Future of Film I: Why Summer 2013 was Destined for Losses
This past summer was a disaster for the major studios - but it was also a highly predictable one. Why are executives claiming otherwise?
This past summer season was a bloodbath for the Big Six Studios, with only four of their 18 would-be blockbusters grossing enough at the box office to cover their production and marketing budgets. Collectively, the studios were down a record $750M over the four month period, representing a -17% return on nearly $4.6B in spend. To many, this performance was a sign that the industry was in crisis: the ‘tent-pole’ film strategy was a failure and the ‘majors’ were rife with overspending and poor decision making. Yet, these critics are missing the truth behind this seemingly irrational behavior: the motion pictures business is transforming what it is and why it exists.
Much has been said about the growing role of ‘tent-pole’ filmmaking, where the superlative performance of a major blockbuster supports the rest of the studio’s portfolio (including failed blockbusters). In practice, however, the strategy doesn’t ‘hold up’. Over the past decade, the Summer Blockbuster season has delivered a net theatrical profit only three times and the major studios have lost nearly $2.6B on $34B in production and marketing spend. Individually, Disney is a perfect example. The studio’s Iron Man 3 kicked off the 2013 summer blockbuster season and has since grossed more than $1.2B worldwide – enough to earn it the 2013 global box-office crown and deliver over $225M in profit. Yet, this gain is almost entirely offset by the failure of Lone Ranger, which cost Disney a reported $160-190M. Rather than standup the rest of Disney’s tent, Iron Man 3 primarily braces another failed tent-pole.
In fact, Lone Ranger’s writedown comes only a year after Disney’s record breaking $200M loss on John Carter. As a result, many have since questioned Disney’s increasing reliance on tent-poles and whether the market had become oversaturated with the films. During Disney’s Q3 analyst call, CEO Bob Iger rejected the idea of audience fatigue and defended the studio’s current strategy: “The last number of summers have been quite competitive and crowded. I don’t think it’s been more crowded or competitive (than previous years) although a lot of attention has been paid to it.”
Iger, however, is incorrect. The Summer 2013 season was so jam packed with “blockbusters” that the industry seemed destined for historic losses containing:
• 18 blockbusters – A historic high and 41% increase over the ten year average
• 15 back-to-back weekends of blockbuster releases – A third more than the ten year average and 25% more than a decade ago
• 5 weekends with two blockbuster releases – 317% more than the average, 2.5x the previous record and 5x the number in 2003
How many $100M+ action movies will someone go to in a summer? How many consecutive weekends will someone go to the movies? Not enough, it seems.
Over the past decade, movie audiences have never supported more than nine blockbusters in a summer, with an average of only 4.5 profitable films and a clear upper limit of around six films. Nevertheless, the Big Six continue to invest more in each picture and release more and more blockbuster-budget films each year. Studio executives appear to believe that audiences will flex to the number (and largess) of ‘event films’, but they don’t – or at least, not enough. Since 2003, the Big Six studios have been able to grow the number of tickets they sold each summer by 22% – but they’ve done so by nearly doubling their collective production and marketing spend. When factoring in increased ticket prices, we can see that this has resulted in cost per ticket growing at twice the rate of net revenue.
Over the past few months, journalists, Wall Street analysts, activist investors and movie fans have obsessed over 2013’s failed summer box office. But even when one steps back from this summer season, the majors seem to be either increasingly irrational, deliberately delusional or oblivious to the Summer ‘Tragedy of the Commons’. They’re not. But to understand why, one needs to look at the industry overall. Comeback tomorrow for the The Future of Film II: Box Office Losses as the Price of Admission.