In Fade to Red David Teather provides a thorough insight into the current state of Hollywood.
last summer, 20th Century Fox abruptly pulled the plug on the project (Used Guys - Starring Jim Carrey and Ben Stiller), leaving the writers and stars in shock. The budget had crept up to $112m (£54m) and the stars, as with most Hollywood projects, had cut lucrative deals for a share of the future revenues. An unnamed Fox executive told the New York Times that the economics had simply made "no sense".
Although the 6 majors reported $36bn in revenue there is another way to look at these numbers
The combined release slate from the major studios last year (132 movies) is expected to lose $1.9bn by the time it has run through the five-year cycle of theatrical release, DVD, pay and free-to-air television, and every other source of income (a film's "ultimates", in movie industry jargon). The Fox decision to pull the plug on Used Guys now looks to have been a rare outbreak of good husbandry.
In Do Movies Make Money? Authored by the report suggests
that a combination of spiralling costs (driven in part by the demands of star actors and directors), a sudden slide in DVD sales, and dipping or flattening revenues from television and the box office has left the studios dangerously exposed. The problem has been exacerbated by an influx of cash from outside investors such as hedge funds, which has left the business awash with money over which less and less control is being exercised. The result is a business model that appears to be broken. "The bottom line is that costs have risen in nearly every facet of the business, while revenues are flat or even down in every sector," Smith says. "Making movies has gone from a modestly profitable activity to one that now generates substantial losses."
Which means the release slate for 2006 will go on to earn $23.7bn, down about 4.6% on 2004's releases, while costs have risen to $25.6bn, up 13.2% on 2004.
Participation deals are partly to blame. Tom Cruise reportedly taking 20% of revenues... Nice
But the real Arms Race is in Marketing. Which in fact Tomi wrote about in our book in 2005.
The biggest marketing budget last year was $53.5m for Cars, according to TNS Media Intelligence, followed by $45.5m for Superman Returns.
Revenue streams have slowed to a snails pace, but the big fear lies in DVD sales
the DVD - the main engine of growth between 1999 and 2004. In the past two years, DVD revenues dropped by 11%, to $11.1bn. "It is undeniably true that DVD revenue, which had been responsible for the big boom that has happened in the past few years, has plateaued and now gone into decline," says Michael Gubbins of Screen International magazine.
New Rules for a New Economy
It is not immediately apparent where the revenue to replace slipping DVD sales will come from. It seems unlikely that consumers will pay the same amount for a download. Still, Gubbins thinks the current financial state of play will lead the studios to push more quickly into new forms of media. "I think we will see an acceleration into things like video on demand and downloading your own content. They are small at the moment and they have been ke pt artificially small. No one will risk the existing revenues when they can't yet be sure of new media. But I think that there will be a lot more attention and a lot more of a push to accelerate this new world and to make it happen."
Do Stories Change for Generation C ? and maybe worth a gander The great TV shows of the 21st Century will be made for the networked and connected generation (Gen-C) or Broadcasting embraces the digital age
Smith gives his readers some advice
Our analysis of the business of the Hollywood studios may come as a surprise to investors and even some people within the industry. We believe there is little chance of the negative revenue trend reversing in the coming years. New technology will not deliver anything like the revenue initially predicted, and as DVD sales continue to decline and the cost if making movies increases, the message is simple: the Hollywood studio's must begin a serious attempt to reign in costs, like News Corporation's Fox have done, if they are to survive.Are we waiting for the bubble to burst?
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