posted 08-08-2003 10:05 PM                    

I came across this article while browsing news stories for Cinematour. It's everything we all already knew, but what the heck.

This is my favorite line in this story: "Of course, making interesting films might be a solution, but that's only a minor determinant."

(Really Long Article) From Oligopoly Watch:

quote:

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Industry brief: Movies

The movie industry as industry is now followed by the general public almost as closely as fans follow the business of professional sports. More and more the daily newspaper entertainment section reads like Variety or Hollywood Reporter, with reports on upcoming projects, financial returns, "bankability" of various stars, and changes in management at the big studios. The weekly film grosses stand beside the Major League Baseball standings and the New York Stock Exchange listings as numbers to keep tabs on. These haven't overshadowed the usual news of Hollywood divorces, love affairs, and drug busts, but they are taking up a bigger part of newspaper gossip columns, television shows (like Entertainment Tonight) and magazines (like Entertainment Weekly), The unending supply of Adam Sandler comedies, gross-out farces, and Schwarzenegger shoot-em-ups pales in comparison with the real melodrama, that of the business behind. the scenes.

The movie industry is like the other oligopolies we have look at. The pace of change is accelerating. New, often hidden, forces are putting pressure on every aspect. The existing oligopoly face a bigger gamble every year. But it is possible to track some of those forces; applying the ideas of shelf life, shelf space and mind space can help define the forces behind most Hollywood headlines.

There are several major trends in the industry that we will cover later.

1. Movies now have three lives: theater, video, broadcast
The shelf life of movies in theatrical releases seems to be getting shorter and shorter. If you want to see movies at the cineplex, you'd better go there in the first or second week, Unless it's a blockbuster, it may not be around by the time you have read the reviews, asked your friends, and arranged for a babysitter. Any theatrical run of over six weeks is unusual.

But this short theatrical shelf life is extended by several afterlives, first as videos to rent or buy (VCR or now DVD), then as TV programs first narrowcast (on pay-per-view, on airplanes, on cable) then broadcast (first on HBO and Cinemax, then on other networks), and, to a growing extent, as downloadables on the Web.. While these after-markets were once incidental to the fiscal health of a movie studio, they now have become a central part of the finance plans of every film. Because of these aftermarkets, all films have now, in theory, an indefinite shelf life. This factor is changing the way movies are made, distributed, and sold.

2. International markets are as important as domestic
Another way of extending shelf life is international release. Increasingly, studios are counting on the U.S, market to simply break even with production costs. They hope to make the real money in the international distribution rights. The global distribution is getting stronger rapidly - with the enormous Asian markets just starting to open up. Over the past decade, more and more cineplexes are being built in more and more countries. The international factor, once just icing on the financial cake; now it fundamental to the planning and making of most Hollywood movies.

As the US overseas movie market expands, the opposite is not happening. If anything, fewer foreign films are shown in the USA than ever, and even fewer have any serious financial success.

3. The blockbuster mentality rules.
The cost of shelf space in the movie industry is so high that there is littleroom for modest hits. In our winner-take-all society, you either a hit or a bomb. Around 500 commercial films are released each year in the United States, 200 of them as major studio releases. The cost of gaining mind space for any one of them is so expensive that small films rarely return the investment - and it's getting worse. On average, only one new film can be a hit each week. That means that 150 of the major studio releases will fall short of hitstatus.

An average major studio Hollywood film costs between $50-75 million to make. It costs between $30-50 million to market. Most films that make less than $100 million dollars within a year from release are failures, and many are. An increasing number of films, like Pearl Harbor (2001) and The Matrix Reloaded (2004), have to make well over $200 million to break even. At that level of risk, though, the payoff can be enormous. The example of Titanic (1999) has wiped out the memory of many expensive bombs.

From a studio's point of view, it's better to swing for the fences than try to get singles and stolen bases, even if you strike out most of the time. The ideal is getting global mindspace, as Titanic did, to drive the after-markets. These have a magnifying effect on the few big winners, making them all the more critical to a studio's fortunes.

4. Turmoil rules the industry - concentration, near bankruptcy, mergers and acquisitions
These high stakes, causing the fiscal hysteria of the movie industry, has meant that most companies are teetering on the brink. A few expensive bombs in a row can nearly wipe out a studio The few video distribution firms (the ones that deliver VCRs and DVDs to the retail market) are getting squeezed out. Video rental stores are in trouble. Six of the top ten movie chains decalred bankruptcy in 2000. Vivendi is trying to cut its losses from Universal Studios by selling it.

For these reasons, all parts of the industry are tending toward tightly controlled oligopolies run by large international media companies. Their objective is to build a structure that minimizes risk, one that, within the variations in public taste, can help deliver steady profits. Of course, making interesting films might be a solution, but that's only a minor determinant. The key is controlling shelf space and finding ways to gain mind space for a global audience.

The studio oligopoly
Basically, the top eight Hollywood studios that control around 98% of the US film business, and the top five control around 80%. All the real independents together have an inconsiderable share of the market, and most of them have to work with or through a major studio to get national release.

Of course, oligopoly in the movie industry is nothing new. Up until the 1950s, most of the current motion picture companies were parts of then current eight-company "studio system" oligopoly, though relative power has changed and some of the names have changed. In fact you can argue in some sense that the current oligopoly is less powerful, because in the 1948 Supreme Court "Paramount Decision": which ruled against film industry vertical integration and forced studios to divest themselves of their theaters. The terms have changed somewhat (owning theaters is not all that tempting a risk for most studios, in any case), but the oligopoly is still pervasive.

Most of the major studios are now divisions of gigantic international media empires. Some of them, like Universal studios, have been bought and sold several times. DreamWorks and MGM/UA are exceptions. DreamWorks's independence is guaranteed by the presence of Steven Spielberg, who can call his own shots. (It also bucking to become a player is other areas, such as music and TV.) MGM/UA is the slowly recovering remnants of two venerable studios that were sucked dry by venture capitalists. It is currently bidding for Vivendi's Universal Studios, but its chance of winning the bidding is currently slim.

Independents like Miramax and New Line have been bought out the conglomerates. Should any new studio have some real success, it will be more than likely swallowed up as well. One of the most remarkable anomalies of the 2002 seasons was the success of little IFC's "My Big Fat Greek Wedding," which ended up as the number five box office attraction of the year, and undoubtedly the most profitable. But such breakouts are quite rare. Most "independent" successes like Miramax's Chicago (#10 in 2002) are safely owned or distributed by the big studios.

Below are players by rank year 2003 (January through July), as reported by industry watcher Box Office Mojo. . With in the first seven months of 2003, total US box office has amounted to $5.4 billion in sales, a somewhat ahead of last year.

** go to the actual article to see the table **

The relative rank of the top companies varies from year to year, often depending on one or two blockbusters. Note that these percentages aren't absolute, in that a number of releases are now joint ventures between two studios or more. For example, while Fox is the studio with release credit for Titanic, in fact, it was a joint venture with Viacom.

Basically, all the major studies offer a new theatrical release every two to three weeks. The films that they deem major get the royal treatment in terms of marketing and distribution. The others get the leavings. Disney and Time Warner issue more films because of their "independent" subsidiaries, which specialize in smaller. Prestige films.

While the movie-making industry has a looser oligopoly concentration than many others at present, it is remarkable how similar the studios all are. Executives, stars, writers, and directors jump from one studio to another. As we've noted above, the studios sometimes join in backing movies. They all face exactly the same task -- getting their films on the shelves and then pulling in the audiences.

It's no surprise that the people who run the studios share exactly the same culture and the same view of the world. Religious conservatives have been howling about this for years. But it's not a Jewish or gay conspiracy. It's just what happens in any oligopoly over time. It is true that you could reshuffle the management and the scheduled releases of virtually all the major studios and no one would ever notice. Once unique entities like New Line and Miramax are looking more and more like studios hat have absorbed them. And all studios (except DreamWorks) answer to distant CFOs and stockholders, who don't care about any ideology except profit.

The cineplex
A basic problem for studios is how to get their new movies displayed in the right number of theatres across North America in order to get maximum profit and prestige. In the sixties and seventies, movie were released gradually, with a step-by-step widening of the market as the film built up momentum. Now the practice is to open big and wide for almost every film. The idea is to grab maximum mind space for the brief moment while the movie is news. This need is played out in the interaction between the studios and the national theater chains.

In the last three decades, there has been an explosion in shelf place in the motion picture industry. Long gone were the days of the standalone movie palace. In the seventies, chains started to build duplex or even fourplex theaters, so movies could share common facilities, including concession stands, parking and rest rooms. The process accelerated in the '80s, and increasingly bigger theater chains started building multiplexes with 8, 10, even 12 screens, with luxurious stadium seating and a big concession bar (often the only profitable part of the operation), even cafes, along with full parking facilities. The AMC theater chain built the first 24-screen megaplex near Dallas in 1994. That set off a building boom, with 14-plexes and 30-plexes popping up across the country like mushrooms after a spring shower. Small theater complexes with fewer screens and old seats were out of luck.

The leading companies in the business were growing fast, both through acquisitions and adding new properties. Regional chains were being bought out by fast-moving national chains, and all were adding screens in the suburbs. In 1990 there were around 23,000 screens in the U.S. By 2000 there were around 39,000. And most of these were owned by a handful of companies (see chart).

Shelf space oversupply
As we've noted, by 2000, the chains learned that they'd built too many shelves (screens). But the industry could not support all these new seats in the same markets. While the number of screens had increased by 50% over the period from 1990 to 2000, viewership had gone up only by some 20%, a few percent each year.

And though most chains hiked prices to help service their debt (by over 25% over the last decade), there were limits to price hikes, in that there were plenty of other entertainment choices, especially home video. Many people asked themselves why go to see a so-so film when it will be available on video in a few months or on TV in half a year. A period of unusually poor (from the box office point of view) movies in the 1999 -2000 season didn't help. So that in 2000 and 2001 a number of chains started declaring bankruptcy. These includes Carmike, Loews, United Artists, General Cinema, and Edwards Cinemas, along with several smaller chains. The other chains were nearly all teetering on the brink.

Theatre revenue actually increased in the last two years, thanks to a number of blockbusters and major ticket price increases. But this may be a short-term fix. While the popularity of movies goes up and down, the oversupply of theaters is still a major problem.

One analyst (Dan Ackman writing for Forbes ) has done the math and concluded that, on the whole, the movie theaters are working at 12% of capacity or less. In other words over 80% of seats, on average, are empty. That's no surprise when we learn that 80% of the revenue comes in the three weekend days, meaning four days a week most theaters are nearly empty, hardly earning enough to pay the electricity to operate the popcorn machine and pay the (minimum) wages of the ticket-takers. Like restaurants, movie theaters make their big money on Friday, Saturday, and Sunday. Those evening are the premium shelf positions.

The oversupply of screens hurt badly. More than 350 theaters, comprising 1,888 screens, were closed during the year 2000 alone. The closures represented 5%of America's theaters and 5% of its approximately 39,000 screens. A number of others have closed since, and the arte of building new ones has slowed considerably. There are now 34,000 thscreens, but some industry analysts think there are still perhaps 5,000 too many screens for a profitable industry. As we've pointed out, at some point shelf space becomes a zero sum game. New theaters simply reshuffle the audience; they don't attract new ones.

Over the past year, Edwards Theaters, General Cinema, and Universal Studios Theaters were sold to the survivors. Hoyts Cinema, an Australian chain, left the U.S. market and sold out to Regal. As you can see, the top five chains now own around 50% of the screens. An oligopsony is developing to define the movie theater business against the oligopoly of the studios.

** go to original article for table **

But that's not the only problem the theater chain owners face. They can add in the twisted economics of the business. Some sixty to seventy percent of the first two weeks' box office collections go directly to the studio. In the third week, normally the share is 50/50. The theatre owner's percentage goes higher as the movie stays longer, up to 70% at week six. However, few films last that long. And, after all, 70% of a $2,000 take is not even close to 70% of $20,000, which is what the studio can get per screen in the first week of most films.

These agreements make the studio all the more eager to bring in another film to drive in a fresh set of profitable viewers, and is already plotting the video release of the current movie in the first two or three weeks.

Theatre owners have to make their income from the snacks and soft drinks concessions - that's why the prices are so high, and the portions so jumbo, at the snack bar. It's also why attracting teens has become particularly important to the chains; parents don't spend as much on concesions. Chains are also making money from selling major amounts of advertising in fornt of their captive audiencesbefore the film begins as well. (New York Times, August 2,2003. "A Movie Theater Revival, Aided by Teenagers") We'll see what kind of a reaction that gets from the moviegoers over the long term.

In fact, thanks to reorganization and getting rid of older theaters, some chains are starting to do well. That's especially true of Regal Cinema, which managed to capture 20% of the market at firesale prices. It will be interesting to see if the increasingly concentrated oligopsony of theater chains will be able to negotiate a bigger cut of the take from the studios. So far, that hasn't happened.

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posted 08-09-2003 01:53 AM                       

quote:

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Industry brief: Movies

The movie industry as industry is now followed by the general public almost as closely as fans follow the business of professional sports. The movie industry is like the other oligopolies we have look at. 1. Movies now have three lives: theater, video, broadcast
The shelf life of movies in theatrical releases seems to be getting shorter and shorter. 2. International markets are as important as domestic
Another way of extending shelf life is international release. Increasingly, studios are counting on the U.S, market to simply break even with production costs. Around 500 commercial films are released each year in the United States, 200 of them as major studio releases. An average major studio Hollywood film costs between $50-75 million to make. Six of the top ten movie chains decalred bankruptcy in 2000. The studio oligopoly
Basically, the top eight Hollywood studios that control around 98% of the US film business, and the top five control around 80%.

Of course, oligopoly in the movie industry is nothing new. Some of them, like Universal studios, have been bought and sold several times. Most "independent" successes like Miramax's Chicago (#10 in 2002) are safely owned or distributed by the big studios. Prestige films. As we've noted above, the studios sometimes join in backing movies. This need is played out in the interaction between the studios and the national theater chains.

The AMC theater chain built the first 24-screen megaplex near Dallas in 1994. Shelf space oversupply
As we've noted, by 2000, the chains learned that they'd built too many shelves (screens). Like restaurants, movie theaters make their big money on Friday, Saturday, and Sunday. Over the past year, Edwards Theaters, General Cinema, and Universal Studios Theaters were sold to the survivors. An oligopsony is developing to define the movie theater business against the oligopoly of the studios.

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posted 08-09-2003 02:14 PM                    

quote:

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The movie industry is like the other oligopolies we have look at.

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