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David Poland

By David Poland

Film Delivelution 32611: Things (Don’t) Change

It’s been 18 days since the last look at the delivery evolution of film (and television). Nothing much has changed, though there has been a lot of news.

Netflix remains in front of the story, though this is mostly because of lazy thinking by journalists and Wall Street analysts. I’ve been thinking about analogies that might make it clearer why Netflix is the tail in this story, not the elephant.

1. When George Lucas made Star Wars in 1976, he was able to negotiate the rights to the films reverting to him AND to keep all merchandising rights. There had been a few cases – like Jerry Lewis – in which rights reverted to the filmmaker. But there was no VHS or DVD or even cable as we know it. HBO launched in 1972, but when Lucas made Star Wars, the network was on 9 hours a day. There was no CNN. though Ted Turner was in the cable business, making TBS “the superstation,” primarily with Atlanta Braves baseball and pro wrestling.

So when Lucas generated billions with merchandising, that cash flow point would be negotiated and put in contracts from then on, even for films for which there will be no merchandising. No one would take the chance.

2. When Jack Nicholson’s agents made the deal for Batman in 1988, there was no sense that his gross points would be worth over $60 million all in. Only five films had ever grossed $400m worldwide at the time; the three Star Wars films, E.T., and Jaws. (Indiana Jones 3 would join the group that summer, having opened four weeks before Batman). No actor had gross points on any of those films.

But in that case, everyone had won. When Steven Spielberg wanted to make Hook a star-studded film and the only way to spend as much as he wanted on effects and to have the stars was to make it a back-end heavy movie, spending little above-the-line upfront, but “sharing” the risk and opportunity with the studio. But without the film being a massive hit, there was little chance of Tri-Star making any real money on the movie, as so much was going out.

New Line made The Mask in 1993, they wanted Peter Reigert to add some familiar, likable flavor to the movie. But the budget didn’t allow him to be paid his asking rate. So he and his agent made a deal for a gross point after a certain breakeven point on this film that New Line saw as small. New Line had had only two films in its history do as much as $50 million domestic; Teenage Mutant Ninja Turtles and TMNT2. So this film, based on an obscure comic and starring a TV guy and an unknown actress was aiming at $40 million, at best. Points for anyone besides the biggest movie starts were not the standard of the day. Push came to shove, and Reigert, the fourth lead in the film, made more money on the movie than any of the other actors. The studio didn’t see a $350 million worldwide hit coming.

Agents continued to push for gross point deals. By the early 2000s, as DVD revenues became a cash cow, points replaced $20 million paydays as the gold standard, with a balance between massive salaries and gross points. Then, it was mega-salaries AND points. By 2006’s Mission:Impossible III, it had gotten so out of hand – with Tom Cruise scoring a $60m+ payday while Paramount scraped to get out of the red ink – that it became a very public, very ugly issue.

As DVD numbers have settled into a less amazing number, studios have tightened their belts. This was positioned as “pushing back against talent,” but though the studios do not want to publicly discuss it, it is a matter of survival. There are still insanely generous deals out there. But as the cost of production rose to meet the cost of talent (including some massive perk packages not listed as salary) and the cost of overhead through the DVD Bubble era, studios found a way to spend more and more on less and less and with a smaller overall revenue stream – ironically, theatrical being the most stable revenue base – pay days in the 30s and 40s (millions) just were not an option for all but the most “guaranteed” cash cows. It had nothing to do with “pushing back,” it had to do with staying in business.

3. The distribution pattern for studio films may not feel all that different – even if it feels shorter – than it used to feel. When AMC opened the first multiplex in 1963, the basic idea was to have 2 showings of the same film, using the hourly staff more efficiency, instead of just having them sit around for 2 hours while the movie played. Then, they tried it with two different shows. When AMC started building new multiplexes nationally in the late 70s/early 80s, the screens and seating capacity per screen were pretty small, emphasizing variety over quality. Given that people were going to these tiny theaters, other older houses were encouraged to plex their big screens, which led to some truly terrible theaters, with sound issues and projection often coming from one side or the other side of the theater, rather than from the center.

But it was when new multiplexes and then megaplexes started being built in the mid-90s that things really changed. It may have seemed, from the outside, that the exhibition business was under attack, but exhibitor bankruptcies, left and right, were putting exhibitors into a cocoon (or coma), allowing them to break old real estate contracts (often with malls) and leading to a lot of newly built theaters with bigger screens and mid-sided auditoriums (200 – 350 seats).

The question came along about how exhibitors were going to fill all these screens. The answer was not, mostly, with a wider variety of product. It was the same product opening on 2 or 3 or 4 different screens – as many as 10 screens on mega-movies as mega-plexes – for the first weekend… maybe 2 or 3 on the second weekend, etc. This meant that a “screen count” of 3500 could actually be a theater count of that number and over 10,000 actual screens playing a movie on opening weekend. Essentially, movies were opening with a similar number of available seats, but instead of having to have 5 opportunities day to catch the start of a new movie, a big film might well be playing every half hour through opening weekend.

This paradigm shift was not about the end of theatrical or about declining attendance, but about maximizing the opportunity to see movies in a positive way… to make more start times available for the most popular films, in a theater with a big enough screen to separate it from your big screen TV and high quality sound and the communal film experience. For studios, it was about maximizing early revenues so that they could get to their ever-shorter window to post-theatrical where there was a big pot of cash waiting, while leaving little of the theatrical revenue behind.

Of course, this didn’t quite work the way everyone thought it would. The pressure on theaters to move product out as soon as possible – taking more advantage of big opening weekend advertising spends bringing in more new popcorn-buying bodies meant that even well-performing films that were a few weeks old were getting pushed out faster than ever, even if there were just 10 films playing at an 18-screen theater.

4. When Apple launched their trailer site, promoting QuickTime, anyone who asked to be promoted on the top of the page was given a slot. Sometimes, the Apple staff just pushed things they liked up there. And then studios realized that it was a promotional opportunity. And wrestling for position began. And it became a negotiation to have material on the featured area at the top of the page.

The same thing has happened as every trailer, poster, promotional piece, etc from movies have become EXCLUSIVE bait for some outlet, online or off.

It’s not complicated. When studios thought of their marketing tools as just marketing tools and they were paying media for ad space to run them, that was okay. But as soon a fourth poster for an obscure movie with a bikini model in it became the chance to be on top of a web page for days for free… there became a cost to media to run a piece of marketing. And if that cost is only the time of a staffer, it is still a cost.

I guess my point is…

Things change. And while there is usually some hook for why it’s changing, it’s usually not the hook that is being promoted in public.

Time-Warner Cable is not Netflix. But as they try to roll out their new online, on-mobile program of anything/anywhere service for their customers, they are running into the exact same issue – albeit, with different details – as Netflix.

Three years ago, if T-WC was rolling out an anything/anywhere solution, they wouldn’t have gotten much resistance, as there was not a lot of value placed on those rights. But now, streaming is seen as What’s Next, and not only does everyone want to get paid… what they really, really, really don’t want is to be seen as the last sucker on the block who was giving it away for free.

I guess the public and media wet dream is that Netflix was, somehow, going to deliver everything ever made on film or TV a few months after release for $8 a month. And anyone getting in the way of that was “not cooperating.”

The truth is, film and television libraries were massively devalued over the course of a decade of big DVD sales. MGM lost, on paper, about 2/3 of its value in 4 years. So any revenue, as recently as two years ago, was considered a lot of revenue from streaming. It was a needle in a haystack of ideas about what would be The Next DVD. It was talked about, but bottom line, Netflix was doing free R&D for the movie and television industry… thanks! And lo and behold, Netflix found a way to make it into a profitable 10-figure business. Thanks again!

And now… pay me.

Since Lucas made a fortune in merchandising, the agents have said, “Thanks, George… pay me, studio.”

Since Spielberg got a studio to make what was destined to be a breakeven movie, as they gave away so much, the agents have said, “Thanks Steven… pay me, studio.”

Since the new multiplexes made it easy to allow virtually every person who wants to see a new movie to see that new movie on opening weekend (give or take a specific showtime), the industry has said, “Thanks exhibitors, now make more faster, even as we continue to put more competing delivery systems in the market and lower and lower prices!”

Netflix made it real. And now, they are paying to stay in business.

Word is that they are talking about $25m a year (plus accelerators) for the Miramax library… most recent title to gross $35m domestic, 2007.

CBS/Showtime, which recently did a deal with them for (mostly) old TV shows, wants to get paid more for new TV shows from Showtime. Shocker!!!

Thing is, if no one is paying for streaming, then streaming is an interesting gimmick and streaming on Netflix, with them picking up the bill and paying a minimum is an okay piece of business. If Netflix is now paying millions for streaming – over retail – no one would or should want to give them anything for free or cheap… even if there isn’t an alternative streaming revenue producer with which to land right now. Criterion landed at Hulu, but Hulu has a limited budget too.

Likewise, Time-Warner Cable, which wants to give people’s copyrighted materials away in a new format for no additional charge. This is Netflix 3 years ago… except that since Netflix already turned this corner, content creators are saying, “Sorry, guys” from the start. Obviously!

Meanwhile, we are all about to get squeezed – Netflix included – by the FCC allowing internet service providers to start limiting your usage… not a couple of years ago when 5 gigs was a lot of usage, but now, when one HD movie for your iPad is about a gig. Everyrone is creating ways to use bandwidth and the providers are saying, “Sure… pay us more!”

And as HBO and Showtime roll out proper streaming systems, do you think they are going to remain a “gift with purchase?”

What is really amazing about the Netflix trajectory is how fast things have moved. And the irony is that Netflix has moved the bar faster than anyone. They are NOT competitors with studio-owned pay-TV or other post-theatrical media. They are, right now, the highest bidding buyer in town and are willing to do non-exclusive deals that roll out relatively late in the game for these huge amounts of money. They clearly are trying to get ahead of a curve that they see coming. And now, by creating the market, they may be ahead of the rest… but they have a whole new set of battles to fight.

No deal will come to Netflix, save tiny companies who need promotion, without looking for a big check anymore. Nor to Hulu or Time-Warner Cable or DirecTV or anyone else who is looking to make streaming a part of their offering to the public. The horse is out of the barn.

One last look backwards… sound movies. The technology was available long before studios embraced them. But the threat of bankruptcy finally pushed the first studio into trying it on a big film. And once it was a sensation, every studio felt they had to move forward and move fast.

Streaming has been available, but in the last five years, it has become much more realistic. There was no technological block keeping studios from getting on the train at the same time Netflix did. The blocks were business blocks. Netflix is The Jazz Singer. Now, everyone is scrambling to move forward.

Nothing changes, even as things change.

12 Responses to “Film Delivelution 32611: Things (Don’t) Change”

  1. Don Murphy says:

    There are a number of flaws in your unread essay Kingo but we know that you don’t groove on the corrections.

    Nevertheless, George Lucas did NOT negotiate sequels and merch in his contract. When the film went overbudget the studio started redoing his deal and almost as consolation, his lawyer said “thrown in sequels and merch and you have a deal.” A small but marked difference from what you wrote.

    Further I do not believe that any history of Hollywood ever indicated that they “could” have done sound years earlier than they did. There WERE systems which involved records synched to films but this didn’t work very well. The Warners started sound just as soon as they humanly could.

    Your understanding of gross points, which go back to the 1960s, is flawed at its core and would take days to educated you about. Gross points are all about the timing of money. Studios don’t want to pay it all upfront, but they have to pay what they have to pay somehow, and not because of evil agents as you try to describe it.

    This is another of your posts destined for few views and even fewer comments- I couldn’t make hide nor hair of it- but I did think it important to clarify what you think are facts.

    Now rip into me, I’m a bastard who started the Chicago Fire etc.

  2. IOv3 says:

    Don, you make great points but you could have just written this:

    Don Murphy says:
    March 27, 2011 at 9:05 pm

    Shit man, you really hate Netflix.

  3. Joe Leydon says:

    Actually, Don, there are other folks who might disagree with your version of how George Lucas got the merchandise control. Have you ever read (or saw the documentary based on) Easy Riders, Raging Bulls.

  4. Don Murphy says:

    Yes both. I am willing to admit if I am incorrect- what is their version?

  5. Joe Leydon says:

    Not necessarily saying you are wrong. But the gist of the book and doc: Lucas held out for merch, even though his friends thought he was silly for doing so because, all things considered. he was lucky they were letting him make the movie.

    Remember what Robert Evans said about the truth: There are three sides to every story.

  6. shillfor alanhorn says:

    The game changer, I think, would be for Netflix to start buying libraries, or at least a controlling interest in some. Steve Jobs’ 7% of Disney has been enough to make that company give favorable terms to Apple; what if Netflix bought equity in Lionsgate or the new Miramax or MGM for only a little more than what they’re already paying to rent the companies’ content? Or on the flipside, all the major studios are owed major money from Blockbuster and have been threatening suit to foil its bankruptcy reorganization. What if they swapped their debt for equity in the new company and ran it as a collective (like they’ve attempted to do with Hulu), then ramped up its streaming component (or merged it with Hulu) and made it a viable competitor to Netflix? Netflix’s huge 800-lb gorilla market share would probably enable them to evade anti-trust concerns.

  7. Don Murphy says:

    I have heard multiple times it was all Dekom, not Lucas.

  8. David Poland says:

    Don… happy to have your insight. I can do without the asshole part, which is hardly accusing you of being a bastard or setting the Chicago fire. But clearly, you feel the need to stick it to me with the same old schtick.

    Concur with Joe on Star Wars. But maybe you are right.

    And yes, I have not done a good job offering up the history of points. Not my intention. But would be thrilled to get any insights you have to add.

  9. Jeffrey Boam's Doctor says:

    Never bought that line about SW merch being a throwaway in the negotiations. Just doesn’t gel with the reality of the time. JAWS changed everything. How many products with the word JAWS were plastered as merch in 75-77? A few hundred or more? From my memory it appeared to be on everything during those years.

  10. Joe Leydon says:

    I vaguely remember that the success of Star Wars actually took toymakers by surprise. So much so, in fact, that some tie-in items still weren’t ready months later during the Xmas shopping season.

  11. Jeffrey Boam's Doctor says:

    For sure Joe. Kenner had no clue of the popularity and couldn’t meet demand. No one knew how nuts it was going to go. I just meant that I can’t see how merch was this laughable thing that no one thought had any value at all.

  12. David Poland says:

    Didn’t write that it was a throwaway, JDB. However, as others have noted, there was nothing close to the merchandising bonanza of Star Wars before Star Wars. Jaws wasn’t close.

    And remember, Star Wars was not a hot property. The success was inconceivable.

    And that is the point of the whole piece… not debating 30 year old memories of what went down, but the fact that one the new meat is clearly labeled New Meat, the rules are completely different. That is what I have been writing about regarding Netflix.

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