.

Advertising, that great machine that feeds on media, is also in transition. For example, television advertising no longer delivers reliable consumer impressions due to time-shifting on home video systems.

And in motion pictures, costs simply can't continue to rise as they have been.

Out of these challenging times can come innovative relationships between media and customers. With the Internet as the wild west, it will be exciting to watch players gamble with new concepts in the ongoing adventure that is mass entertainment.

In the time between the last edition and this one, as I continued teaching movie business at the USC School of Cinema-Television, it became clear that there was a broader way to teach the field, because movies were no longer stand-alone enterprises. Rather, movies as product are linked to other entertainment products, from music to theme parks, consistent with the expansion of media companies.

My goal is to use this edition as a platform to encourage academic colleagues to group their instruction of consumer media together under a horizon of "entertainment studies." Movies, TV, home video and interactive games should be studied together with recorded music, publishing, toys, radio, theatre, theme parks, concerts and sports. This will equip undergraduates with the background and tools to compete in an evolving industry where the lines between these products increasingly blur. After all, it's likely that their careers will span a full spectrum of products, and they must be prepared for the crossover. Examples of this expanded horizon can be found sprinkled throughout the book.

This idea was crystallized in my article for The New York Times Sunday Money & Business section on April 19, 1998, entitled "What's Your Major? Entertainment Studies." How pleasant it was to hear from students, professors and industry executives around the country who either hoped for such a curriculum, or were planning a class to reflect this approach or were already offering one.

Using the movie business as a template to study how money is arranged for, spent, protected, and returned in a creative industry is at the heart of this third edition Movie Business Book. With the same enthusiasm as anyone discovering this material for the first time, it is a pleasure to present it to the reader.

Copyright © 1983, 1992, 2004 by Jason E. Squire

the reader.