Will the Movie Industry Contract in 2017?

Originally published in Cultural Weekly on January 4, 2017. 

Movies are going gangbusters, and one studio—Disney—achieved a record-breaking $7 billion global box office last year. What could possibly go wrong?

According to my analysis of historical patterns, we’re due for a downturn.  The film industry is often likened to a roller-coaster because we experience it as having surprising ups and down. The analogy is even more precise than we would like to think. Just as a roller-coaster rises and falls on a fixed and predictable track, so too the film business has an uncanny, regular pattern of peaks and valleys.

I first became aware of this pattern in 1988 as a junior executive at Walt Disney Studios when the Writers Guild went on strike. The strike lasted 155 days, during which time no new screenwriting took place, and even after the strike was over it took years before movies and TV shows achieved full levels of production. I imagined this was an unpredictable economic event. But when I talked with some of the old-timers, people who had been in the financial offices of Disney and other studios for decades, they told me it was to be expected: they didn’t know the writers would go on strike, but they had been certain the movie business would have a downturn in the late ‘80s. They had seen the pattern before.

How could that be? I started to do some research, going back to the beginnings of filmmaking in 1891, when Thomas Edison patented the kinetoscope, the precursor to the motion-picture projector. I discovered that innovations in technology and distribution have been driving the movie industry through rising and falling economic cycles, and that the cycles happen in a predictable, ten-year pattern.

I first wrote about this phenomenon in Screen International magazine in December, 2009. My editor dubbed my observations “The Leipzig Hypothesis.” At that time the movie business was in a downturn, and I predicted that the cycle would start to turn up in 2012. It did.

My hypothesis states: The film industry’s expansion and contractions — based on known milestones — for the last 120 years has followed a wave pattern which peaks with uncanny regularity in the middle years of each decade, then bottoms out in the decade’s last years, only to rise again from the ‘0’ year driven by new innovation. It looks like this:

Film Industry Cycle over a decade

I admit that the Leipzig Hypothesis is somewhat impressionistic. It relies, in part, on verbal data I got in conversations with finance people who had been in the movie business since the 1950s. It’s difficult to evaluate the entertainment industry’s profitability from the outside; studios play fast and loose with the numbers so it’s been hard to measure historical ups and downs. Box-office numbers, even when adjusted for inflation (which they usually aren’t) account for only a fraction of a film’s revenue, and today box office revenue matters less than it ever has before, because of the films being financed by streaming services Netflix and Amazon.

In addition, domestic numbers often seem to show patterns that alter radically when currency-fluctuating (and poorly counted) foreign sales are thrown into the mix. So the movie industry, unlike more numerically minded businesses, is never really sure whether its economic viability is rising or falling; it has always seemed more of a gut feeling, at least to people outside the highest levels of the industry.

However, based on my nearly three decades in the business, my knowledge of studio balance sheets, and my interactions with the financiers who keep this industry spinning, I’m ready to go out on a limb once again and predict that a contraction will happen starting in late 2017 or early 2018, and filmmaking will feel an economic downturn. If the hypothesis holds, it will make the movie business a bit more quantifiable for everyone. If the hypothesis fails – which it may, due to significant changes in business models – we can put it to rest as a historical artifact.

Here is how the hypothesis has functioned historically. (See infographic below.)

In the early years of each decade, as an innovation takes hold, the business tends to expand. There’s a sense of renewed optimism among industry executives and bigger movie budgets soon follow, along with higher salaries and richer deals for the talent. The expansion generally peaks around the sixth or seventh year of each decade, when higher spending has taken its profit-reducing toll.

Then, pessimism sets in, and industry leaders call for the business to be reined in. Budgets become smaller and negotiations become tougher amid prognostications about the ill health of the industry. In the final few years of each decade, which we are entering now, the business contracts, reaching its nadir at decade’s end, when, almost miraculously, the next innovation is born that will start the cycle anew.

Each innovation is an advance in technology or a new distribution market. For example, in 1900, the size of each reel of film doubled, allowing longer, more complicated takes. In 1910, black-and-white movies were enhanced with two-color tinting.  Technicolor was chartered in 1921 and the first film in Technicolor’s Process 2 was released the following year. Synchronized sound technology started in 1927; silent movies ended in 1929. Then 1940 saw the advent of multi-channel sound; the screen image became much wider in the early 1950s with the innovation of CinemaScope; and special effects took a leap forward in the late 1950s and early 1960s.

New distribution markets have been the drivers for the past 40 years, beginning with the first multiplex cinemas in 1970, and the creation of HBO and cable television in 1972. Then, in 1976, VHS and Betamax videotape appeared, starting the trend towards in-home entertainment, which became widespread by 1980. The foreign markets exploded in 1990: films began making more money overseas than from the domestic market, and a new internationalism began to take hold in Studio-land. DVDs began to explode in 2000.

The most recent expansion was due to wide adoption of another new technology: streaming video services. Although Netflix began its streaming service in 2007, it really took off in 2012 when it went public and was able to grow exponentially. Since then, Netflix has grown from 27 million subscribers to more than 86 million today, and has a presence in more than 190 countries. Amazon Prime began streaming original content in 2013 and now has nearly 70 million subscribers.

I feel it is an open question if the hypothesis will continue to hold.  For the first time, it is hard to quantify exactly what the movie business is. When Netflix and Amazon finance or acquire feature films to exploit their value on their streaming services – not at the box office – and further, not reveal how many people are watching (which they don’t) there is no way to tell if movies are economic success or failures. As Michael Smith and Rahul Telang posit in their book Streaming, Sharing, Stealing, the power-center of the movie business has moved from companies that create content (studios) to companies that own their audiences (Netflix, Amazon, YouTube, iTunes). This shift is fundamental, unstoppable; we may need a new model to predict expansions and contractions.

On the other hand, the cycle may hold. For one thing, the U.S. dollar is at record-level strength against other currencies, which means that international revenue will be lower than projected – this alone could incite a contraction. Also, the content acquisition budgets for Netflix ($6 billion) and Amazon ($3 billion) are unsustainable and both companies will probably begin to ratchet back their spending in the next couple of years.

My conclusion? Let’s find out together. I’ll meet you back here at the beginning of 2018 to take the pulse of our business again and see where we are on the roller coaster.

Film Industry Cycle Infographic

Film Industry Cycle Infographic for 10 years

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Top image: Concept art for Captain America: Civil War, which earned over $1.1 billion in worldwide box office in 2016. Courtesy Marvel Entertainment/Walt Disney Studios.

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Sundance 2015 Infographic: Dollars and Distribution

$4.6 Billion Invested in Indies; Nearly All Festival Films Get Distribution

Congratulations Sundance filmmakers! You have a 4 in 5 chance of getting a distribution deal.

That’s one key finding from our data-crunching preparation for the 2015 Sundance Film Festival. As recently as 2010, getting distribution at Sundance was rare. In that year, as in years prior, only about 10 percent of the movies got deals. But then came the Great Digital Shift, with the explosion of Netflix, Hulu, Amazon Prime, iTunes and other opportunities for video on demand. We may now predict that more than 100 of the 124 feature films at Sundance this year will get some form of distribution opportunity.

Our key economic finding is equally staggering. We estimate that the amount of financial investment in all the feature-length films submitted to Sundance is $4.65 billion. To put that in perspective, the motion picture studios and Netflix each spend about $3 billion annually producing and acquiring content. The total investment in independent filmmaking significantly tops that number; once again we may call Indies the Eighth Studio.

SEE ANIMATED AND INTERACTIVE SUNDANCE 2015 INFOGRAPHIC (please allow a moment for it to load)

'Advantageous,' directed by Jennifer Phang, screens in the US Dramatic Competition. Photo courtesy Sundance Institute.

‘Advantageous,’ directed by Jennifer Phang, screens in the US Dramatic Competition. Photo courtesy Sundance Institute.

However, unlike the movie studios, which have the MPAA as a trade association, there is no such thing for independent film. No official organization compiles data on independent filmmaking. To address this need, last year we published our first Sundance infographic, and we continue our work with better data this year. Because Sundance is the premiere independent film festival in the world, we use information from Sundance as a proxy for quantifying indie movies overall.

Follow the Money

With the help of the Sundance Institute, we are now able to break out the number of dramatic (or narrative) features submitted each year, and the number of documentary features submitted each year. For the 2015 festival, there were 2,309 dramatic features submitted, and 1,796 documentary features submitted.

Then we went a step further and canvassed our colleagues in an effort to estimate the average budgets of these indie dramatic and documentary features. I spoke with independent producers (both domestic and international), sales agents, distributors, and the heads of the independent divisions of some of the largest talent agencies. I asked each of them to estimate the average dramatic and documentary feature budget, and I averaged their responses. The collective results? Estimated average budget for indie dramatic features: $1.7 million. Estimated average budget for documentary features: $400,000.

This means that the total estimated financial investment in features submitted to Sundance tops $4.65 billion — $3.93 billion invested in dramatic features, and $718 million in documentaries. Of course, all of those movies didn’t get in. For those accepted to screen at the festival, we estimate that $134.3 million was invested in dramatic features, and $18 million was invested in documentaries.

SEE LAST YEAR’S SUNDANCE INFOGRAPHIC AND ANALYSIS.

Distribution Dynamics

'How to Dance in Ohio,' directed by Alexandra Shiva, screens in the US Documentary Competition. Photo courtesy Sundance Institute.

‘How to Dance in Ohio,’ directed by Alexandra Shiva, screens in the US Documentary Competition. Photo courtesy Sundance Institute.

The vast majority of the films Sundance selected this year will get a distribution deal. Last year, 95 films got distribution, a number that has been rising steadily since 2011, which is why I can predict more than 100 will get distribution deals in 2015.

While Sundance Festival programmers make their selections based on their own artistic criteria and judgments, theoretically blind to the movie acquisition marketplace, inclusion in the festival is an initial stamp of approval for acquisitions executives. Financially, however, what does that really mean? In most cases, indie film financiers won’t get their money back. Only a handful of movies will get deals topping $1 million; last year’s highest sales price was a relatively modest $3.5 million. Getting distribution is easier today because of the digital explosion, but along with that has come a price implosion.

'Mistress America,' directed by Noah Baumbach, screens in the Premieres section. It was purchased pre-emptively by Fox Searchlight last week. Photo courtesy Sundance Institute.

‘Mistress America,’ directed by Noah Baumbach, screens in the Premieres section. It was purchased preemptively by Fox Searchlight last week. Photo courtesy Sundance Institute.

Yes, there were 95 Sundance movies that got distribution last year, but that was spread out across more than 50 distribution companies. Some you have heard of — IFC, Magnolia, Drafthouse, A24, Netflix, Lionsgate, Music Box, Roadside Attractions, The Weinstein Company, Sony Pictures Classics, Fox Searchlight, Focus — and these companies will be active again this year. But many of the companies that distributed last year’s Sundance films barely appear on the radar, and most only distribute a few films a year in microscopically modest ways. As it was last year, most of the distribution deals in 2015 will be digital-only, and most will be for extremely low numbers: $25,000, $10,000, and in some cases zero — literally zero dollars, with the promise of financial participation based on sales.

Despite the robust number of films made, and dollars invested in them, being an indie filmmaker clearly is not a career choice. Very few people pay the rent this way, and even filmmakers whose movies are well-received often have to wait years before being able to get their next movie made. For the indie film investor, it is a precipitously risky business proposition, given the small chance of recouping an investment unless you can control marketing and distribution yourself, in effect behaving like a mini-studio.

It Takes a City

Using a figure of 100 film crew working on an average indie production — from writers, to actors, to costumers, to post-production — we calculated that more than 410,000 people worked on all of the films submitted to Sundance this year, a number that rivals the population of Atlanta. At least 45,000 people will attend the festival this year, six times the population of Park City, and, if last year is a guide, the festival will bring more than $86 million in economic impact to the state of Utah.

SEE ANIMATED AND INTERACTIVE SUNDANCE 2015 INFOGRAPHIC (please allow a moment for it to load)

Sundance 2015 Infographic Produced by Entertainment Media Partners for Cultural Weekly. Sponsored by 'Inside Track for Independent Filmmakers,' available now.

Sundance 2015 Infographic Produced by Entertainment Media Partners for Cultural Weekly.
Sponsored by ‘Inside Track for Independent Filmmakers,’ available now.

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Infographic produced by Entertainment Media Partners for Cultural Weekly. Tod Hardin, special features editor; Ahmad Zaeem, designer.

InfoGraphic: Cannes Film Festival by the Numbers

By Adam Leipzig, Entertainment Media Partners, and Jeremy Kay, Screen International

The red carpet and rosé, movies and movie stars, buying and selling, prix and paparazzi. The world is watching. How does the Cannes Film Festival showcase the worldwide business of film?

To find out, Entertainment Media Partners, Cultural Weekly’s publisher, and Screen International have collaborated to crunch the data and produce the 2014 Cannes by the Numbers infographic.

Here are our findings:

Is Art its Own Reward?

Films in Festival competition don’t tend to make a lot of money. Only two in-competition films in the past five years have grossed more than $100 million worldwide. Nor do they win many Academy Awards; in the past five years, in-competition films have only taken home eight Oscars, out of 47 nominations.

Why? The Cannes Film Festival exemplifies the dual drivers of the international film industry. On the one hand, it is the most celebrated venue for premieres, especially those by notable directors. Cannes celebrates the art of filmmaking, and its 2014 jury is comprised of international art house luminaries: jury president Jane Campion (New Zealand) is joined by Willem Dafoe (US), Nicolas Winding Refn (Denmark), Jia Zhangke (China) Sofia Coppola (US) Gael García Bernal (Mexico), Leila Hatami (Iran, star of Oscar-winner A Separation), Jeon Do-yeon (South Korea), and Carole Bouquet (France).

On the other hand, the Marché du Film, its film market, which runs parallel to the festival, is the year’s most important movie buying-and-selling bazaar. While the number of buyers, producers, sales agents, and countries represented has been rising steadily over the past three years, the number of films screening remain roughly even. This year, 560 sales agents and 5,100 companies will hold court in suites, tents and bars. 110 countries will be represented, and there will be 1,450 movies screened in the market—a number that towers over the 19 films in Festival competition.

International Talent, But Not Always Distribution

Cannes faithfully represents the international composition of the movie industry, but the films don’t always travel to screens worldwide.

Talent. For the films in competition in the past five years, international lead actors, producers and directors have outpaced US citizens in the same categories by ratios as high as 19:1. However, US representation is trending upward. In 2013, US lead actors, producers and directors comprised one-quarter of the talent pool for in-competition films. And that may be good for their commercial success: The biggest earners at the global box office (including the international box office portion) tend to be those that contain a US element, be it a production company, director or star.

Distribution. What happens to those films after the festival is another story. Of the 101 films in competition between 2009-2013, 78% were distributed in the United States, 50% were distributed in Brazil, but only 4% of them gained distribution in China.

Phantom India. India is a movie powerhouse, with immense box office grosses, admissions and screen count. Yet Bollywood movies have not achieved particular commercial success internationally. Among all the major film territories, only India has not had a film represented in competition at Cannes over the past five years.
Power and powerlessness

No majors. US studios have not acquired a single Cannes competition film in the last five years. At times, a US studio will bring a film to Cannes, as Paramount did with Nebraska.
Art house. IFC Films is the most voracious buyer of Cannes films for the US market, as it feeds its VOD (video on demand) pipeline. The Weinstein Company and Sony Classics are also major US buyers.

Captain America. In-competition films that generate the biggest revenues tend to have a US component, such as a US distributor or US stars. French films also fare well. There are a few notable exceptions: Japan’s Like Father, Like Son, Spain’s The Skin I Live In, South Korea’sThe Housemaid, Italy’s We Have a Pope and The Great Beauty, and Scandinavia’s Melancholiaand The Hunt.

Trends and predictions

One of the benefits of assembling data is that it gives us the opportunity to spot trends and, throwing caution to the winds, predict the future. Here’s what we foresee:

A strong America. Even as North America’s box office becomes a smaller percentage of the global total, US stars, directors and studios will continue to produce the most commercially successful films worldwide, and, in fact, their significance will increase.

Mixed results for sales agents. Because the movie business has become more global and transactional, additional sales agents will come into the ranks. Short term, this may spur greater opportunities and competition. Long term, it will make existing sales agents fight harder for a smaller slice of the pie. We expect to see consolidation and a correction in the number of sales agents beginning in 2016.

China will become more international. In order to demonstrate its membership in the international filmmaking community, beginning this year we’ll see an uptick in the number of in-competition films available to Chinese audiences.

Time will tell if these predictions prove correct. Until then, the Croisette awaits. Enjoy yourrosé.

Cannes Film Festival by the Numbers: Infographic, 2014

View the animated infographic at CannesbytheNumbers.com

Please include attribution to http://www.culturalweekly.com/ with this graphic.

Cannes Film festival 2014 Infographic

 

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