"The best-kept secret in Hollywood, especially from Wall Street, is that the movie studios' biggest profit center is not theatrical movies, or even DVD sales; it is TV licensing," writes Edward Jay Epstein in Slate. Epstein is the author of The Big Picture: The New Logic of Money and Power in Hollywood. Forget the notion that box office sales are a big profit center to the movie industry, Epstein argues.
"In the new Hollywood, the world box office is a money loser: In 2004, the studios lost an estimated $2.22 billion on the $7.4 billion they took in from the box office." For every dollar a studio makes from box office sales, it shells out an average of $1.40 in expenses, he estimates.
The average DVD sells wholesale for $5, about two-thirds of which amounts to pure profit for the studios. "But the studios' real El Dorado is television," according to Epstein's analysis. "What makes television licensing, both at home and abroad, especially profitable for the studios is that virtually all the expenses required to market a television program, including tapes and advertising, are borne by the licensee. The studios only have to pay the residuals to the guilds and unions, which varies between movies and TV and average roughly 10 percent. The studios get to keep the other 90 percent. In 2004, this amounted to slightly more than $15.9 billion, making it the studios' single-richest source of profits."
"What used to be a business centered in movie houses has been transformed into a business centered around the TV in the home," he writes.
That's why independent studios ultimately will have a hard time sustaining themselves -- they are dependent not on the vast reservoir of profit from old movies and television shows, but on continuing to make movie hits in the marketplace -- a business that is, ultimately, quite risky. Epstein therefore does not bet on the long-term success of independent studios like DreamWorks. Such independents "cannot compete with the studios that have this rich cushion (television licenses) to fall back on."
Journalists' dutiful reporting of movie box office sales each week, fueling hype of great or poor opening weekends for movies, are virtually meaningless, according to the author of a new book about the film industry.
Epstein writes that reports of box office sales have "little real significance other than to measure the effectiveness of the studios' massive expenditures on ads." He writes in another Slate column that long ago, when studios owned movie theaters, box office sales meant something. But not today.
He points out that early ticket sales are "projections" based on first weekend performance. Reported "grosses" are by no means "net profits." Very few movies actually make a net profit at the box office these days, he reports. The profits are made on secondary sales as home entertainment, primarily DVDs, where the cost of marketing and distribution is far less. "Box-office results reflect neither the appeal of the actual movies, nor their quality, but the number of screens on which they are playing and the efficacy of the marketing that drove an audience into the theaters," he writes.
The media's "fixation on box-office grosses obscures the much more lucrative global home-entertainment business, which is the New Hollywood's real profit center. The six major studios spoon-feed their box-office grosses to the media, but they go to great lengths to conceal the other components of their revenue streams from the public, as well as from the agents, stars, and writers who may profit from a movie."
Theatrical releases now essentially serve as launching platforms for videos, DVDs, network TV, pay TV, games, and a host of other products, Epstein points out.