DCS Member Content Contribution: Bracing for the Correction

Marty Shindler, DCS Advisory Board Member and CEO of the consulting firm, The Shindler Perspective

We often hear on the business news channels and in the business press about companies, industries, and even market segments going through correction periods. Sometimes the phenomenon is described as downsizing, but behind the journalese or corpspeak, it is a correction, plain and simple.

The entertainment industry, with an emphasis on the feature film market, could be entering such a correction period in the not too distant future, if indeed we are not already there. For months now headlines have announced that some of the blockbuster or tentpole movies are not tracking well in market research and some have underperformed at the box office.

While box office gyrations are not unusual, when it happens to several very expensive movies, it becomes a trend, or at least the strong beginnings of one.
With budgets for major movies reaching $150 – $250 million or more before marketing and distribution costs, the revenue needs to flow in from all sources in order to turn a profit for the investors.

Even with the box office in #2 country China up 27% for the first half of according to Variety, locally produced movies were responsible for 63% of its marketshare. US box office as of this writing is approximately at a breakeven point over last year on a year to date basis.

US studios and other global producers and distributors rely on global revenue to help reach profitability. International revenue, for example, is now about 70 – 80% of the global total, with North America, the #1 territory, accounting for the balance. The same percentages relate to downstream revenue sources as well.

Even with the expanding markets outside of North America, roughly 65 – 70% of the movies made lose money for their investors. Studios rely on their slates, so that the few that earn profits make up for the many that lose.
Some of what is occurring in 2013 is very reminiscent of what occurred in the mid – late 90s. So how does that relate to the possibility of a correction?

In the mid 90s, on the coattails of breakthrough visual effects heavy movies Terminator 2 and Jurassic Park, all of the studios and many independents rushed to put big event movies into production, thinking that major visual effects extravaganzas would result in Jurassic Park and T2 size box offices.

Unfortunately, they did not do the same level of business taken as a whole, notwithstanding many being visually spectacular, but often lacking the fundamentals of story and character.

The visual effects industry expanded rapidly at this time, with studios and facilities built to handle the frenzy of product coming to market.

As a result, during this time period, several Hollywood studios began their downsizing efforts, beginning to decrease the number of movies put into production each year and relying increasingly on third parties for some of the budget money on those they did produce. Independent filmmaking grew during this time, but as is commonly known, independent budgets are not studio size budgets.

It is probable that there will be another round of decreases, or corrections, in the number of movies being made and it is further likely that there will be belt tightening as well to keep the public companies’ numbers where the Street expects/wants them to be. This could easily include reductions in studio staffing in production and distribution.

This will also have a profound effect on the entire supply chain, from the number of actors, directors, producers and writers working to the amount spent on other below the line staffing and on to post production, with an emphasis on visual effects as a major line item.

Decreased budgets will also most likely increase the reliance on producing in incentive states and territories. Rebates contribute to the bottom line, even if revenues do not.

The widely reported travails of the US visual effects industry’s collapse, a financial morass according to some, means that work will continue to expand in territories where the incentives and/or lower labor rates are in place.

While many bemoan the US based visual effects companies that have gone out of business due to the foregoing, it is also generally known that many have the artistic and technology skills, but just do not have the required business and administrative skills. We have seen way too many tombstones as a result.

In due course, survival of the fittest will prevail no matter where the facilities are located. Good business skills, or lack thereof, transcends territorial lines.
The correction cannot happen overnight as the lead time to produce the blockbuster size movies is usually several years. Tentpole, visual effects extravaganzas for 2015 are in production or at least certainly in late stages of development.

In time, the industry will go through a correction again, perhaps going on a growth spurt, however defined. This may occur as a result of a push toward new exhibition technologies, be they 4K or 8K, laser projection or the advent of glass displays in theaters, designed to keep the theatrical experience ahead of the rapid changes occurring in home viewing technology as UHD TVs begin to roll out.

Companies at all points on the pipeline need to get their fiscal, business and operational house in order. So, depending on where one is working within the feature film industry, it is time to begin bracing for the correction. It is coming.

What have you done to survive the correction?

About the Author: Marty Shindler is CEO of The Shindler Perspective, husband and wife consulting practice with extensive hands on management roles and long time consulting experience. The consulting practice has worked at nearly every point on the entertainment technology value chain. Marty Shindler is also a long time member of the Digital Cinema Society and serves as a member of the Advisory Board.