Moral Hazard

In January of 2012, I wrote an overly earnest post about how frustrated I felt after perusing the upcoming release schedules of the major Hollywood studios. I called the post “The Impending Studio Meltdown,” and wrote:

Hollywood may not follow the Mayan calendar, but 2012 projects to be a disastrous year for the studios. Just as the American auto industry refused to end its reliance on gas guzzling sedans and SUVs when it became apparent that sales from those vehicles were about to collapse, so too have the major studios either missed warning signs completely, or, worse, recognized the signs but decided to keep going with their current business strategies anyway, until the whole system is run into the ground. The auto industry was recently bailed out, and Hollywood’s bailout, for the next few years anyway, will come from overseas box office. But that’s a losing proposition. Producers can’t figure out what domestic audiences want these days, and the notion that for every hit movie aimed at American tastes there will be another completely different movie specifically tailored to foreign audiences just doesn’t make sense…

…There certainly aren’t many upcoming studio releases that accomplish anything beyond continuing the industry’s reliance on “tent-pole” blockbusters and animated hits for kids. A generous reading of this year’s titles would be that Hollywood plans on sleepwalking through yet another year, resigned to leaving the awards and accolades to “specialty divisions” or independent studios such as The Weinstein Company. But this may be perhaps the worst moment in recent memory for Hollywood to be phoning it in. The competing pressures from video games and the internet have finally reached a tipping point, and this could be the year that a high profile movie tanks so badly at the box office that it takes other movies down with it.

If life were a movie, Hollywood may be hoping that 2012 borrows its plot from The Producers: make bad movies on purpose and then watch as a few of them become accidental hits. In past eras, this wouldn’t have been such a big deal — there simply weren’t enough viable, competing alternatives out there to take audiences away from the movie-going experience. But this is nothing like past eras, and studios should be genuinely concerned. In the last three decades, the major studios decided it was in their best interests to feed our appetite for blockbusters. If and when we decide we’ve had enough, or if the quality of the product is so terrible that we finally decide we can’t take another bite, then it’s not as if the studios can tweak the menu or hire a new chef. To continue this annoying food analogy further, movies are as disposable today as hamburgers at a fast food restaurant, and you don’t really get a chance to improve on fast food. You’re making junk, and when people stop eating it, you’re done.

So what happened in 2012, when all was said and done? It ended up the highest grossing year in domestic box office history. A record four movies grossed over a billion dollars each in global box office, while a bunch of other titles came close to that number (including The Hunger Games and the final Twilight). A couple of movies from Sony that no one seemed to want — MIB 3 and The Amazing Spider-Man — earned back their sizable budgets and then some, and 3D animation for kids soared once again, as did an R-rated comedy about a talking teddy bear. Meanwhile, five films nominated for Best Picture earned over $100 million each domestically, while, across the board, overseas box office surged to unprecedented heights.

So much for predictions.

But there were flies in the ointment. John Carter and Battleship were more than just expensive duds; they were intended to jump-start new franchises. Snow White and the Huntsman, also hoping for tent-pole status, underperformed. The lucrative Batman and Twilight series were finally ending (Harry Potter had retired the previous summer); The Avengers was the culmination of many years of careful planning by Marvel to get all its chess pieces into place; and The Hobbit, in spite of cashing in, took a lot of heat for being, well, awful. In short, the movies vying for blockbuster status that were expected to succeed rose to the occasion, while the ones that were being offered as replacements to expiring franchises fell flat.

A pattern had arisen. The brands that flourished were the ones that audiences already knew they wanted, while the stories that people had to be convinced to see were rejected. This year, new candidates for franchise status have generally met (or will meet) similar fates: The Lone Ranger, Pacific Rim, R.I.P.D., Jack the Giant Slayer, After Earth, and Oz The Great and Powerful were not meant to be one-offs. They were supposed to be the next generation of sure bet, can’t miss franchises. Even The Host and Beautiful Creatures, based on popular Young Adult novels, were expected to sail far into the future.

Two movies this summer that did connect with audiences, Man of Steel and World War Z, will surely get their own sequels down the road. But, again, Man of Steel was expected to succeed, and underperformed in relation to last year’s reboot of another superhero franchise, The Amazing Spider-Man, which earned $750 million in global box office to Superman’s current tally of around $600 million.

Todd Cunningham at The Wrap has had his hands full trying to figure all of this out. Three headlines from recent articles are enough to make your head spin:

Summer Box Office Up 13 Percent: How Hollywood’s Big Bet Is Paying Off

which was then followed less than a month later by

Hollywood Blockbusters Losing Luster: They’re Off 13% at Foreign Box Office

and, on the very same day

Bombs Away: Hollywood Braces for Historic 4 Straight Weeks of Megaflops

Yikes!

The film industry is in a constant state of flux these days, so it’s no wonder that trends are difficult to pin down. But the silver lining in the article about the four projected huge flops in a row (beginning with White House Down in June and ending with R.I.P.D. later this month) is:

Sony’s $80 million Adam Sandler comedy “Grown Ups 2” is expected to open Friday at between $40 million and $45 million, roughly the number the original managed. And Fox’s Hugh Jackman action film “Wolverine” is projected to debut with around $70 million on July 26.

In other words, the solution to lower numbers from recent sputtering blockbusters is…more blockbusters. That’s a little like saying that the last batch of cocaine was sub-par, but the next shipment should make up for it.

If the fate of the film industry is left in the hands of Adam Sandler, then what exactly are we talking about? What’s the end game?

The inevitable freakout over last weekend’s disastrous numbers for The Lone Ranger and this weekend’s dire predictions for Pacific Rim have presented yet another opportunity for media pundits to declare that the age of the bloated, mega-budgeted Hollywood blockbuster aimed at overseas audiences has finally come to an end. But has it?

Don’t get me wrong — I’d love to pile on. It wasn’t that long ago — a few months after I predicted The End of Hollywood As We Know It — that I wrote about how insane it was for Disney to rely on a handful of outrageously expensive gambits each year. John Carter temporarily exposed the motion picture division of The Walt Disney Company as overly dependent on the success of movies produced by Pixar and Marvel. But ever since that fiasco, The Avengers went on to become the highest grossing film of 2012, and Disney doubled down on its acquisition mania with the purchase of Lucasfilms for $4 billion. And now, even after taking into account The Lone Ranger‘s significant losses — which some analysts have projected to reach $190 million — Disney remains the highest grossing movie studio domestically thus far in 2013.

While it might be fun to argue that Disney is in “trouble” after The Lone Ranger, it just wouldn’t be true. The movie division that existed prior to all those splashy acquisitions isn’t really a studio anymore. It only distributes half a dozen films each year, aimed at general audiences. To the degree that it can still be considered separate from its production cousins Marvel and Pixar, the movie studio that carries the parent’s name is playing with house money. Even characterizing Disney as a movie studio gets the whole equation backwards, putting the cart before the horse. The Walt Disney Company is a theme park and television network conglomerate that, when it’s not acquiring the successful brands of other companies, dabbles in the PG-rated movie business. The parent company can never be sold, taken-over, fall into bankruptcy, or go out of business. The so-called “write downs” that get all the attention in the press are nothing new to the parent and have become commonplace in recent years. Shareholders and Wall Street view them as minor annoyances, the equivalent of a parking ticket (Disney share prices increased in the days after The Lone Ranger tanked). The theme parks, along with the ESPN network, essentially print money, and the movie side of things just can’t screw up badly enough to endanger the other, more profitable, divisions. But in case you want to argue that the parent company will have no choice but to change course after this mess, I have two words for you: Star Wars.

But let’s not turn this into an indictment of Disney. Pacific Rim, from Warner Bros., is precisely the type of movie that can only exist if we’re expected to believe that the primary function of a movie studio is to create imaginary monsters with computer technology, set them loose on facsimiles of highly populated urban centers, and document the destruction. That is essentially the plot of Pacific Rim (and if those urban centers happen to be in regions of the world where the film is most likely to score with audiences, all the better), but is that even a movie? At least The Lone Ranger can be said to possess the vestiges of a plot; I’m not sure building giant robots to combat equally enormous sea creatures qualifies. But that’s where we stand in the movie business right now. Pacific Rim offers nothing that audiences weren’t already getting from other franchises, but, to Warner Bros. it represented a chance to get a lucrative robot/monster franchise of its own.

Wikipedia defines a moral hazard as

a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk. In other words, it is a tendency to be more willing to take a risk, knowing that the potential costs or burdens of taking such risk will be borne, in whole or in part, by others.

The moral hazard Hollywood has been engaging in involves continuing practices that, even if they should fail, will neither effect the overall growth of the parent companies, nor cause established business practices to change. The studios know where the money is — overseas — they know how to get it — 3D, CGI, sequels, superheroes, animation, robots, and aliens — and they don’t care if there are stumbles along the way. It used to be conventional wisdom in Hollywood that the hits would pay for the misses, but that entire way of thinking has been turned on its head. In today’s high risk/reward film export economy, one mega-blockbuster, one billion dollar baby, will pay for a multitude of flops, near-misses, break-evens, and minor hits. At Sony, James Bond will fix all. At Warners, The Hobbit will ride to the rescue. Every studio has its franchise. These rainmakers pay for everything.

Lynda Obst has received a bit of attention recently for biting the hand that feeds her. I read the excerpt from her new book, and listened to her interview with Kim Masters, and while Ms. Obst makes a lot of valid points, she completely loses me when she argues that it was better in her day, when producers would “develop” a project and bring it to a studio to be greenlit. If her point is that things have gone from bad to worse, I can go along with that; but if instead she’s claiming that things have gone from good to bad, well, that’s another matter. Under the system Ms. Obst is nostalgic for, she produced How to Lose a Guy in 10 Days, Someone Like You…, The Siege, Hope Floats, Contact, One Fine Day, Bad Girls, and Sleepless in Seattle. Of those films, only Sleepless in Seattle has had any lasting staying power.

Sure, movies may have been objectively “better” before all the superheroes showed up, but the era Ms. Obst is referring to shifted the balance of power in Hollywood away from directors and into the hands of producers who were willing to play ball with the studios and talent agencies. By the end of the 1970s, as the newly flush major studios wrested creative control away from directors (and screenwriters), American movies didn’t get better — they got substantially worse. Throughout the 1980s and 1990s, when studio executives and “A-list” producers such as Ms. Obst where being treated like rockstars by the media, the projects they “developed” and “green lit” were formulaic, derivative, and uninspired. An art form that was once placed in the hands of visionary filmmakers was systematically marketed and sold to the public as a commodity (the buzzword in those days was “property”), and the craft of storytelling degenerated into what proudly came to be referred to as high concept. The only metrics Hollywood paid attention to were box office numbers, Q Scores, and focus group results.

But Ms. Obst is certainly correct to argue that, whereas studios could once rely on DVD sales to bail them out, today there can be no doubt that only surging overseas box office returns, higher ticket prices, and a greater reliance on 3D, CGI, sequels, and franchises will satisfy their ever-growing thirst for global cultural domination. Every news story referencing the latest $200 million bust is greeted with a shrug within the film industry. For each picture that flops, three or four others will eke out a profit (and one might hit the jackpot), and nothing will change until overseas audiences tire of this onslaught of juiced-up entertainment (which might already be happening). This isn’t pre-merger Hollywood anymore, and no studio lives or dies by the box office results of a single release. Executives understand what much of the general public hasn’t quite grasped: success at the domestic box office today is, for the first time, no longer a requirement. A movie can lose money in the States and still come out ahead. Wasn’t After Earth supposed to be a giant headache for Sony? Sure it was — all the media said so. But Sony knew better. A movie can’t flop unless it loses money, and, these days, movies aimed specifically at international audiences are having a hard time losing money.  If current numbers hold (though that’s looking less and less likely), 2013 will beat last year’s record-breaking haul of $10.8 billion in domestic box office. But the only number I’ll be interested in at the end of the year will be international receipts.

After Earth has already grossed $140 million overseas, and, if it gets really lucky, stands a chance of breaking even. At this point, print and online media outlets should stop referring to a movie’s domestic box office results to the exclusion of foreign numbers. Just stop. It’s pointless, and it creates a false narrative. If we read that After Earth was a disaster for Sony, but never learn that it went on to nearly cover its losses overseas, the impression is left on us that America’s role as the world’s taste-maker remains secure, that our ability to sniff out the stinkers continues to be prized across the globe. Sorry, folks, but that’s not how this is playing out.

Every time you see an article with a headline such as this one:

The Lone Ranger Represents Everything That’s Wrong With Hollywood Blockbusters

remind yourself that, from the standpoint of the bottom lines of the major film studios, nothing is wrong! Rephrase the headline if you must — “The Lone Ranger Represents Everything We Hate About Hollywood Blockbusters” — but don’t trick yourself into believing that anything is “wrong.” Having three flops, or four, or five, is just the cost of doing business to the movie divisions of these media giants.

Ask yourself this: why would the movie studios continue a business practice that doesn’t elicit a positive outcome? The answer, while not a popular one, is that they wouldn’t. As long as they are earning money, they see no reason to change. Wishing that studios would stop making effects-driven action movies will have no impact on future schedules. They’re not going to fail at this game simply because we may want them to.

Could things change? Anything is possible.  The only way out of this mess is to give up on the quest for the ultimate mega-blockbuster. As Joshua, the computer in War Games once put it, “The only winning move is not to play.” It would take an entire studio renouncing overpriced franchises, and that’s asking a lot.  A studio would have to put all its sequels, tent-poles, and reboots into turnaround, pursue an aggressive strategy of producing modestly priced (under $50 million), smartly crafted, character-driven pictures which would then have to go on to earn huge profits and win awards. Could it happen? Anything is possible, but I’m not holding my breath.

One response to “Moral Hazard

  1. It’s ridiculous in a global economy for there to still be such importance placed on domestic box office. If the NBA went global, would sports news only report the scores of the U.S. games?

    I also agree that while this may not be the greatest movie era ever, to over romanticize the 80′s & 90′s by comparison is pretty lame.

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