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The Business of Entertainment or Hollywood’s Spending Problem

Written by Kristen Anderson in category 
May 27, 2015

As we enter summer it is time for Hollywood to bring out some of the biggest movies of the year. The screens will be dominated by movies whose production budgets start north of $100 million and soar to $280 million for Avengers: Age of Ultron. These numbers do not include the estimated additional $100 million spent per movie for North American marketing plus another $100 million for international marketing. However, the returns can be just as staggering with early summer entrant Furious 7 taking in $1 billion in a record setting 17 days.

But there is a flipside with John Carter, the 2012 Disney flop, losing an estimated $128 million. The 1963 film Cleopatra starring Elizabeth Taylor and Richard Burton, was infamous for being the most expensive film ever made at that point and despite being that year’s top grosser still failed to get out of the red. Careers have been ruined based on expansive failures and not just the executives who greenlit the projects. Kevin Costner’s star faded with high profile, high budget disaster Waterworld and crashed to earth with the panned vanity project The Postman.

Everyone knows that Avatar is the all-time box office champ, but it fails to crack the top 20 most profitable films as based on return on investment. In fact the highest budgeted film, The Hangover, was made for just $35 million. The ROI champ is Paranormal Activity made for only $450,000 (which if you’ve ever seen it certainly didn’t end up on the screen, I would have thought they made it for like $15,000 tops, the whole thing is two people in a house and nothing happening for an hour and a half) while grossing $89.3 million for a return of 19,747%. The year 1992 saw the box office dominated by Aladdin, Batman Returns Wayne’s World the top ROI film was Disney’s kiddie action romp Three Ninjas.

The argument against smaller budgets in Hollywood are two fold. The first is they say, “Why should spend so little on the movie when I’m going to spend so much more than that just advertising it?” Budget conscious indie directors turned Hollywood darlings like Robert Rodriguez and Kevin Smith amongst others have heard this approximate phrase. This ignores a main principal of business to make the product for the least amount possible. The biggest reason for ignoring the ROI is the massive numbers when a big budget does hit. Furious 7 cost around $190 million for production plus another estimated $200 million for global advertising, almost $400 million dollars in total. But even if the movie stopped at $1 billion at the box office (it hasn’t) that would leave $600 million in profit. Not a great ROI, but a much bigger number than the approximate $84 million profit of Paranormal Activity.

In the past fifteen plus years Hollywood has shifted strategy. Previously each studio only made a few major budget movies, but then released a wide variety of mid to small budget films. Some of these small and mid budget movies would become hits and even classics while others would disappear quietly. Today the number of films put out by Hollywood has shrunk. The mid budget films that used to make up a majority of the “surprise” hits have disappeared as their funding is given to more blockbusters. The studios still put low budget films, mainly for award grabs and not in the same numbers as they used to. The previous strategy was to use volume to get as many hits as possible and they would cover the losers, much like a baseball player hitting for average. Today’s strategy is mega-hit or bust like a baseball player who if they don’t hit a homerun strike or pop out (baseball fans think Adam Dunn).

9The temptation of major payoffs out ruling normal business sense has happened before. The subprime mortgage crisis happened because people were bringing in huge profits, but was doomed to crash and burn. Even many of the biggest perpetrators knew what they were doing was asinine and said so to each other in e-mails as they giggled over the piles of money they were making. The key was to not be the one holding the bag when it all came crashing down.

Complaints over the stale receptive nature of the film landscape have increased as the variety of movies has decreased. With so much money at stakes studios don’t want to take chances and so the same pre-existing intellectual properties (IPs) are used again and again no matter how poorly the previous installment was received (see four Transformers films and counting and yet another Spiderman re-boot). The Hollywood paradox is the most valuable thing is an original IP that can be franchised, but you can’t create an original IP in Hollywood because they want make it. Instead all the IPs are created in literature, comics, video games and the Internet. Hollywood has even tried board games to varying success.

Television is now one of the biggest IP creators as well, in fact the period starting in the late ‘90s or early ‘00s to the present is considered the Golden Age of television because of the huge number of high quality shows being produced. Today the most artistically daring and critically praised projects occur on TV. They inspire the kind of fan devotion that used to be major films. And there lays the irony. Movies looked down on TV as the poor stepbrother. Film was more intellectual, more challenging. TV was the lowest common denominator. But as the TV market fractured, breaking the stronghold the safe programing Gestapo of the big 4 networks, shows where forced to do more to attract an audience. No longer were they competing for 30 million or more viewers they were fighting for 12 million or 2 million and needing to connect with people gave them more freedom. At the same time Hollywood began aiming for a bigger and bigger audience as they poured more money into each big film. They could no longer risk alienating any audience member.

Throughout this time Hollywood has seen the overall number of moviegoers dropping. They have blamed this on home theatre technology improvements and piracy. Much of the true revenue shortfall has been masked by rising ticket prices. Hollywood has also tried to counter the home theatres with gimmicks like Imax and 3-D, which has the secondary benefit of increasing the ticket price even more for something of questionable value. They can’t quite seem to understand that the audience will return if you make better films and if you make more films instead of bigger films the chances are better that there will be good ones. After all it’s just good business sense.



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