By Anne Thompson | Thompson on Hollywood June 16, 2009 at 7:19AM
The economy is a ruthless, Darwinian Master. Only the strong shall survive, and that applies to the mighty studios as well as everyone else. Sure, the theatrical market is holding up pretty well. But for every Fast & Furious, Star Trek and The Hangover there's a cynically bloated flop like Land of the Lost (for which Universal pulled print ads on its second weekend) or Imagine That. (The Wrap was inspired to do a quickie Stars Who Should Worry chart including Will Ferrell and Eddie Murphy, which probably got the site into more trouble than it was worth.)
In any case, healthy boxoffice doesn't bail Hollywood out of the predicament each studio owner is in. DVDs, once a beautiful way for the studios to reap tidy profits, are inexorably declining, most dramatically among the blockbusters that used to deliver huge returns. For example, Pixar's 2004 The Incredibles earned $260 million at the domestic boxoffice and sold 18 million DVDs. By comparison, in 2008, DreamWorks' Kung Fu Panda earned $215 million domestically, but sold 11 million DVDs. That's a sizable drop. Sales are down across the board, including classic rereleases, and less precipitously, specialty titles.
The studios can recoup those losses in three ways:
Make movies cheaper.
Make talent their partner. Push back the gross to a point where the studio can make some money.
Cut marketing costs. As the studios produce fewer movies going forward, one bonus will be less clutter and noise for marketing departments to cut through.
Studios answer to beleaguered corporate parents fighting their own battles. Paramount owner Viacom--which one report suggests is open to a Paramount merger when there's no evidence that anyone has interest in buying anybody else--has volatile Sumner Redstone at the helm as ad rates plummet. Each of the six media behemoths is rocked to some degree by the horrid ad climate: 30 to 70 % of their incomes come from ads. News Corp and Time Warner are coping with reeling publishing empires. NBC/Universal parent GE is dealing with its troubled financing division. Disney's Robert Iger is worrying about ABC and theme park attendance. And Sony's hardware divisions are getting slammed.
But at this point in history one studio won't buy another studio because it's impossible to put a value on their assets. Studios generate new hits as locomotives for their libraries. That's the studio business. But now it's tough to place value on the library because nobody knows whether the copyrights will live forever, or be worth nothing in a few years because of the Internet. (The music business has gone from a combined value of $30 billion to $8 billion because the music catalogs are worth next to nothing, due to free music downloads.)
Four weaker companies are more likely to seek new alliances in order to survive: indie Lionsgate, having over-leveraged itself, is under attack by financial agitator Carl Icahn; fledgling Overture's pitiless owner John Malone could easily withdraw support if the company doesn't deliver some Summit-sized grosses; and both MGM and The Weinstein Co. are desperately seeking relief from their crushing debt burdens. Trouble is, while a deep-pocketed player could buy enough debt to shut down a company and buy its library, who's to say what it's worth today? Goldman Sachs is desperately trying to recapitalize MGM before its $4 billion comes due next year. Ordinarily they'd find some action, but at this rate they may have to sell the library at a discount to a tech player with a digital future.
Some folks believe the entertainment economy will bounce back. Others think the Internet has killed the golden goose. (Here's Wired's Chris Anderson on the free economy.) Some studios want to pursue a Hulu model, others prefer following iTunes or Netflix. But unless the consumer has an easy way to buy cheap movies, they'll download them for nothing.