THE BUSINESS OF SHOW
1) When it comes to glamorous businesses, the film industry is right up there with fashion and frozen yogurt. But, as our cover story illustrates, show business is very much a business, and for all their glitz, American movie studios are essentially manufacturers who know that success in today’s world depends on identifying international markets and cost-effectively delivering product to those markets. And like so many—pretty much all—manufacturers, the folks who run dream factories know success hinges on: 1) finding the right partner in the right markets; 2) understanding and utilizing technology that has fundamentally changed how they do business, and; 3) … wait for it … figuring out China! And nowhere does the business of show business show itself more than when it comes to something called distribution. Action!
2) Though much more attention is made to the making of or box office of a movie, arguably the most critical and expensive step determining a film’s success is actually delivering and selling the product in individual markets. The suits in the suites call this “distribution.” It’s in this phase that the business of film shares everything in common with children’s toys, lawn equipment and designer handbags, et al. For decades, Hollywood almost exclusively concerned itself with domestic markets; not anymore.
3) The reason? To quote All the President’s Men: Follow the money. A lot fewer people are actually going to the movies in North America. Take the summer of 2017 … please. Domestic ticket sales were $3.8 billion, about a 15 percent drop from the summer before, and one of the steepest declines in recent history. In fact, you’d have to go back 11 years, to 2006, to find a summer with less earnings.
4) You know where people are going to the movies? Pretty much everywhere else. Today, more than 70 percent of the film industry’s ticket sales are generated internationally. Consider our friends in a galaxy far, far away. Two years ago, nothing could best Star Wars: The Force Awakens domestically as it churned up $936 million in sales. Well, nothing except Star Wars: The Force Awakens internationally, which did an otherworldly $1.13 billion in business.
5) Numbers like that have Hollywood chasing new markets and customers overseas and, as any manufacturer knows, once you’ve created a market, the most important thing is getting your product to it. For decades, that meant making physical, individual film copies of films, usually 35mm celluloid, and delivering them to individual theaters. As you’d expect, it was a cumbersome process that was expensive—running into the tens of millions of dollars—and it was prone to miscalculation. Send too few prints and theater owners will have to turn away customers; order too many and they’ll be left with lots of empty seats. Neither case is the way to engender healthy international business relationships.
6) Things got a whole lot less expensive with the development of hard drives with specially encoded digital video files called Digital Cinema Prints. DCMs can be written to a DVD-ROM and sent through broadband cable or transmitted via satellite. There are virtually no shipping costs and it doesn’t cost a production company much more to show the movie in 100 theaters than in one.
7) Displayed using a digital projector rather than a film projector, digital movies have several ancillary benefits. One, if a movie does better business than expected, a theater owner can show it on additional screens by simply connecting to the digital signal. Two, hard drives contain a file which controls the permissions to the video file, meaning that hard drives can be shipped without concern the film will be viewed ahead of its official release. Complex permissions can be set, permitting screenings only at certain times or on certain digital projectors.
8) Like all other manufacturers, the film industry has learned that no matter how amazingly technology can turn our world into a very small place, that place is still populated with different cultures, attitudes and tastes, all of which must be learned and marketed to. In distributing its films overseas, Hollywood has discovered that Europe goes for romance and sex while Asia likes its action bloody. To that last point, the 2010 film Machete played off the political overtones of America’s immigration debate. But when Machete made its way to Thailand, distributors decided their customers were less interested in overtones and far more interested in overblown, which is why the film emerged there with the new, most excellent, least subtle title: Machete: Splatter Blood.
9) A good deal of those digital movies finds their way to China, where the much-ballyhooed, sought-after and emerging Chinese middle class has shown it really likes to watch. Consider that by 2015, movies had become such a popular form of entertainment in China that an average of 22 new screens were being unveiled in the country every day.
10) The sheer breadth of Chinese customers has not only had an effect on where American moviemakers send their films but how they make their movies. Or perhaps you thought it just a nice touch that in 2015’s The Martian it’s the Chinese space agency that is ultimately painted as the hero? Just the year before, Transformers 4 had done record business in China ($320 million) with a story that featured Hong Kong locations and myriad Chinese product placements. Cut!
The New Geopolitics of Trade in Asia
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