Tinseltown in Transition

The rise of foreign markets and popularity of 3D are offering Hollywood much-needed signs of hope. But insiders admit the good old days of filmmaking are very likely gone forever.

By Chris Krewson

3D_GlassesHollywood studios simply don’t green-light movies based on original ideas anymore.

Which makes Josh Heald’s story all the more remarkable.

“The idea for Hot Tub Time Machine,” says Heald, W’00, “was just about the weirdest thing I could have walked into a studio with.”

Indeed, Heald’s over-the-top, offbeat, downright ridiculous script for Hot Tub Time Machine—the hit comedy, released last year, that tells the story of how a dip in the hot tub at a decrepit lodge brings four old friends back to their 1980s’ adolescence—probably wouldn’t have swayed many studios. Especially these days. It was, however, the perfect fit (at the perfect time) for venerable old Metro Goldwyn-Mayer.

See, as it turned out, Heald delivered his pitch to MGM at precisely the moment that the studio was trying to prove its very viability in the film market.

MGM needed scripts. Heald had one.

And that’s why the film got made.

“We caught MGM on the right day,” Heald says. “They were trying to aggressively tell the industry ‘We’re here, we’re still trying to make movies. So the response was ‘How fast could you get us a script?’”

Heald knows he’s unlikely to strike film gold twice, though, and the reason is simple: The old Hollywood is gone, and the new Hollywood is still sorting itself out.

Corporate ownership of Hollywood’s major studios means that fewer and fewer films are being released every year. Film executives are turning to the so-called ‘tentpole’ strategy, wherein big, blockbuster movies are made specifically with the idea of generating enough money to prop up the entire film division. It’s a popular, safe approach—and according to the industry’s leading trade group, it’s working—but one that leaves little money left for fewer introspective ideas or scripts based on original ideas.

Studios have adopted the tentpole strategy in order to maximize the dollars they get back, but according to Hollywood insiders, even that’s a moving target in 2010. Financial models built a decade ago have already been thrown out the window, thanks to technology that’s changed the home video market, the exponential growth of foreign audiences and new dollars from 3D.

In short, it’s a time of great change in Hollywood.

And, for Heald, that means that easy greenlight experience from his first film won’t easily repeat itself. His next project, currently in development, is a remake of the 1979 Bill Murray screwball comedy Meatballs. It’s yet to be purchased.

“We were in production [for Hot Tub] quickly—the movie came out less than two years after I sold it,” he says. “It was crazy, crazy fast. I shouldn’t expect the stars to align again anytime soon.”

***

The struggle to get original ideas on film is nothing new to Wendy Finerman, an accomplished producer with numerous box office successes and Academy Awards under her belt. She’s the producer behind Forrest Gump and The Devil Wears Prada, and is currently working on One For The Money, due out next summer.

“Years ago if you got bankable talent, [studios would] be open to stories that were outside of the box,” says Finerman, W’82. “Studios have become more risk-averse, and therefore want to make movies that really are very ‘within the box.’ Today, studios are more concerned about servicing the mass market than individual markets.”

Why?

According to Finerman and others, it’s all about the desire among studios to maximize their return on investment—or, at the very least, making back the millions they pour into a film’s production and marketing budgets. Studios need and want safe bets—films that figure to draw big on their opening weekend and keep drawing until profits are turned.

“What studios are doing is making the art side subject to the commercial side,” says Kent Smetters, the Boettner Professor of Insurance and Risk Management at Wharton. “It’s sheer economics.”

The box office cash a film earns on its opening weekend—an opening weekend that follows weeks if not months of a marketing blitz (trailers, TV commercials, newspaper and magazine ads, billboards, public transit ads, appearances on late-night comedy shows, etc.)—is absolutely crucial for studio success. The biggest film of 2010, Toy Story 3, earned $109 million in the U.S. during its mid-June opening weekend.

Fast forward to mid-August, two months after its release, and the film had earned $400 million. The math is simple: More than a quarter of the film’s earnings came from its first three days in the theater.

The success of Toy Story 3 is hardly a surprise to Finerman. Indeed, it follows a longstanding tradition of sequel success in Hollywood. That’s why those films, with their built-in name recognition and audience awareness, are such a staple of the summer release schedule. Studios are also constantly looking for projects based on a hit in another medium, or a ‘reboot’ of franchises they already own. Many of Finerman’s projects, in fact, come from books—including Gump, Prada and the forthcoming One for the Money—and that’s helped in getting studios to sign on the bottom line.

“With a bestselling series of books by Janet Evanovich, you can at least say you’ve got a viewership that’s built in,” she says. “You have to look for what else can be done, things that aren’t superhero franchises but make a studio feel that there’s some value added. There’s a process, a method to the madness.”

In other words, it’s hard to sell an original idea these days. So Jon Hurwitz’s advice is simple: Don’t try.

Hurwitz, W’00, made his name in Hollywood as one of the co-writers of the Harold and Kumar film franchise. But Hurwitz says he encourages young writers to avoid doing what he did—writing and pitching an original script. Instead, he says, they should be leveraging new technologies to their advantage.

“I wouldn’t be trying to write a screenplay. That’s not the way you’re going to get attention,” Hurwitz says. “I would make two-minute short videos on the Internet. That’s something that’s going to stand out. Move to L.A. Get involved in the (improvisational comedy scene). You can film that stuff, and it’s a low cost of entry. The Internet has blown up. … The opportunity to get your content out there has never been so easy.”

Even if getting a film made has never been more difficult.

***

The studios’ increased interest in “safe” films is derived in part from the fact that some of their other revenue streams are drying up.

For years, studios reaped profits from so-called “pay cablers” HBO and Showtime. At their launch, those networks provided some of the only access customers had to films outside theaters. They were a hit. But the days of HBO and Showtime as “movie networks” are long gone.

“This was really the only in-home distribution of uncut Hollywood movies after release, so our business began in a very different feature film environment,” says Matt Blank, W’72, chairman and CEO of Showtime Networks. “But there’s no way we’re going to be the primary exhibitor of those films on the video screen now and in the future.”

The primary exhibitor today? Home theater, of course. First through VHS tapes, then through DVDs, the home theater experience proved to be a financial boon for studios. But even that market is starting to dry up. Three years ago, Variety reported that sales of DVDs had peaked, at $16.6 billion. That number dropped by 5.5 percent a year later, and 13 percent last year.

In an effort to stem the tide, studios started agitating to shorten the “release windows”—the time that elapses between when a movie is introduced into theaters, and then makes its way into the home.

In February, Disney shocked movie theater owners by announcing it would release Tim Burton’s Alice in Wonderland 3D on DVD just three months after its theatrical release, instead of the usual four. Why? From Disney’s perspective, it seemed to make more sense to piggyback on the expensive marketing for the film’s theatrical release—which included a takeover advertisement on the front page of the Los Angeles Times that reportedly cost the studio $750,000—and release the disc as soon as possible.

Theater chains, particularly those in the United Kingdom, rattled sabers and threatened to keep the film out of their multiplexes. But ultimately, the stakes—and the $3-4 3D surcharge theaters stood to reap—proved too tempting, and another milestone fell.

Thanks to Disney’s bold move, the new industry standard has been set: Ninety days after movies are in theaters, they’re available at home.

Of course, how those get into the home is another prickly matter—one that’s yet to be sorted out. Satellite, cable and telephone companies are all having success with Video On Demand services. Of course, then there’s Apple’s iTunes, the enormously popular store that sells films for the iPhone, iPod and the fast-growing iPad. And yet at the same time, the DVD market is in free fall. Former rock-solid studio partner Blockbuster Inc. filed for bankruptcy late this summer amid stiff competition from Netflix and Redbox.

The home theater market is, essentially, a big muddled mess. Hollywood doesn’t know where the money will come from—or if there’s even money to be made at all.

“What people thought about sequential distribution 10 years ago may just not be the case in this environment,” says Blank. “There’s a good deal of uncertainty about how much revenue is coming from that world and in what schedule. So I think it’s hard to figure out where it’s all going.”

All of that uncertainty is why Blank’s Showtime has shifted its business model markedly, from post-theatrical-release movies to original television series. “Weeds,” starring Mary Louise Parker, is the most popular of eight new series underway at the network.

“We had been an output purchaser (of films) for decades, and then we reached consensus that we needed to be more in control of our own destiny,” Blank says.

“You want strong content and you want strong brands. Whether you’re a premium network, a movie studio or a broadcast network, you’d better have content that people want,” Blank says. “At Showtime, we are selling a brand. Somebody’s buying us month-in and month-out. People may be watching ‘Weeds’ but they’re buying Showtime. Our marketing task is to connect those things.”

***

The financial alchemy that makes up a total box office gross has also been impacted of late by two other factors: An upswing in foreign box office receipts and the revival of 3D.

In June, the major Hollywood studios estimated their take from the international box office jumped a whopping 64 percent during the first five months of the year. In years past, the international market had typically contributed 60 to 65 percent of each film’s total box office figure, but that percentage is likely to increase this year.

Some experts have attributed the growth in foreign to improved theaters, 3D installations and a growing middle class. China’s box office, for example, is up 189 percent over the same period from last year, while Russia saw a 70-percent jump.

The impact of the foreign box offices are reflected in Toy Story 3’s totals, as well. The film earned more than $500 million overseas. In total, the film grossed $920 million, making it the highest-grossing cartoon in movie history.

Movies presented in 3D are proving alluring to studios and movie exhibitors for reasons beyond the cool factor: Those who chose to watch the film in an extra dimension pay another $3-4 per ticket—and those surcharges really add up. James Cameron’s Avatar, the most popular 3D movie of all time, is the also highest-grossing film ever made, earning $736.9 million domestically and $1.94 billion overseas through March 21. Experts estimated that as much as a third of the film’s earnings came from the 3D surcharge.

Audiences are showing a willingness to pay that price. The Motion Picture Association of America estimates that 3D ticket sales accounted for 11 percent of the total North American box office take this year, compared to just 2 percent in 2008.

“It’s been such an interesting year, when you see how quickly 3D got a foothold and how tough it’s been for other movies this year,” Blank says. “There are a lot of challenges out there. The rate of change is so quick, it’s not easy for people to adjust and have the answers.”

Of course, history shows that exhibitors banking on 3D dollars may not enjoy that banquet indefinitely. Throughout history, theaters have charged customers more to watch movies with sound, and then those with color. Once all movies had those elements, the surcharges disappeared, Smetters notes.

“Once technology evolves and engineers figure out how to bring 3D into the home, I’d expect that surcharge to drop down to $.50 per ticket,” Smetters said. “The difference in cost will become smaller.”

***

Here’s a quick, pithy snapshot of the state of Hollywood in 2010: According to the MPAA, North American box office receipts were up more than 10 percent last year, but the number of films actually released into theaters shrank 11.8 percent from 2008.

From a bottom-line point of view, it’s hard to argue with the results.

How do studios keep growing that box-office number—and also creating more revenues elsewhere?

Some studios are looking to an academic approach, exploring the idea of applying an actual scientific formula to help them assess the viability of films in the theatrical pipeline. And according to two Wharton professors, such a formula may actually exist. Jehoshua Eliashberg, the Sebastian S. Kresge Professor of Marketing, and Z. John Zhang, the Murrel J. Ades Professor of Marketing, recently studied 200 films released between 1995 to 2006 with the ultimate aim of figuring out how and why some films prove to be successful. Their paper, “Green-lighting Movie Scripts: Revenue Forecasting and Risk Management,” was published in May.

“We are establishing a fundamental way of comparing a script to other scripts that have been made into movies,” Eliashberg says. “There is a certain type of story structure associated with movies that have been released in the past and performed well in the box office.”

What did they find?

Well, for those who have followed the success of Toy Story 3, their conclusions were anything but a surprise.

“Family movies did the best,” Eliashberg says. “Hollywood makes a lot of R-rated movies, but family movies earn more at the box office than the horror and dramas that tend to be R-rated. The bottom line, based on the data we have, is that Hollywood should make more PG- and G-rated movies—at least from an economic standpoint.”

Another plan, however, currently under consideration at Time Warner Cable, involves making movies available via Video on Demand just 30 days after the movie premieres in theaters—but starting at the premium price of $20 per view. Some executives at other studios have questioned the intelligence of Time Warner’s idea, with most saying a 60-day home viewing experience would be much more palatable to the movie exhibitors.

But clearly, others say, the day of reduced windows is coming.

“There used to be heavy barriers of entry,” says Showtime’s Blank. “But now consumers don’t care how that picture gets to the screen. It’s about convenience, content and control.”

Chris Krewson is Editor-In-Chief at Variety.com. This is his first piece for Wharton Magazine.

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