Cinema Is In Trouble
Franchise fatigue, a dearth of great films and the demise of the movie star are all symptoms of the abuse of monopoly power that is eating up Hollywood.
Yesterday, I had the pleasure of watching the new Dune movie. A fantastic film which feels like a triumphant moment for Hollywood in what are far from triumphant times. The movie industry is changing, gone are the days when we would be blessed with multiple blockbusters a year. Great films are much rarer now, and thus I find myself cherishing the few we get a lot more. Inspired by this great work, I thought I’d give you a primer on Hollywood, where we are, how we got here, and where the industry goes next.
The last 18 months have been tumultuous for the movie industry. There were some small victories, such as US box office passing $9 billion in 2023, the best post-pandemic total yet. These were overshadowed by some failures, highlighted most profoundly by the Screen Actors Guild - American Federation of Television and Radio Artists (SAG-AFTRA) and the Writers Guild of America (WGA) striking concurrently for the first time since 1960.
The strikes arrived at a time where disillusionment among moviegoers was palpable. The rarity of fun movie experiences, franchise fatigue, overabundance of sequels and a dearth of new movie stars had soured the taste of audiences post pandemic. This, coupled with the incessant supply of cheap entertainment online from Youtube, TikTok and television shows have put the movie industry in a spot it has not been before.
Interestingly, other than the pandemic, a lot of these issues are self inflicted. Major industry players’ push towards consolidation and monopolization of the medium has had adverse effects on their business models and the industry in general. More than half a trillion dollars was wiped off the market value of the world’s biggest media companies in 2023, and the bleeding has not stopped. To understand how exactly we got here, let’s look at how the movie industry used to operate.
1910-1948
In the early 20th century, Hollywood operated under an autocratic studio model. The studios controlled production, distribution and exhibition. This means that not only were they in charge of what gets made and who gets hired to make it, they also controlled movie theatres and thus oversaw what gets played where. A perfect recipe for anti-competitive practices, highlighted by studios engaging in tying and bundling to force theater owners to take their films. The Justice Department sued the studios under antitrust laws to break up these anticompetitive entities. In 1948, the Supreme Court ruled against the studios, requiring them to divest themselves of their movie theaters if they wanted to continue in the production business. These were known as the Paramount Decrees.
1948-1960 and beyond
In the late 1950s, television was becoming a major part of the entertainment experience. Movie studios quickly took advantage of this by licensing their movies to television networks without any added compensation for creative talent. Writers and actors subsequently struck, concurrently. This was the last time this happened until 2023.
After a months-long standoff, a historic compromise was brokered by Actors Guild President Ronald Reagan (still a moderate Democrat) and MCA/Universal head Lew Wasserman. It established residual payments for post-1960 films. The studios also contributed millions of dollars to a pension fund for talent and established new health and welfare protections.
The result was an industry ecosystem in which creative talent and technicians could earn an honest living and studios could be economically viable. The separation of the means of production and distribution stabilized the industry, allowing it to become one of America’s most culturally and economically important contributions to the world.
This is often regarded as the golden era of film. It is no coincidence that regulation and market dynamics ensured that each player; producer, distributor and exhibitioner had their own defined sphere to operate in and they could do so profitably. Producers were prohibited from vertically integrating into the traditional distribution business. That way, there are fewer conflicts of interest in the content business; producers had to create high quality work, and if they didn’t, distributors could choose to sell someone else’s art. Policy removed power as the mechanism of competition, and emphasized art.
The Recononsolidation
In the 1980s and 1990s, media companies consolidated. Time and Warner Brothers became Time Warner. This also happened with the exhibitioners. Regal Cinema and AMC began rapid expansion, borrowing large amounts of money to buy competitors and build megaplexes. In 1995, the top five movie chains owned a third of movie theaters in the country, with the biggest, Carmike, owning around 2500 total. By 2016, the top five movie chains owned over 53% of the move theaters in the country, with the largest, AMC, owning 8,380.
This increase understates the picture; in terms of screens and revenue, the larger chains built megaplexes, with 20-25 screens, far more than the single theatre in a small towns that were common in the 70s and 80s. As private debt firms from Wall Street such as KKR came into the business and used debt to finance a build-out, the radical increase in size of theatres changed the art of moviemaking. This is a Wall Street Journal story from 1998:
They also satisfy the demand for most movies with startling efficiency. The original theory of putting 25 screens in one location was that a single theater could play every film in the marketplace at that time. Instead, theatre operators are choosing to play mostly the biggest hits on several screens, with new shows beginning every 20 or 30 minutes.
That appears to be creating a situation in which films do most of their business in the first two or three weeks, rather than over a couple of months. It makes the megaplexes desperate for a continuing flow of new titles from the studios. And it has in some cases raised the cost of getting films from the studios.
The typical arrangement allows the studios to keep 70% or 80% of a film's ticket take in the first two weeks, falling back to 60% and 50% later. Exhibitors begin keeping the majority of each dollar after four or five weeks. If films play best in their opening two weeks and then burn out, theatres don't profit unless there's an extremely high volume of moviegoers.
In simple terms, it became much harder for a film to compete on the open market. Good movies attracted audiences because word would spread if something was great. Exhibitors would cater to this demand by showing these popular films for longer, profiting until the demand dissipated. But the consolidation allowed the distributors to accumulate too much power. This caused a dynamic where the only way to break the distributors bottleneck was to invest in IP so strong that audiences would default to it regardless. A reason why Marvel and Star Wars are as dominant as they are today.
Netflix and the rest of the streamers
A little over a month ago, I wrote a piece entitled “How Netflix Won The Streaming Wars” which went into great detail regarding Netflix’ journey and the position the streaming market is in today. A large reason why Netflix surged to their position of dominance is because they blurred the lines between producer, distributor and exhibitor, just like the autocratic studios of the 1940s. They have achieved pure vertical integration.
By producing their own content, which they distribute on their streaming site, that their subscribers pay to access, Netflix and other streamers are in control of the entire value chain. This has led to worse outcomes for everybody but their shareholders. Netflix seeks to decrease the price it pays for content by producing content in-house and cutting out the “studio middleman.” This behaviour eliminates earnings for independent producers and the writers who create for them, and increases Netflix’s control of the production market. In the 2021-2022 season Netflix had a 29% share of original online scripted series and 61% of those series were self-produced.
Furthermore, Netflix has rapidly grown in market share as an employer, rising from being a new entrant to the largest employer of screenwriters and the largest employer of writers for online series (followed by Disney) within just seven years. With increasing leverage over workers, the company has reportedly set a low ceiling on experienced writers’ pay, and has attempted to severely underpay writers for their work during series’ post-production. Netflix’s power is such that it can impose these subpar terms of employment on even the most powerful writer with responsibility for running a given show. Both of these practices appear to be spreading to other major employers, illustrating the ease of tacit coordination among the handful of powerful buyers in the writing labor market.
Most insidiously, if a show produced for Netflix is cancelled—sometimes despite apparent popularity —it is virtually impossible for writers to take the show to other platforms. Thus far, no show or movie wholly produced by Netflix has moved to another service. Netflix also popularized the now-standard practice among streaming services of releasing limited, if any, viewership information, decreasing writers’ and other talents’ leverage in employment negotiations by denying them crucial information about the success of their own work.
On the consumer side, Netflix has already raised the price of all three U.S. tier subscriptions by 11% in the past two years, and more than 25% on its premium subscription in the past three years. Industry analysts have noted that Netflix’s ability to raise prices and maintain low subscriber churn is illustrative of its pricing power.
Netflix and other streamers such as Disney+ and AppleTV have ensured that this is the current film landscape we find ourselves in. Creative talent is stifled and underpaid, theatrical experiences are undervalued and diminished and a hegemony of thought and ideas is what currently controls one of the world’s most creative industries.
The Economics of Moviemaking
In the traditional movie model, first you sell a movie to first-run theatres, then to budget theatres, then to hotels and airlines, then to pay-per-view, then to videocassettes/DVDs, then to cable, and finally to broadcast TV. That’s seven distinct opportunities to sell a piece of content. Going straight to streaming, though, collapses seven windows to one, reducing the ability to make money off of a particular piece of content.
Movie star Matt Damon explains the phenomenon here. Click the tweet to watch the short clip.
This new reality has affected the risk appetite of movie studios and how they decide what type of films to green light. If there are less avenues to sell content and utmost emphasis is put on how a movie performs on the first week, then studios are inclined to green-light movies that audiences are already familiar with. Hence the current 15-year-long Hollywood obsession with franchises. Audiences are more likely to go see Spider Man on opening weekend than they are a brand new IP that they haven’t witnessed before.
The only other way to circumvent audience unfamiliarity is by heavy marketing. By dominating the mindshare of an audience leading up to release, studios can attempt to create a “must watch event” that mimics the effect of well known IP. Barbie and Oppenheimer used this playbook to perfection last summer.
However, these obscene marketing budgets ensure that having a successful film is even more of a gamble. The general rule of thumb entailed that a film needed to box office around 2 to 3 times its production budget to break even. Todays mammoth marketing budgets render the economics completely out of whack. 2023s Indiana Jones and The Dial of Destiny had a production budget of $300m with an $100m marketing budget. The movie only made $384m over its entire box office run despite needing to make around $800m to just break even. This is a tentpole film for the studio, which means that its success is typically used to fund cheaper and more niche projects. Since it failed, you can imagine Disney will be more risk averse when green-lighting films of all kinds. A net loss for audiences.
This risk aversion has affected casting decisions as well. New movie stars are not being minted because the industry has reduced actors to stewards of profitable intellectual property, robbing them of the opportunity to connect with audiences and shine. Directors are now expected to make films that fulfill studios’ broader cross-platform marketing and merchandising goals. The role of the movie star, meanwhile, is reduced to providing the mere physical embodiment of a character for studios and parent companies who are solely concerned with acting as custodians of profitable intellectual property. Think of Robert Downey Jr. in Iron Man vs. Robert Downey Jr. in Oppenheimer.
As technological progress continues to race ad infinitum, one has to wonder whether studios will be waiting with bated breath for generative artificial intelligence (AI) to help them craft their perfect movie stars for a fraction of the cost. This was one of the key points of contention during the 2023 strikes. While actors and writers were able to get assurances that their work will not be used in generative AI training, writing and acting, it seems like a fight that is far from over.
Why this needs fixing
Film is a special art form. It enriches us, it teaches us, it emboldens us, it pacifies us. Cinema serves as a mirror to society, reflecting its joys, struggles, and complexities. Through films, we witness stories that resonate with our own experiences, making us feel connected and understood. It portrays diverse cultures, lifestyles, and issues, promoting audience empathy and understanding. We need cinema more than we need the media overlords to add a zero to their balance sheets. We need to save it.
How we can fix it
There needs to be political action to break up the major media players. The inputs of production, distribution and exhibition need separating. We need to make the entertainment industry genuinely competitive again, and stop the one-way landslide towards monopoly. Free markets work, monopolies do not.
We should also vote with our wallets. Seeing the smaller films, seeing the art house films, seeing the niche films will let studios and distributors know that there is demand. People are increasingly doing this already. It just needs to happen more.
The risks of losing this great art form are dire. Alena Smith, showrunner of AppleTV’s Dickinson put it brilliantly here:
We can do it again. And we must — or one of America’s great exports, the films and television of Hollywood, will simply vanish. There will be no culture left aside from an algorithmically-imposed, A.I.-generated, economically exploitative feed of digital sludge. We’re already well on our way to that dystopia, but we can still change course. We must restore open markets for TV and film and stop these monopolies from ruining a time-honored industry that has, for generations, created so much of what makes it good to be alive.
One potential issue with your thesis is that Hollywood's golden age -- when it was at its absolute peak as an economic and cultural power, when the majority of Americans went to the movies every single week -- was precisely when it was most monopolistic. And it held that status because of the "media overlords" like the Warner Brothers, Samuel Goldwyn, Adolph Zukor, Marcus Loewe and others who had built it from the ground up. The midcentury period that you identify as a Hollywood golden age was actually a period of cultural and economic decline in the face of television, cultural fragmentation and other factors; 1946 remains Hollywood's peak year in terms of per capita ticket sales. (Weekly attendance at movie theaters dropped from 80 million in 1940 to about 40 million in 1960, despite unprecedented US population growth.)
The other factor that needs to be taken into consideration is technology, specifically the way in which technology can create entirely new media (like the movies themselves). During Hollywood's golden age, television a technological curiosity and there was no internet, home video or video games. Cinema has simply become a smaller piece of the cultural pie; in 2022, the global box office was about $26 billion whereas global video game sales were more than $180 billion.
I also had a wonderful time watching Dune 2 last weekend. Although I have to admit I've only been to the cinema three times since pandemic (to see Joker, Oppenheimer and Dune 2). However, in terms of movies and TV series watching, I have done a huge amount of this in the past three years - hence I see where Robert Walrod is coming from with his comment on Hollywood golden era.
I think A24 has set quite an interesting example in the recent years with their unique offerings and successes. Having started as an indie studio, and with them morphing into a cinematic powerhouse in just over a decade, has truly shown what's it like when that sweet 'niche' spot has been hit. My personal favourites from them are Ex Machina, Room, Midsommar, Everything Everywhere All At Once, Beef, The Whale, and Past Lives.
Digital distribution has completely reshaped how we access films, lowering the barriers for new players to find their demand. A24 has really tapped into something special - their work resonated with me so much.
Another one that surprised me recently was Spaceman starring Adam Sandler. Horrible ratings on IMD, Rotten Tomatoes and Metacritic - but I loved it so much. I think it captures the essence of what life is truly about really well. Amazing dialogue and so much life wisdom packed in there.
Overall, I'm happy to see new unique ways of storytelling for the very era we are living in right now. It's kinda meta and a little bit scary.