The Hollywood Economist 2.0

by Edward Jay Epstein

  When we arrived, he decided to skip the reception hosted by independent distributors. “I personally enjoy watching many of the low-budget films that come from independents,” he said, “but they are not a significant part of our business.” In fact, according to Stephenson, 98 percent of the admission revenues of his theater in 1997 came from the principal Hollywood studios—Sony, Disney, Fox, Universal, Paramount, and Warner Bros. These companies supplied his multiplexes not only with films but with the essential marketing campaigns that accompany them. (Occasionally, to be sure, independent films do succeed in winning a mass audience, as, for example, The Full Monty and Slumdog Millionaire did; but, as Stephenson put it, “We don’t count on them.”)

  Marketing campaigns begin months before the release date, use the most sophisticated methods available to target demographic groups, and intensify their activity in the final week, often with saturation television advertising, in order to capture “impulse” moviegoers. Stephenson and other theater owners rely on them to muster, if not to create, the audience for a film’s crucial opening weekend. The campaigns require massive resources. The major studios spent, on average, $19.2 million in 1997 to advertise each of their films, a sum that would be considerably higher if it included the advertising provided by fast-food restaurants, toy companies, and other retailers in promotional tie-in arrangements that can amount to many times what the studio itself budgets. Rather than attend the large reception, therefore, on our first night we dined with the representative of Coca-Cola, a company that exclusively “pours” the soft drinks in over 70 percent of American movie theaters, including Stephenson’s. Soft drinks are an important part of the movie business. All the seats in Stephenson’s new theater, and most other multiplexes, are now equipped with their own cup holders, a feature that theater executives consider one of the most groundbreaking innovations in movie-theater history. With cup holders, customers can not only handle drinks more easily in combination with other snacks but can store their drinks while returning to the concession stand for more food. Hollywood Theaters, which now offers an oversized plastic cup with unlimited refills, sold slightly in excess of $11 million dollars-worth of Coca-Cola products in 1997, of which well over $8 million was profit.

  Although most of ShoWest’s official functions take place in convention halls and hospitality suites at Bally’s Hotel, much unofficial business was done in its sprawling coffee shop. It was there early the next morning that I joined Stephenson for a breakfast meeting with an analyst from J. C. Bradford & Co., an investment firm. Acquisitions were in the air; Kohlberg Kravis Roberts had just bought and consolidated two of the largest theater chains. Stephenson, as he made clear at the outset, planned to partake in this industry consolidation by acquiring state-of-the-art multiplexes. Since he planned to finance this aggressive expansion by selling part of his company to public or private investors, he needed the services of investment bankers who, in turn, needed a story or convincing rationale, to raise the money.

  Stephenson’s story centered on stadium seating, in which every row of seats is elevated about fourteen inches above the row preceding it, allowing all customers to have an unimpeded view of the screen. While the seats take up more space, Stephenson said, “Our focus groups show that people now seek out theaters with stadium seating and will drive as far as twenty miles to find one that has it.” Attendance increased between 30 and 52 percent where he had installed such seating. Stephenson would repeat this story to four other investment bankers at similar kaffeeklatsches over the next two days.

  A little later, Stephenson moved to a different table to meet with two of the top executives of another major chain. He had told me beforehand that he wanted to buy five of their multiplexes and sell them an equivalent number in different locations, or “zones.” In the movie business, the country is divided into zones that contain anywhere from a few thousand to a few hundred thousand people; the major distributors license their films to only one theater owner in each zone. Just over two-thirds of Stephenson’s theaters are in such exclusive zones, and he wanted to increase this number. These talks ended inconclusively, and in the late morning I accompanied Stephenson to the convention hall, where we took assigned seats in the grandstands. Stephenson, along with 3,600 other attendees, was there to see the first major studio presentation, Sony’s product reel. Sony’s top executives sat on a dais, as if addressing a shareholders’ meeting. Jeff Blake, the president of Sony’s distribution arm, said that last year Sony films had brought a new record gross into American theaters: $1.2 billion. Indeed, Sony accounted for nearly one out of every four dollars spent on movie tickets in 1997.

  Vanna White, the television personality, then conducted a mock Wheel of Fortune game in which every clue referred to films coming from Sony in the next year, including Godzilla. As Vanna White announced each title, actors from the film in question rushed onto the stage—among them such stars as Michelle Pfeiffer, Julia Roberts, Nicolas Cage, and Antonio Banderas. All of this was followed by excerpts from the films. A highlight of sorts came when the stage suddenly filled with dancers costumed as characters from Sony’s movies. Robert Goulet played the part of Jeff Blake and sang, to the tune of “The Impossible Dream”:

  This is our quest, to be king of the box

  There’ll be lines round the block

  When that big hunk Godzilla is finally here

  And you’ll know what we’ve done for you lately

  When we beat the unbeatable year.

  A private meeting held afterward, in Sony’s Las Vegas conference room, was far more grounded in reality. A top Sony executive immediately set the tone by observing that the presentation had cost Sony four million dollars (a gross exaggeration, it turned out) and then quipped that next year, instead of hosting the event, Sony would just send a ten-thousand-dollar check to each of the chains’ film buyers. It became apparent at this meeting that the negotiations did not concern whether a chain would show Sony films on their prescribed release dates; that was taken for granted. At issue was the terms under which they were to be played and positioned against the films of competing distributors, for instance, the number of screens they would be shown on in a multiplex, the guaranteed length of each film’s run, the amount of free advertising there would be in the form of trailers and lobby displays, and the division of the box office receipts.

  For example, regarding Godzilla, the executive outlined the enormous marketing campaign, supported by worldwide licensees of three thousand Godzilla products, as well as promotional tie-ins with such retail partners as Taco Bell, Sprint, Swatch, Hershey’s, Duracell, Kirin beer, and Kodak, which were designed to drive a huge and voracious audience of teen-age boys to their theaters. This particular audience, as he described it, was not concerned with the quality of the film, or even whether it was in focus, as long as there was action and popcorn. He joked that the theaters’ potential popcorn sales should persuade them to agree to give Sony a larger opening-week cut. Joke or not, the implication was not lost on Stephenson’s film buyer, although for the moment he successfully resisted Sony’s suggestion. (As it turned out, the Godzilla campaign succeeded in “driving” people to pay seventy-four million dollars to see the poorly reviewed lizard in its opening, Memorial Day weekend.)

  The next private meeting, in the hospitality suite of Twentieth Century Fox, was more relaxed. After offering Stephenson a soft drink, the Fox executive discussed the strategy for the summer season, which provides the largest audience for theaters. Indeed, of the nearly 1.4 billion tickets sold in 1997, some five hundred million were for the summer season, when, as the Fox executive put it, “Every day is a school holiday.” (Another two hundred and thirty million were sold in the so-called holiday season, between Thanksgiving and New Year’s.)

  For the summer release season, Fox was facing competition from a number of catastrophe films, such as Godzilla, Deep Impact, and Armageddon, which early tracking polls showed were attracting the attention of large numbers of male teens. Th
e polls I saw, which were conducted by the National Research Group, had divided respondents into five demographic “quadrants”—under twenty-five, over twenty-five, male, female, and a racial category—and asked about their awareness of, and interest in, upcoming films. On the basis of these data, along with other research supplied by the company, the major studios can avoid simultaneously competing in the same demographic categories and dividing up their opening-weekend audiences. Even in March, the Fox executive reckoned that competitors’ films, particularly Godzilla and Armageddon, would dominate two crucial quadrants—male and under twenty-five—in the early summer. He therefore opted to counter-program, which meant scheduling romantic comedies, that would appeal to the female and over-twenty-five quadrants.

  Although the Fox people had an easier style than their Sony counterparts, they wanted the same limited commodity: the chain’s better screens, play dates, and in-theater advertising. So did the four other distributors Stephenson met with during ShoWest. By his count, in four days he watched brief excerpts from some fifty films. “They all tend to blur together,” he said, and plots were never described. Instead, the accompanying pitches identified them in such jargon as “Clearasil” (coming-of-age), “genre” (teen-age horror), “romantic comedy” (love story), “ethnic” (black characters), “franchise” (the carbon-copy sequel of another film), and “catastrophe” (volcano, comet/asteroid/monster, loud sound effects). The Holy Grail was a film like Titanic, which appealed to all five quadrants. The last and longest meeting was with Disney’s distribution arm, Buena Vista; its senior executives were eager to spend an hour or so discussing marketing plans with Stephenson. While they voiced some concern about the proximity of July’s Armageddon, in which the earth is on a fatal collision path with an asteroid, with Paramount and DreamWorks’ Deep Impact, in which the world is on a fatal collision path with a comet, they had an ingenious scheme for differentiating their product. Holding up a rectangular box, their executives explained that it contained a kit that would help theater managers to build a mock asteroid. Disney planned to distribute this package to theaters playing Armageddon and award prizes to theater managers who used it to create the most forbidding cosmic rock. The theme would then be amplified through such stunts as end-of-the world parties hosted by local disc jockeys.

  Later, Stephenson, along with several of his top executives, toured the trade-show pavilions located in two giant tents behind Bally’s, where delegates to ShoWest were somewhat greedily sampling popcorn, jelly beans, chocolates, licorice, frankfurters, nachos, and other snacks, many of which claimed innovative new flavors and aromas. Others were getting a look at the non-consumable products at the booths, such as loudspeakers, projectors, ticket rolls, cleaning equipment, marquee letters, plastic cups, and remote ticketing systems.

  As we walked around, one of Stephenson’s associates stopped to try an oversized Wetzel’s pretzel. According to the pretzel company’s representative, the Wetzel’s, though about three hundred calories, would appeal to diet-conscious non-popcorn-eaters, such as women who wait on the concession line with their boyfriends. At this point, one of Stephenson’s top executives, who was assessing different popcorn-topping oil, said to me in a hushed tone that “The real secret is the salt.” As a veteran of the movie exhibition business, he explained that the more salt that a movie theater added to the butter it poured over its popcorn, the more money it made since it drove customers back to the concession stand for drinks—where they buy more popcorn. Stephenson concurred, adding, “We are in a very high-margin retail business.”

  WHY DO MOST NEW MOVIE THEATERS HAVE FEWER THAN 300 SEATS?

  The multiplex can be traced back to an otherwise unmemorable shopping center in Kansas City, Missouri in 1963. Its theater owner Stanley H. Durwood split one theater into two “screens,” allowing a single box office and concession stand to service audiences watching two different films. In addition, new automated projectors allowed a single untrained (and non-union) projectionist to run an entire program, including trailers, advertisements, and the movie for multiple screens. The arrangement proved so profitable that Durwood’s company, American Multi-Cinema, or AMC as it is now known, along with the other major chains, converted most, indeed almost all, of the large movie palaces in America into multiplexes.

  What greatly contributed to the shrinking of the multiplex auditoria, or “screens,” was the Americans with Disabilities Act (ADA) of 1990. This act requires that new or renovated public theaters with more than 299 seats provide wheelchair access to all rows. Providing such access requires up to one-third more space for the necessary ramps—space that cannot be filled with revenue generating seats. To avoid this problem, multiplex owners divided their space into smaller theaters with a maximum of 299 seats. The result was a further proliferation of screens. Between 1990 and 2005 the total number of screens in the United States rose from 23,000 to nearly 38,000. Since multiplex owners essentially are in the people moving business—moving as many people as possible per hour past their concession stands—they found that the best way to maximize this “flow,” as one multiplex owner explained, was to show the movies expected to draw the largest audiences on different screens every hour or even half-hour. So the same movies were booked on multiple screens at a single multiplex.

  This strategy has recently undermined the studio’s system of “zones” and “clearances” in which the studio’s distribution arms refuse to provide the same movie to competing theaters in the same locale. This practice made sense in the era of neighborhood movie theaters. Theater owners insisted they needed such protection to prevent audience confusion proceeding from people seeing the same movie playing at two nearby theaters. And studios accommodated even though it meant that they had to have a larger inventory of movies available to make allocations to a larger number of theaters.

  This restrictive system became unnecessary when multiplex owners moved towards smaller theaters to deal with the ADA. What multiplexes now wanted were the most heavily advertised new blockbusters even if they were playing across the street (or mall). As Richard Myerson, the general manager of Twentieth Century Fox’s distribution arm explained to me, “multiplexes were no longer competing with one another for different movies.” They simply wanted to attract a bigger flow of popcorn eaters to their entertainment complex. So as theaters no longer wanted it, the studios happily ended the system.

  The consequence of this chain of events is that studios found themselves needing to distribute fewer movies. And this allowed them to further concentrate their resources on producing the action-packed franchise movies that help multiplexes maintain their flow of teen foot traffic past concession stands. Instead of a diverse portfolio of movies, studios could now open a franchise movie such as Batman Begins, Transformers 2, or Spider-Man 3 on 4,000 or more screens and, if successful, get huge grosses flowing through the box offices.

  The only down side for studios is that opening on more, smaller screens requires more prints. Back in the 1970s a studio could open a movie with 800 prints (an outlay of $800,000)—even Star Wars, the biggest hit of its time, never played on more than 1,100 screens. But with wider openings the cost of prints became far more substantial. With each print costing about $1,500, opening on 4,000 screens requires an outlay of $6 million.

  The butterfly effect may even tip the scales in favor of digital projection in the coming decade. After all, if smaller screens continue to replace larger ones because of the ADA challenge, the simplest way that studios have to offset the growing print and distribution cost is to help subsidize a shift in multiplexes from analog to digital projectors. The advantage to studios, as one Paramount executive suggested, is that a studio could open a movie in “30,000 theaters around the world, if only for a weekend,” and capture the huge cash-flow that would come from a global campaign. Such a vision, alas, might not bode well for those who enjoy less-action packed non-blockbusters.

  SEX IN THE CINEMA: ASSET OR LIABILITY?

  In the early d
ays of Hollywood, nudity—or the illusion of it—was considered such an asset that director Cecil B. DeMille famously made bathing scenes an obligatory ingredient of his biblical epics. Nowadays, nudity may be a decided liability when it comes to the commercial success of a movie. The top twenty-five grossing films since 2000—including such franchises as Spider-Man, Lord of The Rings, Shrek, Harry Potter, Batman, and The Incredibles, contained no sexually oriented nudity. In fact, the absence of sex—at least graphic sex—is often key to the success of Hollywood’s moneymaking movies since it increases the potential audience of children in both the domestic and foreign markets. To be sure, directors may consider a sex scene artistically integral to their movie, but studios almost always have the right to exercise the final cut, and, if they want to maximize the potential revenue, they have to consider three factors.

  First, there is the rating system. For a film to play in movie theaters belonging to the National Association of Theater Owners—which includes all the multiplexes in America—it first needs to obtain a rating from a board organized by the Motion Picture Association of America, the trade association of the six major studios. All the expenses for rating movies are paid to the MPAA by the studio out of a percentage deducted from box office receipts. As it presently works, a movie that contains sexually oriented nudity gets either an NC-17 or an R rating, depending on how graphically sex is depicted. The NC-17 rating, which forbids theaters from admitting children under the age of eighteen, is the equivalent of a death sentence as far as the studios are concerned. In fact, since the financial disaster of Paul Verhoeven’s NC-17 Showgirls in 1995, no studio has attempted a wide release of a NC-17 film. As one Paramount executive suggested, because of their sexually related nudity, movies such as Louis Malle’s Pretty Baby, Bernardo Bertolucci’s Last Tango in Paris, and Stanley Kubrick’s A Clockwork Orange would not even be considered by a major studio today.