Hollywood Isn't Dying, It's Evolving

And the winner is... After 2011, many in the film industry feared what the future might bring. Now there are signs that the industry is making strides in the right direction.

Jan 22, 2014 at 12:15PM

Award shows are everywhere -- music, movies, and television. It's like white noise.

I ignore most of it, but I do pay attention to the Academy Awards. Maybe it's the tradition of it. I am a movie fan, casually speaking, but I usually wait until after the Oscar nominations to see what's worth paying for and watching. Then I'll go to Redbox, browse Netflix (NASDAQ:NFLX), and if it's something I really, really want to see, shell out my hard-earned dollars and catch it at the local movieplex.

Truth, be told, I do not enjoy spending a ton of money on seeing a movie, eating too much over-priced popcorn, and drinking huge $5 sodas that make me go to the bathroom at the climax of the flick. 

Movie

The falling sky
In 2011, late move critic Roger Ebert penned an editorial on the decline of the box office in response to a David Germain article on the revenue decline in 2011. It seemed like a "sky is falling" kind of a moment. Studios make and release too few blockbusters. Tickets cost too much. Inconsiderate moviegoers talk on their cell phones or text. Theaters charge too much for concessions. More moviegoers stay at home and watch Netflix. Viewers from non-urban centers can't access leading indie, foreign, or documentary films.

Well, domestic revenue had plummeted over 3.7% in 2011.

Now it's 2014, and domestic box office revenues appear to have recovered. According to the Motion Picture Association of America, revenue leaped back up 6.5% in 2012 as ticket sales increased 6.1%. In 2013, ticket sales declined 1.3%, but revenue grew slightly by 0.8% due to higher ticket prices. The average ticket price in 2013 was $8.13, while in 2012 it was $7.96.   

So the reality is movie theaters sell fewer tickets, but make a little more money per moviegoer, and it seems that Ebert's warning was either premature or a wake-up call. 

How the studios are changing
In 2013, an article in Variety magazine by Cynthia Littleton overviewed the film industry research by Michael Nathanson of Nomura Equity.  Nathanson dug into a decade of movie studio financials, 2002 through 2012, to find out what was really going on in Hollywood.

One of his discoveries was that the movie studios, especially the Big Six (Disney (NYSE:DIS), 21st Century Fox (NASDAQ:FOXA), Viacom's (NASDAQ:VIA) Paramount, Sony, Universal, and Time Warner's (NYSE:TWX) Warner Bros.), were actually doing a pretty good job of cutting expenses for the sake of profitability. He cited the studios' practice of releasing fewer movies and controlling overhead as the key reasons.

This did not hold for movie studios across the board as a total of 665 movies were released in 2012 and 678 in 2013. In 2011, movie studios only released 602 movies. 

Key profitability trends
The report also mentioned three key trends that had come together to drive this change. The number of moviegoers increased in 2012 for the first time since 2009, the decrease in home video sales was stabilized by increases in video on demand and subscription video on demand, and the growth of the international box office kept rolling on.

International expansion offsets slower domestic growth
Nathanson's study estimated that Time Warner, Fox, Viacom, and Disney saw their international box office numbers go up $350 million as their U.S. box office lost $550 million in 2012.

MPAA numbers showed that Nathanson's findings not only applied to the big studios, but all studios. International revenues increased across the board to $29.3 billion in 2012. Every foreign box office grew except for the European market. China led the charge with 36% growth, moving past Japan to become the biggest international market. China, Russia, and Brazil have fueled the global expansion over the past five years as foreign box office revenue has increased 32%.  

SVOD is here to stay
Ebert's recognition that Netflix was stealing away moviegoers is a reality that has to be faced ... just like the newspapers have had to adapt to the online delivery of news. This trend is not going away, but the good news for the movie business is the numbers from 2013 indicate it can have it both ways. The market for U.S. box office attendance can grow, although slightly, as the SVOD market takes off.

According to Research and Markets, North American use of SVOD is gaining momentum. In 2012, subscriptions increased more than 50%, according to industry estimates. That's around 50 million subscribers in North America. In addition, Western Europe had 7 million subscribers. Asia, which has huge growth potential, had almost 5 million subscribers, and Eastern Europe had more than 4 million.  

Is the sky falling for the U.S box office?
So even though Ebert and other movie people got nervous in 2011, it doesn't look like the sky is falling, but the landscape is definitely changing.

To compete with SVOD and other challenges, the domestic box offices need to innovate and not simply charge more. If the movie industry can interject the same creativity into bringing people to the theater as it does to the making of movies, it has a chance to keep growing domestic revenue. But it must continue to run a tight ship, give customers a reason to come to the movies more, and go back and read what Roger Ebert had to say.

The next step
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Fool contributor Chris Brantley has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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