July 2013

Bracing for the Correction

 

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 2013, 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?

As for The Shindler Perspective

Siggraph 2013 - We are looking forward to Siggraph 2013 on July 24 – 26, 2013 in Anaheim for several reasons, including having an opportunity to get up close and personal with the latest technology for creating great visuals and seeing people not seen in some time as well as networking and making new friends.

 

On Wednesday, July 24, 2013, Steve Waskul of Waskul Entertainment and I will be discussing the state of the industry, technology on the horizon, the future of TV and other related business matters live at the Intel Studio XPerience at Siggraph.  Hope to see you there at 3 PM.   

 

Pre-sales of Renee Dunlop’s Focal Press book Production Pipeline Fundamentals For Film And Games start at Siggraph 2013 for a currently anticipated December release.  I am pleased to be an additional contributor to the book. 

 

Hong Kong Trade Development Council – Tied in with the E3 Conference in June, the HKTDC held an event in LA to showcase Asia as a promising market through Hong Kong.  We are in a global marketplace, afterall, and exports as well as imports fuel economies.  Marty Shindler was interviewed during the event and a short clip from the interview was included in the HKTDC post LA promotion video. 

 

The future of TV – The Academy of Television Arts and Sciences (Emmys) understands the importance of this concept and held a panel in mid June on the topic entitled TV, Here, There and Everywhere at CBS Studio Center.  We were honored to be a part of the panel and to be able to discuss this future thinking concept with the prestigious audience.  Thanks to ATAS, George Taweel and Alex Georgiev and the other panelists for making this a very successful evening.

 

 

In the future - We are thinking ahead to fall.  Mark your calendars for September 25 for the next Amplify Roundtables Leading Edge Technology series event hosted at United Talent Agency, where once again, I will moderate a panel.  I will also be moderating two panels at Digital Hollywood Fall in October.  Stay tuned for details on both and others that are in development through our Twitter, Facebook, Google + and LinkedIN posts.

 

Trends in the Marketplace and Other

Trends in the marketplace – While not exactly a trend, but perhaps the end of an era, the final telegram ever was sent – and presumably received in India on July 14, 2013.  RIP.

 

Comics reflect reality – And speaking of rest in peace, the world mourned the passing of Ray Harryhausen since our last newsletter.  Harry Bliss mourned him, too, in this Bliss comic from May 27, 2013.  We were also gratified to see the acknowledgement to Mr. Harryhausen in the end credits of Pacific Rim.

 

It’s all about story as we say in Bracing for the Correction.  For some it is a Hollywood hard luck story in this Non Sequitur comic. 

 

Roberta Shindler and I hope that our clients, prospective clients and friends are having a wonderful summer for those in the Northern Hemisphere and a not too cold winter for those in the Southern Hemisphere.

 

 

Please feel free to send your feedback on what you read here, pro or con or other matters of interest to you.

 

For The Shindler Perspective, Inc.

Sincerely,

Marty Shindler

Chief Executive Officer

Visit us on Facebook, LinkedIN and on Twitter.

     

 

© 2013 The Shindler Perspective, Inc.