The Simple Math of Why Hollywood is Broken

By  · Published on June 17th, 2013

As we all know, Hollywood is imploding. Steven Spielberg is on the case, millions of angry comment section responses to remake announcements are on the case, and now producer Lynda Obst is on the case. In an excerpt from her new book, “Sleepless in Hollywood,” Obst laboriously details her drive to former Fox CEO Peter Chernin’s house while repeating the phrases New Abnormal and Old Abnormal until they seem clever.

Okay, so I didn’t like the chapter, but it did feature at least two clear insights into the current production mindset of the major studios. The New Abby Someone, if you will.

First: DVD sales numbers are the real killer. According to Chernin via Obst, “The historical studio business, if you put all the studios together, runs at about a ten percent profit margin. For every billion dollars in revenue, they make a hundred million dollars in profits. That’s the business, right? . . . The DVD business represented fifty percent of their profits. Fifty percent. The decline of that business means their entire profit could come down between forty and fifty percent for new movies.”

Second: The magic wand of the Profit and Loss Statement where studios considered the earning potential of a movie based on its actors, director and content is now a mystery to most. Again, Chernin, “They said to me, ‘We don’t even know how to run a P&L right now. We don’t know what our P&L looks like because we don’t know what the DVD number is!’ The DVD number used to be half of the entire P&L! . . . The implications are – you’re seeing the implications – the implications are, those studios are frozen. The big implication is that those studios are – not necessarily inappropriately – terrified to do anything because they don’t know what the numbers look like.”

The takeaway is that streaming has eaten into DVD/Blu-ray sales, which has eroded a major source of revenue for studios while creating a major source of fear for them. The result is less gambling, because if you think you have a small stack of chips (or if the pot isn’t sweet enough), you’re not going to go all-in. Simple psychology for simple math.

None of this is particularly shocking or profound (or new), but what makes it fascinating is what the future holds for studios and how they navigate this oncoming crisis. After railing against home video with the advent of the VCR as a potential extinction event, the industry now relies heavily on those of us who shell out for a physical disc. Without that leg to stand on, the studios will have to adapt (as they’ve done in the past) to a digital world where we’d rather store things in the Cloud than on shelves. Of course in 40 years, we’ll probably be discussing the potential implosion of a studio system too reliant on internet streaming revenue.

For now, studios very well may find themselves further backed into the corner of blockbusters – pouring more money into advertising and budget for fewer movies overall while a robust independent cinema delivers the non-caped, lower budget movies that audiences still clearly want. They may also pivot in a way that finds better balance between the heavy-hitting single points of failure and the smaller movies that are seen as gambles currently.

Or they may implode. No matter what, it’ll be fun to watch. And to see what comes next.

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