It's bad enough that a movie's box-office gross revenues will decline about 50 percent each week and that the time between a film's release in the theater and its debut in the home-video market is shrinking rapidly. (That window is less than four months now, down from six months just a year ago; some industry leaders predict it will soon shrink to nothing.) Even more vexing, success or failure in theaters, often a break-even proposition at best, will be determined with near-certainty by early afternoon of the opening Friday - and then by the turnout at a few bellwether theaters like Loews Lincoln Square and AMC Empire 25 in Manhattan.
Things get really scary when the studio chief puts his or her movie, often years in the making, on the legitimate home-video market - and becomes a hero or a goat in a fraction of a day.
The DVD release of a film is all-important because it is truly profitable, and studios have thus far been largely successful in keeping these profits to themselves. A typical studio movie costs nearly $100 million: an average of $63.6 million to make and $34.4 million to market. Theater exhibitors - Regal, AMC, Loews, and the like - generally keep 50 percent of their box-office sales, which means that a movie must sell nearly $200 million worth of tickets worldwide to return $100 million to the studio and thus break even in its theatrical release.
Since few movies earn that much at the box office [craigbe note: this is true, but he's ignoring international box office, where it gets a little better], the studios have increasingly relied on the home-video market, where the equation is much more in their favor, to help recover losses and make a profit. For example, a DVD costs about $2 to manufacture and $2 to market. It is then sold wholesale to retailers at $16 a unit, amounting to a $12 profit. Since manufacturers' suggested retail prices are usually $20 to $30 a DVD (typically discounted by 20 percent), a DVD can return tens of millions of dollars in profit to the studio.
More than a third of all DVD's (and more than 50 percent of some titles) are sold at Wal-Mart stores, so you focus a lot there. Part of the genius of Wal-Mart's distribution system is its ability to keep track of every detail; Wal-Mart computers know exactly where every individual unit is, in which store, at any given time. This lets the chain maintain inventory at optimum levels - neither too much on hand, nor too little.
In today's world of computerized supply chains, the whole process of releasing a movie on DVD has become one in which success can be measured nearly instantly. At 8 a.m. Tuesday, you arrive in the Southern California office of Universal or Sony. Already, Wal-Mart stores in the East have been open for four hours; based on the number of sales in that short time frame, their computer programs will calculate projections, accurate to within 5 percent, of how many total units will be sold in the first week, the first month, the first six months.
If your movie is performing below expectations, by the time you arrive at work Tuesday morning, already the unsold units are being loaded onto trucks to be returned. Something like this happened with DreamWorks Animation's Shrek 2. The movie was a hit by any measure, but last May, when DreamWorks reported that it had sold fewer DVD's than it anticipated, its stock tumbled 17 percent over two days.
But, if your movie does better than expected, you still get no rest: Instead, you must immediately begin production of more units - studios can manufacture up to half a million a day - so retailers will have fresh stock by the weekend.
Working backward a bit, the equation now comes down to the following: The movie business turns on DVD sales. Strong DVD sales are generally propelled by strong theatrical box office. And what propels theatrical box office?
In most cases, nearly half of a movie's total audience turns out in the first week of release, which means there has been very little or no word of mouth motivating most of the audience. In other words, many people go to a movie without any real information about it - without even reading a review. Or, put most cynically: Most of the time, there is no relationship between how good a film is, and how many people turn out to see it [craig's note: on opening weekend that is... then word of mouth spreads.].
So what makes people go to a movie? Generally, it is awareness - or now, in Hollywood parlance, pre-awareness. Since studios cannot spend enough on advertising to buy awareness (there is so much advertising noise in the marketplace these days), there is a tendency to make movies with familiar titles, characters and stories: The Dukes of Hazzard, Spider-Man, War of the Worlds, Charlie and the Chocolate Factory. In the past decade, most box-office revenue has come from pre-aware titles, which includes sequels (X-Men 3, set for a May 2006 release) and remakes (King Kong, Dec. 14).
When word of mouth does happen, it moves with lightning speed: teenagers will send a text message to friends during the first show on Friday about whether a film is good or bad. While it might not be true - yet - that most people decide on the Thursday before a movie opens if they will see it in a theater or buy it on DVD, certainly 24 hours after a film's theatrical opening most of the audience has in effect made that decision.
What does this all mean? Other than the fact that the movie business is riskier than high-stakes Texas Hold 'Em, it means that the economics of the industry are being propelled by sweeping technological changes. Among them are digital projection (which allows films to be broadcast to theaters from secure servers, even possibly allowing different versions to be shown in different communities); shrinking distribution windows in which more films will open simultaneously in theaters, on home video and on cable television (on Jan. 27, the Steven Soderbergh film Bubble will be released at the same time in theaters, on cable television and DVD); and new forms of delivery (soon satellite radio services will be able to transmit video to cars). But the underlying business model of the motion-picture industry has not yet adjusted to the momentum or velocity of change.
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