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5by5 | The Critical Path #20: Below the (belt)line

Jan 4, ’12 11:14 PM
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Horace and Dan begin a journey through the financial carnival that is Hollywood and talk about the wonders they encounter.

via 5by5 | The Critical Path #20: Below the (belt)line.

During the show I refer to the diagram below which represents the allocation of costs of production for a sample of movies:

  • http://www.informationworkshop.org Mark Hernandez

    Right at the end when you were summing up and saying that there’s a big “veil of deception,” that what you hear “just doesn’t sound right,” it’s a “huge industry,” you have to analyze it by “following the money,” and its mechanisms have been established to “inhibit innovation” and “maintain the status quo,” and “distribution” is the heart of it all, you could have been talking EXACTLY about American politics.

    Any intelligent person watching the elections in Iowa yesterday would see all these same identical traits, starting with “it doesn’t sound right” and “follow the money.”

    “Americans Elect” is an internet-based attempt to disrupt American politics.

    Also, I wanted to bring your attention to the internet show created by Lisa Kudrow (of “Friends”) et al, called Web Therapy which got started on the Internet and was subsequently bought up by Showtime.  I actually use an RSS feed to be alerted to new episodes.  The new shows that have big stars are now exclusive to Showtime but web-available shows are still produced as well.

    I think Web Therapy is a great proxy for what you are discussing in terms of disruptive programming that’s unusual, creative, an odd length, etc.

    • http://twitter.com/DrErnie Ernest Prabhakar

      Great point, Mark (and I’m also a fan of AmericansElect as a disruptive force, though I’m ambivalent about their chances).  I was going to say the same thing: visual media isn’t the last domino, politics is. There’s also education, but that domino is probably going to fall before visual media does.  Political candidates are both treasured and trapped by their parties much like stars are by studios.  Further, the influence of money in politics appears directly correlated with the cost of television advertising, so if we disrupt TV we may end up disrupting politics as well. 🙂

      I think the common thread here is that control of distribution creates an artificial scarcity that prevents innovation.  That ties in with the theory that disruptive technologies are those that turn scarcity into abundance.  I wonder if you could use such as theory as not merely predictive, but prescriptive: what is the best way to leverage new technology to disrupt an incumbent?  How much requires luck (such as needing an insider to “defect”) versus what a purely grass-roots insurgency? 

  • http://www.informationworkshop.org Mark Hernandez

    Also, I mentioned this last year in the comments but there was a fantastic documentary on the TCM Channel about the history of movies and movie making in America called “Moguls and Movie Stars.”  The takeaway from the documentary was that the Hollywood “machine” was all about the small handful of men who controlled the distribution channels (theaters) and used the movie stars in their turf wars.  I watched all seven episodes with great interest.

    Anyway, it’s a great history lesson that shows how things became the way they are now, as you have pointed out — focused on distribution, setting prices, the studio system, the insiders, the theater chain wars, and merchandising.

    The website is here…  http://www.tcm.com/moguls/

    The DVD is available here… http://www.amazon.com/Moguls-Movie-Stars-History-Hollywood/dp/B004MQ6W5K/ref=sr_1_1?s=movies-tv&ie=UTF8&qid=1325769009&sr=1-1

  • Anonymous

    Horace,

    I like where you are going with “how to disrupt Hollywood”
    and admit I do not know the answer.  But
    let me muddle the waters a bit in an attempt to help you find the answer.

    First, two points on the data:

    1.  I wonder if the
    numbers you quote above include the cost of “points”, which are really just
    revenue shares that are typically given to stars, directors, and even writers.
    If so, some of the very large costs are the result of success (high revenue)
    and applicability should be addressed.

    2. If you haven’t read Art DeVany’s work (on movies, not the
    silly stuff on diet and exercise) I recommend it. (His book is called “Hollywood
    Economics.” Epstein’s is actually “The Hollywood Economist.”) I would argue
    that you have to understand the mindset of complex adaptive systems when
    dealing with these businesses. The basic point is that success is unpredictable.
    This has very important implications. For example, since you can’t cherry-pick
    the winners, you would need to include the costs of the 80% of the movies that
    fail in any analysis using the profits of the 20% that succeed. (This mindset
    also helps to explain why movie prices are all the same, but that is another
    subject.)  

    But let’s get to your bigger points. Is the movie system self-serving,
    self-perpetuating and corrupt? Yes, but is it any different than sports, music,
    investment banking? The stars (probably less than 1% of the system) make a
    disproportionate amount of the profits.  The 99% are the poor shmucks who oil the
    machine, trading their lives for a one-in-a-million chance of success. But is
    this really part of a devious master-plan (“we shall call them ‘artists’ and
    convince them that suffering is good”) or, on a probabilistic basis, are the
    rewards so potentially high that the costs are rational? By the way, is this
    really any different that computer software? Don’t 1% of the apps make 90% of
    the money? Or blogging? What’s the 5×5 ad revenue breakdown by podcasts?

    So, what will it take to disrupt this? I think you should
    think about two more things.

    1. The entertainment business has already gone through huge
    disruption (stage to screen, silent to talkies, radio to television, live to film
    to tape to DVD to digital to on-line) and the profit distribution hasn’t changed.
    Why?

    2. Isn’t the control of the distribution channel?  So, what could break this? Here, I think you
    could add value by inverting your work on Apple. What would it take to disrupt
    Apple’s distribution profits in itunes and the app store?

    • http://www.asymco.com Horace Dediu

      Thanks for the feedback. I don’t “judge” the system for being good or evil. In fact, I expect it to be the way it is for good reason, especially since it’s been this way for so long. I do try to understand the reasons it is so and thus what hold is this way. Only by understanding the causality can we expect to see a way it can be improved. I will write more on the subject as I’m building a more comprehensive view. This show was just touching on the break-down of the production cost structure. The revenue, financing and ownership structures await.

  • http://twitter.com/grendel001 Charles

    Just listened to The Critical Path 20 on my drive in and I have some thoughts to add.  For you bucking the system disruptors you’re looking first at Steven Soderbergh and Mark Cuban who in 2006 released Soderbergh’s “Bubble” a tiny budgeted indie movie made with complete unknowns to cable (HDNet), DVD, video on demand and theaters on the same day.  This was met with considerable opposition and the only theater chain that would run the movie was the one that was owned by Cuban.  The movie didn’t make much of a splash but it wouldn’t have no matter what, it was a slow and ponderous indie with no stars.  Soderbergh wasn’t hurt by it, he has a rep for swinging wildly from the commercial to the indie and he’s made six movies since with two more coming out in 2012.

    Last year Kevin Smith did something similar in his release of “Red State” where he purchased the film himself and then a travelling road show with himself and the cast showing the movie in auditoriums with Q&As following each showing, he charged a top dollar price for a movie ($30 – $60 as I recall) but with more of a concert feeling.  The movie then did a week long Academy qualifying run (a movie has to have played in a Los Angeles area theater for one week starting no later than Christmas Day of that year to qualify for the Oscars) the movie was then released to VOD for $10 and then started running on Netflix streaming.

    Even more recently Universal kicked up some trouble when they wanted to release the medium to large budgeted Eddie Murphy movie “Tower Heist” to Comcast VOD three weeks after it debuted in theaters.  The plan was to charge $60 for a viewing but Universal backed down after the theater chains cried foul and threatened to pull their showings.

    It seems like the area most set in its ways and most ripe for disruption is the theater distribution and chains.  It’s come to a head for a lot of people and for me personally.  A Los Angeles Monday matinee of “Girl with the Dragon Tattoo” this week cost $16 before parking and popcorn, that’s a system that has become too much of a once in a while treat and away from where it was a weekly habit for a good chunk of America.  We still like movies, we’re just willing to wait a few months to watch them in the quiet of our homes on our giant plasmas.

    • http://www.asymco.com Horace Dediu

      Pricing is a very important signal of quality which is completely ignored by the current distribution system. It’s not just theaters which avoid price competition but even the price of DVDs seems strangely uniform.

    • Listrade

      As Charles says, Kevin Smith offered the most “disruption” with Red State. In effect he just sold the film to his fans and therefore cut out the marketing budget. It’s probably as disruptive in reality as the Louis CK show where its just cutting out a middle man to sell a product.

      Interesting though was the amount of vitriol Smith faced when he took this step. Not just from “”Hollywood”, but also from journalists. 

  • Boyd Waters

    Horace, you are in Helsinki, the location of the best example of “democratization” in movie production:

    http://starwreck.com

    This spoof of a high-budget special-effects movie was made by some starving artists in a one-bedroom flat in Helsinki. It is a spectacular accomplishment, and was a big hit (for viral video in 2003).

    This film won corporate sponsorship for the team’s nest project, which is out in TEN DAYS:
    http://www.ironsky.net/

    I have no money in this game, but I find this sort of thing fascinating, and the timing of your interest in this could not be better.

  • http://www.matthewbaldwin.net/ Mbaldwin

    The trend of lessening movie revenue can be examined as an effect of a broader array of media offerings, each demanding their share of consumer dollars. Movie Theaters now compete with Cable costs, data-bandwith costs, digital content subscription fees (ex: netflix and hulu) game console, individual game, and console + game subscription costs, app fees, smart phone fees, etc. Then there’s additional costs for the consumption of music, etc.

    My first instinct is to view movies, television, gaming, book/magazine publishing, music, software/apps as separate silos–but as the digitization of these media creates a common denomenator, hybrid mutations take place, the membrane that separates these disciplines becomes thinner and thinner.

    It’s also the wild west, where it’s hard to see many standardization efficiencies being created right now. No value bundles are being created for the consumer. Instead we are asked to create allegiances to specific systems, and then double our cost commitments if some fare looks better through different media ecosystems. 

    sorry my thoughts are messy about this, but my gut hypothesis is that typical consumers are feeling far more cost-stressed with media than ever. Added to this stress is the lack of direct ownership of content: gone are the days of lending books or making mix tapes. Some positive trade-offs in digital content certainly, but this also adds costs.

    I crave a constellation map of media ‘players’. Identifying as many species as possible undoubtably helps our understanding of the media ecology.

    -m.

  • Anon

    Arrested Development’ to return on Netflix
    Netcaster, 20th TV and Imagine seal deal to revive comedy
    http://www.variety.com/article/VR1118046367

  • Roger

    Horace

    Very interesting topic to address. Are you familiar with “The Master Switch” by Timothy Wu? It describes how the forces of conservatism (by which I mean those who have an interest in preventing disruptive change) have fought to bring a number of communications technology (radio, TV, film) under control. I think his coverage of the history of the film industry and the way in which it became controlled by distribution is relevant to your analysis.

    Roger

  • Dixon

    Loved the episode. I have a couple of thoughts. 

    First look at the DVD sales v.s. Box Office sales. The lion’s share of the revenue comes from the Box Office. For example Spider Man two made domestically 
    $373,524,485 at the Box Office and only 
    $4,196,484 in DVD sales. Incredible difference. This difference in spending is in large part because of the difference in experience between going to the theater, which is as much a social event as entertainment, and curling up alone with your iPad. So here’s the point. You can’t have a large disruption through technology here. You could have super high quality films being created and distributed on the internet for lower costs, but how would that disrupt theater distribution which is the the main revenue source? What kind of technology could do that? Digital distribution to theaters possibly. But even if that were to occur (which it probably will ) there are still a limited number of screens and big studios with massive budgets will still have the advantage in advertising and theater chains would go with them.  

    What I see occurring is studios working out of the system, and then merging and becoming part of the system once they have the clout. 

    I’d love to hear about other possibilities however. Because I agree that it would be nice if things changed. 

    • http://www.asymco.com Horace Dediu

      I’ll be talking about the revenue side of the business in a future episode. So far I’m trying to come to terms with the cost of production.

    • http://www.facebook.com/people/Peter-Rollins/100001006869722 Peter Rollins

      There’s NO way Spiderman 2 only made $4,196,484 in DVD sales, that’s clearly a mistake on The Numbers site. For point of comparison, Spiderman 3 made $124,155,770 in DVD sales. 

  • http://thetorg.com Bill Torgerson

    Thanks for the good work you do, Horace.  I want to address something I’ve heard you say a couple times about not consuming movies because you don’t like to escape.  Certainly a person might read George Orwell’s ANIMAL FARM as a silly fantasy about talking animals, but as you probably know it’s–among other things–a critique of Stalinism, about the corrupting nature of power. 

    I write a lot of fiction and one of the lines about fiction I hold most dear comes from Chekhov.  It goes something like this:   it’s not the function of art to solve problems but to present them clearly. 

    I think of a novel and film such as No Country for Old Men which was critically and commercially successful and had as one of its features to illuminate the “war” that is happening on the United States / Mexico border.  Another favorite of mine is a film such as American Beauty which captures some of the frustration that can mount for families in the suburbs who get themselves trapped in money making / consumerism cycles.  Human beings aren’t robots for whom only numbers are worth analyzing. 

    You teach by telling stories.  A story doesn’t have to be true to learn from it.  I cite Animal Farm and No Country for Old Men as examples.  I’m very much oversimplifying these books and the power of story, but this might get us started or get you thinking about stories in a different way.  It may be that you’re already there and you’ve just said “escape” a couple times in podcasts because you’re focusing on something else when it comes to entertainment.

    Thanks for the conversation!  

  • http://www.facebook.com/people/Peter-Rollins/100001006869722 Peter Rollins

    Investigating the site more, their DVD revenue information only seems dependable for movies released in the last few years. I looked up some other 2004 big releases, such as The Incredibles, and they had no DVD sales info at all for it.

  • Anonymous

    Pretty interesting episode. Having been in and out of the music industry I can see parallels between all the entertainment industries and their production costs / profits. The key thing about entertainment is that no one “needs” it. The second thing to realise is that the success or value of any entertainment “product” to the consumer can vary like the weather. The current social climate dictates the popularity of a product and no one knows exactly how to make it a hit all the time. The final thing to understand is that every one “wants” entertainment of some sort and people enjoy creating entertaining things because as human beings where wired that way. Also as human beings we naturally want to push the boundaries because we get desensitised to things pretty quickly. Therefore producing entertainment can be very expensive as pushing boundaries means more work and therefore costs more money.

    Put all of these facts together and you have situation that no one can control because there are far too many variables and costs and no certainty. That is unlike any other business out there.
    To limit the uncertainty entertainment companies have worked on the model of averages.
    If you fund 10 products and 2 work well, those 2 will pay for the other 8 and some profits for your backers. Most other industries dont works that way. Product lines for things in technology generally have a unit cost and a profit and loss associated per product. Its rare that any company in tech designs and releases a product knowing that it has a good chance of being a loss making item. Entertainment companies do that all the time. The whole music industry is based on that formula because the music execs all know they cant accurately tell what a hit will be. So they just play the averages game.

    I think the issue with the entertainment industry is that people outside the industry think there is a formula that guarantees success, yet people who are actually in the industry know there is no such thing! When you buy an entertainment product you are effectively paying a subscription to an “entertainment system” rather than the cost of producing the actual item. Profits in the system are distributed throughout to pay for the production of other products. That system cannot survive on a product by product basis unless the cost of production and distribution practically disappears. The only place that seems to have happened is in the music business and even then someone has to pay for development and production of the whole Lady Gaga or Beyonce entity. The music may be dirt cheap to make but the videos, tours etc.. marketing and imagery are not. 

    Furthermore, even if a film has no financial pay off it can have a cultural or internal pay off. Letting Clooney do an art house movie that makes nothing can mean that the studio gets him to do Oceans 15 that will make loads of money for the studio. Funding Kubrik or Spike Lees’ movies can have huge implications for the development of the movie business in the long term I suppose you can look at the movie business as almost a “communist” like entity. Subsidy is the approach, thats why all films costs the same etc.. They need to know how much they’re getting in in order to know how much the can subsidies the other loss making parts of the business.

    In my opinion, getting rid of this system would be a case of “careful what you wish for”. Google et al are eyeing up the entertainment industry because they see the production and distribution costs as artificial. They , (just like Guy Hands didn’t understand with EMI) dont understand how the system really works. The short answer is, if you want to see the next ground breaking “Avatar” type release, only the Hollywood movie system can produce that. The system is the way it is for very valid reasons. Nations that dont respect copyright and dont pay the cost of subsidising there “entertainment systems” have poor entertainment product. Its as simple as that.

    • http://www.asymco.com Horace Dediu

      I completely agree that the system is the way it is for very valid reasons. It’s the envy of the world and an amazing value creating machine. What I don’t see however is the ability for the system to change. Technology changes, expectations change and value chains evolve. As these changes happen, the product will also have to change. Very few industries are immune from disruption. I don’t think movie making is one of them.

      • Anonymous

        Disruption occurs when a new method or invention replaces or improves upon the current product. At the core of the movie industry is the communal viewing of films on a huge screen. That product cannot be disrupted. Thats why its been there unchanged for over a 100 years. As long as a large number of people want to see a movie together in the same place at the best possible quality the movie making mechanism will be what it is.

        To make that product you need good people because its a specialist industry. And you need physical things like lighting rigs, set design and  the people to operate these things. On top of that you are trying to out do the previous movie and so need the best quality you can get. Unlike music where style and composition matters more than production quality, quality is a major component of the movie business. Most people only see a movie once, so first impressions matter. Thats why people would rather see it in the movie theatre in the first place, quality is of paramount importance to the customer.

        In my opinion the movie business cannot be disrupted in any major way because its core product (communal movie viewing in a theatre) and the way the core product is produced (high technology, number of staff, equipment) have not changed significantly in decades and “digital” does not change the process enough to be disruptive. 

        Selling expensive popcorn and cola, dvd’s and blu-rays are all things that support the creation of the core product i.e. the 100m dollar movie.  I suppose the real question for the movie industry is not “how can we make these movies cheaper and guarantee success?” (that is a impossible), rather its “how can we support this extravagance?”. A man can either stop going to the casino or make enough money to fund his casino habit.. what he cannot do is make the casino experience “safer” because that is the whole point of the casino!
          

      • http://www.asymco.com Horace Dediu

        Disruption does not happen when an invention improves the current product. Most improvement are sustaining and are embraced or co-opted by the incumbents. There have been many sustaining improvements in cinema including in the distribution methods available (VCR, DVD, VOD, Netflix, etc. which in combination exceed the revenues from box office recepits–in 2003 18% of total revenues were from theaters). Disruption happens when the incumbent companies lose their profits to entrants competing on new bases of competition. The competition is typically asymmetric and causes the incumbents to refuse directly addressing the entrants efforts. A disruption of the film industry therefore is caused by the emergence of a distribution method that makes money in ways that current distributors find unattractive.

      • Anonymous

        I think there is an over emphasis on the distribution aspect of the movie business. There is the ability to go straight the dvd/streaming already. There is the ability for anyone to make a film and put it on Vimeo, or Youtube etc.. And reach huge audiences at minimal cost. There is also the ability to charge for streaming etc.. What studios find hard to replace is the marketing effect of the large screen cinema release to spearhead the movie promotion.

        It may be true that movie theatres only make 18% of total revenue for the film in the long run, but it is the fact that these movies are in the theaters in the first place that ultimately created the revenue for the other distribution methods.

        I suppoe its the equivalent of the fashion industry where couture design houses like Vesarce & D&G make far more money from the their cheap diffusion lines (t-shirts, jeans etc..) than they do from the expensive limit run designs they show on the catwalks. However, its is the couture business that drives the technology, brand awareness and prestige of the labels that allows them to sell the diffusion lines. You cannot have one without the other.

        Likewise, it will be hard to make films to level of Avatar or Inception without the initial desire to make a film for large screen communal movie theatres. HBO are probably the nearest in making Hollywood level productions and getting funding for them via subscriptions and selling dvd’s etc.. But even they would struggle to make the same types of products that hollywood make.

        Maybe I’m wrong, but the initial cinema experience is an important part of the business. The blockbuster movie system is dependent on the theatre release. I’m not sure its easy to disrupt the industry without figuring out how to replace that aspect of it. 

  • http://twitter.com/StudioRefract Refract

    I love t

  • Andy C

    I’m looking forward to the revenue side of this debate, especially an examination of ROI for films. What makes a big budget film gross, say 4+ times it’s cost? What makes a small budget film gross up to 10 times its cost or even more? As an example check out the Briitsh teen comedy ‘The Inbetweeners Movie’  http://en.wikipedia.org/wiki/The_Inbetweeners_Movie. I think maybe ‘Cloverfield’ might also be in this category, budget $25m with a gross reveneue of $170m according to wikipedia.

    I wonder whether the dynamic of financial success is different for smaller budget movies, say <$70m budget compared to the big $150m to $200m blockbusters. The small budget movies succeed on word of mouth, viral, and social media marketing, or maybe having an interest base that's built of TV ratings – in short they need to be "cool". The big budget movies might rely on a big lead actor/actress or possibly the director, or maybe the fact that it's part of a franchise.

    I'm guessing this sort of analysis might stray in to the realm of 'what makes a movie successful?' Rather than just an examination of the components of income, and that Horace will look at the creative factors as well as the financial ones. These are difficult to quantify but I think they may be linked. And I'm pretty sure than viral media and social media marketing – which were used for both the films I've cited – are now a crucial element.
     

  • Brian

    Horace –

    Great topic and great show. This is something I have been personally very interested in and look forward to more discussion on the subject. Don’t have much to add here to whats already been posted, but I see where someone mentioned a recent book “The Hollywood Economist” by Epstein, and wanted to also recommend this as a good book to read. While it doesn’t go into any real hard numbers it did seem to provide a very good overview to the unique inner workings of the motion picture machine. 

    As you have noted, it is very difficult to find a lot of financial information for obvious reasons. I am interested in hearing more on the subject and maybe where information can be found. 

    Keep up the excellent work! 

  • WFA

    “Why the Movie Industry Can’t Innovate and the Result is SOPA”
    Management of Innovation: “The introduction of new technology is always disruptive to existing markets, particularly to content/copyright owners who sell through well-established distribution channels. The incumbents tend to have short-sighted goals and often fail to recognize that more money can be made on new platforms and new distribution channels.”

    http://blogs.berkeley.edu/2012/01/08/why-the-movie-industry-cant-innovate-and-the-result-is-sopa/

  • http://www.informationworkshop.org Mark Hernandez

    Here is another interesting discussion.  This UC Santa Barbara discussion panel takes a single popular show on TV and in just the first video the movers and shakers talk about everything from different perspectives, and you can observe how they deal with branding, the value proposition, disruption, reshaping their demographics to stay in business, how they measure viewership and how that is changing, timeshifting, advertiser influences and a lot more…

    http://www.carseywolf.ucsb.edu/pollock/events/law-order-changing-television

  • Tdelrahim

    Check out the example of dr horrible’s sing-along blog as example of creativity during the writer’s strike and potential disruption-

    http://en.m.wikipedia.org/wiki/Dr._Horrible's_Sing-Along_Blog

  • http://twitter.com/jmmarkiewicz Marcin Markiewicz

    some data on Hollywood movies / budgets from the @infobeautiful tweet: https://twitter.com/#!/infobeautiful/status/156856209469734913

  • http://twitter.com/jmmarkiewicz Marcin Markiewicz
  • http://www.facebook.com/profile.php?id=524209399 Jon Sweet

    Old post from prolific blogger Joel Spolsky, a sort of Pricing 101 for indie software developers: http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html

    I thought of his post immediately because it talks specifically about the surprise/irony of movie tickets all have same price.

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  • Anonymous

    Hi Horace,
    I know you said you don’t watch video content.  However, here is a link to a 20 minute short that I think is a perfect example of the type if viral, creative product that meets the criteria you describe for a model which is disruptive of the Hollywood establishment.

    http://devour.com/video/flagpole/

    —Steve