Hollywood Babble On & On 1215: Hollywood's Model Trap

I've discussed the basics of movies and money before, but I'm going to expand on them a little here and talk about a trap that lies deep within the current Hollywood business model. I've talked, frequently about how Hollywood's self-fulfilling idiocy is causing an inflation in film production costs not seen outside of Weimar Germany, and that most major studio films need to break records to just break even, and that's including the precious international market.

And yet, the people running Hollywood don't seem to be worried about this situation.

Why?

Artist's conception of a studio executive.

Well, it might be because they expect to be fired with a golden handshake before everything goes tits up, but I suspect that it's because the Ivy League educated industry brain trust think they have it covered.

They don't see the fact that it's next to impossible for a film to turn a profit in theatres as a problem.

That's because they think their profit margins come from 2 things.

MERCHANDISE: This covers everything from toys to t-shirts, and everything in between. This works by licensing the name and imagery associated with a film to the manufacturers of the merchandise for either a flat up-front fee, a piece of the profits, or both.

HOME VIEWING: This includes broadcast and cable television airings, streaming services like Netflix and Amazon, purchases & rentals on iTunes, and sales of DVDs and Blu-Rays.

Now let's look at the problems inherent in these methods and how they can potentially crash the major Hollywood studios.

MERCHANDISE: Manufacturers of movie-related merchandise would prefer to license projects with a track record rather than risk their money on things they know nothing about. Things like comic book characters, old movies and TV shows. Basically superheroes and remakes.

These come with multiple problems:

1. Franchises can burn out, and most remakes fail to win a new audience leaving the manufacturers with a bunch of merchandise they can't move because everyone is sick of the sight of their subject.

2. It's next to impossible to develop new wholly original projects & franchises, even ones with great merchandise potential.

3. Pre-existing properties often come with pre-existing hands out. Creators, publishers, lawyers, are all looking for their piece of the pie, and if they don't get it, then the expensive litigation starts.

HOME VIEWING: The problems of profiting from home viewing revenue are three fold.

1. SYNERGY: Most of the broadcast and cable television outlets are owned by the parent companies of the major studios. They call this "synergy" and was sold to the brain trust as a way to keep profits in house. In theory the movie division makes the movies and sells them in theatres, then the broadcast/cable division sells them on TV, and the money rolls in.

What happens in reality is that the studio's films don't get the same prices for the broadcast licenses that they would have landed if they were in a competitive bidding environment. Plus, outside of a handful of family films and holiday fare, when was the last time you saw a major network air a previously theatrically released movie in prime time. It just doesn't happen very often anymore.

Most movies end up running on cable channels, which don't pay as much as the networks, and their licensing agreements usual involve rerunning them until the tapes wear out for decreasing amounts of money.

Even then, an increasing number of channels are producing their own content because in many cases it's cheaper than paying the licensing fees the studios are asking for.

2. STREAMING OUTLETS: The model for streaming outlets like Netflix and Amazon is to pay out a huge chunk of cash to license films in bulk from the studios.

That means that each individual film don't make that much money. The studios think that's great, because it allows for them to still claim losses on the films and get out of paying profit shares. But that means that people with clout who get profit shares will demand more cash up front, and the self-fulfilling idiocy will only grow.

The studios think that since streaming revenue is skyrocketing that the good times will never end. Well, all good things come to a crashing halt. The streaming services will reach a point where they will say: "We're not going to pay that much for these movies" and that revenue will plummet.

Amazon and Netflix are already having some success with producing and releasing their own content. Soon there will be a tipping point where they will see that it's much more profitable to just make and sell their own shows and movies, just like the cable channels.

Then what?

3. REPEAT VIEWINGS: DVD & Blu-Ray rentals have pretty much completely disappeared, and sales have been in a decline for so long folks don't remember the times when they sold well. Also ratings for airings of recent movies don't exactly burn up the Nielsen ratings, especially when they were theatrical blockbusters.

Why?

Because most big blockbusters don't really inspire a desire to see them again.

I can watch The Thin Man pretty much any time TCM decides to air it, and I can watch most of the Bond films on an annual basis. But the majority of recent movies don't spark a desire to see them again and again and again. 

Spectacle might sell tickets in the theatre, but its quality in story, characters, and filmmaking that make the most spectacle filled blockbuster bearable to be seen more than twice.

All these problems will eventually converge, and the major studios will be forced to rethink their business model, or go the way of the dinosaur.

Maybe they might want to turn a profit in theatres as a good way to start?