In Denial, Studios Continue Lavish Ways

Minutes before the summer box-office games kicked off this weekend with the blow-away $41-million debut of the Warner Bros.-Universal Pictures co-production “Twister,” you could almost hear the deafening sound of teeth gnashing in studio executive suites across Hollywood.

Since there are so many hundreds of millions of dollars riding on such movies as “Twister,” “Eraser,” “Independence Day,” “Mission: Impossible” and “The Rock,” it’s no wonder studio executives are sweating.

These are nerve-racking times all right. Perhaps more so now than ever because of the generally poor profitability of the movie business right now.

For sure, “Twister” has the makings of a major blockbuster. And, likely, there will be others this summer. But, what about the tens of dozens of costly films that won’t be so lucky?

Despite how hot this summer’s grosses turn out to be--if that’s the case--what matters, as always, is not what the box office takes in but what the studios can count as true profitability--or lack thereof.

And, the truth is, the movie business is currently in the dumper.

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The stakes are getting higher and profit margins--said to be between 3% and 5% at best estimates--are sinking lower. The economics of the business clearly points to so many more failures than successes, it’s scary.

“I keep a list of the dead on my desk to remind me,” said one top industry executive, referring to the dozens of movies that have crashed and burned at the box office since the beginning of the year. Only one film, MGM/UA’s “Birdcage” has grossed more than $100 million.

“All the bad pictures are eroding a limited margin to begin with,” another executive said.

No studio has been immune to the long lists of misses, which include Sony’s “Sunset Park,” Paramount Pictures’ “Kids in the Hall: Brain Candy,” Walt Disney Co.’s “Last Dance,” MGM/UA’s “It’s My Party,” Universal’s “Ed” and Warner Bros.’ “Big Bully.”

Ask any movie executive and he or she will tell you that the biggest issues facing the industry today are the prohibitive costs of making and marketing their films and the struggle to keep them alive in an overcrowded, cannibalistic marketplace.

Yet, few seem to be coming to grips with those realities, at least not enough to do much about it. It’s as if the industry is somehow suspended in a state of collective denial, even as companies begin to see their bottom lines affected.

Turner Broadcasting System just took a $60-million write-off in its first quarter to account for such Castle Rock flops as “City Hall,” “Othello” and “Midwinter’s Tale.”

Disney saw its net income decline and will also take a write-down on some of its film production costs--an acknowledgment that those releases will never recoup costs.

Earlier this month, Viacom’s first-quarter earnings plummeted 61%, in part because of declining results at its entertainment division, which includes Paramount Pictures.

Cinergi Pictures Entertainment took big hits last month on its big-budget movies “Nixon,” “Judge Dredd” and “The Scarlet Letter.”

Consequently, Cinergi head Andy Vajna said the company is rethinking its current filmmaking strategy of making expensive event movies.

Ted Turner avowed: “Going forward, we will be more closely monitoring and managing the costs associated with this area of the business.”

One must wonder if there’s not just a whole lot of lip service going on.

Aside from the few cases where studios are co-producing some of the bigger ticketed movies, where is there any evidence of that once-popular catch phrase “reining in costs” when the Motion Picture Assn. of America tells us that the average cost of making a studio movie rose 6% last year to $36.4 million and marketing costs leaped 10% to $17.7 million? That means the average cost to make and market a movie has rocketed to more than $54 million.

And, as everyone well knows, there are many current and forthcoming films that cost twice that much and more, including “Eraser,” “Devil’s Own” and “Starship Troopers.” As he normally does when he releases figures at his annual state-of-the-industry address, MPAA President Jack Valenti warned that rising movie costs are a “huge, hairy beast slouching toward our future.”

Costs of making movies have only dropped twice in the last 15 years. Once, in 1991, it dipped almost imperceptibly to $26.1 million from $26.8 million the year before. In 1988, it declined to $18 million from $20 million the year before. But that’s it.

Whereas Valenti--always the eternal optimist--wants to believe that someday production costs will again descend and that foreign revenue is helping offset domestic losses, more realistically, he said, “I’ve clanged the alarm for years but people get caught up in the ferocity of competition and they don’t want to be left at the gate.”

Executives are practiced at the art of griping about costs, particularly about what the other guy is spending, and about how the overproduction of movies is hurting everybody.

Disney, for instance, has come under fire from rivals for spending more on marketing than ever before. “We’re all guilty,” admits Disney Studios Chairman Joe Roth. “We’re all trying to find openings for our films, but I’m not spending any more than anyone else.”

True enough.

MGM/UA Chairman Frank Mancuso also concedes, “We’re paying the prices of an overcrowded market.”

Sony is often criticized by its competitors for overspending on talent, sometimes even paying stars more than their going fees.

As Valenti points out, what seems to be perpetuating the high costs is fear. A prominent talent agent said he frequently makes deals with studio executives “predicated on fear that somebody else will pay it if they don’t.”

Roth defends the studios’ position, noting that like in the sports business, where owners are criticized for how much they pay players, “Everyone, including me, justifies having to have a superstar.”

Peter Chernin, chairman of Twentieth Century Fox, points out: “As long as we keep producing too many movies, there will continue to be cost escalations.”

And MGM/UA’s Mancuso concurs: “The supply-and-demand curve is out of whack.” Too much is being made and that has driven up the cost of production.”

Mancuso believes overproduction was precipitated by a miscalculation by Hollywood. “We were producing movies based on the growing demand for product on a worldwide basis, but many of the additional revenue streams like multichannel pay-per-view and emerging markets like China and Russia have not yet realized their potential.”

After years of wanting to bulk up on movies to feed their libraries, is Hollywood now willing to make fewer movies? Again, everyone claims he or she already is. And some may be. But, according to Exhibitor Relations Co. President John Krier, who tracks the box office, “All the studios are going whole hog next year,” when there are a projected 169 major releases planned, compared with 149 this year.

Even though it’s illegal to collude, the studios should make the pact with each other. “I will if you will.” Maybe then something will give.

Exhibitor Relations Co. provided the box-office and release figures used in this story.