1997 was an interesting year in the film industry, which saw a record box office and attendance numbers challenged by diminishing profitability from a number of factors, including increased competition and the continuing scourge of box office burn-off. The year also saw a transition in box office influence from the Baby Boomers to their offspring, the growing teenage demographic. This report will highlight some of the more notable issues and achievements of Hollywood in the past year.
In terms of revenues, the top ten worldwide box office draws of films released in 1997 were:
1. The Lost World (Universal) |
$600,000,000 |
2. Men in Black (Sony) |
$550,000,000 |
3. Liar Liar (Universal) |
$300,000,000 |
4. Air Force One (Sony) |
$280,000,000 |
5. My Best Friend's Wedding (Sony) |
$240,000,000 |
6. The Fifth Element (Sony) |
$230,000,000 |
7. Batman & Robin (Warner Bros.) |
$230,000,000 |
8. Bean (Gramercy) |
$215,000,000 |
9. Face/Off (Paramount) |
$210,000,000 |
10. Con Air (Paramount) |
$210,000,000 |
1997 was a buoyant year for box office receipts, with a total take of $6.2 billion, which exceeded the previous record of $5.76 billion, set in 1996. And unlike previous years, this increase in the box office was coupled with an increase in total admissions, up to 1.3 billion, breaking the trend of eroding attendance that saw growth of box office revenues being derived purely from ticket price increases in the past few years.
The 7.5% growth in the box office over the previous year has been attributed to many factors. First, this year saw the greatest number of wide releases in the past three years (in 1997, 165 pictures occupied 4,000-5,000 screens on the opening weekend, up 4% from the prior year), which boosted overall average per picture performance to $35 million, which was up 9.4% over the prior year. This increase in the number of wide releases resulted from a studio-driven market-expansion strategy that saw an increase in the number of 'tentpole' productions (the trendy word for 'blockbuster'), which lured audiences into the theatres more frequently throughout the year. While this strategy was successful in increasing attendance during the traditionally soft periods of spring and early fall (which saw a slew of successful pics such as the "Star Wars" re-issue, "Liar Liar", "Kiss the Girls", "In & Out", "I Know What You Did Last Summer", and "The Peacemaker"), this 'bigger is better' philosophy also resulted in dismal returns during the sequel-heavy early summer and late fall periods. Finally, the box office growth has also been attributed to a gradual shift in the moviegoing audience back to teens and young adults, the largest movie-consuming demographic, and this trend is expected to continue over the next three years.
The big winner in this record-breaking year was Sony, who earned a top-spot market share of 21.5%. Its staggering total domestic take of $1.25 billion, a stunning increase in excess of 100% over the prior year, was bolstered by having three of the four top-grossing summer releases and a string of strong pictures with an average domestic box take of $50 million each, including "Jerry Maguire", "Anaconda", "The Fifth Element", "Air Force One", "My Best Friend's Wedding", "Men in Black", and "I Know What You Did Last Summer".
In the number two position was Buena Vista, with a market share of 19% and domestic box office of $847 million, despite the disappointing performance of "Hercules" (the $91 million box office was nowhere close to the record $300+ million take of "The Lion King"). However, despite coming in second, the House of the Mouse may come off with better profitability than Sony with a portfolio of low-cost film properties that included successful low-budget fare ("Nothing to Lose", "Air Bud"), the sleeper hit of the summer ("George of the Jungle"), and overseas distribution revenues for two event pictures that were financed by other studios ("Face/Off" and "Air Force One"). The latter contributed to the achievement of the largest overseas receipts by any of the majors: $1.3 billion.
However, the king of profitability in 1997 would probably be Universal Pictures. Though it ended up in sixth place with market share of 10.3%, it scared up a domestic box office of $599 million on a small slate of only 12 films, including the year's number one top-grosser, "The Lost World", in addition to the success of "Liar Liar" and "Dante's Peak" in the first half of the year.
1997 also saw increased business for Hollywood in overseas markets, beating the previous year's record of $5.5 billion in overseas box office. Over 20 films made in excess of $100 million in overseas receipts, and for the first time in history, three major studios made in excess of $1 billion in overseas revenue. The growth in overseas business, which encompasses 5 billion people in 67 separate markets, has been enormous over the last two decades-- in 1980, the North American box office contributed 45% of total worldwide revenue for major releases, and now the figure is down to 23%.
Traditionally, international successes have been characterized by the American action genre with recognizable stars. However, this year's crop of overseas hits shows some shifts from this paradigm. Four films of foreign origin were strong in international markets, including "Bean" & "The Full Monty" from the United Kingdom, "The Fifth Element" from France, and the animated "Princess Mononoke" from Japan. There has also been a shift towards science fiction and comedy genres, evidenced by "The Lost World", "Men in Black", "The Fifth Element", "Bean", "The Full Monty", and "My Best Friend's Wedding".
This growth in the overseas box office has been attributed to the continuing development of international film markets, with an emphasis on improved marketing and the expansion of the exhibition infrastructure. One-screen outlets are gradually being replaced by multiplexes in major urban centers, balancing the supply and demand, thereby allowing films to play longer without being 'bumped' to make room for the next one-- a problem that currently plagues the Canadian exhibition market.
However, this international expansion was tempered by several factors. Whereas the growth in the revenues has been strong, there has also been an increase in the costs of doing business overseas, with annual increases in the range of 30% for foreign print and media costs in the past three years. The growth of the indigenous film industries has also been strong-- though the box offices in all major European markets were dominated by "Men in Black" and "The Lost World", local productions took an increasing amount of market share away from the majors and now take in 30-50% of total box office revenues. In fact, some indigenous films have even taken top spots in the box office of their respective countries, beating Hollywood at their own game, particularly in the United Kingdom, France, Italy, and Japan.
Hollywood was also not immune to the stock market crisis of late October, which saw currency devaluations in Asian markets. Though revenues from these markets still only account for a small proportion of the overseas box office, it was still a disappointment for the majors since Asia had long been touted as the next arena for growth for the entire entertainment industry. Currency devaluations, which went up to 50% in some regions, cut into box office revenues, wiping out whatever gains were made in terms of increased attendance. This also resulted in the renegotiation of several film rights deals and put a damper on the sales of film rights in the final quarter of '97.
The overseas outlook for 1998 is also gloomy, with the double whammy of the Winter Olympics and the World Cup soccer tourney luring audiences away from other entertainment venues, including the movie theater. The greatest concern is for the World Cup, to be held in Paris next summer, right in the middle of the prime movie-going season. With an average of 600 million television viewers worldwide per game, the majority of the games being played between 4pm and 11pm French time, and the tournament eating up every weekend between June 10th and July 12th, the majors are expecting a very weak box office for 1998 in the traditionally bullish European film markets. Furthermore, the effects of the World Cup may also be felt in North America, given the large immigrant population and the cross-gender appeal of soccer.
To the dismay of exhibitors and the studios, the continuing trend of fast film burnoff created dismal returns on many tentpole pictures, making this perhaps the most important issue of 1997. Over the past decade, the average playing life for films has shrunk, with virtually all demand for a film being met within the first few weeks of its release (in 1990, opening week grosses accounted for 24% of total theatrical grosses, and now it is up to 37%-- which is also a quick gauge used by studio execs to estimate final box office).
Blame for this phenomenon has been assigned to a glut of screens in the marketplace, the result of a building boom by the major exhibition chains, such as AMC Entertainment, Cineplex Odeon Corporation, and the United Artists Theatre Group. This excess of exhibition outlets means that audiences don't have to wait for the long line-ups to subside before seeing the latest releases. This is further compounded by the increasing practice of wide release patterns (a film is opened in 4,000 to 5,000 screens at once-- "The Lost World" occupied 5,500 screens on its opening weekend), which has resulted in the number of films exceeding 2,000 simultaneous playdates tripling between 1993 and 1997. Finally, there was a deluge of films this year, with a larger-than-average number of major releases each week during the summer and the fall, leading to a plethora of choice for audiences. This was glaringly apparent in the traditionally quiet fall season, which saw an average of four films released each week, with up to six on the more crowded weeks. These high-concept and high-priced pics, some of them refugees from the crowded summer market, squeezed out the usual arthouse and independent fare that have traditionally owned the market at this time of year, and hence there was no repeat of autumn 1996, which saw many critically-acclaimed independent films commanding the box office: "The English Patient", "Secrets & Lies", and "Shine".
So who wins in a situation like this? First, let us examine how the average $8.50 movie ticket price is broken down by the various players in the film industry business system:
Producer |
Distributor |
Exhibitor |
Consumer |
$2.13 |
$5.53 |
$0.85 |
$8.50 |
The distributors take up approximately 65% of box office revenues. Why is that? In other industries, distributors are often the middlemen between the manufacturer and the retailer, with functions relegated to warehousing and transportation, and occasionally with a selling function attached. However, in the film business, the distributor is essentially the marketing activity for the entire business system. In addition to formulating and implementing promotional and advertising strategies, the distributor will liaise with the media, produce all necessary promotional materials, provide advice on all aspects of production to enhance the marketability of the film, and provide production financing through advances and the buying of distribution rights. Furthermore, the distributors are concentrated, with only six of them distributing 90% of the film properties on the market (in contrast, theatrical exhibitors are more abundant and also fragmented geographically). Not surprisingly, distribution agreements are skewed in favor of the distributor, in recognition of this marketing activity and the supplier power they possess.
Distribution deals, which are based on published guidelines that have changed little since 1972, usually guarantee a 'floor' of 70% of the box office receipts going to the distributor in the first few weeks, which is gradually scaled down as the weeks drag on. The most common deal is the 90/10, where the distributor will get 90% of the gross receipts after the exhibitor overhead has been subtracted. And so, the only winners from fast-pic burnoff are the distributors, who take the lion's share of the box office receipts in the first few weeks of opening. However, even the distributors are not completely immune from the effects of burnoff: because of the glut of tentpole pictures, they are finding their profit margins being eroded due to the higher marketing and production costs of these types of films.
The biggest losers are the exhibitors, who must deal with the increased film rental costs caused by burnoff. The exhibitors are increasingly finding themselves in the red, with this year's losses exceeding those of last year. This comes at a most inopportune time, when most exhibitors are trying to pay off the huge debts incurred from recent expansion and renovation programs. Already, the tell-tale signs of a maturing exhibition industry have been seen, with consolidation, closures, and integration occurring, the most prominent being the merger between Sony's own Loews Theatres Exhibition Group and Cineplex Odeon Corp., creating the second largest North American exhibitor with 2,600 screens and a more manageable debt load. Other initiatives to combat this problem include exhibitors lobbying to renegotiate distribution deals, which the distributors have so far been reluctant to respond to. Other exhibitors have resorted to a niching strategy to avoid the burnoff associated with the wide releases: specialized arthouse exhibitors Landmark and Reading are expanding their specialized chains, which cater to a distinct audience with longer-running alternative fare.
The studios, already coping with increased competition, mushrooming production costs, and increasing media costs, are also concerned with this problem, as they must make their return on investment in a shorter time period. Some studios have begun to pass on expensive productions, such as the recent dropping of the Harrison Ford vehicle "The Age of Aquarius" or "I Am Legend" with Arnold Schwarzenneger. Measures implemented by the studios aimed at increasing short-term cash flow include the selling of overseas rights, altered release patterns (such as the modified wide-release, used by "Gattaca", in which a film opens with 1,000-2,000 playdates in large urban centers and then is gradually rolled-out to other markets to allow the inexpensive word-of-mouth promotion to sell the film), more regional versus national television ad buys, and balancing the cost of advertising with the cost of prints to maximize box office profitability.
Long-term strategies for the studios to counteract this problem include a strategy that has been refined by Canada's own Alliance Releasing: an emphasis on managing a portfolio of film properties. The profitability of film properties follows the tried-and-true 80/20 rule, where 20% of the films will produce 80% of the revenues, which means a portfolio of sufficient size and diversity is needed to ensure viability. Many of the studios are returning to this mindset, balancing out the pricey tentpole productions with more low-budget actioners, such as the upcoming "Firestorm", and niche films, such as "The Full Monty", "Soul Food", "Austin Powers", and "I Know What You Did Last Summer", as a hedge against risk. Another advantage of the renewed focus on niche pics is that it allows the studios to target specific demographics of moviegoers, such as age, race, and sex, and this segmentation keeps costs down with more focused ad buys and the need for fewer prints. The previous tried-and-true hedge against risk, sequelitis, failed abysmally in the first half of summer '97, with a weak box office dominated by sequels ("The Lost World", "Batman & Robin", "Speed 2: Cruise Control"). It wasn't until the second half that things picked up with more original fare ("George of the Jungle", "Men in Black", "Air Force One").
Hollywood was caught between two demographic trends in 1997: the waning influence of the Baby Boomers, and the increased spending by their children, the burgeoning teenage demographic. The Baby Boomers have been contributing to the growth of the upscale arthouse type film in the past three to four years, or as Tony Cianciotta, former Vice President of Alliance Releasing said in an interview last year, "whereby five years ago, a film like 'Howards End' would have grossed $2 million in the U.S., today it can gross much, much more". This demographic, with empty nests and more disposable income, have rediscovered the moviegoing experience (the age 40 and over moviegoing audience increased from 15% in 1986 to 36% in 1994), are more amenable to films which are not typical studio fare, and are more responsive to critical praise. The apex of this trend was seen in last year's "Year of the Independents". Though their influence is still seen, with many films still catering to them (is it a coincidence that the cross-demographic-appeal "Air Force One" had a Baby Boomer hero, or that there were so many retro-pics, such as "Austin Powers", "Boogie Nights", etc.?), their bankability has seen a downturn, with the less-than-stellar success of Boomer-friendly fare such as "L.A. Confidential", "Amistad", and "The Ice Storm".
On the other hand, the children of the Baby Boomers, now in their teenage years, have begun to demonstrate their enormous spending power. Currently, there are 30 million North Americans in the 12-17 year old age group and their numbers are growing, expected to swell to 55 million by the year 2005. You can already see their influence in television (the explosion of those live-action teen high school dramas, such as "Saved By the Bell", that slowly supplanted cartoon fare on Saturday mornings since 1992), in radio (the rise in popularity of urban dance radio) and in printed media.. Their influence was most apparent in the fall film market as seen in the domination of two low-budget horror pictures, both targeted to this demographic: "I Know What You Did Last Summer" and "Scream 2". "I Know What You Did Last Summer" had a cumulative domestic box office of $69 million as of December 14th, outpacing the number two hit of the fall season, "In & Out" by $7 million. "Scream 2" broke the opening weekend record for any film opening in December with a $39 million take and is expected to exceed the $103 million box office of its predecessor. Coupled with the fact that the teenage/young adult years are the prime moviegoing years and have fewer constraints on their time and disposable income, Hollywood has been taking notice. 1998 will see more films targeted to this audience, with the release of teenage fare such as "Spice World", "School Slut", "The Party", and two prequels to "From Dusk Till Dawn".
1998 should also prove to be an interesting year, as the studios and exhibitors continue to grapple with the challenges of box office burnoff with the new strategies that they have developed. The film market will probably be a repeat of 1997, with crowded release schedules being the norm, exacerbated by some wide releases that were held back in 1997, only to be dumped into 1998 (such as the retitled "Hard Rain" and "The Mask of Zorro"). However, with the Olympic Games and the World Cup luring audiences away from the movies, and the continued monetary woes in Asian markets, it is questionable whether the box office and attendance records will be broken again. Though the growing teenage demographic may prove rewarding, the ability of the studios to lure teenage audiences to theaters has been mixed in the past, and it remains to be seen whether or not this trend will continue. Exhibitors will most likely continue to consolidate, creating larger chains with the fiscal critical mass necessary to compete effectively, and leveling the playing field with the concentrated distributors. And despite the paper-thin margins that have become the norm, exhibitors will be continuing their expansion and renovation programs, replacing the 'old-style' theatres with more upscale outlets with stadium seating, digital sound, and complementary entertainment venues (sit-down cafes, bars, franchise eateries), in a bid to secure greater 'share of entertainment spending' with a 'one-stop shopping' entertainment package under one roof.
But if there is one that can be said about the film industry in 1998, it is that it will probably be full of surprises.