“Why doesn’t Hollywood have any new ideas?”
It’s a question you often hear when covering the movie industry, and it’s hard to fault the logic behind it. Last year, you had to go all the way down to number 13 on the North American box office chart to find a non-sequel, non-franchise, non-remake movie on the list of the year’s top-grossing movies (Pixar’s Coco, which was wonderful). In terms of all-time box office, only two out of the top 10 and three out of the top 20 fall into that category.
It’s tempting to think that the movie industry is just out of ideas, or struggling to come up with them, but the truth is they just don’t seem to need them that much. They certainly don’t invest in them. The business has shifted, to brands, and franchises, and the degree to which it has done so would shock just about anyone who doesn’t cover the business for a living.
Perhaps no one has done as good and thorough a job explaining both what the modern, brand-based, “franchise era” of movie making looks like, and how it came about, than the Wall Street Journal‘s Ben Fritz. His new book, The Big Picture: The Fight For The Future Of Movies, chronicles this momentous shift in the way movie studios make movies that has happened in the past four or five years.
For one thing, the profit expectations of the companies bankrolling the studios underlying every decision have changed. “Until the past few years, companies used to think something like 10 percent was a healthy profit margin for the movie business,” Fritz tells us. “You couldn’t really do better than that. And the other thing they thought, it was never gonna be stable. Disney has completely upended that. Disney is making profits, in its film studio alone, with a margin of close to 30 percent recently. And they’ve been doing that consistently.”
And they do it with big brands — Star Wars, Marvel.
“Approximately 40% of the box office [41%, as of this writing] so far this year is five movies. It’s Avengers, Black Panther, Jumanji, Ready Player One, and A Quiet Place,” Fritz says. “That means only 60% of the box office is available for every other film, except those five.”
Franchises are not only seen as safer bets that end up absorbing the majority of a studio’s resources, they offer a built-in business plan. A superhero movie isn’t just a movie, it’s a five-year plan.
In the past, when studios were only expected to make 10 percent, give or take, they would bankroll bets on movies based on the understanding that the person running the studio was competent at making those bets. To contrast the current era to the way it was done in the past, Fritz utilized the treasure trove of information uncovered in the Sony hack, which allowed him to explore the inner workings of a studio — which are normally intensely secretive — in a way that’s never been possible before.
“The business plan of Sony was Amy Pascal,” Fritz says. “She was their movie business plan — her relationships with talent. Her taste, those were the movies they made.”
These days, studio heads are much more likely to be “brand managers” with MBAs than fast-talking, cigar chomping (proverbially) movie people like Pascal. Love superhero movies or hate them, Fritz’ scholarship is key for a full understanding of what movies get made now and why, so we kept talking.
How has the movie business changed since the mid-2000s, and specifically, how have profit expectations changed?
Since the mid-2000s we’ve really entered what I would call the Franchise Age of filmmaking, which is where the movie business at the major studios at least, is primarily centered on these branded franchise films; your Marvel, your Star Wars, your Fast and Furious, your Transformers, your DC, your Harry Potter, etc. These are the movies that make by far the biggest profits. They make profits that are meaningful to these big parent companies like Comcast, and Disney, and Time-Warner, and AT&T and so on. They can spawn sequels, spin-offs, reboots, toys, theme park rides, etc, so they make a lot more money than just the movies themselves.
These are the kind of films that audiences, despite what they sometimes complain about, really prefer, if you look at the box office. More and more of the box office is going to fewer and fewer films, and those films are primarily these types of films. They work especially well in foreign markets where brands matter a lot: China, Russia, Brazil, etc. And, with the rise of high quality television, the Golden Age of TV on cable and streaming services, a lot of the types of content people used to go to the movies to see, like original dramas for adults; that space is being taken up by TV. People don’t go to the movies very much anymore. Those types of films are succeeding less and less and are losing money more and more.
So the decline in attendance, that’s all real and not just an anecdotal thing we think about?
Well right, there are two trends to note there: There is a decline in attendance, it’s been happening for most of the century, a sort of slow but steady decline in theatrical attendance, in the United States and in Western developed nations. Not globally, in China it’s still growing a lot. But the other important trend to know in there, is and I think one that’s even more important, is that people are going to fewer and fewer films. Fewer and fewer films are taking bigger chunks of the box office.
So far this year, I believe, approximately 40% of the box office [41%, as of this writing] is five movies. It’s Avengers, Black Panther, Jumanji, Ready Player One, and A Quiet Place. That means only 60% pf the box office is available for every other film.
That’s not the way it used to be. It used to be there was a much broader array of films. People were going to see a more diversity of films. Now, we all kind of want to see the same handful of films, that everybody’s talking about and that are the only ones that are sort of spectacle enough, and/or buzz worthy enough to get us out of our living rooms and off our butts and into a theater.
Right, and so you talk about the profit expectations. What was that in terms of what the expected profit margin was in the past and what it was now.
Sure. Until the past few years, companies used to think something like 10% was a healthy profit margin for the movie business. You couldn’t really do better than that. And the other thing they thought, it was never gonna be stable. You’re gonna have good years and bad years. You’re gonna have the years where you have a bunch of hit movies and a bunch of flop movies. You can’t expect consistency in the film business. They thought it was always going to be a roller coaster. So you might have a year where you only make a profit of 2%, another year maybe it’s 13%. But generally about 10% is what you could shoot for.
Disney has completely upended that. Disney is making profits, in its film studio alone, with a margin of close to 30% recently. And they’ve been doing that consistently. They don’t have very many flops. They don’t have zero, but they have way fewer than there used to be. And if you look at just Marvel and Star Wars, take two of their big franchises, they have had zero flops. I mean they literally, every movie they release is either a hit or a mega hit.
Nobody thought that was impossible before, but Disney is achieving that and of course every other studio is looking at it. And they and more importantly, their bosses, the big corporations are saying, “Why can’t we do that?”
Right, so have there been anybody else that have been able to recreate what Disney’s doing at all?
Nobody’s been able to recreate it. Others are trying to varying levels of success. I think that the other company going after that strategy most aggressively is Universal. They’re owned by Comcast, the the people who run that business, several of them are former Disney people. And they’re a very well resourced company, just like Disney. And they also have a theme parks business, Universal Studios. Just like Disney, they’re building a consumer products business that can rival Disney’s. And they’re investing heavily in their core franchises. They have Fast and Furious, they have the animated Despicable Me and Minions, and The Secret Life of Pets, and so on. Now that they have Jurassic World of course, they spend very heavily on those, are trying to build those in to franchises that can rival the ones of Disney’s, I think. So, they’re definitely following the same strategy.
With the caveat, they also have a healthy horror business. They have Blumhouse [the lower-budget production company founded by Jason Blum], and movies like The Purge and so on. I would say low budget horror films about the only types of other films that are succeeding with any level of consistency recently.
Yeah that is interesting, how do you sort of explain that phenomenon, or do you?
Well, the best explanation I say is it’s the one genre besides… Let’s look at what are the genres that Netflix, Amazon, HBO, FX, etc. can’t really replicate? Okay, they can replicate the drama experience pretty well, there’s nothing better about seeing most dramas in the theater than seeing them at home. With comedy people used to think, “Oh you want to be in the theater laughing with other people.” But that’s proving to be not so true anymore. Comedies are struggling at the box office and people are pretty happy to watch comedies at home too. But horror is the type the thing where actually sitting in the dark with your friends, family, a group of people who are feeling the same tension, that actually works a lot better in a theater. If you’re pausing the movie to go get some food or something, or you can hear your kid crying in the other room, or somebody takes out their phone, that kind of ruins the tension of a horror movie. Sitting in the dark theater with other people actually makes that experience better. I think that’s the reason why horror is still hanging on.
Shifting gears a little a bit. Well, actually no let me go back to the, when we talk about the profit expectations, where do those come from? Is it investors, the parent company? What is the root expectation that’s driving the market?
Well, it’s the parent companies. But then they themselves are driven by Wall Street financial analysts, shareholders. They want to see real returns on invested capital. You know, running a movie studio is not cheap. Okay, it costs, most major studios spend at least a billion dollars a year producing movies and at least a billion dollars marketing and releasing them. That’s a lot of money. A big company could be like, “We could take that two or three billion dollars and keep spending it on movies, or what if we spent it instead on cable television or a new streaming service or a new theme park where we get better returns on that?”
And when the movie business isn’t generating very big profits, then the companies or their shareholders say, “Hey, you could be doing something a lot better with your cash, than investing it in movies.” So that’s why they’re demanding better returns than they used to be getting. Because they’re realizing that it’s possible, and if it is possible, then why aren’t we doing it. And if you can’t do it, then go invest your money in a better business somewhere else.
Right, I mean is part of the push to branded content and franchises, is part of that because that’s just an easier promise to make to investors? It’s easier to say, “Hey we have this franchise, and there’s gonna be this many installments in these years,” as opposed to saying, “Hey I’m smart, I’m good at picking movies in the past I can continue to do so.”
Absolutely. Another thing that investors love is consistency, and predictability. They like to be able, they’d love if the company can say, “Hey, our movies business is gonna make,” I’m making this number up, but “We’re gonna have revenues about a billion dollars in profits with about 200 million dollars next year.” That’s great. They like to know that, because that helps them figure out their investment portfolio and make financial models. And that’s really important to shareholders, actually.
And look, if you’re Proctor and Gamble, you can usually meet those predictions within a pretty tight margin. Right, the amount of laundry detergent people are gonna buy in any given year, doesn’t vary a lot. And when people start shifting their allegiance from Tide to Clorox or whatever it is, then those don’t happen overnight. They happen over time and we can see the changes. But in the movie business, if you’re just like, “Hey I’m a really smart guy, or woman and I come up with a good slate, trust me.”
There’s no way to predict how those movies are gonna do. And the fact is, no matter how talented a person is there’s nobody who can make a consistently successful slate by just picking original scripts and ideas. This has never happened, it can’t happen. There’s too many factors in play that a person can’t control. But, there is a higher level of consistency when you’re releasing a franchise film. The Han Solo movie may gross a billion dollars globally, it may gross 1.5 billion globally, it may gross 800 billion globally. I can tell you with 99% certainty it’s not gonna gross [only] 150 million globally. That’s just not gonna happen for a Star Wars movie, you know.
Whereas when you release A Quiet Place, which has been a big hit but until that movie came out nobody in Paramount and nobody in the parent company, Viacom investors, knew that movie was gonna gross what it has. [The expectation was] several hundred million dollars or was it gonna fizzle and gross 20 million, there was no way to predict that. You can’t really build a business around hoping for hits. That’s a lot a tougher than saying, “We got Star Wars, we got Marvel, I have Fast and Furious, I got The Hunger Games.” You can say with some level of confidence those movies are all gonna gross within a certain range.
So, my favorite thing about the Sony hack was when Jonah Hill said, “clean, and rad, and powerful” about the Jump Street and Men in Black team up idea. You went over that hack really in depth, what did you learn from going though those hacked Sony emails?
Man, I learned a lot. I read tens of thousands of emails and documents and I feel like I kinda got in the heads of some of those leaders of the studio. I think most fundamentally I learned that a lot of powerful people in Hollywood project a high level of confidence and certainty that they really don’t have. And that you know, with the studio in particular, they were really struggling to understand consumer behavior as we were changing to this franchise-driven world.
It’s so easy from the outside to be like, “Why aren’t you doing this? Why, why would you make that terrible film or why have you made those Spider-man reboots that are so obviously bad?”
Actually just making a high-quality film is incredibly hard. Things can go off the rails so easily. One thing I didn’t really appreciate is that the entertainment business, the way we consume entertainment is changing so fast. It changes a lot within a year, look at what entertainment was like a year ago vs now. But making movies takes three years. You know, from idea to release. And it’s really, really hard for the movie executives to adapt to a world where digital technology is changing things so frequently, consumer behaviors and tastes are changing so frequently. But it takes them years to create their products. That’s really one of the toughest binds that they’re in.
Amy Pascal, I mean I thought she was, it’s funny that you get clues to her character… she becomes a character through these emails, I mean you also make her a character through your writing. What is the archetype that you think she represented, and what is the archetype of a studio head now?
Amy is really the late 20th, very early 21st century archetype of a movie studio head. Which is that she came up through development and production, she’s kind of like a movie producer right? She loves making movies, she loves digging into scripts, she loves working with talent. She really respect and feels closest to directors, writers, actors, those are the people she relates to the most. She’s not a natural fit to be a corporate executive. You cannot imagine her being an executive at any other company. Imagining her at Goldman Sachs or Apple, or Nabisco, would be ridiculous. She makes movies and nothing else. And her, the archetype of someone like her is that it’s really her taste, her personal taste and sensibility that defines the studio. It defined the movies that Sony made, the artists they worked with.
And she personified that studio in a real way. That was the way most studios used to be run. There was a person or people who decided what they made, and their relationships and their taste, that was the business plan. The business plan of Sony was Amy Pascal. Her taste, those were the movies they made. You know, period.
The archetype of a movie studio head now, look at someone like Jack Shell at Universal, or Alan Horn at Disney, they’re more brand managers. They’re people, they do not get involved in the nitty gritty of developing scripts, of working with their favorite artists and so on. They really think about, okay we have these core brands at Disney, Alan’s job at Disney to a large extent is we have Marvel, we have Star Wars, we have Pixar, we have the Disney brand. Which primarily now does live-action remakes of their animated movies, like Beauty and the Beast, and The Jungle Book, and so on. And he is to keep those brands and the people who work under him managing those brands on track.
It’s not dissimilar to go back to Proctor and Gamble managing all their different consumer brands. It’s not completely un-creative, but it’s at least as much brand management as it is creative. And it’s not about their favorite artists or their favorite scripts. By the way, not coincidentally, a lot of these sort of 2018 studio heads are MBAs. Whereas, someone like Amy Pascal was certainly not an MBA.
I mean there always seems to be in any business, there seems to be this drive to take human taste and personal taste out of the equation. Do you see a failing in that strategy at some point? Because the end consumer is still going to be a human.
Yes, absolutely it is, and you can’t just manage these brands with no sense of creativity, but like keeping them creatively fresh is important or else they turn into, like look at Transformers. The last movie was pretty universally panned and financially it did way worse then the prior ones. People lost interest because those movies hadn’t been innovating, and they’ve kind of, they’ve died as a result.
What Marvel, primo example, has done so well is they’ve stuck to their brand. There a core quality of a Marvel movie has, but they’ve innovated somewhat. Black Panther is a different movie, than you know, Thor was, or Captain America was. They’re not radically different, it’s not like all of a sudden they’re making R-rated horror films.
There are certain core qualities, there’s superheros, the come from comic books, they’re PG-13, they’re gonna have action, adventure, but probably safe for kids over 8 or 10. They’re gonna have a certain amount of comedy that’s mixed in with the action and adventure. Those qualities are always there, but then they vary that.
That’s the balance of these companies, that they have to sort of manage these brands. They have to figure what the core qualities are, keep to them, keep up their level of output. At the same time they need to have creative people there who can keep these brands and movies fresh. That’s a very tricky balance. And if it doesn’t work, the audiences smells cynicism and they stay away. And that’s why you see some brands of franchise films not working any more. And the ones that are well made, work to astronomical levels of success.
Right. You talk a lot about Netflix and Amazon being the saviors of the mid-budget comedy, mid-budget film for adults in general. Is the connection between distributing quality movies and their bottom line too tenuous for that to be… like once all the people that like good movies are already subscribed, what’s their incentive to keep making good stuff?
Well their incentive would be they don’t want to lose their subscribers. The subscription entertainment business is competitive and is getting more and more competitive. You already have, I mean the big plans right now are Netflix and Amazon. But Disney is preparing to launch its own service for families next year. Warner Brothers are launching a DC comics streaming service for example. You’re gonna see more and more of these. Eventually, if you want to want to subscribe to every big subscription service your internet content bill is gonna sorta look like your cable bill.
So there’s gonna be competition and if they are not delivering the kind of thing that you want you’re going to unsubscribe. There is an audience for interesting, original mid-budget dramas for adults. It’s just not an audience that can rival the number of people who will go out an buy a ticket to see Avengers.
As I argue in the book, their value to consumers is that people are getting something they love. So even if only, I’m making this up, two million people see this new mid-budget drama for adults that’s on Amazon, but those two million people love it, they’re passionate, they’ll keep subscribing. Whereas, Disney doesn’t care a lot if you love Avengers, or you just like it, as long as you bought that ticket. They still get the same amount of money no matter what. But when it’s a subscription service you want to tune in, you want to keep watching it, finish watching it, feel satisfied and therefore you’ll keep paying your 10, or 12 bucks, whatever, per month.
Do you see any parallels between the movie business, in terms of them having a higher expectation for profit margin, do you see any parallels between that and other business that traditionally haven’t had a huge profit margin? Journalism for instance? What’s the future of businesses that don’t have a huge profit margin? Are we all at the mercy of investors looking for a huge return?
Well, yeah. Newspapers are a great example right, because this is where you see some of America’s great newspapers being bought by rich individuals, who are not buying it for the purpose of getting a bigger profit. Who think there’s some civic purpose in it. Like Jeff Bezos and the Washington Post, or Patrick Soon-Shiong here in Los Angeles who just bought the L.A. Times. Those companies, they used to be part of public companies and investors, who only care about their returns on their shares, understandably, ere really hammering those companies, and telling them to keep cutting costs. Which is bad for our civic life if you care about high quality journalism.
So, yeah, in any area of our economy I’d say, if there are things that we value that don’t necessarily create the highest returns, then there’s two options. One is they turn into, kind of non-profits or tolerably low profits, if they’re privately owned, which is happening with the newspapers. Or in the movie business, we’re getting to a point where the companies have to be making movies for another purpose, beside making the biggest profit on those films.
If that’s what they care about, they’re going to follow the Disney model, to make the biggest profit. If they care about making any other type of film, it has to be for another purpose. So in Amazon they make a diversity of films because they want to keep you engaged as much with Prime so that you’ll buy an Alexa and you’ll buy patio furniture and you’ll buy all this stuff that you want in the world.
At Netflix, they don’t make movies to make money on each individual film, they make it to have an overall slate of content that satisfies their subscribers. To keep them subscribed.
We looked at AT&T, is soon, if the government approves it, going to buy Time Warner. You can imagine, I understand all the things that are bad about that. But one thing I would argue could be good is you can imagine AT&T encouraging Warner Brothers to make movies that are available for free or discount or available to you first if you’re an AT&T subscriber. Then you could watch it on your tablet, or with their internet at home or on your phone, or whatever. That changes the economic calculus of those films, and may make it more possible for Warner Brothers to make the kinds of films that don’t necessarily make the most money at the box office anymore.
I was just thinking about what happened to Direct TV when AT&T bought it. Oh God. Anyway, thanks for talking to me.
Okay, thank you. Have a good day.
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