Lynda Obst: Hollywood's completely broken

When you stopped buying DVDs and started streaming on Netflix, Hollywood's economics changed. So did the movies

Published June 15, 2013 7:30PM (EDT)

Excerpted from "Sleepless in Hollywood."

I was driving west in a classically horrible L.A. morning commute on my way to Peter Chernin’s new office in Santa Monica, thinking about our regular lunches back when he ran the studio and I worked as a producer there in the nineties. Peter, who is now building his own media empire at Fox and had been president of News Corp. for over a decade, was clearly the perfect person to ask what had turned the Old Abnormal into the New Abnormal. First of all, he was incredibly smart about the business. But more important, I now realized that during those lunches, he was the first to warn me that the proverbial “light ahead” was an oncoming train. It was way before things turned obviously grim. Since I was reliably churning out pictures then, I didn’t take his gloomy talk about piracy seriously. I just went around saying, “The landlord has the blues,” and blithely fell into the future.

Peter wasn’t exactly having a hard time making the transition. Once he decided in 2009 to leave the number-two job overseeing the News Corp. media empire, he became the biggest producer at Fox (one of the biggest anywhere), with guaranteed pictures and huge potential profit participation. His first picture was the tentpole smash Rise of the Planet of the Apes, and he already had three television shows on the air. More recently, he released the smash Identity Thief, with Melissa McCarthy and Jason Bateman.

The long drive got me thinking about the contrast between the struggling Old Abnormal producers (and writers) and the soaring New ones like Peter. It was discussed at a fancy-pants dinner party I went to a week before.

“They’re completely broke,” said a studio head, when asked by me (of course) about how different things were these days. He spoke about famous players who regularly came to him begging for favors—a picture, a handout, anything.

“Why?” his very East Coast guest asked incredulously.

I recalled his exact words as I sat in bumper-to-bumper traffic. “They have extremely high overheads,” he said to his guest with me listening in. “They have multiple houses, wives, and families to support. They’ve made movies for years, they were on top of the world and had no reason to think it would end. And then suddenly it did. They’ve gone through whatever savings they had. They can’t sell their real estate. Their overhead is as astronomical as their fees used to be. They’ve taken out loans, so they’re highly leveraged. It’s a tragedy.”

His natty guest looked unsympathetic, so I tried to bridge the worlds between us. “Okay,” I said, “the Sudan is a tragedy. This is just sad.”

I understood that it was hard to sympathize with broke producers when so many families were being tossed onto their lawns by bailed-out banks that had bullied them into bullshit mortgages. Meanwhile, New Abnormal producers like Peter were  thriving, easily finding supersized tentpoles with the “preawareness” that was so craved by the New Abnormal, like his hit film Rise of the Planet of the Apes.

That is because those films were so well suited to their sensibilities and ambitions. But Peter was more than just a successful model of a New Abnormal producer. He had green-lit the two biggest movies of all time when he was head of Fox during the Old Abnormal.

Peter had earned his top-down as well as bottom-up perspective on the business by working his way up through publishing, then TV, to eventually run both Fox Broadcasting Company and Twentieth Century Fox Film. He became Rupert Murdoch’s number two, overseeing the whole Fox empire, and shareholders clamored for the board to name him Murdoch’s successor. But this was a job designated by Murdoch to go to an actual heir, so Peter left to become a producer. He knew the business, as Joni Mitchell’s great old tune said it, “from both sides now.” More important, he was gifted with a brain both creative and financial in equal measure.

Peter’s offices are as close to the water as you can get without falling in. He came into the lobby to greet me, always personable, never grandiose, but still a bit larger than life. He is the humblest of moguls, but that doesn’t mean he doesn’t have a strong ego— just not a damaged one.

We sat in his Santa Monica office with huge plate-glass windows overlooking the Pacific, where he happily relayed that he rarely crossed the 405 East-West divide. When I asked for his help in getting to the bottom of all this, I was reminded of how tough-minded he is. Even though we are old friends (we went to high school together), he had no problem challenging my buried premises. Maybe they weren’t very buried.

“So how did we get here,” I asked, “where things are so different from when we started? What happened?”

I leaned back a little on Peter’s comfortable couch, and he sat forward to say, “People will look back and say that probably, from a financial point of view, 1995 through 2005 was the golden age of this generation of the movie business. You had big growth internationally, and you had big growth with DVDs.” He paused to allow a gallows laugh. “That golden age appears to be over.”

It was good we both could keep our sense of humor, the only way to survive the industry’s crazy carousel of wild ups and low downs. And this very carousel and its need for constant— bordering on psychotic—optimism to keep your projects going made it hard for a person like me to find a steady perch from which to see what was really going on. Peter, however, had one.

He seemed to be saying that the DVD market was critical to the life and death of the Old Abnormal. I knew the DVD profits were key, but it seemed to me like a classic case of the tail wagging the dog. “Why did those little silver discs go to the heart of the business?” I asked. “There have to be other key revenue streams.”

“Let me give you the simplest math,” he replied. “The simple, simple, simple math.”

Good, I thought. Because my friends and I are not so great at math. I can guesstimate the budget of a big movie to within a hundred thousand dollars by reading the script, but I can’t add the columns therein.

“The movie business,” Peter said, “the historical studio business, if you put all the studios together, runs at about a ten percent profit margin. For every billion dollars in revenue, they make a hundred million dollars in profits. That’s the business, right?”

I nodded, the good student, excited that someone was finally going to explain this to me.

“The DVD business represented fifty percent of their profits,” he went on. “Fifty percent. The decline of that business means their entire profit could come down between forty and fifty percent for new movies.”

For those of you like me who are not good at math, let me make Peter’s statement even simpler. If a studio’s margin of profit was only 10 percent in the Old Abnormal, now with the collapsing DVD market that profit margin was hovering around 6 percent. The loss of profit on those little silver discs had nearly halved our profit margin.

This was, literally, a Great Contraction. Something drastic had happened to our industry, and this was it. Surely there were other factors: Young males were disappearing into video games; there were hundreds of home entertainment choices available for nesting families; the Net. But slicing a huge chunk of reliable profits right out of the bottom line forever?

This was mind-boggling to me, and I’ve been in the business for thirty years. Peter continued as I absorbed the depths and roots of what I was starting to think of as the Great Contraction. “Which means if nothing else changed, they would all be losing money. That’s how serious the DVD downturn is. At best, it could cut their profit in half for new movies.”

I’d never heard it put so starkly; I’d only seen the bloody results of the starkness. The epic Writers Guild strike of 1988 was about the writers trying to get a piece of home viewing profits. It shut down the town for eight months, and estimates of what it cost the Los Angeles economy run between $500 million and $1 billion. They held out as long as they could, until all parties had bled out as if they’d been struck by Ebola. And still the writers got no piece of those golden discs. Then the writers struck again in 2007–8 for a piece of the Internet frontier, and won not much more than they did after the last awful strike, and we all watched its terrible and unintended aftermath play out during the recession and in the subsequent suspension of writers’ and producers’ deals.

“I think the two driving forces [of what you’re calling the Great Contraction] were the recession and the transition of the DVD market,” Peter said. “The 2008 writers’ strike added a little gasoline to the fire.” Well, at least my writer friends would be relieved to know that Peter didn’t think it was totally their fault, as some in town were fond of intimating.

He went on to say, “It was partially driven by the recession, but I think it was more driven by technology.”

There it was. Technology had destroyed the DVD. When Peter referred to the “transition of the DVD market,” and technology destroying the DVD, he was talking about the implications of the fact that our movies were now proliferating for free—not just on the streets of Beijing and Hong Kong and Rio. And even legitimate users, as Peter pointed out, who would never pirate, were going for $3 or $4 video-on-demand (VOD) rentals instead of $15 DVD purchases.

“When did the collapse begin?”

“The bad news started in 2008,” he said. “Bad 2009. Bad 2010. Bad 2011.”

It was as if he were scolding those years. They were bad, very bad. I wouldn’t want to be those years.

“The international market will still grow,” he said, “but the DVD sell-through business is not coming back again. Consumers will buy their movies on Netflix, iTunes, Amazon et al. before they will purchase a DVD.” What had been our profit margin has gone the way of the old media.

It hit me like a rock in the face. The loss of DVDs for our business had created a desperate need for a new area of growth. This was why the international market has become so important a factor in creative decisions, like casting and what movies the studios make.

We sat in mournful silence for a second before I realized that Peter probably had to take a call from China and I should go home and take a Xanax.

But then Peter said the most amazing thing. A P&L, if you’re not a numbers person, is a profit-and-loss statement. Studios create P&Ls in order to explain to their financial boards, banks and investors how they are going to recoup their costs when they green-light films. It estimates how much money key domestic and international markets are expected to gross based on how “elements” (i.e., stars, director, title) have performed in the past in those markets, country by country. It also estimates how they will perform in various ancillary markets like DVD, TV, pay cable, Internet, airplane devices, VOD, handheld devices, etc., again based on past performance. If it all adds up to the amount of the budget or more, Go!

These are the quantifiers that studios use to rationalize their decisions, to put them on solid-enough financial ground on which to base predictions to their corporate boards.

“So,” Peter said as I was about to leave, “the most interesting thing is what a few studio heads said to me privately about two years ago.” He stopped to smile. “None of them from Fox, of course.”

“Of course,” I said. I knew he was about to share something very inside with me.

“They said to me, ‘We don’t even know how to run a P&L right now.’” The look on his face expressed the sheer madness of that statement. “ ‘We don’t know what our P&L looks like because we don’t know what the DVD number is!’ The DVD number used to be half of the entire P&L!”

“What are the implications of that?”

He looked at me incredulously, as if to say, Haven’t you run a studio? Then he said very emphatically, “The implications are— you’re seeing the implications—the implications are, those studios are frozen. The big implication is that those studios are—not necessarily inappropriately—terrified to do anything because they don’t know what the numbers look like.”

Of course they are. They’re frozen, so the gut is frozen, the heart is frozen, and even the bottom-line spreadsheet is frozen. It was like a cold shower in hard numbers. There was none of the extra cash that fueled competitive commerce, gut calls, or real movies, the extra spec script purchase, the pitch culture, the grease that fueled the Old Abnormal: the way things had always been done. We were running on empty, searching for sources of new revenue. The only reliable entry on the P&L was international. That’s where the moolah was coming from, so that’s what decisions would be based on.

The Great Contraction explains the birth of the New Abnormal, and so many of the cultural changes that came along with it. Technology changes culture. Think of the way the all-embracing texting culture of the Japanese teenager created the first-person text novel (keitai shousetsu). The anonymous romantic accounts of teens written by texters were sent chapter by chapter as apps were being designed in real time to meet the needs of the growing audience. That birthed a genre that spawned “real” books and movies. Our industry reformatted itself with an application called “new revenue streams.” A crucial question of that app was “what stars play in foreign territories,” and the answer was, “whoever had a big hit there before!” Casting was not the only thing that technology changed, nor was the (disappearing) pitch. The big change was what movies get made.

From "SLEEPLESS IN HOLLYWOOD" by Lynda Obst. Copyright © 2013 by Lynda Obst. Reprinted by permission of Simon & Schuster, Inc.

By Lynda Obst

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