Hollywood Economist [Paperback]

This is Epstein sequel to The Big Picture: Money and Power in Hollywood released in 2003. Unfortunately, it adds little new information. Here are some of the main themes that are repeated from the previous book:
1) The history of Hollywood with the Studio era (stars are just studio employees; and box office captures 100% of the business) from 1929 to 1950 and the new Studio era (stars make the real bucks, and movies account for just 20% of revenues).
2) Movie financing considerations including cast insurance, completion bonds, pre-sales distribution contracts as collateral for bank loans, and investors ready to lose their shirt to make the whole thing work.
3) The pop corn economy where movie theaters make more money from pop corn and sodas than movie tickets.
4) Hollywood's focus on male-teenagers because they go to the movies and buy the merchandising follow ups (DVDs, video games, toys).
5) The Hollywood formula for blockbusters: a PG rating, a vulnerable character turning into a hero who will vanquish evil forces, etc...
6) Arnold Schwarzeneger's lucrative success in the Terminator movies.
7) The financial fiasco of "Gone in 60 Seconds" even though it grossed several hundred millions.
8) The emergence of VHS and DVDs that first threatens Hollywood business model. Ultimately, Hollywood will learn how to make more money from videos than from movie tickets.
9) The difference between studio produced moronic blockbusters with sequels, prequels, and merchandising follow ups, etc... aimed at male teenagers vs intelligent independent movies doomed for commercial failures but often reaping Oscar awards.
10) Big stars demand tens of millions to work in a studio produced movie, but will work for little to work in an independent movie. This is to have a chance to work with Woody Allen.
11) Stars are not worth their money. It is more about advertising, distribution budget and release date.

If you read "The Big Picture" you already know all that. So, what is new? Here are two themes I found pretty interesting.

The first one is the death of the independent movies. This is because foreign distributors pre-sales contracts are disappearing (this was the main source of collateral for bank financing). With the advent of broadband the availability of pirated movies are undercutting the stream of revenues from theaters and DVDs overseas. A French executive stated: "Why should we buy in advance the exclusive rights to a movie when our potential customers can download it before we can release it?" Many banks have left the movie financing business. This includes John Miller formerly from JP Morgan who resigned in 2008 after being the lead banker in for the past two decades. In 2008 five major independent film distributors announced they were closing.

The second theme is the emergence of movie downloads. Download is the cheapest and fastest way to distribute a movie worldwide. The studios could easily make a lot of money facilitating the download of movies for only a dollar or two just like ITunes did for the music world. But, this cannibalizes their sales of DVDs and would upset their biggest customer, Wal-Mart. So, the studios would have to defer the download of the movie well after its DVD release. When it comes to illegitimate piracy this is obviously a loss. There are now pass protected websites where subscribers already trade movie downloads (the Napsters of the movie world) that are impenetrable to outsiders. How will the studios deal with that?

Otherwise, the book has other flaws. It repeats itself. The history of Hollywood, movie financing, and Hollywood's formulaic approach are all covered numerous times ultimately confusing the reader.

Another flaw is that on certain topics the author is as clear as mud. When talking about movie financing, it is unclear if Epstein is talking about studio movies or independent movies. And, he does not spell the differences between the two. Yet, studio financing is not dead; While, independent movie financing is.

Another ambiguous topic is how much do the studios make. In one passage, they supposedly reap internal rate of return (IRR) of 15% even on unsuccessful movies because of their distribution fees of 30% of gross. And, such IRRs can go up to 60% when they produce a blockbuster. But, outside this passage the book invariably portrays the stars as making the money and the studios struggling to breakeven. Also, whenever Epstein shows an income statement or budget for specific movies, it shows staggering losses even after all auxiliary revenues are taken into account a decade down the road. In such situations, it is unclear how the studios would earn a positive IRR. Also, in "The Big Picture" Epstein showed a movie business that was not viable on a stand alone basis as all major studio companies became subsidiaries of larger diversified conglomerates. So, what about those IRRs of 15% to 60%?

In 1929, an average 80% of Americans attended movie theaters each week. Today that figure is less than 6%, and there are only one-third as many theater sites. (More screens, though, due to multiplexing.) Epstein goes on to also reveal that the major studios lose money on most pictures, and not because of accounting legerdemain. They spend more on production ($65 million average), advertising ($3.7 million/picture average on newspapers alone, $19.2 million average total - including TV), and distribution than their net revenues; similarly, theater chains also lose money on showing films. No, the studios and theaters don't make it up on volume - the studios' main income is from DVDs, pay-for-view TV, toys, fast food tie-ins, and electronic games, and the theaters' profits come from the concession stand (80% margins). The secret to studio success - couch potatoes, not movie-goers, and to theater success - add more salt to the popcorn and boost soda sales! (Theaters should get a cut from cardiologists?)

Epstein's "The Hollywood Economist" reveals a number of key movie-industry details, such as stadium seating (eliminates most blocked views) increased attendance 30-52% when introduced, the business is seasonal (500 million of 2007's 1.4 billion tickets were sold in the summer season, and another 230 million in the Thanksgiving - New Year holiday season), Schwarzenegger's contract for "Terminator 3" was 33 pages long and gave him a $29.25 million guarantee + 20% of DVD, TV, game, etc. sales after reaching break-even, financing for star-studded movies requires insurance (guard against injuries, walkouts, etc.), etc.

Ever wonder why most theaters are now 299 seats or less? Epstein tells us - the ADA requires wheelchair access to all rows if the number of seats exceeds 299. Wonder why there's so few 'NC-17' rated (children not allowed) movies? Epstein reveals that NC-17 is considered the 'kiss of death' because TV won't accept advertisements for the film, beverage, toy, and fast-food enterprises won't participate, and Wal-Mart (accounts for about 40% of U.S. DVD sales) limits its participation when NC-17 is involved. Conversely, an 'R' rating allows children to attend (with an adult), though again nudity is verboten for the same previously mentioned participants. However, if the R rating comes from violence (attracts youth), it's accepted as 'All-American' and probably a guaranteed money-maker.

Major studios avoid simultaneously competing in the same demographic categories by using a service that reports the relative potential draw of various new movies appealing to the same category of viewers if offered at the same time. The 'Holy Grail,' of course, is one that appeals to all (eg. "Titanic"). Next best are movies that visually appeal to children and teenagers - they're easy to target with TV ads, consume large quantities of popcorn and soda, and studios can hope for good DVD, pay-for-TV, game, TV, and toy revenues, possibly even sequels (Terminator 87?). (Hint for budding producers: Car crashes outrank name stars for most teens.)

Multiplexes began in a nondescript Kansas City shopping center in 1963 when one enterprising owner divided his large screen into two smaller ones. Sharing overheads among multiple screens lowers cost/viewer and increases profits. The added distribution costs may push the industry into digital distribution and viewing. Meanwhile, theaters 'mine' their old films for silver and added profits, and wonder how to deal with the "Hollywood Death Spiral." (DVDs, with increasingly attractive added features deter some from theater viewing - the more this occurs, the quicker the DVDs are released to meet studio quarterly profit goals, the more stop going to theaters, etc.)

Meanwhile, Netflix and vending operators are increasing DVD market share while lowering returns for Blockbuster, Wal-Mart, etc., bankrupting Hollywood Video, and putting Blockbuster Video on the edge. Netflix's current surge, however, is tenuous - built on a digital licensing agreement via Starz that expires in 2012 and won't be renewed without a steep increase (per Disney). HBO may take over, but at what price? Stay tuned -

Bottom-Line: "The Hollywood Economist" comes close to serving as background for a Harvard Business School case - except Epstein doesn't explain how the industry manages to profit from Oscar-winners with real acting and plots. The book also fails to clearly explain potential future strategies to combat increased pirated downloads and disc sales (1.5 billion in 2009) from China alone; South Korean DVD sales fell from $1.3 billion in 2006 to $80 million in two years due to Internet-enabled piracy. Readers should also be warned that Epstein's book is largely a repackaging of his earlier "The Big Picture" and prior "Slate" columns. So if you haven't read Epstein's prior work, "The Hollywood Economist" is a good overview.

Unfortunately, while the topic is a worthy one, the Author covered about 80% of this book in his earlier and by far much better book, The Big Picture: Money and Power in Hollywood. What's worse, much of what's new comes from other articles he's written which are freely available on the web. The author also repeats himself in various parts of the book. Finally, by using large fonts and margins, the book is nearly twice the number of pages it needed to be.

These are, in a nutshell, the big problems with the book. For those interested, here's more information:

The author knows his stuff, I'll give him that much. And I loved his other book, The Big Picture: Money and Power in Hollywood. But this particular book really is little more than a collection of essays or blog posts which he has already covered via his "Hollywood Economist Blog" or articles on other blogs or magazines (most of which can be found online by searching his name and the title of this book). For example, his section on "the real secret is the salt" in this book was covered in his 1998 New Yorker magazine article entitled, "The Popcorn Economy". And his blog entry from January 2010 presents the same content found in his book on indie financing. And his section in this book on the role of technology in the industry is essentially his 2006 Financial Times article entitled "The Samurai Embrace" - he even uses the same term in this book.

Beyond this, the author repeats himself over and over throughout the book, leading to the sense that this book is little more than a collection of articles thrown together without any real editing. For example, he discusses how indies might finance films by getting overseas distribution set first - he does this in two or three different sections of the book, often using the same key sentences or phrases over and over again. It's the kind of thing you would expect to see when the same person pens several articles over the course of several years, each time going back to a central idea, giving some background, and then expanding on it. The problem with doing this in the book is that the reader is forced to read the same content over and over again, in order to get that one new nugget of information the author didn't present the last time he covered it 30 pages earlier. It's necessary for stand alone articles, but completely unnecessary and unhelpful in this book. Either this was due to seriously poor editing, or by the need to inflate the number of pages to turn what would otherwise be a collection of articles into a book.

Finally, the publisher has bulked up the page count on this book by using a very large font and even larger margins. If printed with the same font and margins found in the author's other work, the 416 page book The Big Picture: Money and Power in Hollywood, this book would probably have come in at about 120 pages.

When you consider the formatting caused page inflation and repetition of ideas from his other book and published articles, there are probably only 15-20 pages of new content not covered elsewhere. It would have been much better had the author simply updated The Big Picture: Money and Power in Hollywood with some new content and published it as a "New and Revised" edition.

In the end, while the information he presents is interesting and useful, it certainly isn't worth either the price or time.