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Hollywood faces an “existential crisis”

Exhibitors and Hollywood studios gather in Vegas at CinemaCon

Every March, Hollywood studio bosses pack their marketing executives and stars into their private jets and head to Vegas to strut their wares before cinema owners, who come from all over the world to attend their largest annual gathering, CinemaCon.  This year, the studios offered more superheroes, dazzling visuals and deafening sounds in the movie clips that they unspooled at the Caesar Palace hotel before their eager audience, who responded with applause as loud as the explosive action on the colosseum’s giant screen.

Hollywood certainly knows how to project an image of success, optimism and glitz. The studio bosses boasted about their box office revenue growth last year and promised more to come next year. Not only did they wow the exhibitors with the enormous size of their new pictures, they mesmerised them with their glittering stars, who came to introduce their movies with a touch of glamour. But behind this facade of flawless perfection, Hollywood is embroiled in an existential crisis.

The exhibitors vs webstreaming:

While indeed the domestic box office hit a record $11 billion in 2016, and the global box office reached a new high-water mark of $38.6 billion, this growth was actually driven by higher ticket prices and inflation rather than more admissions. In fact, the number of people going to cinemas in the U.S. and Canada is still below the 1.5 billion admissions in 2004. Younger audiences, who used to fuel the box office, have shunned the big screen for their smartphones, with which they watch whatever they want whenever they want, and share the experience with their friends via social media or instant messaging rather than gather in packs inside a cinema theatre. Evidently, the small screen is where the money is and where Hollywood wants to be but it can’t!

The studios are tied to a 90-day release window between a movie’s opening and its availability on other platforms, including web streaming, for theatre owners. And since 2011, they have been trying to shrink this window, but, rather understandably, theatre owners have been hostile to the idea, fearing such a move would do to their business what iTune did to music shops- namely render it obsolete. Studios who dare to challenge them risk losing a theatrical release for their movies. With that in mind, every studio boss declared his/her loyalty and expressed their gratitude to the exhibitors before proceeding with their studio presentation.  Sony Pictures’ boss, Tom Rothman, went even further, cursing their nemesis, Netflix, the webstreaming giant that has refused to adhere to the 90-day window, and consequently its movies have been banned from theatres. Needless to say, Rothman received a rapturous applause.

Studio bosses, however, are not the moguls who used to run Hollywood anymore; they answer to bigger bosses, who run massive networks of cable, TV, and other entertainment or electronic conglomerates, such as Comcast, Disney and Sony. In fact, the studios are often the least profitable branch in these networks, so they are under immense pressure to produce a profit. To do so, they have to tap into webstreaming without upsetting the exhibitors.

A bit of History:

In the 1950’s, Hollywood faced a similar existential crisis when Television took off. The fear was that people wouldn’t bother to make the journey to cinema theatres and pay a fee for visual entertainment, when they could get it for free in the comfort of their living rooms. To stem the decline in cinema theaters’ admissions, the studios utilized a new technology, cinemascope, which doubled the size of the picture on the screen, added color and more sound tracks, in order to lure people out of their homes, offering bigger and more dazzling biblical epics and musical extravaganzas, such as Spartacus, Lawrence of Arabia and Singing in the Rain. Soon TV turned into a source of income for Hollywood studio, when they started syndicating their movies to TV networks, who were looking for content to fill their nightly slates.

The emergence of VHS in the early 80s and then DVD, which rivaled the cinema’s picture and sound quality, in the mid 90’s posed new challenges for Hollywood. Theatre admissions declined and piracy became a new threat. The studios fought back with legal actions and encryption technology. Eventually, the perceived threat turned into a lucrative profit. Within a few years, DVD sales revenue surpassed the box office receipts, and, in many cases, was the only source of income for movies that didn’t get theatrical release.

The DVD party didn’t last long.  A decade ago, the advent of Video on Demand (VOD) and Webstreaming started eating out DVD profits, gradually wiping it out. The studios watched impotently as nearly half their revenue, which came from DVD sales, evaporated before their eyes. Meanwhile, the box office figures in North America remained stagnant.

The international Market:

Relief came from overseas. The meteoric expansion of new markets, like Russia and China, elevated foreign box office receipts from 20% in the 1980’s to 70% in the 2010’s of the global gross. But international audiences have an expensive taste; they are chiefly attracted to big blockbusters with thunderous special effects, which has led to soaring production and marketing costs, with an average of $150-300 million a project.

Eager to tap into the burgeoning international markets, particularly China, the studios abandoned mid-budget dramas and comedies, which had dominated their slates in the 80s and 90s, and veered into the world of superhero franchises and animated fantasies, rebooting the old and sequelizing the new, if it turned a hit. “We do only projects with over $100 million budget,” a studio boss told me in 2012, when I pitched a $30 million project to him. Then he went on to explain that even if my film became a hit, it wouldn’t  yield more than a few $10s of millions, but the potential profit of a $200 million project would be  $100s of millions. The studio needs only one or two of such hits a year in order to turn a profit.

But soon these big monster movies began cannibalizing each other in the box office, causing massive losses. Nevertheless, the few that survived the slaughter, often thanks to the Chinese market, kept the studios afloat. But even the Chinese market can’t be relied on anymore: last year, it grew just under 4%, a steep drop-off after years of increasing at an average of 35% annually.

Lack of funds and access to the Chinese market:

With studios’ losses mounting, Hollywood’s traditional source of capital, including Hedge Funds and Wall Street investors, went looking for a more promising investment, and found it in Silicon Valley, where Tech companies have been offering and providing great fortune for their shareholders. Furthermore, some of them, such as Netflix, Amazon and Hulu, are attracting Hollywood’s best talent to their projects, produce high quality products and have their own platforms to stream them.

Once again, relief came from China. Since 2012, Chinese companies has poured billions of dollars into Hollywood production companies and studios, either in purchasing them or investing in their projects. The Chinese investments saved some Hollywood companies from total collapse and enabled others to fill their slates with more giant blockbusters, while the collaboration deals opened the gates of the world’s second largest market, adding more needed funds into the studios’ dwindling coffers.

But good things don’t last long in Hollywood. For the last few months, Chinese money has dried out. Concerned about the flow of capital out of their their country, Chinese authorities have put new restrictions on foreign investments, forcing their local companies to withdraw from lucrative deals in Hollywood. Last month, Dalian Wanda couldn’t close the $1 billion purchase of Dick Clark Productions, and currently the $1 billion slate-financing pact between Paramount, and Huanhua Media and Shanghai Film Group is on hold.

Nonetheless, it seems that salvation may come again from China. John Zeng, president and board director at Wanda Cinemas, told the CinemaCon audience that box office revenue in the country would continue to rise, fueled by new theatre construction and a vast audience of young, movie-loving consumers, predicting an annual growth at a rate of between 15% and 20%. Apparently, while only 47% of the youth buy movies tickets in the US, 71% of the same demographic drive ticket sales in China. But he warned that tastes in China differ from those in the US, noting that Chinese audiences are particularly interested in special-effects-heavy action films, rather than the animated movies that find a great success in North America.

This sounds good, but Hollywood’s access to China is still limited. A quota of 34 foreign film releases a year is still enforced there and their producers receive only 25% of the profit, instead of the 50% in the US. While these restrictions are due for renegotiation, the prospect for a better deal is not promising, given the arrival of the Donald Trump administration, which has been making hostile gestures toward China and threatening it with import tariffs.

Talent moving over to Tech companies:

To complicate matters further, Hollywood’s great directors are charging the studios with destroying the art of cinema, by shunning human dramas and replacing them with “theme park” blockbusters in order to cater to the taste of teenagers in China. Many have moved to rich tech companies that can afford making the risky “cinematic” movies and endow them with creative freedom. Among the studios’ harshest critics is legendary director Martin Scorsese, who is currently making his $100 million “The Irishman,” starring Al Pacino and Robert De Niro, at Netflix.

Unlike Hollywood studios, Netflix is unencumbered by financing and distributing deals with third parties. It reaches 170 countries via its online streaming platform and is able to tailor its films to its nearly 100 million subscribers’ tastes via intelligent algorithms, which has enabled it to invest in a wide range of movies, instead of being locked in action-driven blockbusters.

The clock is ticking for the studios:

With all that in mind, the studios have become so desperate to tap into the webstreaming revenue, they have offered the exhibitors a share in whatever they make from premium VOD rentals during the 90-day window. A premium VOD rental will also be more expensive than a  theatre ticket, ranging between $30-$50. But for exhibitors it’s not merely about tickets, it’s also about selling popcorn and sodas. The debate is whether premium VOD becomes additive or it cannibalizes the exhibition business?

“98% of the box office intake is collected in the first 17 days of release, so they are not going to be losing much after that,” Jeffrey Katzenberg, the former DreamWorks animation studios chief, told Variety last year.  But even the studios can’t agree among themselves on the size of the release-to-streaming window and rental cost. Warners, for instance, is suggesting a 17-day window/$50 rental proposal, while Fox is leaning towards 30-45-day window/$30 rental. Disney, which has been dominating the box office over the last few years, is nonchalant about the whole issue.

The parties left Vegas without an agreement, knowing that the clock is ticking for the studios. If they don’t stop the the hemorrhaging losses and fail to justify their commercial existence, they risk being ultimately swallowed by the tech giants, such as Netflix, Apple and Amazon. If that happens, the exhibitors won’t have much leeway against those superhero companies, and will end up relenting to whatever they dictate to them.

 

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