Why Movies Are in the TV Business

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A movie is a message designed to capture, hold, and focus attention on franchises that make studios all of their money. Does that sounds like an ad to you?

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Movies used to be all about movies. Now movies are all about TV.

The most important way to sell a movie? On television. The largest source of revenue for studios? It's television. The second largest source of revenue? It's the movie-rental/-buying/-streaming business for your computer and television.

In his fantastic overview of the Hollywood money machine, The Hollywood Economist, Edward Jay Epstein explained how Hollywood got into the TV business. Before the 1950s, 80 percent of households went to the movies every week. Today, it's more like 5 percent. That doesn't mean people don't see movies. It means targeted advertising, most of it on TV, is crucial to build a particular audience for each feature film. The typical film spends $35 million on advertising and most of that money goes to national television spots aimed at young men and women.

But when a movie leaves theaters, it's almost always in the red. After an average cost of $70 million to make a movie, plus $35 million to advertise it (2008 numbers), the typical title makes back about $26 million in theaters. So how does any movie make money?

Well, many of them don't make a profit. The profitable few make most of their money outside of theaters. In 2007, worldwide MPAA studio receipts totaled $43 billion. U.S. box office accounted for less than 10 percent of that haul. The world's multiplexes accounted for a little more than 10 percent. "The other 80 percent now came from the ubiquitous couch potato who was viewing his movies at home via DVDs, Blu-rays, pay-per-view, a digital recorder, cable channels, or even network television," Epstein wrote.

But here was the paragraph that made me grab a pen and start scribbling in the margins:

Since the publicity campaigns for these blockbusters have proven effective in the popcorn economy, studios recycle their elements into endless sequels, such as those for Spider-Man, Pirates of the Caribbean, Shrek, and Mission Impossible, which then become the studios franchises on which they earn almost all their profits.

Let me put this slightly differently. For a movie to become a multi-zillion-dollar brand -- for it to snag TV deals, merchandise sales, and future movie contracts -- it needs to have a good showing at the box office. But having a good showing at the box office isn't nearly enough to earn a profit. What's another word for a beautiful expensive production that fundamentally serves the purpose of building a brand that makes all the money? It's not a loss leader, exactly. It sounds more like, well, an ad.

***

movie biz.pngOf course, movies aren't literal advertisements. Even Michael Bay epics stuffed with corporate logos are still pieces of entertainment, commerce, even art. But consider a broader definition of "advertisement" from Atlantic contributor Nigel Hollis, a marketing executive in New York: An ad is a message designed to capture, hold, and focus attention on a brand to build a market.

That's what movies do in the box office.

Typically, we consider trailers as the advertisements for movies. We watch trailers and then we decide what to see and what to ignore. But from the studios' perspective, the box office performance of a film is as much a prelude to the main event as the trailer is the prelude to movie. Movies aren't about just box office performance anymore. That's hardly a fifth of their total revenue pie (see pie). Movies are about creating franchises, sequels, merchandise, properties. Movies are messages designed to capture, hold, and focus attention on franchises on which studios earn almost all of their profits. Movies sound like ads.

The information revolution has accelerated and complicated the movie-selling business -- both legally (Netflix) and extralegally (downloads) -- that same way it has accelerated and complicated the business of music. Album sales have fallen by more than 60 percent since 2000, forcing artists and labels make it up from live performances, merchandise, and sponsored music on TV. (That's one reason behind the rising price of tickets: In 1996 a ticket to a top-100 concert cost $35.30 inflation-adjusted; in 2010, the Economist reported, it was $62.57.)

Music offers an interesting parallel. U2 is its own impenetrable brand in a way that no actor is -- nor director, nor producer, nor studio. U2 is Star Wars. It doesn't matter that their last album was boring (or that they wasted the mid-to-late1990s) just like it doesn't matter that the last three Star Wars movies were horrible, terrible, and only mostly embarrassing, respectively. That's because U2 and Star Wars have already built their brand. They're already created their market.

Financially speaking, the most expensive non-sequel movies are brands in infancy. A brand comes of age when families take it home. Between 19 and 20 in 20 households own a television. One in 20 households attends the movies any given weekend. The business of movies is in home entertainment. The box office matters mostly as an indicator of popularity based on which studios make the vast majority of their revenue. Seen this light, box office openings are previews. They are promotions for the main event. They are ads.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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