Why Hollywood Blockbusters lose money at the boxoffice (but gain it on dvd sales)

The media, by treating the box-office grosses released on Sunday afternoons as if they were the results of a weekly horse race, further a misunderstanding about the New Hollywood. Once upon a time, when the studios owned the theaters and carted away locked boxes of cash from them, these box-office numbers meant something. But nowadays, as dazzling as the "boffo," "socko," and "near-record" figures may seem to the media and other number fetishists, they have little real significance other than to measure the effectiveness of the studios' massive expenditures on ads.

To begin with, the Sunday numbers are not actual ticket sales but "projections" furnished by Nielsen EDI, since the Sunday evening box office cannot be counted in time to meet the deadlines of the morning papers. Variety, to its credit, corrects the guess estimates on Monday with the actual weekend take. Yet even these accurate numbers leave in place four other confusions about who earns what.

First, the reported "grosses" are not those of the studios but those of the movie houses. The movie houses take these sums and keep their share (or what they claim is their share)—which can amount to more than 50 percent of the original box-office total. Consider, for example, Touchstone's Gone in 60 Seconds, which had a $242 million box-office gross. From this impressive haul, the theaters kept $129.8 million and remitted the balance to Disney's distribution arm, Buena Vista. After paying mandatory trade dues to the MPAA, Buena Vista was left with $101.6 million. From this amount, it repaid the marketing expenses that had been advanced—$13 million for prints so the film could open in thousands of theatres; $10.2 million for the insurance, local taxes, custom clearances, and other logistical expenses; and $67.4 million for advertising. What remained of the nearly quarter-billion-dollar "gross" was a paltry $11 million. (And that figure does not account for the $103.3 million that Disney had paid to make the movie in the first place.)

Second, box-office results reflect neither the appeal of the actual movies—nor their quality—but the number of screens on which they are playing and the efficacy of the marketing that drove an audience into the theaters. If a movie opens on 30 screens, like Sideways or Million Dollar Baby, there is obviously no way it can achieve the results of a movie opening on 3,000 screens. And how do studios motivate millions of moviegoers—mainly under 25—to go to the 3,000 screens on an opening weekend to see a film no one else has yet seen or recommended? With a successful advertising campaign.

Studios spend $20 million to $40 million on TV ads because their market research shows that those ads are what can draw a movie's crucial opening-weekend teenage audience. To do that, they typically blitz this audience, aiming to hit each viewer with between five to eight ads in the two weeks before a movie's opening. The studios also spend a great deal of money testing the ads on focus groups, some of whom are wired up to measure their nonverbal responses. If the ads fail to trigger the right response, the film usually "bombs" in the media's hyperbolic judgment. If the ads succeed, the film is rewarded with "boffo" box-office numbers.

Third, the "news" of the weekend grosses confuses the feat of buying an audience with that of making a profit. The cost of prints and advertising for the opening of a studio film in America in 2003 totaled, on average, $39 million. That's $18.4 million more per film than studios recovered from box-office receipts. In other words, it cost more in prints and ads—not even counting the actual costs of making the film—to lure an audience into theaters than the studio got back. So while a "boffo" box-office gross might look good in a Variety headline, it might also signify a boffo loss.

Finally, and most important, the fixation on box-office grosses obscures the much more lucrative global home-entertainment business, which is the New Hollywood's real profit center. The six major studios spoon-feed their box-office grosses to the media, but they go to great lengths to conceal the other components of their revenue streams from the public, as well as from the agents, stars, and writers who may profit from a movie.

Each of the major studios, however, supplies the real numbers to its trade association, the MPAA, including a detailed breakdown of the money they actually receive, country by country, from movie theaters, home video, network television, local television, pay television, and pay-per-view, which is then privately circulated among the six studios as "All Media Revenue Report." (To see these private data click here.)

These numbers tell the story. Ticket sales from theaters provided 100 percent of the studios' revenues in 1948; in 2003, they accounted for less than 20 percent. Instead, home entertainment provided 82 percent of the 2003 revenues. In terms of profits, the studios can make an even larger proportion from home entertainment since most, if not all, of the theatrical revenues go to pay for the prints and advertising required to get audiences into theaters. (Video, DVDs, and TV have much lower marketing costs.)

This profit reality has transformed the way Hollywood operates. Theatrical releases now essentially serve as launching platforms for videos, DVDs, network TV, pay TV, games, and a host of other products. Even so, the box-office totals are losing their traditional influence. Up until a few years ago, the results from the U.S. box office largely drove secondary markets, especially video. If a film had a huge opening, the video chains would order 200,000 or more copies (at $60 or more apiece wholesale) for rentals. But this buying formula ended when consumers began buying DVDs at mass retailers. By 2004, Wal-Mart was accounting for more than one-third of the studios' revenues in video and DVD.

For merchandisers like Wal-Mart, DVDs are a means to lure consumers, who may buy other products, into the store. The box-office numbers are of little relevance (especially since it's teenagers who create huge opening weekends, and they cannot afford to buy more profitable goods like plasma TVs). Instead of box-office results, merchandisers look for movies with stars such as Tom Hanks, Julia Roberts, or Arnold Schwarzenegger, who have traction with their highly desired older customers. For example, whereas the sophisticated mind-bending love story Eternal Sunshine of the Spotless Mind had a dismal seventh-place finish in the box-office gross sweepstakes—earning a mere $8.1 million for the theaters during its opening weekend—thanks to the presence of recognizable names like Jim Carrey and Kate Winslet, it did extremely well on DVD, selling more than 1.5 million copies during its first week in the stores.

Edward Jay Epstein is the author of The Big Picture: The New Logic of Money and Power in Hollywood.
Illustration by Mark Stamaty.