Hollywood-By-The-(Secret)-Numbers

Under the intriguing headline "Video Sales Abroad Are Good News in Hollywood. Shhh," Ross Johnson reports in The New York Times today (January 31, 2005) that the Motion Picture Association (MPA), although it is privy to the studios income from worldwide DVD and VHS sales, will not give out that vital information. An MPA spokesman told Johnson, "Those figures are confidential, and we don't release them." So instead the Times had to rely on a British publication called Screen Digest for the guessestimate that the studios took in $11.4 billion from overseas home-video sales in 2004. Johnson rightly complains "It has always been hard to pry reliable numbers out of Hollywood, even when the numbers tell a happy story."

Ross Johnson is absolutely right about the importance of MPA numbers. They come directly from Fox, Time Warner, Sony, NBC-Universal, Paramount, and Disney, the 6 studios that dominate the new Hollywood . As part of their general principle of keeping their audience in the dark, the studios keep secret from the public-- and even the Wall Street analysts-- the data that accurately reflect the real sources of their earnings. Each of these studios, however, furnishes these precise data, including a detailed breakdown of their worldwide revenues from movie theaters, home video, network television, local television, pay television and pay-per-view– to the Motion Picture Asocciation on condition that they will not be released to any other parties. The MPA then consolidates these cash flows into the MPA All Media Revenue Report which it then circulates back to the studios on a confidential basis. Each studio can then use this common pool of data– the 2003 report is over 300 pages– to compare its own performance, and that of its subsidiaries, to that of the other major studios in 64 different markets. I had access to all these reports between 1999 and 2004 for my book The Big Picture: The New Logic of Money and Power in Hollywood. They helped answer a crucial question: how do the studios actually earn their money?
Now, there is no reason for the home-video market to remain a secret or even a press guessestimate. In 2003– the last full year that the MPA reported the studio data– the studios (and their subsidiaries) earned $18.9 billion from the world home video market. Of that $18.9 billion, $7.68 billioncame from overseas markets. Foreign DVD sales provided $5.52 billion, foreign VHS $2.16 billion. Ninety percent of those foreign earnings came from just 10 countries. (For a more complete breakdown, see Tables 2 and 3 in the Deal X-Raying section of my website).
Why shouldn't Hollywood-by-the numbers be public knowledge?

The Hollywood Sexopoly

There’s no business reported like show business--coverage of which usually consists of star-driven anecdotes, idiosyncratic examples, and anachronistic measures of performance, enlivened with punning headlines such as "Incredible Incredibles Capsize Nemo at the Box-Office." If news of the OPEC cartel were reported in this fashion, its business would be reduced to a series of "boffo" gushers and "megaflop" dry holes– and, no less, in its older fields that no longer produce its real wealth. Perhaps it’s fitting that an industry dedicated to illusion should be covered in such a make-believe way except that the new Hollywood is not just entertainment, it is a vast multibillion-dollar economy ruled by six giants– Sony, Disney, NBC-Universal, Fox, Time-Warner, and Viacom. And what is neglected by Show Biz stories about star assignments, PR hype wars, astounding digital-effects, and box-office grosses is the reality of how the Hollywood sexopoly cashes in on the world entertainment economy.

Consider, for example, just television-- a medium that the old Hollywood attempted to strangle in its crib in the 1940s by denying it movies. The studios' numbers here, even though they are not in the domain of entertainment journalists, tell a remarkable story.

First, there is global Pay-TV. While the six big studios do not disclose to the media what they earn from Pay-TV in 2003, they (and their subsidiaries) scored $3.37 billion from licensing their movies to it . Of that total, $1.59 billion came from sales to Pay-TV channels in the US, such as HBO and Showtime; and the remaining $1.78 billion came from Pay-TV abroad (largely from Rupert Murdoch’s satellite broadcast empire). The studios license most, if not all, their films in "output deals," or multifilm packages, at a fixed price per film. That price – currently about $8 million per film in America– is not dependent on the film’s box-office performance. (When, in earlier days, Showtime tied the fee it paid for Ghostbusters to its box-office performance, it proved disastrously expensive for Showtime.) As a rule, then, a box-office failure generally commands the same price as a success. For many foreign output deals, a film is required to have played in theaters for a minimum period (which is why studios sometimes have token openings for movies in a handful of theaters).
How profitable is the studios’ take on their Pay-TV deals? In 2004, the $3.37 billion the six studios got far exceeded what they cleared from the box office after they had deducted their print and advertising costs. (Bear in mind that with Pay-TV deals, all advertising expenses are paid by the Pay-TV channel, and, of course, there are no prints.)
In addition to Pay-TV, the Big Six sell their movies, cartoons, and television programs to the six American broadcast networks – CBS, NBC, ABC, FOX, UPN, and WB– all of which are now cozily and conveniently owned by the studios’ own corporate parents. In 2003, the networks paid their corporate siblings licensing fees of slightly over $4 billion for the rights to broadcast their products. Over three-quarters of this money was for television series and made-for-TV movies that obviously have no relation to the box office. Even in the case of the movies they license, networks weigh many factors aside from a film’s success at the box office. For one thing, they must consider the durability of its appeal, since it will not be broadcast until between two and five years after its theatrical release. More important, they have to consider whether their advertisers, as well as government regulators, will consider it suitable for a prime-time audience. Controversial films by Oliver Stone that proved successful at the box office, such as JFK and Natural Born Killers, for example, were turned down by the networks. They now also have to take into account their connection to the studios that are their corporate siblings. ABC, for example, which is owned by Disney, not surprisingly licensed the lion’s share of its films and shorts from Disney.

Finally, the studios have a cash cow in licensing the films and television programs in their libraries to local television and cable stations around the world. In 2003, library sales earned $5.5 billion for the six studios. Since library sales do not begin until a half-decade after movies are out of theaters– and are often part of output deals– their box-office performance is only loosely related to what they earn for the studios.

In all, the six studios took in about $14 billion in 2003 from a television complex that their corporate parents largely control. And this is only one part of Show biz's unshown side . For more on this cozy if not incestuous liaison of the sexopoly, see the answer to my Question of the Day today on my web site.

Gross Misunderstanding

The Tomb Raider
Today, like every Monday, newspapers ritualistically published the week’s box-office grosses as if it were important news. Once upon a time, when Hollywood studios owned the theaters and carted away locked boxes of cash from them, these box-office numbers meant something. Nowadays, as dazzling as the "boffo, " "socko," and "near-record" figures may still seem to the media, their main import is to help further a gross misunderstanding about the real business of the New Hollywood. That misunderstanding takes at least three different forms.
First, the box-office results seriously confuse outsiders about who earns what. The reported "grosses" are not those of the studios but those of the independently owned movie houses. The movie houses take these sums, keep their share (or what they claim is their share)--which, along with the so-called "house allowance," can amount to over 50 of the original box-office total--and remit the balance to the studios’ distribution arms, which then deduct the out-of-pocket expenses involved in marketing the movies.
Consider, for example, Disney’s action "success" Gone in 60 Seconds, which had a "boffo" $242-million box-office gross. From this impressive take, the theaters kept $129.8 million, and remitted the balance to Disney’s distribution arm, Buena Vista. After paying mandatory trade dues to the MPAA, Buena Vista was left with $101.6 million. From this sum, it repaid the marketing expenses that had been advanced– $13 million for prints so the film could have a wide release; $10.2 million for the insurance, local taxes, custom clearances, and other logistical expenses; and $67.4 million for advertising. So what remained of the nearly quarter-billion-dollar reported "gross" was a paltry $11 million. (And that did not include the $103.3 million that Disney had paid to make the movie in the first place .)

Second, box-office results primarily reflect neither the appeal of the actual movies–nor their quality–but the number of screens on which they are playing and the efficacy of the ad campaign in getting people to go to these theaters. If a movie opens on 30 screens, there is obviously no way it can achieve the results of a movie opening on 3,000 screens. And how do studios motivate millions of moviegoers–mainly under 25–to go to 3,000 screens on an opening weekend to see a film no one else has yet seen and recommended? With a successful advertising campaign. Studios spend $20-30 million on TV ads because their market research shows that those ads are what can create its crucial opening-weekend teenage audience. To do that, they typically blitz their target audience, aiming to hit each viewer with 5 to 8 30-second ads in the two weeks prior to a movie’s opening. If the ads fail to trigger the right response, the film usually "bombs," in Variety’s hyperbolic judgment; if the ads succeed, the film is rewarded with "boffo" box-office numbers.

Third, and most important, the gross "news" confuses the feat of buying an audience with that of making a profit. Last year (2003), the cost of prints and advertising for the opening of a studio film in America totaled, on average, $39 million, which was $18.4 million more per film than studios recovered from box-office receipts. In other words, it cost more in prints and ads--not even counting the actual costs of making the film--to lure an audience into theaters than the studio got back. So while a "boffo" box-office gross might look good in a Variety headline, it might also signify a boffo loss.
Ironically, what is obscured by the media’s relentless fixation on box-office grosses is the true genius of the New Hollywood: its profitable takeover of the much more lucrative global home- entertainment economy. Disney’s corporate earnings, for example, soared fifty percent in the first half of 2004 despite an almost unbroken string of box-office failures, including Hidalgo and The Lady Killers in March, Home on the Range and The Alamo in April, Raising Helen in May, and Around the World in 80 Days and King Arthur in June. What were Disney’s real money spinners: think ABC, The Disney Channel, ESPN, Disneyland and (still) Mickey Mouse.

Movies, of course, are still part of the big picture–and always will be–but the true art of Hollywood is, more and more, the art of the deal, not the picture. And unlike the ubiquitous box-office numbers, the mechanisms of the deal--involving government subsidies, tax shelters and artful presales–rarely appear on the public’s radar. Even underlying the otherwise silly Paramount movie Lara Croft: Tomb Raider is a minor masterpiece of a deal. To see how Paramount raked in $87 million through financial alchemy before it even green-lighted that film, see the answer to my Question of the Day. For a fuller account of how and why Hollywood keeps its audience in the dark, see my coming book The Big Picture: The New Logic of Money and Power in Hollywood.

Rupert's Radical Strategy

Rupert Murdoch

Rupert Murdoch, who revolutionized British journalism in 1986 by moving his four newspapers in the middle of the night from Fleet Street– London’s newspaper center for over 100 years– to Wapping in the docklands ( crushing two powerful unions in the process), is not a man to do things in small measure. He currently controls, among other things, a major movie studio (Twentieth Century Fox), a television network (Fox Television), 30 cable channels (including Fox News, FX, and Fox Sports), and an armada of satellites that beam movies, sports, and programs to television sets on five continents.
Business Week reports that he is ordering 20 million Tivo-type Digital Video Recorders. Does he now plan to revolutionize the way the world gets its movies on television? For Murdoch’s radical strategy, see the answer to my Question of the Day (Today)

The Role of Intellectuals

Woody Allen
Whatever the role of intellectuals in American politics, they clearly have a role in the American cinema-- even if it is only a walk-on. For clear proof, see my List 43.

The Golden Globes Informational

Hilary Swank
Since my new book concerns the social as well as economic logic of Hollywood, I tivo-ed the Golden Globes Awards last night on NBC. If this star-wrangling informational did not exist, NBC might have had to invent it to compete with ABC’s Oscar Awards. Fortunately, for NBC, an otherwise obscure group calling itself the Hollywood Foreign Press Association (HFPA) had invented this award-ceremony in 1944 during a free lunch in the 20th Century Fox commissary. Although its dozen or so "members" were mainly refugees in the Land of Nod (as Sam Spiegel called LA). The German occupation of their homelands had made most of them correspondents without a country, but they loved movies. At this point, Twentieth-Century Fox’s ingenious studio head Darryl F. Zanuck saw that they offered a highly-valued product in Hollywood: awards for studio movies. Since the Academy of Arts & Sciences had passed over his studio's Song Of Bernadette for the "Best Picture" Oscar in 1943), why not accept the "Best Picture" award-- as well as Best Director" and Best Actress-- from the Hollywood Foreign Press Association (although the "association" had not yet put together enough money to design the "Golden Globes.") So, with a little largesse from the studios, another annual Award ceremony-- and opportunity for product placement-- was born.

In short order, the HFPA came up with a slew of other awards that appealed to studio chiefs: "Best Film for Promoting International Good Will," "Best Film Promoting International Understanding," "Best Non-Professional Acting," "Hollywood Citizen Award," "Ambassador of Good Will," and a special award for "Furthering the Influence of the Screen" (which went to the Hindustani version of Disney's Bambi.) With them, it promoted lavish dinners at celebrity hangouts including Ciro's, the Coconut Grove and the polo lounge of the Beverly Hills Hotel.
For a while, it was run by Swedish twin brothers; Gustav and Bertil Unger, who were tap dancers. Gustave wore his monocle in his right eye, Bertil in his left. Reportedly, they picked winners on the basis of who they could get to show up.

But despite the fun, the enterprising group only began to make real money when Ted Turner elected to televise its informational in the 1980s, a gig taken over by NBC in 1996 (which paid the HFPA roughly $3 million a year for the broadcast rights.)

Nowadays it is of no matter that the 82 members who vote the awards are mostly free-lance writers and photographers with day jobs or that they have little, if any, connection with the Hollywood community. As the Hollywood Reporter observed "The studios couldn't care less whether the awards are decided by isolated Benedictine monks in the Himalayas or angels on high, at least not since the Globes have evolved into a tremendous marketing tool." As such, it offer scripted speeches by stars, promotional clips from movies, and nostalgic eulogies to some 20 million viewers. And by this time the value of public self-congratulation has become so inculcated in the Hollywood culture that one producer carpingly complained to me, "These ceremonies have taken over our social life. Almost every week we get into our formal gear, push through a gauntlet of paparazzi to get to some ballroom, give ourselves awards for everything from movies to lifetime achievements, and then applaud ourselves." Nevertheless, Hollywood’s star troopers suited up last night for yet another black-tie award ceremonies. All part of the Big Picture.

The Ring of Untruth

Sasha Lazard
Although it is not yet monitored by the Center For Disease Control in Atlanta, the Celebrity Headline Virus (CHV) is now rampant. It has even infected the front page of the mighty New York Times today. Under its "All The News That’s Fit To Print"logo, and amidst more conventional news about Iraq, torture guidelines, and the Supreme Court’s transformation of the legal system, is the dazzling headline, "At Celebrity Nuptials to Die for, Vendors Give Themselves Away."

The story itself is a replay of a similarly-infected 3-day-old New York Post story that Donald Trump was given free a 13-carat diamond ring, "worth up to $800,000," by Graff, a London-based jeweler seeking publicity. Even though, like much of CHV-infected journalism, the premise was untrue– Trump in fact paid Graff $750,000 for the diamond ring– Trump easily kept the bogus story alive in an interview in Business Week:

Business Week: You were just on the front page of The New York Post, with that free ring for your fiancee, Melania.
Trump: People give me wedding rings. I have every major diamond group throwing diamonds in my face. "Please take our diamonds. Please! Here's a million dollars!" And if I take it, I'm on the front page of the Post.

By the time the Times had recycled the story, Graff acknowledged it had actually sold the ring to Trump for $750,000. Since it is hardly front-page news that a jeweler sells a diamond to a millionaire, the Times reported, "Graff, the diamond sellers, made national news by chipping in [to Trump's celebrity nuptial event] a 15-carat, $1.5 million engagement ring." In doing so, it both increased up the number of carats in the ring and its price from the Post version. It only then added in a parenthesis: "It was not free, as reported, but half that price."

Since CHV-induced stories are based on celebrity quotes rather than facts, the Times finessed the value problem by quoting Trump as saying ""Only a fool would say 'No thank you, I want to pay a million dollars more for a diamond,"
Trump may be correct that only a fool would pay more for a diamond than its sale price, but as such wisdom alone did not justify a front-page story, the Times moved to enhance its non-story by suggesting that vendor-gifting is a wide spread phenomenon at celebrity weddings.

A non-Trumpian example the Times found of "social wattage" was the wedding of Sasha Lazard to Michael Mailer. Sasha Lazard is an accomplished soprano, having sung Cinderella in Rossini's La Cenerentola, 'Cherubino' in Mozart's Le Nozze di Figaro, the title role in the anime movie Princess Mononoke and her own songs in her album The Myth Of Red; her husband Michael Mailer is the successful producer of no fewer than a dozen movies. The Times made no mention of their artistic accomplishments noting instead "Before Sasha Lazard, a banking heiress, married Michael Mailer, Norman Mailer's son, in Tulum, Mexico, in May, her bridesmaids were invited to pick through trunks of designer dresses in the Los Angeles office of Harper's Bazaar." Evidently, when the Times is in its Celeb mode, fact-checking is not a requisite. If it was, the Times would have discovered that the talented Ms. Lazard did not really inherit a bank (her father Sid Lazard was a prominent NBC TV correspondent.) The temporary loan of clothing for a photo-shoot by a fashion magazine could only be stop-the-presses news in a CHV-infected story.

Finally, to add a global economic dimension to its front-page celebrity wrangling, the Times concluded, "The London-based Graff Company noted an uptick in traffic in its New York, Chicago and Palm Beach stores after the Trump publicity." Before these media-driven shoppers stampede into buying rings at $60,000 a carat at the Graff company, they might consider the fact that diamonds, after television sets, are perhaps most common consumer product in America. How the illusion of their value has been brilliantly maintained by De beers can be found (free) in my book The Diamond Invention.

A Mickey Mouse Trial in Delaware

In the competition to lure corporate management, Delaware long ago won the great race to the bottom via its now infamous "business judgment rule." Under this rule, Delaware courts have held that the business decisions of management, no matter how mistaken, unprofitable, or deleterious to the corporation, could not be second guessed by judges or juries . "The law will not hold directors liable for honest errors," notes the Cylopedia of the Law of Private Corporations, "even though the errors may be so gross that they demonstrate the unfitness of the directors to manage the corporate affairs." The reasoning behind the business judgment rule is that shareholders elect their management every day they retain their shares in a company, therefore courts should not intervene if shareholders do not like the way their company is managed. The only exceptions are fraud, bad faith, and other gross abuse.

In light of the powerful shield afforded by this rule, most of the Fortune 500 companies are now incorporated in tiny Delaware Yet, despite it, and to the utter delight of the entertainment media, there is now unfolding in Delaware, a bizarre class-action suit against Disney’s past directors claiming that they erred in the handling of the dismissal of Michael Ovitz eight years ago.

The facts are straightforward: Disney CEO Michael Eisner hired Ovitz as a possible successor in 1995, then decided he made a mistake and, 14 months later fired him, with the approval of the Board and gave him a severance package of options and pay worth $140 million.

Even if the $140 million payoff was a bad business decision, it is precisely the sort of decision that is shielded from court intervention by Delaware’s business judgement rule. No fraud or self-dealing were involved in the decision, so to get the case to court, the dissident shareholders claimed that Disney’s directors acted in "bad faith."

"Bad faith" is very difficult to prove in Delaware. The court test for it is whether or not directors followed the prescribed procedures of a company in arriving at their decision. If they ignore their own procedures, they can be judged to be acting in bad faith; if they followed them, they are in the clear.

Consequently when a class-action suit like the Disney one gets to court, the directors are carefully coached by teams of lawyers as to what actions on their part would constitute a "good faith" decision. Not surprisingly, when the directors are then called on to testify they stick to this story, no matter how naive or silly it makes them sound to the public,

Such testimony of course is grist for the mill of journalists watching the Disney trial on close circuit television in Georgetown, Delaware, even if it is little more than well-rehearsed mantras, designed by lawyers to proof the witnesses, including Eisner and Ovitz. against a "bad faith" verdict.

So what then is this 8-year old Mickey Mouse trial really about? Since it is unlikely the court will order the directors to repay Ovitz’ compensation to the Disney treasury, all that can be expected from this exercise is the further embarrassment of Eisner by his Quixotic enemies Roy Disney and Stanley Gold.