Weekly Update

Trouble in Tinseltown

These are not happy times in Hollywood. Despite high hopes for some big-budget year-end releases, total box-office grosses in the U.S. and Canada fell nearly 4 percent in 2011, the second straight year in which theatrical revenue has declined. Were it not for the effects of ticket-price inflation and an uptick in the number of 3D films released, which generally carry higher ticket prices, the falloff would have looked worse. Total domestic movie attendance declined by nearly 5 percent.

Nor is there likely to be much to cheer in the New Year. BTIG Research analyst Rich Greenfield argued in a widely cited blog post last week that the lost movie theater audience is likely gone for good. “We expect movie attendance to fall yet again in 2012,” Greenfield wrote. “More importantly we believe attendance is now in secular decline in the U.S.”

It didn’t have to be this way. While the studios still focus largely on piracy as the principal source of their woes, pushing legislative fixes like the Stop Online Piracy Act and the PROTECT-IP Act, much of their trouble is self-inflicted.

Turnstiles have been slowing at domestic theaters for much of the past decade, with only a brief respite in 2006 and a short-lived spike in attendance in 2009 due to the release of Avatar, the highest-grossing film of all time. But with the 3D premium eroding as the novelty has worn off and the weak economy and growing competition for entertainment dollars now keeping overall ticket inflation in check, the erosion of the movie audience is plain to see.

While piracy can probably be blamed for some of that decline, part of it is simply the lack of movies being turned out by Hollywood. The total number of films released by MPAA member companies (the major studios and their subsidiaries) fell from 204 in 2006 to 141 in 2010, according to MPAA data (2011 data has not yet been released). Much of the decline has come from MPAA subsidiaries, which typically release small and medium-budget films. They released 80 titles in 2006 but only 37 in 2010.

As a group, the studios have adopted a strategy of making a smaller number of easily marketed, big-budget “tent-pole” movies and sequels in hopes of maximizing their returns. But that strategy looks increasingly like a trap.

When those movies don’t click, the studios have little else to fall back on to keep people coming to theaters. Even when they do click, moreover, the audiences for those movies are proving to be extremely shallow. The box office figure known in Hollywood as “the multiple” — a movie’s total box-office gross relative to its opening weekend — has fallen dramatically over the past decade.

The rule of thumb in Hollywood had long been that the opening weekend should account for 25 percent of a film’s ultimate gross. Today it is typically closer to half, suggesting that movies are appealing to a highly motivated core audience that shows up on the opening weekend but that they have little appeal outside that core group.

By the time movies reach DVD or pay TV, they are old news to their core audience and are unlikely to sell to anyone else. What audience exists outside the target demographic is happy enough to wait for it to get to Netflix or another low-price, low-margin option.

In short, the studios’ product strategy has whittled down the audience to where the business model only works if the movie is an Avatar-like hit. And there just aren’t many of those around. Better movies might help, as would less piracy. But if the studios continue to produce movies aimed at an ever-narrower audience that are consumed and forgotten almost as soon as they open, they won’t be creating value that can sustain the business for very long.

Question of the week

What will it take for the studios to escape the trap they have set for themselves?