MCN Commentary & Analysis

Year’s End: Box Office Rorschach, Pt 1 – Whose Disruption Is It Anyway?

There is a disease in Hollywood that is also found in many places, more so in 2019 than in the past… though it has certainly been there in the past as well.

When it’s about someone else, gossip is fun, even if it might be untrue… but if people are saying it, there must be some truth to it. When it’s about Me, gossip is unfair and unkind and why in God’s name don’t They (at least) stick to the facts?

Box Office Reporting, in 2019, is driven as much by gossip as by facts.

There are a series of assumptions that are popular in the media and they color virtually every story written about the film industry, especially in season-end and year-end pieces. Like any good lie, they have a kernel of truth that makes the lie seem more believable.

You’ve heard it. If you are reading this, you surely see this “fact” stated, as a matter of fact, every week.

Motion picture theatrical is dying. Motion picture theatrical is dead.

At the core of this anti-factual fart is — and has been for the last four decades — home entertainment. VHS was going to end the theatrical business. Cable was going to end the theatrical business. DVD was going to end the theatrical business. And now, of course, streaming is the final nail in the coffin of theatrical.

When Blockbuster opened in 1985, domestic theatrical was just over $3 billion. When cable became ubiquitous, 1990, let’s say, theatrical was at $4.4 billion. DVD launched in 1997 when domestic theatrical was $6.1 billion. And when Netflix launched streaming in 2008, theatrical was $9.5 billion. This year, as negative box office story after negative box office story is launching, we are having the #2 all-time box office year in domestic history with $11.5 billion and what may well be the #1 year worldwide in history.

But theatrical is dying.

A lot of this starts with a simple lean into the wrong ideas about what the industry is going through. Yes, there is seismic change… again. But what is the target of disruption? Is it people leaving their homes to go see a movie or is it how we see movies (and other content) in our homes, day after day, on average about 8 hours a day?

I’m not saying that the theatrical window has not been disrupted. But it has been disrupted in a mostly minor way (aside from the relentless negativity in the media).

The same way that Netflix disrupted Blockbuster to death by offering unlimited DVD rentals for a subscription rate of $10 or so a month, less than three Blockbuster rentals, Netflix’s streaming subscription model and the ideas that occurred within it — easy access on multiple viewing platforms, binge viewing, everything on demand, no commercials — first disrupted pay TV and now has launched the paradigm shift that will end cable/satellite as we have known it.

The arguments that so many journalists keep making — they make it so often, they have stopped challenging their own assumptions — are not new. Netflix has not changed that. “It’s too expensive.” “Too many kids behaving badly and interrupting my experience.” “Concessions are too expensive.” “Tickets are too expensive.” “Who wants to leave the house when you can sit at home and watch this beautiful TV of this (currently) enormous size?”

Be honest. If you are old enough to remember, you heard every one of those complaints in 1975, 1985, 1995, 2005, 2015, and even this week.

And along that road (45 whole years), everything has changed in home entertainment at least five times. And indeed, theatrical has changed dramatically at least four times. We went from solo theaters to plexing of the solo houses to multiplexes being ubiquitous to wild overbuilding of multiplexes in the same neighborhoods to closing most of the solo and plexed theaters (via a wave of bankruptcies) and the end of healthy second-run business due to VHS and DVD to another rebuild of the surviving multiplexes into stadium seating to accordion platforming (as I call it… expanding to a huge number of screens to fit demand in multiplexes on opening weekends and sometimes beyond) to the consolidation of screens down to a handful of companies, three of which own almost half the screens in America and define the business model for almost everyone else with their choices.

The last 45 years has changed dramatically multiple times for film and television distributors as well. On the film side, there was a relatively small market for international theatrical distribution in the 70s and 80s. And frankly, I don’t have the resources that properly tracked international numbers through those years because the business was considered minor except in certain cases and often, distribution was primarily through international television, not theatrical. There were movies around, say, 1980, like Mad Max, that made more internationally than domestically. But there were others that had almost nothing on the balance sheet. Now, international tends to be two-thirds of the overall worldwide on big movies and often half on mid-sized films, with bad patches like comedies, which don’t always travel.

On the film side, the only post-theatrical business of note was sales to television and even then, a fairly small payday. When E.T. arrived and blew up the box office in 1982, Spielberg refused to put the film on VHS until 1988, sold about 5 million copies at sell-thru prices, then made a deal to license the film exclusively to Sears for TV for 10 years, starting in 1991, in what I remember as a $20 million deal, which was unheard of at the time.

Cable television became a normal part of households in the late 70s. HBO became available in all 50 states in 1980, though it still only operated from 3pm until midnight. But HBO and its eventual rivals changed the pricing of films airing on television significantly, as well as the number of opportunities to see something. Dozens of replays were available for the first time. And if you had a VHS and you could make the time work, well, you had it made.

Blockbuster hit its stride in the mid-80s (which, going back to E.T., was part of that story, as Spielberg & Co decided to go sell-through, which was not the primary VHS business yet). Rental revenues grew massively as Blockbuster standardized the business, worked closely with the distributors, and became the standard for a moment.

E.T. inspired other highly successful films to go sell-through on VHS, climaxing with Batman in 1989, which broke precedent and was released just under five months after release for $19.95 in most places, thanks to a cross-promotional deal with Pepsi. For the next decade and change, the home entertainment market was bifurcated between rentals and sell-through.

The DVD launched as a commercial product for films in March 1997, with Twister. By April 1998, Netflix had launched, mailing DVDs of the existing commercial library of 925 titles was available. A year later, in September, Netflix moved to their subscription model.

But that was a sideshow, for the moment, as the industry decided that DVD would be a sell-through business with a relatively minor rental side (8% – 17% of the DVD market), and that changed the paradigm yet again. For about five years, from 1999 – 2004, the proverbial idea that “you can’t lose money making a movie” almost became true.

In that period, both the gross and the returns to distributors from DVD grew quickly to be larger than the gross and returns on theatrical. By 2004, the number of DVDs sold and the number of domestic theatrical tickets sold were about equal… but the price point on DVDs was higher and the return to the studio was at least 50% higher.

The end of the “can’t lose” DVD era is marked by Mission: Impossible 3, in 2006, when Paramount declared war on Tom Cruise not because of Scientology or jumping on couches, but because Cruise’s deal sent him home with about $60 million while Paramount took a small loss on the film. Sumner Redstone did not think this was okay. But he wasn’t getting a rebate. (Paramount was also home of one of the worst IP deals in history, giving 88% of returns on Indiana Jones 4 to Lucas, Spielberg, and Ford after paying for the film.)

Then, too, it was fashionable to tout the death of movie theaters. In 2005, the New York Times took a tack on theatrical that it has steadfastly refused to move off of since. It was the year after The Passion of The Christ brought in $370 million domestically in February and March, which had really changed all expectations of what was possible in that part of the year. (The wave is still felt.) When Hitch and Constantine only delivered about $250 million that February, the attacks began. What was happening to theatrical. It was all over. The internet. DVD. Yadda, yadda, yadda. When the box office turned more positive that summer, with Star Wars: Episode III – Revenge of the Sith, Madagascar, Mr. & Mrs. Smith, and Batman Begins (among others), the standard went from domestic grosses to the number of tickets sold, which is an estimated number based on average cost and the total gross. The year ended up being about 6% down domestically, but 2006 would be the 2nd biggest movie year in history, topping 2004’s #2 showing. In the last 18 years, six years would be down from the previous year and the 12 were up. 2007 would see $9 billion for the first time ever. 2009 cracked $10 billion and 2015 saw $11 billion for the first time.

But theatrical is dead.

Also in the late 90s, international grosses for American-made movies passed domestic for the first time. It doubled between 2001 and 2007, representing 2/3 of the total worldwide box office for the first time in 2007. International is close to tripling domestic today. Worldwide box office has doubled since 2003.

The story with the natural competition for Netflix and all the other streamers is not theatrical movies, but cable/satellite TV. We have had easy access to more content than any human could consume since pretty early on in the cable invasion. While there have been some significant shifts for cable/satellite, like High Definition and On Demand. The whole mindset was that cable was installed, city by city, with underbids and negotiated contracts that set standards for the providers.

There was a giant flip in the economics when broadcast networks (and others), who were initially given legally-required access to cable slots, started getting paid by the cable networks (and the satellite companies as well) to keep the channels onboard.

But basically, cable/satellite has stayed in place, not unlike Blockbuster. Comcast grew massively, buying NBC/Universal while AT&T flipped the other way and took on the smaller Time-Warner, including DirecTV. And in the last few years, we saw the arrival of small-bundle streaming packages… most of which have seen their pricing explode in the last few months as the direct threat to cable/satellite became clearer. Sony even pulled their entry off the market.

Cable and Satellite is basically in the business of packaging a wide array of cable and broadcast networks for the consumer, delivered primarily through a hard cable or beamed in from a satellite. And the movement of the streamers is to debundle (for now) and allow the consumer to make a la carte choices that can supplant both the bundle and the still-increasing cost of cable/satellite.

The irony is that as loathed as cable/satellite companies are and who they are seen as money gougers, their offering is still incredibly attractive to most Americans, but it does keep getting more expensive for these providers to deliver. Still, they have been a $120 billion a year-plus industry for a decade while the theatrical movie business in America is an $11 billion business.

And so the question… and think before you answer. Is an average consumer more likely to rebuilt the package of content they get in their homes and either cut budget or expand content access or both every month of their lives OR are they likely to stop going to the movies that they choose to go see a few times each year to cut back their budget?

More in Part 2.

11 Responses to “Year’s End: Box Office Rorschach, Pt 1 – Whose Disruption Is It Anyway?”

  1. Erik Beck says:

    To support what is a completely correct article, I give you the following chart:

    YR Top 10 Top 100 TOTAL
    1977 $906,670,774 $1,373,129,789 $1,373,129,789
    1978 $882,420,643 $1,552,339,752 $1,552,339,752
    1979 $801,926,552 $1,957,517,364 $1,957,517,364
    1980 $887,375,165 $2,278,059,253 $2,295,889,828
    1981 $899,210,357 $2,283,183,241 $2,290,052,401
    1982 $1,256,980,362 $2,822,843,985 $2,867,956,473
    1983 $952,655,362 $2,531,009,243 $2,657,434,919
    1984 $1,266,956,669 $3,164,482,530 $3,352,501,032
    1985 $1,012,417,946 $2,852,231,939 $3,056,361,529
    1986 $1,112,930,343 $2,986,118,349 $3,202,619,999
    1987 $1,020,567,790 $3,317,028,375 $3,570,513,914
    1988 $1,107,338,721 $3,268,254,006 $3,573,577,161
    1989 $1,399,873,683 $3,922,852,601 $4,159,369,381
    1990 $1,555,418,424 $4,201,762,579 $4,527,600,215
    1991 $1,281,989,774 $4,013,340,886 $4,314,587,748
    1992 $1,448,348,483 $4,338,501,242 $4,605,316,133
    1993 $1,534,980,118 $4,493,750,447 $4,985,441,134
    1994 $1,662,665,764 $4,609,740,780 $5,082,449,306
    1995 $1,305,235,489 $4,793,838,006 $5,383,533,805
    1996 $1,651,217,305 $5,045,235,024 $5,706,784,971
    1997 $2,112,526,046 $6,113,944,155 $6,671,782,536
    1998 $1,616,043,282 $5,871,484,332 $6,574,789,117
    1999 $2,130,720,492 $6,632,162,974 $7,316,341,126
    2000 $1,898,250,308 $6,950,983,104 $7,738,748,349
    2001 $2,325,805,315 $7,339,639,621 $8,070,481,319
    2002 $2,527,882,447 $8,104,412,522 $9,206,418,047
    2003 $2,363,209,759 $8,108,321,662 $9,057,460,265
    2004 $2,674,096,989 $8,323,920,849 $9,319,470,570
    2005 $2,415,345,520 $7,697,562,088 $8,805,987,960
    2006 $2,294,585,211 $7,888,489,250 $9,214,534,884
    2007 $2,711,691,711 $8,509,652,684 $9,690,706,149
    2008 $2,531,726,277 $8,522,863,503 $9,698,009,486
    2009 $3,263,120,292 $9,863,827,871 $10,821,412,310
    2010 $2,859,374,511 $9,318,098,659 $10,212,570,628
    2011 $2,488,792,018 $9,057,688,864 $10,114,058,969
    2012 $3,313,717,122 $10,034,865,654 $10,959,626,973
    2013 $3,168,070,832 $10,059,687,522 $10,955,920,497
    2014 $2,736,384,725 $9,585,005,031 $10,436,386,003
    2015 $4,004,836,746 $10,321,355,959 $11,098,754,924
    2016 $3,789,137,317 $10,381,763,394 $11,373,560,923
    2017 $3,801,477,308 $10,271,408,705 $11,124,738,106
    2018 $3,982,586,621 $10,637,567,907 $11,607,914,813
    2019 $4,095,949,907 $9,489,867,485 $10,544,807,497

  2. Erik Beck says:

    Apologies for a second comment, but a reminder that those numbers are based on release date, so those 2019 numbers will continue to grow as the films from the last two weeks of the year continue to earn big box office throughout the first several weeks of 2020.

  3. Hcat says:

    I have always agreed with all the points mentioned above, but this feels a wee bit different. Look at how few movies were released by Disney, Fox and Paramount. I don’t think any of them cracked a dozen. I think Columbia also had their thinnest year in awhile. The theaters seem to be trying to continue to make it an experience, but the studios seem to be sleepwalking.

    Plus next year three of the five major studios will have their own streaming services where they can release midlevel films without the massive marketing costs and negative box office reporting that often greet them. I can see where even fewer films reach the big screen. If faced with the choice of making a To All the Boys or a Booksmart….there doesn’t seem to be a downside financially or critically by going safe and streaming.

  4. Sam E says:

    Movie theaters sell about 80% of the tickets they sold in at their industry peak in 2004. That sounds bad but consider how happy ABC would be to have 80% of the viewers they had in that year. As for the content side, I agree to some extent but it should be pointed out to the degree filmmakers (IE David Fincher and Adam Sandler) have abandoned the theaterical distribution model for streaming they’ve actually transitioned from a profitable business to an unprofitable one at least in the short term. Also, movies still seem to be the place younger artists who aren’t necessarily industry insiders seem to be drawn to(IE the Safdies, Berry Jenkins and Damien Chizelle)

  5. Kim Last says:

    Thanks Eric for the numbers mumbo jumbo. Real enlightening.

  6. David Poland says:

    Hcat – Paramount has been sleepwalking for a decade. And Fox is just playing out the string.

    Sam E – Sandler didn’t abandon theatrical… Sony stopped being willing to pay him to the point of excess… he’d still be at Sony if they were paying as freely as Netflix. But they are a perfect marriage. As for Fincher, he wants to make very expensive dramas. Studios won’t pay for that anymore – and should not – without the protection of stars or IP.

    The question isn’t whether the theatrical business is stronger or weaker without Fincher. He is pretty much a non-issue in terms of theatrical revenues. Like Scorsese, studios don’t do deals with him to make money. They make those deals for prestige.

    I didn’t say it in this post, but the idea that Netflix or anyone can produce content at these prices with no return other than maintaining subscriptions is not a forever reality. Every time some entity has bent the spending curve way up by spending wildly, it has shifted back to sanity within a few years. This is inevitable. There will another sense of where the norm is within 3 or 4 years. And it won’t be television series at $15m an hour.

  7. cadavra says:

    This isn’t exactly breaking news, but when people say theatrical is dying, they’re probably focusing on the collapse of the kind of mid-range movie that used to star John Wayne, Doris Day or Kirk Douglas. Most of today’s huge numbers are generated by franchise titles, and the remainder by tiny arthouse films. Modern aging actors who used to wide-open those kind of films–Diane Keaton, Michael Douglas, Robert Redford–now find their pictures playing a coupla weeks at Landmark theatres and then zipping off to streaming.

  8. Bob Burns says:

    Theatrical revenues have been growing at the rate of inflation or less for decades, while whole industries have emerged and matured. Interactive, for example, is twice the size of all theatrical, domestic and international combined. TV and Cable is much more than ten times the size of all theatrical. Theatrical has become a vanishingly small part of the work of the film industry.

  9. Sam E says:

    @David Poland

    Thanks for the detailed response and your point that network tv and possibly cable are actually the real content competitors with streaming services is well taken. FWIW in mentioning content production I was mostly responding to Hcats comment about the relative dearth of theaterical releases. Whatever the reason and maybe ‘abandoned’ was too strong of a word it does seem a number of filmmakers/stars(I could have also mentioned Baumbach and Soderbergh) have started to make more content for cable or streaming services and less for theaterical release. My point was in the long run I don’t know if this will be a continued trend though because it seems the spending on individual projects for Netflix especially and other streaming services too is way out of line with industry standards; maybe a business model where individual projects have to be profitable and thus are priced more accurately is actually a better bet to the extent there is a competition.

    PS Thanks for the column. I’m often aggravated with what seems to be a lack of basic business knowledge among a lot of entertainment writers. Often when I’ve read the sort of columns you’re referencing about why movie theaters are ‘dying’ they read more like personal analysis about why the author doesn’t like going to movies than business analysis.

  10. Hcat says:

    David, I agree that Paramount is not a well run studio, Viacom has let it rot on the vine. But if you look at the past few years they still managed to make some actual movies (Arrival, Fallout), some of them quite ambitious (Mother, Annihilation). So while as a studio they are competing more at a Lionsgate level than a Warners they could normally churn out something approaching a full slate. Now they seem to be leaning into the Nick IP more and delegating the films they don’t want to spend the marketing on to Netflix. Its lazy and they have been routinely lazy for years, but this is not the time for anyone in the industry to be lazy. We went from six studios to five, four is you want to relegate Paramount to a mini major since they can’t field a hit as well as STX.

    Bob, its true that distributing films is a smaller revenue stream than owning a broadcast network (so far) or a dozen cable channels. But the revenue for the life of the film is generally set by the box office take. What pay cable or a streamer pays for the film and how often it is scheduled, how prominent the shelf space at Wal-Mart and Target, how many copies Red Box buys, all ripples off of what a film makes in theaters. So while ancillary platforms might eventually outgross the cut from theatrical, the money it makes in the theater is more important as it will generally predict what the long tail profitability will be. And am I showing my age by asking what Interactive is? are you talking about online videogame subscriptions?

  11. David Poland says:

    Bob – Theatrical is a mature, but changing business.

    Home Entertainment is connected, but of course it is much bigger… it’s in almost every home. The choice to go see a movie is not as invasive, even for the most avid moviegoer. Can’t be. Shouldn’t be.

    The NBA is a $5 billion a year business. Is it a vanishingly small part of the work of the sports industry?

    The majority of content going into and being consumed in streaming is library content. Theatrical motion pictures is no small part of that stew. And the business is not meaningless because it isn’t a massive growth industry.

    Moreover, the era of the $15b a year content spend is about at the end of its 15 minutes. It is not sustainable.

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