There’s a Bubble Growing in Hollywood

(This is a revised edition of an earlier post from July 12th which provides a more in depth analysis insofar as solutions are concerned)

It’s Friday night, and it’s raining. And apart from the bar and the movie theater, there’s really not much to do on Long Island when it rains. So my friends and I decided on the movie theater option, because drinking is a waste of money.

Scrolling through the titles, we quickly concluded that too would likely just be a waste of money, because there is literally nothing worth seeing. An entire theater full of undeserving sequels, cheap, unintelligent comedies and poorly reviewed dramas with only star power dressing up an otherwise dull storyline.

I still won’t say Hollywood is creatively bankrupt, but at this point, I am willing to go on the record saying it is near creative peril. And that’s because thoughtful films these days are a rare breed, usually reserved solely for the awards season.

Now in my mid-twenties, I came of age in the 1990s, a truly memorable period in film history, featuring some of the greatest films of all time. While Braveheart is my personal favorite, Pulp Fiction, Titanic, The Shawshank Redemption, Saving Private Ryan and Shindlers List are all right up there with it. Even into the early 2000s, movies were still original; and they were solid enough to convince studio heads they deserved to get made. There were films like We Were Soldiers, The Bourne Identity and American Psycho — even the Dark Knight was a more-than solid super hero film.

Yet in 2013, many of those films I just mentioned would likely struggle to get made. And that’s because of the ever-evolving business structure that goes into influencing what films get the green light. Eventually, this restrictive process of green lighting fewer and fewer projects (releases down 60% on an end of period basis) will fail. Limiting to films that are only most likely to make money will actually cost more in eventual losses for those involved. There is a bubble growing in Hollywood, and its only going to take a few big flops to make it pop. And while Spielberg and George Lucas have spoken about this, I will seek to go more in depth as to why this is truly the case.

Resolving this problem of creative endangerment and bubbles (its a fun word post-2008) requires a little analysis, and it starts with one question: How do most studio films get funded?

To avoid boredom, in a nutshell, hedge funds and film finance companies. In fact, California is second only to investment tax-friendly Connecticut in terms of the number of hedge funds operating in the state. Studios make massive deals with hedge funds on a rotating basis to keep funds flowing in to their coffers. The studios then exercise options to produce various films using that money that will make up its release slate. Naturally, the studios are going to be a bit selective about what they choose to invest in.

Now you may be saying, “yeah, but this is how it has always been.” And you would be right. So what has changed then? What is it specifically that has resulted in a less diverse selection of movie offerings year-round? What is presently causing the bubble to grow?

Three words: Return on Investment (or ROI for short).

Ask any investor, in any type of investment situation, and before they invest, if they’re smart, they’ll inquire about their ROI opportunity. The same goes for films.

Studios remain the most attractive vehicles for financing for their ability to reduce systemic risk. After all, financing a film is an incredibly expensive business venture with a high degree of risk attached to it. The key to a positive ROI is reducing the risk of an investment.

The way studios can reduce risk is by insulating themselves against individual losses. Even if you’re a wealthy independent filmmaker, financing on your own is often too risky for one failure could spell financial doom.

The way the studios have offset risk is by using the “tent pole” strategy. The strategy is as follows: A film that is guaranteed to do well at the box office (think your standard super hero film) makes a lot of money for the studio — enough that the studio can then fund films with more risk that are not as likely to do well at the box office. Ask most film professionals, and they will tell you that most films do not make money. The studios know this, but they are required to post a profit, not only for themselves, but because they are liable to shareholders and their hedge fund and investment partners.

Studios remain profitable because tent pole films act literally like a tent, propping the studio up financially on the year, despite the fact that most films don’t make money. Then studios saw all the records in box office figures these tent poles started bringing in. Suddenly, it seemed a box office record was being shattered every summer release season.  Every year, there’s a new “highest grossing genre film.” Each super hero film is in a rush to outbid the other financially for bragging rights. Suddenly, in 2013, $100m in the opening weekend for a Star Trek sequel isn’t good enough. It underperformed its expectations!

Why did it under-perform? Because studios and their investors are making money hand over fist by mostly releasing tent-pole and event-style films. Record profits in turn have lead to record expectations by investors. Hedge funds and the like expect the studios to continue to post higher profits year-over-year. If this sounds like 2008, you’re catching on. This is exactly how you create a financial bubble! The current trajectory is absolutely unsustainable and creativity has been beaten with a gold stick in the process. You cannot expect record growth, eventually the bubble has to pop.

The studios have been super profitable in restricting their release slates to films most likely to succeed financially, as stated above. Braveheart would likely never get made today. Even Titanic, one of the highest grossing films of all time, would likely not get the green light. The historical or period piece is a death sentence on pitch (its why I know the producer will never tell me about my WWII script).

Even mid-budget action films, like the many Harrison Ford films in the 90s, would likely never get made today. When action films do get made, they’re either done on the cheap or with a bloated budget for something which should be done for much less. And when these films flop, the studio often points to the risk of genre and not the fact they cheaped out and/or over-spent (see: $150 mil. budgeted White House Down, a flop and clone of Olympus Has Fallen). Mid-budget action films are becoming rarer and rarer each year. When they do get made, they’re done on a cookie-cutter story formula based on other successes, and its not lost on audiences. R.I.P.D was literally a story-clone of Men In Black — it tanked. Fewer and fewer original spec scripts are being bought, according to the Black List. When spec scripts are bought, they’re rarely produced. The one’s that are are usually of the cheap comedy or horror genre previously alluded to.

Instead of the diversity we had in the 1990s and before, today we’re left with mostly sequels, cheap comedies & horror films and large-budget remakes and comic book adaptations. And when a rainy Friday night rolls around and you’re looking to see a film, these films are already getting old and outplayed. And so people like me and my friends stay home. Following on the heels of mega-flops like John Carter and Battleship, Lone Ranger is only the latest expensive, high profile film to flop. Instead of producing a variety of mid-budget films, the studios have taken an all-or-nothing approach to green lighting; expensive tent poles or cheaply made horror/comedy films. There is no middle ground. Not only is this in fact more risky, it’s restricted creativity because there is not enough of a variety of films being released.

Eventually, as studios restrict their release slates in this manner, they reduce their money making opportunities. One financial failure could result in heavy losses. The bubble is perilously close to popping. There’s a serious problem when $100m for Star Trek isn’t good enough. You’ve set expectations too high, but people are making so much money, they don’t stop to notice. A film like Abraham Lincoln: Vampire Hunter turned a profit overall. But because it didn’t gross well domestically, and according to expectations (as a tent-pole), its frequently cited as a flop. Calling that film a flop is a financial fiction, it posted a profit. Ultimately, its exactly this type of financial fiction along with unrealistic growth expectations that has set an unsustainable bubble in motion, just like the financial crisis of 2008.

So what’s the solution?

Stop being greedy and go back to the basics. The sooner studios realize this trajectory is unsustainable, the better. Cut your losses now. They need to again diversify to reduce over-dependence on a smaller release slate. In turn they will reduce risk, shrink the bubble and have a greater variety in selection.

Many historical epics or 90s-action films would likely still see interest today. Sure, some may fail, but some may also make a lot of money. Right now, studio’s have put all their eggs in one carton. Furthermore, people are tired of the same old super hero story (how many Spiderman and Wolverine movies can you make in a decade?!). Eventually people will go to see these films less and less. Eventually expectations will erode, and it may not even take an outright flop to pop the bubble, rather just diminishing returns.

On top of a reduced slate, ticket prices have jumped every year. While there are already more expensive options (like 3-D) to continue to fuel larger profits, audiences are choosing to go to theaters less or opt for the less expensive 2-D option. Most audiences have realized there is actually little difference. Most films are not filmed in 3-D, rather they are converted. This creates a discrepancy in quality (no matter how much studios/3-D converters will say otherwise), and its not lost on the audience that just paid $6 extra for a ticket. On top of that, this conversion costs a lot of money. For most films, its just money wasted in pursuit of higher profit. The trick is old, its not working any more. And that’s because audiences are opting not to pay that premium, and do so in only certain circumstances.

Ticket prices in general are off-putting and make little economic sense. The average American in 2012 went to theaters only 2-4 times a year! Perhaps if smaller budget films also had lower ticket prices, audiences would be more willing to give that film with an artistic vision a shot. But instead, when even a base ticket price costs $12-14 in most multiplexes, audiences choose to opt for the event-style film instead. There should be more price-flexibility that better reflects the reality of the film being released. It makes no sense to have a product that differs significantly in cost and market appeal where each product costs the same to buy. That pretty much entirely defies the laws of economics. Surely if they can offer IMAX tickets, 3-D tickets and $50 mega-tickets, they can offer cheaper tickets for lower-budget, mid-budget or independent films (but I’m sure there’s some industry politics involved in that decision). In the 21st Century, there’s other entertainment options that can be had for less, so studios also need to start acknowledging that as theaters cannot force certain prices against economic reality. They don’t have the entertainment monopoly they used to, so there needs to be more flexibility in ticket pricing. Ask, would you rather your film sell an $8 ticket, or have someone shun your film entirely by staying home or watching something else resulting in $0 for your effort? Its common economic sense.

Finally, studios need to let artists get back to the basics. Allow artists, directors, creative producers and screenwriters to take chances. If you’re uncomfortable with investing in art, maybe then one should consider a different business! Ultimately, people like the guy from Stony Brook who analyzes scripts on behalf of studios for trends have no business being in the film or art industry. You cannot reduce viewer expectations to Bayesian statistics and mathematical formulas. If that’s your idea of how to make money, there’s this place called Wall Street.

Right now, Sunset Boulevard has become too much like Wall Street. And unless its returned to the artists that made it what it was, it’s likely to see the same fate; where the bubble pops and people stand around pointing fingers wondering why no one did anything. Now is the time to do something.

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3 thoughts on “There’s a Bubble Growing in Hollywood

  1. Pingback: Wait, I’ve Seen This Before! — Story-Telling in Hollywood « Musings from a Sarcastic New Yorker

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