Sure, the box office numbers looked pretty for 2007. They had Cinema Blend's Katey Rich cheering [check out the article here] and rightly so. Nearly $10 billion in ticket sales for the year! That's a lot of money, and a nice percentage above last year. However, the numbers we see every week only show how much money is coming in. Where does it all go and are studios actually making any money? The answer might surprise you.

For a few months now the movie industry has been mulling over the results of a massive report issued by Global Media Intelligence, an organization that tracks, analyzes and reports on the comings and goings of various media industries, in particular where cash is concerned. The report showed that in 2004 major theatrical releases turned a profit of $2.2 billion for the studios. Hooray for Hollywood indeed.

But in 2006 the picture looked quite a bit different. Thanks to some new ways in which movie profits are distributed, the report estimates studios took a hit of $1.9 billion and there's a good chance that when someone gets around to summing up the numbers for 2007, the picture isn't going to be much better. So where is all your movie ticket and DVD money going?

According to the report, some of the biggest cash-suckers in the industry are the big name stars, producers and directors. Major players (*cough* SpielbergCruiseSmith *cough*) can demand what are called "gross participation" salaries, which usually mean that they get to take a cut of the box office sales right off the top. The $300 million the studio spent to make and distribute a summer blockbuster have to wait until the big stars and directors get an extra percentage paycheck from the box office sales first. If there's anything left over, the studio can have it to pay off the real costs of the movie, like budget and marketing expenses.

How much money gets spent on gross participation? The report totalled it at around $3 billion for 2006, a number that likely grew in 2007. That's about one third of all the box office sales in 2006, essentially paid as bonuses to the big guns.

Of course, that's only part of the problem. Production and marketing costs have skyrocketed in the last few years. Just ten years ago it was almost unheard of for a movie to cost more than $100 million. The $200 million James Cameron spent on Titanic seemed absolutely insane. These days it's accepted that a lot of movies will have budgets of $125 million and $150 million. It's costing more and more money to crank out films and studios aren't keeping up.

It's not that studios haven't made some effort. They've certainly tried pushing the cost on to you, the movie-goer. I know I grumble a little when I have to shell out $9 for a movie ticket, and that's nothing compared to the $10 - $11 big markets charge. And then there's rising prices for new DVDs. Is it any surprise that convenient rental systems like Netflix are becoming more popular while internationl DVD sales are in a slump?

So what does all this mean for the studios? For one thing, their well of cash is drying up. Once upon a time movie studios could bankroll their projects with money they had from previous movies. However, with all the cash they've been losing and the rising costs of filmmaking, they've had to look elsewhere for the dough. According to the report, studios have turned to places like private investors and hedge funds. But that gravy train is slowing too. Investors are catching on to the fact that those pretty $9.6 billion box office receipts aren't quite so simple and that the real returns on their investments are slim to none.

The bottom line is that the movie industry is in trouble. Big trouble. The author of the GMI report, Roger Smith, called the future "bleak", saying that their "analysis of the business of the Hollywood studios may come as a surprise to investors and even some people within the industry. We believe there is little chance of the negative revenue trend reversing in the coming years. New technology will not deliver anything like the revenue initially predicted, and as DVD sales continue to decline and the cost of making movies increases, the message is simple: the Hollywood studio's must begin a serious attempt to reign in costs, like News Corporation's Fox have done, if they are to survive."

So don't cheer those box office numbers too quickly. Big money only counts when you're actually turning a profit, and Hollywood is deep, deep, deep in the red.

For more information check out the official company press release on the GMI report at Screen Digest.
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