Updated: 05/29/2009

Film, Radio and TV - 9

The Film

Business Today

Today, ticket sales are a long way from their 1946 box office peak.

The number of screens dropped dramatically in the 1950s, largely due to the impact of television. (The term "screens" is used rather than "theaters," since theaters can have a dozen or more screens showing different films.)

However, after this major slump and after some target audience and content adjustments by Hollywood the number of screens started to steadily increase. In 1970, the number was about 10,000; in 2001 it was about 25,000. Most of the new theaters (multiplexes) are in suburban shopping areas.

But, for the major theater owners there's a problem.

Film Profits Drop

Even though both the number of screens and the revenues have increased steadily over the past five years, because of the debt incurred from building additional megaplexes, overall revenues for all four of the biggest theater chains dropped.

The green area represents the average decrease for the four major theater chains in the mid-1990s. For AMC Entertainment, the drop was $55.2 million in 1999; for Carmine Cinemas, $19.9 million, For Lowes Cineplex Entertainment, $51.4 million and for Regal Cinemas $88.6 million. Several major theater chains even declared bankruptcy in 1999 and 2000.

But things were about to change.

Recessions Help Ticket Sales

One of the few positive things about economic downturns is that a greater number of people go to the movies to try to escape their problems.

This happened again in 2009, when theater attendance jumped 16 percent Monsters vs Aliens and ticket sales jumped 17.5 percent to $1.7 billion -- the biggest jump in two decades.

Moving away from somber films to comedies such as Paul Blart: Mall Cop, was a part of this.

Several 3-D films, most notably the The Dark Knight, Johnas Brothers Concert, and Monsters vs. Aliens (depicted above) also helped.

Although the number of theaters offering true, 3-D projection was still limited in 2009, the extra cost of tickets (up to $15) helped boost revenues.

It’s not rocket science, people want to forget their troubles, and they want to be with other people.
Martin Kaplan, the director of the Norman Lear, Center for the study of entertainment and society at the University of Southern California

At the same time, among the more affluent in society, something is impacting ticket sales in a negative way.

High-Definition DVDs

In 2006 we began to see "home theaters" centered around high-definition DVDs with flat-screen displays and 5.1 (surround) sound.

With images that rival or exceed those in theaters, many people — at least those who can afford home theaters — now find little reason leave their homes to see a movie.

Instead, videos are rented, either at the local video store or (more and more) via the Internet with services such as Netflix.

At the end of 2007, there were two major competing and incompatible DVD high-definition standards. There was the HD-DVD format led by Toshiba consortium and Blu-ray backed by a Sony-led consortium. Blu-ray

By early 2008, after several major motion picture studios backed away from HD-DVD, Toshiba conceded that Blu-ray (and Sony) had won the HD format competition. The public had also become aware of the picture quality advantage of Blu-ray, as shown in side-by-side comparisons of the technical quality of different video formats.

The cost of movie tickets continues to increase at a faster rate than box office revenues. This is largely due to the cost of labor and special effects.

Labor issues represent one of the reasons that Film Crew so many U.S. films are now being done outside of Southern California—so called runaway productions. Florida and Texas are popular "runaway" destinations.

Labor costs can be saved by using non-union labor and shooting in foreign locations—even when a foreign locale isn't dictated by the story line. England, Canada, and Australia have been popular with producers. War stories have been shot in Ireland and the Philippines.

In the past, elaborate settings would have been built in studio lots around Hollywood to represent many of these foreign settings. The Casablanca-era films are good examples.

By 2006, California had partly reversed the exodus by providing various incentives to keep the highly-lucrative production projects in California. By this time even CSI New York was being shot in California.

Thanks to the help of computer generated settings, today, many scenes are shot against a solid blue or green background, and the desired setting is electronically added. This process, which saves considerable time and money, is discussed in more detail here.

Then there is the cost of another type of "labor." The salaries of stars (and a few producers and directors) that can exceed $20 million a picture. Even so, producers feel that paying a star like Julia Roberts $20 million for doing a film can translate into more than $20 million in profits—or at least they hope it will.

Often, producers have to make creative decisions based on financial tradeoffs. They might ask the question, "Should we drop some of the special effects we want in favor of having a top star, or will the special effects do more for the picture?"

Then here is the delicate balance between movie attendance and the Tickets and Money cost of tickets.

If the price goes up at the same rate as production costs, fewer people will be able to afford to attend films—thus, reducing revenue. In particular, the younger audience will be affected.

Have you ever wondered why the price of popcorn, hot dogs, candy and soft drinks is so high at theaters? Theaters depend on the high profit in these sales to pay for a significant part of their operating expenses.

Tickets Don't Pay For the Movies

This is another way of saying that "the tickets don't pay for the movies"—even if they do represent a key indicator of their popularity.

So, what does pay the costs of producing movies?

Most of the revenue comes from ancillary rights (revenues from non-box office sources). Today, these profits come from 10 areas.

network TV rights
foreign distribution
sales to independent TV stations
pay and pay-per-view TV rights
airline rights for in-flight movies
college rights for campus screenings
music sales for film soundtracks
film-related merchandise (toys, etc.)
book publishing rights (when a book follows the movie)
and product placement (money received for clearly showing certain products in scenes.)

Without these ancillary profits the film industry couldn't exist—nor could producers expect to fund new projects.

The exception to the heavy emphasis on ancillary profits is represented in independent films, which, as we've noted, are generally made for a fraction of the cost of studio-backed films. These are typically financed either by a few individuals who don't mind the high risk involved -- typically producers, directors and stars -- involved with the project.

The Future of the Film Business

The film business should remain at least stable—and will probably even expand—for six reasons.

There is an increasing number of pay cable and satellite TV services that schedule films.

Internet sites are now featuring full-length films, a trend that has just started to develop.
With film production moving to high-definition video (digital cinema or e-cinema) and desktop computer-based postproduction, production costs should shrink. Moving to high-definition video for productions is increasing the profit margin for many "films."
Foreign distribution of films is expected to continue to expand.

With the availability of relative inexpensive, high-quality digital video equipment along with sophisticated desktop computer editing systems and high-quality video-to-film transfers, many more people—but probably not canines—will be able to produce "films."

With theaters expected to move to e-cinema, film distribution costs will shrink and film duplication costs will be virtually eliminated.

World-wide, the pirating (illegal copying and selling) of films represents billions of Countries Pirating Films dollars of lost revenue each year. This graph shows the six countries most associated with pirating.

The Harry Potter movie released in late 2001, for example, was available on DVD in Asia for about one dollar a copy—only two days after the film debuted in U.S. theaters.

It may come as a surprise to some that at least one country produces more films each year than the United States. We'll cover the international dimension of film in the next module.

The next matching quiz will be after Module 10.

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