The Hollywood Economist (13 page)

In Hollywood, thanks to the services of a secretive research firm called NRG, rival studio executives do not need to meet together and conspire. NRG helps them coordinate openings in such a way that their movies do not compete head-to-head for the same demographic slice of the audience. Founded in 1978 as the National Research Group, NRG—now a part of Nielsen Entertainment—supplies the same weekly “Competitive Positioning” report to each of the six major studios. NRG’s founder, Joseph Farrell, signed all of the studios to exclusive contracts, ensuring that the
data from his telephone tracking polls became the accepted standard. Because of this monopoly of information, the report provides the studios with a common basis on which to make their scheduling decisions.

Here is how the research is compiled. The NRG telephone pollsters ask a sample of likely moviegoers first whether they are “aware” of a specific movie and, if so, what is the likelihood that they will see it when it opens. They also ask the age and gender of the respondents. The NRG analysts break down the data from these tracking polls into four basic groups, or “quadrants”: males under twenty-five, males over twenty-five, females under twenty-five, and females over twenty-five. (In some cases, the respondents are also divided by race.) From these results, NRG projects how well upcoming movies will do against each other in each audience quadrant should they open on the same weekend. For studios, the Competitive Positioning report is critical reading. Why? Nowadays, Hollywood has to create an audience for each and every movie via ad campaigns, appropriately called “drives” (as in “cattle drive”). “If we release twenty-eight films, we need to create twenty-eight different audiences,” a Sony marketing executive lamented to me. Audience creation is a hugely expensive
exercise. For a drive to work, it must not only round up a herd of moviegoers who favor the movie, it must also get this herd to move at a specific time: opening weekend.

This feat almost invariably requires buying a slew of ads on the limited number of television and cable series that the prospective herd grazes on during the week preceding the opening. To make sure they get the herd’s attention, the ads are usually repeated eight times, which is why these drives cost so much. The multimillion-dollar drive runs into a serious problem, however, if a rival studio goes after the same herd that same week—for example, under-twenty-five males—by also buying a parcel of ads on the same shows. The herd then might be cross-pressured and confused, and certainly divided. Such a competition would likely spell failure for both rivals, since even the winner stands to lose a part of the audience to the rival film. To win, then, studios must avoid such conflicts, even if it means yielding to each other.

Enter NRG. The major studios can and do avert such titanic disasters by consulting the NRG Competitive Positioning report. Each studio gets an early warning from the NRG report when one of its films is on a collision course with a competitor’s film that appeals to the same herd. By comparing
the projected turnouts for both films in the crucial quadrant(s), the studios know which film will lose the matchup, and the losing studio can reschedule its opening to a different weekend, even if it’s a less advantageous time period (i.e., not the summer and not the holidays).

Consider how Paramount captured the highly prized Fourth of July weekend in 2005 for
War of the Worlds
even though Warner Bros. had a major contender in
Batman Begins
and 20th Century Fox had
Fantastic Four
. In the NRG tracking polls, all three films did well with males under twenty-five (aka teens), the audience quadrant that’s easiest to find clustered around TV programs and, hence, the easiest to stampede toward a July 4 weekend opening. But
War of the Worlds
was also strong in the under-twenty-five female quadrant, so it would easily best both
Batman Begins
and
Fantastic Four
. (In fact, it led in all quadrants.)

Warner Bros. averted a head-to-head competition by opening
Batman Begins
in mid-June, and 20th Century Fox opened
Fantastic Four
on the weekend following July 4. As a result, all three films won their weekend box office and could advertise themselves, as
Fantastic Four
did, as “America’s No. 1 hit.” No Adam Smith-type conspiratorial meetings were necessary between the rival studio executives
of Paramount, Warner Bros., and 20th Century Fox in order to advantageously stagger their film openings so they did not collide. Of course, the weaker contender might try to bluff his way through. For example, in 2002, Disney’s subsidiary Miramax had a direct conflict with Dreamworks SKG concerning the openings of their two competing films
Gangs of New York
and
Catch Me If You Can
, both starring Leonardo DiCaprio and both scheduled to open on December 25. Even though the Miramax film had a slightly higher “awareness” level in the targeted males-over-twenty-five audience, Dreamworks refused to yield. At that point, Harvey Weinstein, the president of Miramax, and Jeffrey Katzenberg, a founding partner of Dreamworks SKG, had breakfast in New York to discuss their movies’ release dates. As Katzenberg later explained in an interview with the
New York Times:
“He [Weinstein] and I had many conversations about why releasing the movies on the same day was in none of our interest … as both companies have a big investment in Leo DiCaprio.” A few days later, Miramax blinked by moving
Gangs of New York
to a different, and less favorable, opening date.

To be sure, NRG’s services to the studios go well beyond helping studios avert unpleasant
fender benders. It also analyzes much larger issues for the studios, essentially helping them to rethink their entire business models by examining the movies’ declining share of the public’s “wallet” and “clock” as they compete with music, DVDs, cable TV, downloading, and other forms of home entertainment. But without its Competitive Positioning reports studios would have a much harder time avoiding box office collisions.

The studios’ Midas formula may have been perfected by Steven Spielberg and George Lucas in the 1980s but the innovator was Walt Disney. He put all the elements together back in 1937, when he made
Snow White and the Seven Dwarfs
. The picture was labeled a folly by the moguls who ruled old Hollywood because it was aimed at only a small part of the American audience, children. They were wrong.
Snow White and the Seven Dwarfs
, which was re-released every seven years to a new crop of children, became the first film in history to gross $100 million. It also demonstrated to the studios, among other things, the propensity of children to see the same cartoon over and over
again. The movie was also the first to have an official soundtrack, including such songs as “Some Day My Prince Will Come,” that became a hit record. More important,
Snow White
had multiple licensable characters (the dwarfs, the wicked witch) who took on long lives of their own, first as toys and later as theme-park exhibits. So, here was Hollywood’s future: Its profits would come not from squeezing down the costs of producing films but from creating films with licensable properties that could generate profits in other media over long periods of time.

The advent of computer-based technology has simply provided new ways of mining this vein. The franchises that have raked in over a billion dollars from all markets (including world DVD, television, and toy licensing),
The Lord of the Rings, Harry Potter, Spider-Man, Finding Nemo, Star Wars, Shrek, The Lion King, Toy Story
, and
Pirates of the Caribbean
share most, if not all, of the nine common elements of the Midas formula:

1. They are based on children’s fare stories, comic books, serials, cartoons, or, as in the case of
   Pirates of the Caribbean
   , a theme-park ride.
   

2. They feature a child or adolescent protagonist (at
   least in the establishing episode of the franchise).
   

3. They have a fairy-tale-like plot in which a weak or ineffectual youth is transformed into a powerful and purposeful hero.
   

4. They contain only chaste, if not strictly platonic, relationships between the sexes, with no suggestive nudity, sexual foreplay, provocative language, or even hints of consummated passion. (This ensures the movie gets the PG-13 or better rating necessary for merchandising tie-ins and for placing ads on children’s TV programming.)
   

5. They include characters for toy and game licensing.
   

6. They depict only stylized conflict—though it may be dazzling, large-scale, and noisy, in ways that are sufficiently nonrealistic and bloodless (again allowing for a rating no more restrictive than PG-13).
   

7. They end happily, with the hero prevailing over powerful villains and supernatural forces (and thus lend themselves to sequels).
   

8. They use conventional or digital animation to artificially create action sequences, supernatural forces, and elaborate settings.
   

9. They cast actors who are not ranking stars—at least in the sense that they do not command
   dollar-one gross-revenue shares. The success of the DVD has propelled the Midas-formula sequels to dazzlingly high earnings. A studio with a successful franchise now assumes it will sell over 30 million units per sequel, harvesting for itself between $450 million and $600 million dollars. (When
   Shrek 2
   sold a mere 30 million copies in 2005 and had 7 million in returns—it wiped out a good portion of DreamWorks Animation’s quarterly earnings.) While this is an enormously high-stakes game, even a single successful licensing franchise can put a studio in the black—as
   Spider-Man
   did for Sony Pictures. Midas Formula franchises might not win Oscars, but they keep the studios in business.
   

Frank Biondi, who headed two Hollywood studios, Paramount and Universal, told me that the reality of the new studio system is that no studio expects to make money from current production, which is a studio’s release of movies to theaters in America. The reason why studios can’t make money from their theatrical release is, in a nutshell, that the average
cost of luring a customer into a theater is more than they get back from their share of the box office. In 2007, for example, the six major studios spent, on average, $35.9 million for advertising and prints per movie but got back $26.6 million per title. Even if the studios had made the movies for free—which, of course, they didn’t (the average cost was $70.9 million)—they would have lost $9.3 million per film on the theatrical run, or “current production.”

Why is it so costly to open a movie in multiplexes? Averages, to be sure, can be misleading, especially when, as in this case, adult dramas and comedies are mixed with teenage fantasy and action movies. And despite the average loss, a few films every year, usually franchise installments, such as the latest
Spider-Man, Harry Potter, Pirates of the Caribbean, Batman, Lord of the Rings
, and
Shrek
, take in more money than their marketing outlay. Sony’s
Spider-Man 3
, for instance, brought in nearly $201 million in rentals—as the distributors’ share of the box office is called in the industry—which was more than twice its $88 million advertising and print outlay (the balance of its massive publicity was subsidized, as many franchises are, by toy manufacturers and other merchandising partners). For the vast majority of its films, however, a studio
has to look to recoup its losses in later markets on the theory that expending huge sums on its American opening will help the movie wrangle more advantageous play dates in foreign markets, sell more DVDs in video stores, and increase the licensing fees paid by pay-TV. That rationale had merit prior to the digital revolution but nowadays the connection between the American opening and the later markets is much more tenuous.

For one thing, zone-free DVD players, DVD piracy, and Internet file sharing have deeply altered the scenario for foreign distribution. Because movies can now be illegally circulated around the world the instant they open in the United States, the studios have begun to abandon their past practice of staggering foreign openings over many months. As a Fox vice president told
Variety
in 2005, “Waiting three or four months after domestic [release] to release our bigger pictures [overseas] is not something we can do anymore.” The result is more and more simultaneous openings in the US box office since figures come too late to help get better foreign play.

As for DVDs a handful of mass marketers, such as Wal-Mart, now account for most of the studios’ revenues, and these retailers demand, and get, a separate marketing campaign, often costing
$15-20 million per title, aimed at their customers, and not only teen movie audiences. After all, unlike other stores, the big retailers view DVDs as traffic-builders, as one Wal-Mart executive put it, aimed at bringing in the relatively well-heeled, plasma-screen-purchasing customers, not the so-called LICs (or low-income consumers). As a rueful Sony marketing executive pointed out, “Unfortunately, our teens are not always who they want.”

This disconnect leaves Hollywood in a bind. A studio needs to create audiences for its entire slate of movies to maintain good will with the multiplex chains and to find the franchises that are immensely profitable, which means it will almost ineluctably lose money on its current production. But, always resourceful, Hollywood has found out a way to mitigate its losses on the adult dramas, comedy, and other non-franchise material: it sells a share of them to outside investors.