Chapter 7: Movies and the Impact of Images

The Economics of the Movie Business

Despite the development of network and cable television, video-on-demand, DVDs, and Internet downloads and streaming, the movie business has continued to thrive. In fact, since 1963, Americans have purchased roughly 1 billion movie tickets each year; in 2013, 1.34 billion tickets were sold.13 With first-run movie tickets in some areas rising to $15 (and 3-D movies costing even more), gross revenues from North American box-office sales have climbed to $10.9 billion, up from $8.8 billion annually in 2005 (see Figure 7.1). The bigger news for Hollywood studios is that global box-office revenues have grown at a much more rapid rate, especially in China (which adds an average of thirteen new movie screens every day), Russia, and Mexico.14

FIGURE 7.1 NORTH AMERICAN AND GLOBAL BOX-OFFICE REVENUE, 2005–2013 (IN $ BILLIONS) Data from: Motion Picture Association of America, “Global Box Office—All Films (US$ Billions),” www.mpaa.org/wp-content/uploads/2014/03/MPAA-Theatrical-Market-Statistics-2013_032514-v2.pdf.

The growing global market for Hollywood films has helped cushion the industry as the home video market undergoes a significant transformation, with the demise of the video rental business and the rise of video streaming. In order to flourish, the movie industry has had to continually revamp its production, distribution, and exhibition system and consolidate its ownership.

Production, Distribution, and Exhibition Today

In the 1970s, attendance by young moviegoers at new suburban multiplex theaters made megahits of The Godfather (1972), The Exorcist (1973), Jaws (1975), Rocky (1976), and Star Wars (1977). During this period, Jaws and Star Wars became the first movies to gross more than $100 million at the U.S. box office in a single year. In trying to copy the success of these blockbuster hits, the major studios set in place economic strategies for future decades. (See “Media Literacy and the Critical Process: The Blockbuster Mentality” on page 259.)

Making Money on Movies Today

With 80 to 90 percent of newly released movies failing to make money at the domestic box office, studios need a couple of major hits each year to offset losses on other films. (See Table 7.2 on page 256 for a list of the highest-grossing films of all time.) The potential losses are great: Over the past decade, a major studio film, on average, cost about $66 million to produce and about $37 million for domestic marketing, advertising, and print costs.15

Rank	Title/Date	Domestic Gross ($ millions)**
1	Avatar (2009)	760.5
2	Titanic (1997, 2012 3-D)	658.6
3	The Avengers (2012)	623.4
4	The Dark Knight (2008)	533
5	Star Wars:Episode I—The Phantom Menace (1999, 2012 3-D)	474.5
6	Star Wars (1977, 1997)	461
7	The Dark Knight Rises (2012)	447.8
8	Shrek2 (2004)	437.7
9	E.T.: The Extra-Terrestrial (1982, 2002)	435
10	The Hunger Games: Catching Fire (2013)	424.7

Table 7.1: TABLE 7.2 THE TOP 10 ALL-TIME BOX-OFFICE CHAMPIONS* Data from: “All-Time Domestic Blockbusters,” Box Office Guru, June 1, 2014, www.boxofficeguru.com/blockbusters.htm. *Most rankings of the Top 10 most popular films are based on American box-office receipts. If these were adjusted for inflation, Gone with the Wind (1939) would become No. 1 in U.S. theater revenue. Star Wars, Titanic, and E.T. would all remain in the Top 10. **Gross is shown in absolute dollars based on box-office sales in the United States and Canada.

With climbing film costs, creating revenue from a movie is a formidable task. Studios make money on movies from six major sources:

First, the studios get a portion of the theater box-office revenue—about 40 percent of the box-office take (the theaters get the rest). More recently, studios have found that they can often reel in bigger box-office receipts for 3-D films and their higher ticket prices. For example, admission to the 2-D version of a film costs $15 at a New York City multiplex, while the 3-D version costs $19.50 at the same theater. In 2013, 3-D film screenings accounted for 16 percent of domestic box-office revenue. As Hollywood makes more 3-D films (the latest form of product differentiation), the challenge for major studios has been to increase the number of digital 3-D screens across the country. By 2013, about 37 percent of U.S. theater screens were capable of showing digital 3-D.
Second, about three to four months after the theatrical release comes the home video market, which includes video-on-demand (VOD), subscription streaming, and the remaining Blu-ray and DVD sales and rental business. This release “window” generates more revenue than the domestic box-office income for major studios, but has been in transition as VOD has replaced the Blu-ray and DVD formats. Video-on-demand includes services like iTunes, Amazon, Google Play, Vudu, Hulu Plus, Netflix, and the VOD services of cable companies like Comcast, Time Warner Cable, Cox, Verizon, and satellite providers DirecTV and Dish. Depending on the agreement with the film distributer, movies may be purchased for instant viewing, rented for a limited period of time at a lower price, or (as in the case of Netflix, the largest streaming service with over 36 million subscribers) instantly streamed as part of a monthly fee for access to the company’s entire library of licensed offerings.
Generally, discount rental kiosk companies like Redbox must wait twenty-eight days after films go on sale before they can rent them. Netflix has entered into a similar agreement with movie studios in exchange for more video streaming content—a concession to Hollywood’s preference to first try to get the greater profits from selling movies as digital downloads or as DVDs before renting them or licensing them to a streaming service. Independent films and documentaries often bypass the theatrical box-office release window entirely because of the necessary steep marketing expenses and instead go straight to home video for release. An executive with the Weinstein Company, a leading independent studio, suggests that a traditional release to movie theaters makes sense only if the studio anticipates that the film will make gross revenues of more than $20 million.16 There is pressure from services like Netflix for Hollywood to release films simultaneously to the home video market and to theaters, but the theater industry and their major studio allies have fiercely protected the three- to four-month exclusive window that theaters have for movie releases, arguing that to lose exclusivity would destroy the movie theater business.17
Third are the next “windows” of release for a film: premium cable (such as HBO and Showtime), then network and basic cable showings, and finally the syndicated TV market. The price these cable and television outlets pay to the studios is negotiated on a film-by-film basis.
Fourth, studios earn revenue from distributing films in foreign markets. In fact, at $25 billion in 2013, international box-office gross revenues are more than double the U.S. and Canadian box-office receipts, and they continue to climb annually, even as other countries produce more of their own films.
Fifth, studios make money by distributing the work of independent producers and filmmakers, who hire the studios to gain wider circulation. Independents pay the studios between 30 and 50 percent of the box-office and home video money they make from movies.
Sixth, revenue is earned from merchandise licensing and product placements in movies. In the early days of television and film, characters generally used generic products, or product labels weren’t highlighted in shots. For example, Bette Davis’s and Humphrey Bogart’s cigarette packs were rarely seen in the actors’ movies. But with soaring film production costs, product placements are adding extra revenue while lending an element of authenticity to the staging. Famous product placements in movies include Reese’s Pieces in E.T. (1982), Pepsi-Cola in Back to the Future II (1989), and an entire line of toy products in The Lego Movie (2014).

Theater Chains Consolidate Exhibition

Film exhibition is controlled by a handful of theater chains; the leading five companies operate more than 50 percent of U.S. screens. Each of the major chains—Regal Cinemas, AMC Entertainment, Cinemark USA, Carmike Cinemas, and Cineplex Entertainment—owns thousands of screens in suburban malls and at highway crossroads, and most have expanded into international markets as well. Because distributors require access to movie screens, they do business with the chains that control the most screens. In a multiplex, an exhibitor can project a potential hit on two or three screens at the same time; films that do not debut well are relegated to the smallest theaters or bumped quickly for a new release.

BLOCKBUSTERS like Captain America: The Winter Soldier (2014), which draws on Disney’s Marvel Comics property, are sought after despite their large budgets because they can potentially bring in twice their cost in box-office receipts, disc and video-on-demand sales, streaming, merchandising, and—studios hope—sequels that generate more of the same. Captain America: The Winter Soldier, sequel to Captain America: The First Avenger (2011), grossed $256.7 million in the United States and earned another $454.1 million worldwide (almost 64 percent of the film’s earnings came from abroad). A third installment is set to be released in 2016. Zade Rosenthal/© Walt Disney Studios Motion Pictures/Everett Collection

The strategy of the leading theater chains during the mid-1990s was to build more megaplexes (facilities with fourteen or more screens), featuring upscale concession services and luxurious screening rooms with stadium-style seating and digital sound to make moviegoing a special event. By 2014, the movie exhibition business had grown to a record number (39,783) of indoor screens, most of them at megaplex locations. To further combat the home theater market, movie theater chains added IMAX screens and digital projectors in order to exhibit specially mastered 3-D blockbusters that carry higher ticket prices.18

Still, theater chains sought to be less reliant on Hollywood studios, and with new digital projectors they began to screen nonmovie events, including live sporting events, rock concerts, and classic TV show marathons. One of the most successful theater events is the live HD simulcast of the New York Metropolitan Opera’s performances, which began in 2007 and during the 2014–15 season screened ten operas in more than 1,900 locations in sixty-four countries worldwide. The top two theater chains, Regal and AMC, also joined forces in 2011 to form their own film studio, Open Road Films, which became a successful production and distribution business for smaller movies, like the animated film The Nut Job (2014) and the indie comedy Chef (2014).

The Major Studio Players

The current Hollywood commercial film business is ruled primarily by six companies: Warner Brothers, Paramount, Twentieth Century Fox, Universal, Columbia Pictures, and Disney—the Big Six. Except for Disney, all these companies are owned by large parent conglomerates (see Figure 7.2). The six major studios account for about 77 percent of the revenue generated by commercial films. They also control more than half the movie market in Europe and Asia. In the United States, three independent studios—sometimes called mini-majors—have maintained modest market share for a number of years: Lionsgate (The Hunger Games, the Twilight series), which purchased indie Summit Entertainment in 2012; the Weinstein Company (Django Unchained, Sin City: A Dame to Kill For); and Relativity (Oculus, Safe Haven).

FIGURE 7.2 MARKET SHARE OF U.S. FILM STUDIOS AND DISTRIBUTORS, 2013 (IN $ MILLIONS) Note: Based on gross box-office revenue, January 1, 2013–December 31, 2013. Overall gross for period: $10.927 billion. Data from: Box Office Mojo, “Studio Market Share, 2013,” www.boxofficemojo.com/studio/.

In the 1980s, to offset losses resulting from box-office failures, the movie industry began to diversify, expanding into other product lines and other mass media. This expansion included television programming, print media, sound recordings, and home videos/DVDs, as well as cable and computers, electronic hardware and software, retail stores, and theme parks such as Universal Studios. To maintain the industry’s economic stability, management strategies today rely on both heavy advance promotion (which can double the cost of a commercial film) and synergy—the promotion and sale of a product throughout the various subsidiaries of the media conglomerate. Companies promote not only the new movie itself but also its book form, soundtrack, calendars, T-shirts, Web site, and toy action figures, as well as “the-making-of” story on television, home video, and the Internet. The Disney studio, in particular, has been successful with its multiple repackaging of youth-targeted movies, including comic books, toys, television specials, fast-food tie-ins, and theme-park attractions. Since the 1950s, this synergy has been a key characteristic of the film industry and an important element in the flood of corporate mergers that have made today’s Big Six even bigger.

The biggest corporate mergers have involved the internationalization of the American film business. Investment in American popular culture by the international electronics industry is particularly significant. This business strategy represents a new, high-tech kind of vertical integration—an attempt to control both the production of electronic equipment that consumers buy for their homes and the production and distribution of the content that runs on that equipment. This began in 1985 when Australia’s News Corp. bought Twentieth Century Fox (News Corp. has since split into two separate companies; the film division is under the umbrella of 21st Century Fox). Sony bought Columbia in 1989 for $4 billion. Vivendi, a French utility, acquired Universal in 2000 but sold it to General Electric, the parent of NBC, in 2003. Comcast bought a controlling stake in NBC Universal in 2009, and government agencies approved the merger in 2011. In 2006, Disney bought its animation partner, Pixar. It also bought Marvel in 2009, which gave Disney the rights to a host of characters, including Spider-Man, Iron Man, the Hulk, the X-Men, and the Fantastic Four. In 2012, Disney bought Lucasfilm, gaining control of the Indiana Jones and Star Wars franchises, plus the innovative technologies of George Lucas’s famed Industrial Light & Magic special effects company.

SYNERGIES in feature films can be easy for Disney, which is a $45 billion multinational corporation. Frozen (2013) is one of Disney’s biggest animated hits ever, and Frozen merchandise was in short supply in North America for fans wanting to celebrate the story of Anna and Elsa, two princess sisters who also became attractions at Disney resort parks. The movie’s soundtrack hit No. 1 in sales, and Disney Cruise Line and the Adventures by Disney tour company experienced a huge increase in holiday business to Geirangerfjord, Norway, the fjord that inspired the film’s fantasy kingdom of Arendelle. © Walt Disney Pictures/Everett Collection

Media Literacy and the Critical Process

The Blockbuster Mentality

In the beginning of this chapter, we noted Hollywood’s shift toward a blockbuster mentality after the success of films like Star Wars. How pervasive is this blockbuster mentality, which targets an audience of young adults, releases action-packed big-budget films featuring heavy merchandising tie-ins, and produces sequels?

1 DESCRIPTION. Consider a list of the all-time highest-grossing movies in the United States, such as the one on Box Office Mojo, http://boxofficemojo.com/alltime/domestic.htm.

2 ANALYSIS. Note patterns in the list. For example, of the thirty top-grossing films, twenty-four target young audiences (The Passion of the Christ is the only exception). Nearly all of these top-grossing films feature animated or digitally composited characters (Frozen, Shrek, Jurassic Park) or extensive special effects (Transformers, The Avengers). Nearly all of the films also either spawned or are a part of a series, like The Lord of the Rings, Transformers, The Dark Knight, and Harry Potter. More than half of the films fit into the action movie genre. Nearly all of the Top 30 had intense merchandising campaigns that featured action figures, fast-food tie-ins, and an incredible variety of products for sale; that is, hardly any were “surprise” hits.

3 INTERPRETATION. What do the patterns mean? It’s clear, economically, why Hollywood likes to have successful blockbuster movie franchises. But what kinds of films get left out of the mix? Hits like Forrest Gump (now bumped out of the Top 30), which may have had big-budget releases but lack some of the other attributes of blockbusters, are clearly anomalies of the blockbuster mentality, although they illustrate that strong characters and compelling stories can carry a film to great commercial success.

4 EVALUATION. It is likely that we will continue to see an increase in youth-oriented, animated/action movie franchises that are heavily merchandised and intended for wide international distribution. Indeed, Hollywood does not have a lot of motivation to put out the kinds of movies that don’t fit these categories. Is this a good thing? Can you think of a film that you thought was excellent and that would have probably been a bigger hit with better promotion and wider distribution?

5 ENGAGEMENT. Watch independent and foreign films and see what you’re missing. Visit foreignfilms.com or the Sundance Film Festival site and browse through the many films listed. Find these films on Netflix, Amazon, Google Play, or iTunes (and if the films are unavailable, let these services know). Write your cable company and request to have the Sundance Channel on your cable lineup. Organize an independent film night on your college campus and bring these films to a crowd.

Convergence: Movies Adjust to the Digital Turn

The biggest challenge the movie industry faces today is the Internet. As broadband Internet service connects more households, movie fans are increasingly getting movies from the Web. After witnessing the difficulties that illegal file-sharing brought on the music labels (some of which share the same corporate parent as the Big Six), the movie industry has more quickly embraced the Internet for movie distribution. Apple’s iTunes store began selling digital downloads of a limited selection of movies in 2006, and in 2008, iTunes began renting new movies from all the major studios for just $3.99. In the same year, online DVD rental service Netflix began streaming some movies and television shows to customers’ computer screens and televisions.

The popularity of Netflix’s streaming service opened the door to other similar services. Hulu, a joint venture by NBC Universal (Universal Studios), Twentieth Century Fox, and Disney, was created as the studios’ attempt to divert attention from YouTube and get viewers to either watch free, ad-supported streaming movies and television shows online or subscribe to Hulu Plus, Hulu’s premium service. Comcast operates a similar Web site, called Xfinity. Google’s YouTube, the most popular online video service, moved to offer commercial films in 2010 by redesigning its interface to be more film-friendly and offering online rentals. Amazon, Vudu (owned by Walmart), and CinemaNow (owned by retailer Best Buy) also operate digital movie stores.

Movies are also increasingly available to stream or download on mobile phones and tablets. Several companies, including Netflix, Hulu, Amazon, Google, Apple, Redbox, and Blockbuster, have developed distribution to mobile devices. Small screens don’t offer an optimal viewing experience, but if customers watch movies on their mobile devices, they will likely use the same company’s service to continue viewing on the larger screens of computers and televisions.

The year 2012 marked a turning point: For the first time, movie fans accessed more movies through digital online media than physical copies, like DVD and Blu-ray.19 For the movie industry, this shift to Internet distribution has mixed consequences. On one hand, the industry needs to offer movies where people want to access them, and digital distribution is a growing market. “We’re agnostic about where the money comes from,” says Eammon Bowles, president of the independent distributor Magnolia Pictures. “We don’t care. Basically, our philosophy is we want to make the film available for however the customer wants to purchase it.”20 On the other hand, although streaming is less expensive than producing physical DVDs, the revenue is still much lower compared to DVD sales, which had a larger impact on the major studios that had grown reliant on healthy DVD revenue.

The digital turn creates two long-term paths for Hollywood. One path is that studios and theaters will lean even more heavily toward making and showing big-budget blockbuster film franchises with a lot of special effects, since people will want to watch those on the big screen (especially IMAX and 3-D) for the full effect—and they are easy to export for international audiences. The other path involves inexpensive digital distribution of lower-budget documentaries and independent films, which probably wouldn’t get wide theatrical distribution anyway but could find an audience in those who watch from home.

The Internet has also become an essential tool for movie marketing, and one that studios are finding less expensive than traditional methods, like television ads or billboards. Films regularly have Web pages, but many studios now also use a full menu of social media to promote films in advance of their release. For example, the marketing plan for Lionsgate’s 2012 movie The Hunger Games, which launched an enormously successful movie franchise, employed “near-constant use of Facebook and Twitter, a YouTube channel, a Tumblr blog, iPhone games and live Yahoo streaming from the premiere” to build interest that made it a hit film.21

Alternative Voices

With the major studios exerting such a profound influence on the worldwide production, distribution, and exhibition of movies, new alternatives have helped open and redefine the movie industry. The digital revolution in movie production is the most recent opportunity to wrest some power away from the Hollywood studios. Substantially cheaper and more accessible than standard film equipment, digital video is a shift from celluloid film; it allows filmmakers to replace expensive and bulky 16-mm and 35-mm film cameras with less expensive, lightweight digital video cameras. For moviemakers, digital video also means seeing camera work instantly instead of waiting for film to be developed, and being able to capture additional footage without concern for the high cost of film stock and processing.

FIGURE 7.3 ONLINE VIDEO STREAMING MARKET SHARE RANKING IN 2013 Data from: Nielsen Newswire, “‘Binging’ Is the New Viewing for Over-the-Top Streamers,” September 18, 2013, www.nielsen.com/us/en/newswire/2013/binging-is-the-new-viewing-for-over-the-top-streamers.html.

PARANORMAL ACTIVITY (2007), the horror film made by first-time director Oren Peli for a mere $15,000 with digital equipment, proves that you don’t always need a big budget to make a successful film. Peli asked fans to “demand” the film be shown in their area via the Web site www.eventful.com, and Paramount agreed to a nationwide release if the film received one million “demands.” Paranormal Activity was released nationwide on October 16, 2009, and went on to gross close to $200 million worldwide, spawning several sequels. © Paramount Pictures/Photofest

British director Mike Figgis achieved the milestone of producing the first fully digital release from a major studio with his film Timecode (2000). Though digital video has become commonplace on big studio productions, the greatest impact of digital technology has been on independent filmmakers. Low-cost digital video opened up the creative process to countless new artists. With digital video camera equipment and computer-based desktop editors, movies can be made for just a few thousand dollars, a fraction of what the cost would be on film. For example, Paranormal Activity (2007) was made for about $15,000 with digital equipment and went on to be a top box-office feature. Digital cameras are now the norm for independent filmmakers. Ironically, both independent and Hollywood filmmakers have to contend with issues of preserving digital content: Celluloid film stock can last a hundred years, whereas digital formats can be lost as storage formats fail and devices become obsolete.22

Because digital production puts movies in the same format as the Internet, independent filmmakers have new distribution venues beyond film festivals or the major studios. For example, Vimeo, YouTube, and Netflix have grown into leading Internet sites for the screening and distribution of short films and film festivals, providing filmmakers with their most valuable asset—an audience. Others have used the Web to sell DVDs directly, sell merchandise, or accept contributions for free movie downloads.