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Really gross revenue - November 13, 2007

Roger Smith and the folks at Global Media Intelligence could not have had better timing for the release of their exhaustive economic study, "Do Movies Make Money?"

The report, which examined total worldwide first-cycle revenue from 132 medium and big-budget films released by the major studios over the past three years, lands just as Hollywood looks to be settling in for a prolonged labor dispute between writers and producers over the writers' share of the revenues from DVD sales and new media platforms.

Smith's conclusion: They're fighting over crumbs.

According to the GMI data, foreign DVD sales have fallen 15.5% over the three-year period, while U.S. sales have fallen at about half that rate. The trend is accelerating, moreover, with 2007 DVD sales in the U.S. likely to come in 12.6% below last year's. Meanwhile, new distribution technologies like video-on-demand are showing no signs of delivering the kind of revenue predicted a few years ago, let alone enough to replace those lost DVD receipts.

Producers are sure to seize on the report as evidence that they cannot afford to give writers a bigger slice of the new media pie, let alone DVD sales, because their own revenue and profits are declining. According to the report, films released by the studios in 2006 will show an aggregate net loss of $1.9 billion when all is said and done, compared to a profit of $2 billion on films released in 2004.

A couple of caveats are in order, however. The studios are not 100% equity owners of all of those films; many have outside investors. So the studios will not incur all of those losses themselves. Deals with outside financers are also typically structured to pay the studio a distribution fee off the top, which is accounted for separately.

"My conclusions concern the nature of the business of making movies," Smith, a 30-year veteran of the industry and now executive editor and motion picture analyst for GMI, a unit of London-based Screen Digest, told Media Wonk. "I didn't care [in doing the calculations] if the studios were able to lay off some of those losses on someone else, or if they were making money for themselves from distribution fees."

The conclusions of the study don't bear solely on the writers strike, however. Pleas of poverty have become a standard part of the studios' Capitol Hill repertoire as well as they angle for ever-more stringent measures to curb piracy.

The decline in worldwide DVD sales--although probably not something they're thrilled to see advertised to shareholders--nonetheless fits neatly into the studios' narrative that piracy is stealing revenue from Hollywood. The studios claim to be losing about $6 billion a year from movie piracy, and the decline in worldwide DVD sales is one plausible way those losses could be manifested.

In both the residuals and piracy debates, however, it's important to keep in mind GMI's real conclusion about where the money went. While ancillary market revenues have declined over the past few years, the cost of making movies has continued to rise. And a big piece of that increase has come from ballooning "gross participation" payments made to top actors and directors (but rarely writers), which totaled $3 billion in 2006, double the figure of five years ago.

According to Smith, the studios may be giving away as much as 25% of their movies' total receipts to gross-point participants. On a per-title basis, that effect is likely to be orders of magnitude larger than the effect of piracy.

That doesn't mean piracy isn't a serious problem that needs to be addressed. But it makes it clear that the studios have at least as big a problem--and probably bigger--on the cost side of their business. And that isn't going to be solved by legislation.


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