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Does This Business Make Sense?
"Could [these companies] screw up? The main way they can screw up is simply that the gambles get so outrageous that it just doesn't make sense anymore. And we're well on our way." So says Variety editor and Hollywood studio veteran Peter Bart. Here are excerpts from FRONTLINE's interviews with Bart, former Fox studio chief Bill Mechanic, Los Angeles Times reporter Richard Natale, industry analyst Larry Gerbrandt, veteran studio executive Lucy Fisher, and entertainment journalist Michael Cieply.

PETER BART
the editor-in-chief of Variety, Hollywood's most powerful trade newspaper, he spent 17 years as a studio executive

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It's hypocritical for any of the studios to say, or networks to say, [they're] on the brink of bankruptcy, because obviously they live under the very handsome corporate umbrella of gigantically rich companies. I mean, they're not even companies. They're sort of nation-states. AOL Time Warner is a nation-state. So is Vivendi. ...

The basic long-term objective seems to be for the multinational corporations that own Hollywood to redefine the basic economics, so that the studios and the networks have much fatter profit margins. ...

Hollywood is going to have to find a way of meeting those profit goals. Now, are they realistic? This is a very volatile, egomaniacal, up-and-down business. And it's a cyclical business, and I don't believe the economics of Hollywood are ever going to satisfy the big multinationals. I think it's too crazy a business to make these global companies happy. Ultimately, they're going to find a way of shuffling off the production function, for example. They don't want to muck around with scripts and artists, for God's sake, that's disgusting.

...

Is there anything the companies can do to screw it up?

... The only thing they can do to screw it up is something they're beginning to do already, and that is let the costs side, both marketing and production, continue to get out of control. I mean, they have tried to cut the inflation and costs on the production side by beating up on everyone except the stars, the big stars making the big money, and the star directors and the star composers and so forth. ...

Marketing costs is the big bugaboo now, because, once again, a generation ago, you opened a picture on six screens, and you bought some newspaper ads. Today, it's 3,000 or 4,000 screens and you spend $30 million, $40 million on just television to open the picture. And it's these companies that own the networks, so they're spending it on themselves, to a degree. But they're still spending it, and the amount of money they spend to open every picture continues to escalate. It's just an astonishing proportion. If you look at what's being spent to open "Pearl Harbor," I mean, those are big numbers.

So I guess my answer would be that now, you know, the norm is a hundred-million-dollar picture. It used to be that people would say, "Boy, a hundred-million-dollar picture, that's an exception." There are $200 million pictures going this year. That's why we used to have this little chart every summer [of] how many hundred-million-dollar pictures would be released. Most of the pictures released during [this] summer have cost, between marketing and production, a hundred million dollars plus.

So could they screw up? The main way they can screw up is simply that the gambles get so outrageous that it just doesn't make sense anymore. And we're well on our way.

bill mechanic
chairman and CEO of Twentieth Century Fox Filmed Entertainment from 1994 to 2000, he is now an independent producer

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...There's nothing in the system that stops, puts the brakes on. ... Saying "no" in Hollywood is a good way to get everybody turned against you so, it's a dangerous job.

You know, in the days when movies worked as a business a little bit better, where there were ... great films, and it still worked as a business, the people who ran the studios owned them. So, you know, there's a different mind-set in that, in that process. ... And now it's, you know, just all passed along because you're five percent of the total income [of a conglomerate] so it doesn't matter.

... Everything you can do that makes your job safer makes it less profitable. It's just a one-for-one kind of thing that happens. ... You know, like, the biggest grossing movie last year probably didn't make any money for the studio, so now your hit doesn't pay for your losses. So now you're in a really fundamentally bad business if you're running it that way. ...

If it wasn't for television, I'm sure that the conglomerates would shut down the movie business completely. ... If you're being honest about it, you'd say, I'm in a lousy business. I'm making no money. I don't know why I'm doing what I'm doing. I have to change it. I have to fundamentally start to say one word, "No." And nobody will do that. So, you know, I sit there with people, I used to pull out statements, show them, you know. It's not hidden stuff. Here it is. I got the most profitable studio in the business and, you know, I could be in the grocery business, making more money.

richard natale
a freelance economic reporter who covers the film industry for The Los Angeles Times

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Who makes the money now?

I would say stars and star directors and star producers are the people who are making the biggest profit in movies. It's not that studios aren't making a great deal of money on movies; it's just that they're not netting a great deal of money on movies. If you have a movie that grosses $200 million and you're paying, in some cases, 20 percent to 30 percent of that to talent, what you get back on that is in the best case scenario, good, in the worst scenario, marginal.

...

What is the danger in that, when a movie is expensive but doesn't click?

... If you look at a movie like "Pearl Harbor" ... They spent $140 million to make it. They spent over $100 million to market it worldwide. And they will come away with probably $400 million to $500 million at the box office, half of which is returned to the studio. But then you have to factor in all of the other costs that go into making that movie. ... So what's left to them is not going to really carry them for a great deal of time. And the reason to create a movie like that is that it's going to take you through some lean months or years.

It used to be that your big film would carry little ones, but now they're all big.

... If you made a little miss and a big hit, you really covered yourself. But now they're making big misses and big hits, so you can see that the profit ratio is shrinking.

...

The big financial stories are the fact that movies are not that profitable, ultimately. ... And because they are subsumed within a giant corporate culture, with so many people who have to be employed and so many different fees and distribution and profit participation, there's very little profit made anymore. What you're doing is throwing big numbers at people. The studios are very fond of something called market share. ... They want to have 20 percent of the market or more in a given year and be the number one, but that says absolutely nothing about how profitable that particular studio was. ... It's all become about numbers. It's all become about dazzle. It's become all about sizzle, and no steak.

...

I think that the business has gotten as big as it can possibly get. ... I think that we're in the era of the dinosaurs. Movies have become dinosaurs. I think they will continue to exist, but I think they will become ultimately less and less interesting.

LARRY GERBRANDT
chief content officer and senior analyst for Kagan World Media

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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.

... Having a blockbuster film 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.

...

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.

...

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. ... 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.

...

Yes, there is a risk. The studios have managed to find ways around those risks for the last 20 years. ... They've stayed just ahead of the curve at each step.

LUCY FISHER
she has been a top executive at MGM, 20th Century Fox, Warner Bros., Columbia TriStar, and Sony Pictures, and has been behind such films as "Jerry Maguire," "Men in Black," "As Good As It Gets," "Gladiator," and many others

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Can you talk about the [motivation] for these massive corporations to acquire movie studios?

Why do big companies want to buy studios? ... It's, like, the biggest toy you could possibly find, and they have every other toy. So this is a great toy. ... It's always been a glamorous profession from the outside. From the inside, not so much, unfortunately, but definitely from the outside. And I think there's always an attraction to stars and access to stars. ... It's almost like the little pearl or the prize that no one can ever quite have, because you get it and it's not what you thought. It's a lot of trouble. It's a wayward child. It's unpredictable. ...

When you wade into the marsh of trying to make movies, you find that it's much, much more complicated than it appears. I think that most of these companies probably think that they could straighten out these silly movie companies pretty easily, and just make them toe the line; [that] there is a formula to make a good movie, and they'll figure out that formula. And then they'll apply that formula and then all their movies will be good.

And it just doesn't work that way. For whatever reason, eight out of ten movies don't turn out that well. ... It changes all the time, but whatever it is, most do not meet their own expectations for whatever the reasons are. And I think that many regular corporate business men think, "Just apply a regular business logic to this crazy business and it'll give us a high return. It'll be fun. It'll be diverting, and it will give us content for our other business." Almost every single one of the studios is owned by a company that has related business. So they feel that the quote "synergy" (because it's yet to work) will help feed itself. ... The sum will be more valuable than the parts. ...

...

Is it yet to be determined if owning a movie studio is a profitable venture?

God, that's funny. That's a harsh statement. ... It's hard ... You have to have other things besides the ability to make the movies in order for it to work. You have to have some of the other ancillary things or there is no way, because too many movies fail. So you need to be able to say, "OK, the movie didn't do that well, but we had the merchandising," or "We have Bugs Bunny at Warner Brothers," which can make money every year, no matter how good or bad the movies would be. Or you have a "Batman" every two years, so that will carry you through some bad times.

And you have a library that you can resell and repackage and make into a home video, then make into a DVD, and then make into whatever will happen next -- then make into something that will sell on the Internet and then make something that will sell through cable. All these different ways, so that the same thing that you paid for once, you can sell a whole bunch of different ways. That's crucial. Just selling through a movie theater is not ever going to be a viable way to make money back on a movie anymore. Unfortunately, boo hoo, but it's going to be a bigger business from now on.

MICHAEL CIEPLY
he has covered the entertainment industry for 17 years, first for The Wall Street Journal and more recently for Talk magazine and Inside.com

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... The interesting thing about the weekend horse race to me is that, when you actually you look at it each weekend, you think, "Oh, my God, what an enormous number, how fantastic." "The Mummy Returns," $68 million open for the weekend. And you think this industry must be flush. This is just incredible that, week after week, they they're beating the game.

And then you realize, when you peel it all the way, that that is not always true. There are some years when the industry itself is getting ahead by 6 percent or 7 percent. There have been some years lately when the industry appears to have fallen behind in a profit sense. Movie economics is a very fragile, marginalized system right now, and a very uncertain system, because essentially, the amounts of money being rolled into each movie are colossal. And every year, new marks are set for the amount spent. That money only rolls back over a six- or seven-year cycle. So nobody's ever quite certain if they are totally going to come out, or how much they are going to make six or seven years from now. So what you get is kind of a false flush every weekend.

...The U.S. box office accounts for about 15 percent of every dollar that's made on movies. They make another 85 percent from other kinds of markets. And so we're all watching this one tiny little blip and thinking, "How wonderful, how great, how big, oh no, that one failed, that one flopped," when it bears very, very little relationship to the actual success, failure, profitability, hopes and dreams of the people involved with movies. It's kind of just a completely separate system with a life of its own, and is no safe indicator of anything real.

...

What's the most fascinating trend you think we should keep our eye on?

... To me, the diminishment in the movie unit. ... Just watch how they will now slide into insignificance within the corporations that cover them. You can go back just two or three years ago and find that, let's say, Warner Brothers, its movie and TV operation within Time Warner -- who is already a merged gigantic corporation -- was accounting for about 35 percent of the company. It's probably down to about 25 percent, 20 percent at this point, or slightly over that, of AOL Time Warner. ...

When Sony bought Columbia Pictures back in the late 1980s, they fully expected that movies, television and music together would wind up accounting for a huge portion of what they sold. I think they thought movies and TV were going to go to 25 percent of the corporate take. It stuck at around 7 percent. It's just never been able to get over that.

The growth levels inside of the movie business just aren't there anymore. And therefore, you're going to find that, every year, they are going to matter a tiny bit less. And the energy in the corporations, and even the energy in the culture is going to start shifting out and into other pursuits, other things. That could have a very interesting and positive impact on film. You could very easily get back to a position that we enjoyed in 1969 and 1970, when movies weren't so lucrative, and therefore the people who made them were freer to make them better.

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