FRONTLINEthe monster that ate hollywood
homewhat's wrongindiesbroadbandthe monsterdiscussion
larry gerbrandt

photo of larry gerbrandt

Larry Gerbrandt is chief content officer and senior analyst at Kagan World Media, a research firm that covers the movie business. Here, he talks about the numbers: why the summer months are so important, how a movie makes its money, and why studios need those ancillary markets to carry them through the lean times at the box office. "The studios themselves don't make a lot of money except in the rare years where they have extraordinary success, two or three blockbusters. ... On a stand-alone basis, it's not a very good business," says Gerbrandt.

This interview was conducted in September 2001.

... A new movie comes in number one every week. Is that good or bad?

One of the patterns that's developed over the last few years is that ... the studios have put a tremendous amount of emphasis on performing well during the summer. They've lined up movies back to back to back, big weekends with huge marketing campaigns, each one of them hoping to be blockbuster. It's a fact that ... about 60 percent of the moviegoing for the year occurs during the summer. So the studios have learned this is the time.

What the studios have learned is, if you've got some big films to release during the summer, you're going to open them just before Memorial Day. Then you hit Fourth of July, and then the season sort of concludes around Labor Day. So they've stacked up the films, sort of like planes coming in for a landing, one after another. And once you get them in the pipeline, it's very hard to abort the landing or abort the release.

It's not a very good thing. For the average film, it works well, for the big films that do work. One of the risks, though, is that mediocre films will knock each other off in succeeding weekends. So if you don't do well in that opening weekend, generate tremendous word of mouth, you're pretty much chopped off at the knees in the next weekend.

[Note: See "Open Big, Open Wide" for more comments on what's behind the opening box-office mania.]

What does that do to the exhibitors?

For an exhibitor, they want movies that stay in the theater for a long time because of the way the split works, the way they split any revenue between the between the theater and the studio. In the first weekend, typically the studio keeps 90 percent of everything that comes in after theaters cover certain base costs. By the end of the run, it flips the other way, so it's 10 percent to the studio, 90 percent to the theater. So the longer the film runs, the better the take gets. In that opening weekend, pretty much all they're doing is covering costs and making money on candy sales.

This is accidental rather than some grand design?

Oh, no. They want a movie that runs for a year. If they could get a film like "Star Wars," which ran for an entire year in the theaters, or "Titanic," which ran very close to a year in some cases, that is the best of all possible worlds. And what they do is they want a film that people actually love so much they go back to see over and over again. It's those repeat visits that really generate the very large box office gross.

Talk us through how "Pearl Harbor" did.

Well, it's actually how it's still doing. "Pearl Harbor" actually just got re-released. They felt that because of this phenomenon of movies knocking each other off and some negative word of mouth -- by and large, mostly the critics, the critics have panned this film rather thoroughly -- it didn't get a fair shot. So they've actually brought it back at the end of the summer for a re-release.

In theory, a hit Paramount film can actually play on virtually every one of its windows on a Viacom property. And in each case, they can maximize the revenue that is generated from that.

However, in its first two weekends, the film did $118 million. And by the third weekend it did $143 million cumulatively. What that means is, of everything that film is going to generate, over 60 percent was generated in the first two weekends, in terms of box office gross. And through the third weekend, three-quarters of its total domestic gross will have been generated in just the first three weekends. So while it's been in the theater now for 15 weeks as we're talking, 75 percent of what it's going to generate, which will probably be somewhere between $196 and $200 million, will have been generated in its first three weeks.

Did that movie make money for the studio?

"Pearl Harbor" is going to make money. How much depends on how much of their overhead they allocate to it, what the profit participations were, what the distribution costs are. But if you look at "Pearl Harbor" just as a pure economic entity, it will probably make cash in/cash out, a couple hundred million dollars, before they start charging other things against it. So the studio, despite the critics, will do well on this film.

How does a movie make its money?

The way a movie makes money is actually by going through a series of ... windows of exhibition. Starts out in the theater, domestically, then fairly shortly thereafter will appear internationally. About six to twelve months later, first you might see it on airplanes and in hotels for a brief period of time. It's not a huge revenue stream, but it generates some towards the tail end of the theatrical release.

[Note: See "Now Playing ... And Playing ... And Playing" for more information on the different "windows of exhibition" for most Hollywood films.]

What percentage of the gross?

That's very hard to do ... because different films will be different percentages. If you specifically want to do "Pearl Harbor," I can try to do it. ... We estimate "Pearl Harbor" will generate worldwide through, over the next eight to ten years, $475 million worldwide to the studio. Of that, about 22 percent will come from the domestic theater, domestic box office. Another 22 percent from international box office, 22 percent from domestic home video. Then international video will probably be about 14 percent, domestic TV -- pay TV and free TV -- will be about 12 percent, and foreign TV, about 8 percent. So that adds up to about 100 percent of the $475 million. But that comes in over a span of many years, as the movie moves through its different windows of exhibition.

How are those percentages affected by how it does the first weekend?

One of the interesting things is you know if a movie's going to work by the end of its second weekend. The first weekend is critical; but what really determines whether a film's going to succeed or not long term is its second weekend. If it doesn't fall off too dramatically, more than 30 or 40 percent by its second weekend, it may actually pick up steam and do well and stay in the theaters longer. So the key is how much does it fall off between its first and second weekend.

A film that tanks on its opening weekend actually has to make up a greater proportion of its revenue from the ancillary window, especially such as home video. So a film can actually not do all that well at the box office. It will still make up some of its revenue in the home video marketplace just because of DVDs, and Blockbuster puts them out in all the stores.

However, this is one of the interesting truisms of the business: A film that does well at the box office does well in every one of its other windows of exhibition. On the other hand, a film that doesn't do well at the box office still can find another audience in home video or maybe on TV But it will never do as well as a film that did very well at the box office, and especially in its opening two weekends. ...

So box office success is a predictor of success in every other window of exhibition. ... A part of this is because of the way some of the contracts are negotiated. For instance, pay TV, what an HBO or a Showtime or a Starz pays to the studio for a film, is linked directly to how well it did at the box office. So it's actually a contractual formula. The more it does at the box office, up to a cap, the more it generates in pay TV license fees.

Talk about "Evolution."

"Evolution" will probably do reasonably well in home video, because it has Duchovny, and it's sort of a sci-fi comedy theme, and those typically do well in home video. It won't do anywhere near as well as, say, "Pearl Harbor." But it will actually do much better in home video than it did at the box office, where it only did about $38 million. The studio will actually have to work the home video window, the pay TV window, and international TV, to try to get back to break even.

This film will probably never make money. But to at least minimize the loss that they're currently at after having spent the money to make it and release it and having taken it through the box office window, the studio will have to try to make its money back from home video and then all the other windows of exhibition. Even after that, it will probably still not be a profitable film.

That goes to what happened in the first weekend?

What happened at the box office and the first weekend was really the predictor of how it would do for the rest of its time in the theaters. If you stumble in your first weekend, it's rare that a film comes back and picks back up in the second weekend.

Talk about blockbusters. Good business or bad business?

You wouldn't have these huge, multinational conglomerates which own studios if you didn't have movies. It really does start here in Hollywood. It provides one of the keys to their worldwide economic power. Having said that, the studio divisions of these conglomerates, a good year will be a 10 percent profit margin. The studios themselves don't make a lot of money except in the rare years where they have extraordinary success, two or three blockbusters. The other exception to that is Disney, which does so well in home video with the animated features that Disney historically has done better than all the other studios, in terms of profit margin.

But it's not unusual for a studio to have invested a billion dollars and to generate less than a 10 percent return on that. So on a stand-alone basis, it's not a very good business. However, if they didn't make movies, you wouldn't be able to run theme parks. You wouldn't be able to run or create TV networks. You wouldn't have libraries against which you can create cable networks. The movies really provide the economic foundation and much of the leverage that these companies have in terms of being able to do other businesses.

[Note: See the "Anatomy of a Monster" section of this website for more information on the seven major studios and their film-related assets, and the media conglomerates that now own them.]

How are these companies geared to make money off this thing it generates in Hollywood?

I'll give you a couple of examples: Fox and AOL Time Warner. Both have multiple cable networks -- specifically, there's Turner Classic Movies and Fox Classic Movies. Those two cable networks are built on the fact that those studios have libraries, and it gives them tremendous leverage in the marketplace. They can go to a cable operator and say, "Look, we can create a cable network at a very low cost." And it just feeds off of the library.

The movies generate record sales, because they're tied in. It's not coincidence that the movie studios also are the record labels in many cases, and music has become extremely important in movie economics. The studios also have studio stores, where they can sell merchandise related to the films. That's another profit center. There is the licensing that goes on, the merchandising that goes on for some films where they actually become major toy hits. Some of them generate video games, which is another source of revenue. Then there are the theme park rides. Equally as important, the studios have international TV and cable network operations, so these movies provide the foundation to be able to go out and program these international operations.

But maybe most important is having a blockbuster film [that] allows you to charge more for almost everything else you do that year, because of the way movies are packaged in with other business deals and other films. So the hits are really the locomotives that drag the rest of the train down the tracks.

Could you relate that to Viacom?

Well, for Viacom it made a lot of economic sense. One, at the time they tied Blockbuster into acquiring Paramount. Both were done at about the same time and Viacom already owned Showtime, a pay service. They had international operations, and rather than always licensing their films from a third party, they realized that by owning a studio, they could self-produce and self-source. Not only that, but every time you do that, you cut out a middleman. If you own the film, you don't have to pay somebody else's commission for selling you that film.

So it either lowers the cost of the film, or conversely, increases your profit margin on the film. And for Viacom, having Paramount as a captive source for Showtime was very important, because they knew that nobody could ever completely put them out of the pay TV business by bidding away for all the other studios. They would always have at least one in their corner.

Explain to us what vertical integration means.

Viacom is as good an example as any of vertical integration. Paramount produces the movie. In the case of Sumner Redstone, he personally is one of the largest exhibitors in the country. His National Amusements is one of the largest consumers of movies. So it made a lot of sense for him to own not only a studio, but also the other businesses that Viacom has. In the case of Viacom, they also own Blockbuster, so the movies go from Sumner Redstone's theaters to Blockbuster stores.

The next window after that, aside from a small pay-per-view window, it then goes to Showtime, its pay window. And then now with CBS, the next window after that is a network window and then it goes, could go into syndication on the CBS TV stations. So, in theory, a hit Paramount film can actually play on virtually every one of its windows on a Viacom property. And in each case, they can maximize the revenue that is generated from that.

Of course, they can't program 100 percent of all of those assets with just Paramount. They do have to go out and source films from other studios. But at least for what Paramount generates, they extract pretty much maximum revenue or, more important, maximum profit at each window of exhibition.

[Note: Learn more about Viacom's diverse holdings on FRONTLINE's "Merchants of Cool" website.]

Tick the windows off one at a time.

Let me take you through the lifecycle of a film. A movie generally premieres in the U.S. at what was typically called the domestic box office -- which is actually the U.S. and Canada -- and it will actually stay in the theaters anywhere from two weeks ... to as long as a year. There have been a handful of films historically who have gone that long. But usually that window lasts from six to twelve months. Towards the end of its theatrical window, it may appear on airplanes in an edited form and in hotel pay-per-view. Also, generally within a couple of days to as long as six months, somewhere in between, it will also have its international premier. ...

So the domestic box office window is six to twelve months. After that comes the home video window. Home video has a protected window of about six weeks, in which it's exclusive to home video. That means the only place that you can rent or buy this film is at a video store. Six weeks after that starts the pay-per-view window, and that generally lasts two or three weeks. All in all, a movie will stay in its primary home video window for around six, sometimes as long as twelve months. Then it moves to pay TV, such as HBO or Showtime, where it will stay about six months. Then it moves on to network television for one or two runs. Then it goes into domestic syndication, either on TV stations or a cable network or both.

And then after about five years in syndication, it will actually come back for another pay TV window, then go back out to syndication, and back to pay TV, pretty much for as long as anyone really wants to watch the film. So at this point we know that movies have at least a 50- or 60-year lifespan. And towards the end, they're just bouncing back and forth between pay TV and syndication.

How do these corporations apply synergy, and how does it differ from the way Hollywood applies it?

Historically, the movie studios before they became part of conglomerates, it was make or break on the film slates each year. In other words, if they had several years running where they didn't make money, the company either had to be sold, or it went out of business, or it had to be re-capitalized in some fashion. Today, because making money just strictly from films isn't the only thing that these conglomerates can do, they can actually stay in business even if they have money-losing slates several years in a row.

So it's actually given them a little more breathing room, although investors still breathe down their necks every year. And even though writing off one or two big films a year won't damage one of the big studio's balance sheet, it doesn't have much of an impact on its value. Investors will still view that very negatively. So the goal is still to make money. It's just not a complete make-or-break proposition any more.

[Note: Read more comments on the viability of the Hollywood business model.]

Who was first to do this?

I would say Time Warner was a bit of a prototype. But in fairly short order, you had News Corp., and Disney was in there as well. They had always tied together their theme parks with the studio. But now, typically, what you have is a movie studio combined with a with a broadcast network, with a family of cable networks, possibly with a pay service. Most of them have theme park operations of one sort or another. Most of them have some sort of consumer products, either studio stores or some merchandising relationship. Many of them have now an online operation so they can try to exploit these in new media. Some, such as AOL Time Warner, have cable systems. So they benefit pretty much from womb to tomb from the exhibition of the films.

The goal still is to cut out as many of the middlemen as possible and maximize the revenue of the film, as well as use the leverage that those films give you to become larger, more powerful [to] make deals. A hit film is a tremendously powerful weaver in negotiations, because it's really the key, especially in the international market, to generating revenue. You can tie several blockbuster films in, and you sell a large amount of library content hooked along with the deals, or packaged in with the deals for these big blockbuster films.

Do you see any threats to this business model in the future?

The biggest threat to the movie business is that they overspend to such an excess that they can't make it up on the back end. One of the problems that they're beginning to encounter is that movies tend to cost more year after year to make. Stars want more, CGI costs more, the special effects cost more. And you begin to reach a point that the costs are rising faster than the revenues can rise, especially in a year like we're in right now, where we're in a poor economic environment. ... I would say, from an economic standpoint, that's the biggest danger.

I don't see any technological threats. There was a time when people thought that "Blair Witch Project" was going to be the undoing of Hollywood, because you're going to have people running around with video cameras, competing with the studios. As it turns out, "Blair Witch" was the exception, not the rule. And it certainly wasn't the future of the business.

A fair number of people point to broadband as a possible threat.

... I don't think broadband is necessarily a direct threat to the business, unless they lose the ability to protect their content. As long as you own the library and you keep making new hits, if you own the blockbusters, continue to refresh that library and you don't lose control of that, I don't think the studios are at risk from broadband. In fact, they intend to use broadband to deliver films directly to consumers. If anything, some of the video stores are more at risk than the studios from broadband, because it does allow them to bypass both the video store and also allows them, in some cases, to bypass the cable operator.

Do you have a sense of how the independent world fits into this?

The independent film business succeeds in large part on individuals' passion and how much money they can charge on their credit cards. So probably the best thing to happen to indie films was MasterCard raising its limits to $25,000 and $30,000. I'm being a little facetious, but not entirely. The indie film business sort of always exists separate and apart. There are a handful of filmmakers who have a real passion, a real zeal, and they want to make films just the way they want to make them, without a studio formula or studio interference. Most of the indie films that are made, though, are made in hopes of getting a real job. Nobody's going to like me for saying that, but ...

It's brutal reality.

It's true. You make an indie film that people say, "God, that was an extraordinary effort. Here, let me give you $85 million for your next project." And guess what? You get to make a couple million dollars out of that. It's the indie hope chest.

How does "American Beauty" slip through the blockbuster mentality?

I actually have a lot of faith in the American audience. They have an excellent crap detector. ... One of the more amazing things about the box office is that, within hours of a film hitting theaters, people seem to know whether or not it's going to be a big hit or not. I think we've all had the experience of going to a theater [and] as people were coming out, somebody said, "That's a terrible film. Don't go to see that." It's the ultimate enviromarketing, because the first wave of people who go see the film tell all of their friends either go see it or don't go see it. That information disseminates very, very rapidly across the country. And for a film like "American Beauty," the word of mouth was good.

Frankly, word of mouth is almost everything in the movie business. You can market a bad film, and you can drag people virtually into the theater in that opening weekend. You can't make them go back and tell their friends to go see a bad film, no matter now well you market it. That's what's led to all this pressure on the opening weekend. It's actually much more important for bad films or films that may not work too well or the studio just doesn't know. The opening weekend is the ball game. You don't get a second bite at the apple for a mediocre or a bad film or a film that's not going to generate word of mouth. So you can promote people into the film one weekend. But that's it.

What happened to Miramax?

Miramax ruled the indie world. They actually were one of those companies that was able to fund themselves and stay in business long enough to really get the chain rolling. ... If you have to live and die one film at a time, you're probably going to die, because far more films fail than succeed. The key is hanging around long enough to have that success that basically pays for all the failures. That, in a nutshell, is the movie studio business. ...

Miramax and New Line, which is its close cousin in many respects, had a handful of films that worked. They were able then to go out and release more films. The problem is, in success, you want to keep reaching for a higher brass ring. So the budgets start going up, you actually start making safer bets, or at least what you think are safer bets, because the budgets are higher. You may take fewer shots and you actually begin to look very much like a major studio. ...

In an effort to get a bigger supply of good films, they start funding films. Now they begin looking more like a major studio. Instead of just sitting there and having indie producers bring them films that were already done, they actually went out and started making them and funding them. There's nothing wrong with that, and indeed, economically, you make more money that way. But you're no longer really an indie film company.

How do you breed predictability in the movie business?

There is not predictability to the business. But what they do know is if they make enough films and release, it's really a business of managing the risks and managing the odds. They know that if they hire certain A-list stars, couple them with good stories and directors who have experience at creating hits, that on average, they're going to succeed more than not. They also know they're going to fail a lot of the time.

So the idea is to spread that risk over a number of films. And you increase the odds that, in any given year, two or three of those emerge to be the big blockbusters. Those hits pay for all the failures. But realize that a film's life is at least 18 months from concept to when it appears in the theater. Much of the money is spent before it ever gets close to the theater. And much of the money, more importantly, is committed before the camera starts rolling. So at that point, the money is tied up in the capital. Therefore, you try to take as many of these shots as you can, in the hopes that several of them are going to pay off.

Some people are concerned that movies are getting so expensive that the big pictures won't cover the rest of your spread. Do you see that as a danger?

No. ... I think I made the comment earlier that the risk is that the cost of films increases faster than the revenue that you can generate from it. Right now, the business hovers above break-even. And you make money by these films going into the library and staying there for a long time and coming back through cycles of syndication. ...

DVD has been fabulous for those who own the libraries, because people go back and say, "I want to replace my VHS tape with a DVD of my favorite film." So you dust off all those masters and make more prints or more DVDs. And you hope that the next technology down the pike does the same thing again and again.

The problem is the short term and, yes, there is a risk that the economic formula -- the economic model -- breaks down. And the biggest risk is this notion that the blockbusters always have to top themselves, especially the sequels. If you had some big special effects in the last film and it worked, and you do the sequel, you've got to make it bigger and better and louder and more exciting and more visual. And that almost always costs more money. So it's really the sequels that come back to really burn you. You know you have a built-in audience, but you also have to spend a lot more money for those.

Yes, there is a risk. The studios have managed to find ways around those risks for the last 20 years. That risk has always been there, and it's been a continual problem as long as I've analyzed this business. They've stayed just ahead of the curve at each step, sometimes through creative financing techniques, sometimes they've laid off the risks, limited partnerships.

Really, ultimately the movie business is about how you capitalize and finance your films. And the studios have become very sophisticated about how to do that. At various points along the way, different players have stepped in to finance the movie business. At one point, it was limited partnerships; more recent years, believe it or not, is insurance companies will actually fund a lot of the releasing costs. They're simply playing actuarial odds on how many films will succeed and how many will fail, and whether the average film covers its P&A. The video business for a while actually funded films. HBO funded films for a while. So there's always been an investor out there who has stepped in and put up the money for the movies.

The danger comes when you pretty much run out of all of those who want to take the risk. The exciting thing about the movie business is the same thing that's exciting about investing in Broadway plays. You never know when you're going to invest in the next "Titanic" or the next "Cats." And the rewards on those are so extraordinary. It's better than hitting the Powerball lottery.

One prediction for a movie's total box office used to be three-and-one-half times opening weekend. This summer it's two-and-a-half-times. That troubled Howard Stringer.

I still maintain you really don't know how a film is going to perform until its second weekend. The studios have gotten so sophisticated, so good at cutting the trailers, at marketing the films, creating that buzz ... that they can put butts in seats on that opening weekend. What has happened this year, I think, is what Howard is referring to -- that the falloff in the second weekend has been more dramatic than usual, and therefore the usual formula doesn't work. So it's really a problem with the films, not with the business itself. ...

The way I would approach that statement as an analyst is that the films haven't been good enough to sustain themselves at the box office. Therefore, the benchmark doesn't work, and therefore, overall, the films are not performing as well as they have historically. But it really is about the fact that the films just simply haven't been that good, no matter how much money was spent to make them and market them. They can't sustain themselves past that big opening weekend.

Multiplexes have three films playing across 15 screens. How did that happen?

A lot of that has to do with the opening weekend. One of the things that the theaters quickly realized when they built the multiplexes is that they didn't want to ever turn anybody away, especially on the opening weekend. And when you have multiple films opening on that weekend, or at least in a short period of time, you don't want people saying, "Oh, jeez, OK, I'll go to the movies tomorrow night or the next night." You want to satisfy them immediately. Therefore, they opened up multiple screens.

Most of us can still remember when you'd go to the theater and there was one screen and three show times, and if you couldn't get in to the first couple, you didn't go see that movie. Now, the goal is to never turn anybody away because you may only have one shot at that customer, because if the film doesn't have legs, they're gone. Their friends have already told them, "Remember that movie you wanted to go see? Don't bother going to see it." So the idea is to capture them on that opening weekend, get their butt in the seat ... and move on.

And therefore, you turn over all the screens in the theater to the movies that opened that weekend, meaning there's very little for the independent films outside of the art houses, which is where pretty much they've always lived.

What's the most fascinating thing about this business?

How enduring the magic is. The fact that it continues to draw some of the most creative people. It continues to find ways to finance itself, and that people still have this desire to get out of the house on a Friday or Saturday night and go sit in the theater and be entertained. And the fact that all of the technological change we've had in the last 20 years hasn't diminished the magic of that formula.

There was a time when I thought that some of the new technologies might actually take something away from the theatrical experience. I think I've now come to realize that we're going to have theaters. In the future, it may be digital theaters where, instead of film prints, it'll be electronic prints. But I think we're going to have theaters for a very long time, because it's the key. How that movie performs in that opening weekend very often determines how successful it is for the rest of its economic life. And there's a magic that occurs in that exhibition environment that you could not create any other way.

What's the scariest or wacky or frustrating thing?

Let me be the skeptical analyst. The thing that's a truism about the movie business is that very often everybody associated with the film makes money except the studio. Everybody who is involved in the project gets paid first, and they make sure they get their piece. The studio, therefore, and ultimately the shareholders who own the studio, are actually the least likely to make money off the movies. That's not the wackiest part of the business, but from ... someone who analyzes the value of studios, it's one of the most frustrating things about the business. I mean, that's Hollywood. You can have producers, directors and stars of unsuccessful films making fabulous sums of money. And the studio doesn't [make money]; neither do their shareholders. ...

home · introduction · what's wrong with this picture · indies are dead...
dreaming in broadband · anatomy of a monster
interviews · links & readings · discussion · video excerpts
press reaction · tapes & transcripts · privacy policy · credits
frontline · wgbh ·  pbs online

web site copyright 1995-2014 WGBH educational foundation

SUPPORT PROVIDED BY

NEXT ON FRONTLINE

Solitary NationApril 22nd

FRONTLINE on

ShopPBS