Movie Revenue Model is Breaking

Sometimes the decline of a business model is historically inevitable even before the peak of revenues for the model.

Voice revenues for the U.S. telecom business peaked, historically, about 2000. Skype was launched in 2003. The Telecommunications Act of 1996, the biggest change in communications regulation in 60 years, occurred just before the Internet explosion.

DVD purchases and rentals likewise hit an inflection point about 2000. By about 2010, even Netflix was predicting the decline of the model.

Rentals from Redbox kiosks likewise seem to have passed an inflection point.

Some think the movie business is headed for a huge change as well, according to Adam Leipzig  Adam Leipzig, CEO of Entertainment Media Partners.

“Studios are incredibly profitable now, and studios will continue to be highly profitable for the next three to four years, largely because they have reduced the number of movies they make, and also because they are being much more conservative in the way they manage their finances,” said Leipzig. “In the future though, five or six years down the road, this cycle will come to an end.”

“The studio profitability will go down,” he argues. And content production will change. “I’d argue that the best writing and the best character development is generally happening on Web or TV series. I would include shows from Netflix, as well as cable networks.”

There is a reason. “Studio movies are big economic plays; most summer movies cost $200 million to make, and another $200 million to market,” says Leipzig.

So there is a tendency to “play it safe.” That tends to mean studios want franchises, and that means sequels. The value of a franchise is that it is easier to market. People already know what to expect from a particular movie that is a franchise.

Filmmaker Steven Spielberg says it's becoming harder and harder for even brand-name filmmakers to get their projects into movie theaters.

“The business model within film is broken,” says Amir Malin of Qualia Capital, a private-equity firm.

Between 2007 and 2011, pre-tax profits of the five studios controlled by large media conglomerates (Disney, Universal, Paramount, Twentieth Century Fox and Warner Bros) fell by around 40 percent, says Benjamin Swinburne of Morgan Stanley. 

Swinburne predicts the studios account for less than 10 percent of their parent companies’ profits today, and by 2020 their share will decline to only around five percent.

Some argue consumers are shifting towards in-home consumption, and away from out of home consumption. 

That is true, but even in-home consumption spending, in the U.S. market is flat, and down from a 2006 peak.

One might argue those trends augur well for independent producers and new types of outlets. One might also argue that the worsening economics of traditional studio-based movie making will shift attention and spending towards new methods.

That should favor outlets such as Netflix, at least some TV networks and independent producers. If these observers are correct, content innovation already is shifting away from the major studies and towards television-based networks and producers.