Movies Thrive as Frugal Folks Seek Escape

There are problems on the horizon for the film industry, but for now, Hollywood is raking it in at the box office.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

April 10, 2009

Hollywood will do very well this year, a rare bright spot in the economy. Domestic box office receipts are on course to break $10.5 billion in 2009, up from $9.85 billion in 2008.

"The old saying is that the industry is recession proof," says Jack Kyser, chief economist of the Los Angeles County Economic Development Corporation. "A lot of people were questioning that, but it does seem to be true." The bottom line is that consumers still want to be entertained. A movie date, even with popcorn and a soda, is still a relatively cheap night out.

Ticket sales are already 11% above this time last year. They'll zoom come the "summer" blockbuster season, now starting in early May. A flood of sequels and prequels will lure in moviegoers: X-Men Origins: Wolverine, Star Trek, Harry Potter and the Half-Blood Prince, Terminator Salvation, Transformers: Revenge of the Fallen, Ice Age: Dawn of the Dinosaurs, Night at the Museum: Battle of the Smithsonian and Angels & Demons (sequel to The Da Vinci Code).

Nonseries films likely to do well include Public Enemies (a John Dillinger biopic starring Johnny Depp), G.I. Joe: The Rise of Cobra and Pixar's Up. On May 13, Up will become the first animated film ever to open the Cannes Film Festival, as well as the first 3-D film to hold that honor.

The industry will also benefit from increased certainty on the labor front. The Screen Actors Guild (SAG) is on the verge of an agreement with major studios on a new contract. The previous SAG contract expired more than nine months ago, and the threat of an actors' strike has hung over Hollywood ever since. IATSE, the union representing 35,000 film and TV production workers, ratified a new contract with the studios last month.

The movie industry still has problems to reckon with, though. Tight credit conditions are affecting Hollywood as much as any other business. Even producers like Steven Spielberg who regularly come through with box office smashes are having a tough time finding financing for new projects. With fewer films in production, studios will have to cut jobs.

Studios are also expecting smaller revenues from DVD sales, traditionally a cash cow. That's in part because more people are likely to rent DVDs than buy in the current climate. But piracy is also taking a toll. Dan Glickman, chairman and CEO of the Motion Picture Association of America, says that while DVD sales of pirated films by street vendors are a problem, digital piracy is becoming a bigger threat. Earlier this month, for example, a stolen, incomplete version of X-Men Origins: Wolverine was leaked to the Web.

To combat the problem, the association will press Congress to increase appropriations for the Justice Department to enforce intellectual property laws. In addition, the industry group recently helped fund a major study by the RAND Corporation that highlighted the involvement of organized crime and terrorist organizations in film piracy. "We're making sure law enforcement around the world see the RAND report," says Glickman. "Our goal was to make sure people saw a strong link."

Then there are structural concerns. The practice of multiplex theaters offering popular films on several screens at once makes it much easier for filmgoers to catch a hot new release. But it makes it tougher than ever for a hit to have "legs," holding on to its top spot in the box office rankings beyond its opening weekend.

When stars such as Julia Roberts or Jim Carrey could keep a film on the top of the charts for several weeks, production companies were willing to agree to large first-dollar gross deals, guaranteeing their lead actors a huge paycheck. Such an arrangement was a gamble in the best of times because even an A-lister can turn in a flop. Now, studios are no longer willing to play the game. Increasingly, they're insisting their stars accept back-end deals -- little or no pay up front, followed by a percentage of the gross, if and when the producers make back their initial investment.

"The agents literally are the bearers of bad news, telling people, 'You can't get what you thought you could get because it's a different environment,' " says Kyser. "Of course, the actors will scream and yell, but what can you say?"

For weekly updates on topics to improve your business decisionmaking, click here.