Top 10 Film Industry Stories of 2010: #7
Summer Bombs Pervade
By David Mumpower
January 27, 2011

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There are two periods on the box office calendar that matter more than all of the rest. One of the two is the end of December holiday phase when consumers have more cumulative free time than at any other point during the year. The other is the summer box office period that has evolved from being a dumping ground prior to Jaws to becoming an entity that starts in early May (or even late April) and doesn’t end until the second week of September. 40% of the industry’s overall box office revenue is ordinarily accrued during this time frame. Summer is not quite everything in the movie industry, but its overall importance is readily apparent.

The summer of 2010 is perceived to be a triumph or at the very least a win for studios and exhibitors. Ostensibly, revenue was up 2% from 2009; overall earnings for this period are around $4.35 billion. Alas, longtime readers of this site know that this is a parlor trick of sorts. The primary reason movie ticket revenue maintains consistency on an annual basis is that ticket prices are constantly on the rise. At the start of the 2000s, the average movie ticket cost $5.39. At the end of 2009, the average price was stated to be $7.50, and even that total was skewing low relative to our common sense. Due to the almost instant spike in ticket prices from IMAX and 3D movie goers, the cost of a single movie escalated dramatically over the past 18 months.

Consider that from 2003 to 2007, the average ticket price rose from $6.03 to $6.88, an increase of 85 cents over a five-year period or roughly 17 cents annually. At the end of the first quarter of 2010, The National Organization of Theatre Owners confirmed that ticket cost averaged $7.95, an increase of $1.07 per ticket in just over two years. Isolating this to only a 15 month period, from the start of 2009 until the third month of 2010, the cost of attendance to a movie increased from $7.18 to $7.95. In 15 months, the industry experienced an average ticket cost increase of 77 cents, one that almost duplicated the total increase from 2003 through 2007. Clearly, stating that movie revenue was up in the summer of 2010 is quite misleading due to the historic spike in the cost of average movie attendance.

This behavior is nothing new, though. One of the dirty little secrets of the movie industry is that customer attendance is falling at a near constant rate. The reasons for this are myriad, but if you have recently watched a movie on Netflix or rented from Redbox, you have a basic understanding of the why of it. From a financial perspective, what matters is that summer movie attendance peaked in 2004 with 642 million tickets sold. In 2010, that number was an almost sickening 552 million (i.e. 90 million less than the 2004 peak), the lowest volume since 1997 (!). Given that declining movie going attendance is systemic, we should not be shocked by these totals. Still, this knowledge does allow us to place the ticket sales information into perspective.

The average domestic movie ticket in 2004 cost $6.21; using the $7.95 average instead, 2004 would have accrued box office revenue of $5.10 billion, a full $750 million better than 2010. Conversely, if we multiply the 552 million of attendance by the 2004 average ticket price of $6.21, revenue plummets to $3.43 billion. Overall, we are talking about a billion dollars less in revenue for the industry if we factor out the recent phenomenon of dramatic ticket price inflation. This is the real summer of 2010 box office performance. I refuse to be alarmist and say that the industry is dying. That’s simply not true. Instead, it is evolving in a way that no one could have anticipated at the start of the 2000s. Still, these numbers give credence to the fact that the summer of 2010 was an abject disaster in terms of movie attendance.

Why did this happen? Do you know the phrase, “It’s the economy, stupid.”? The movie equivalent of this is, “It’s the movies, stupid.” Many analysts had concerns about the overall depth and quality of the summer releases. And even some of the ones that had potential on paper proved to be wildly disappointing. There is a short list of high profile summer releases that matched/exceeded expectations. Those include Iron Man 2, Toy Story 3, The Twilight Saga: Eclipse, Shrek Forever After, The Expendables and Grown Ups. A handful of others were pleasant surprises. That list is headed by Inception, The Karate Kid and Despicable Me. Every other major title from the summer has a performance that could be called into question, especially in terms of domestic performance.

Robin Hood was the first summer title to go down in flames. The mid-May release was afforded a staggering budget of $210 million, with insiders claiming that stated cost was significantly lower than the actual cost. The Russell Crowe movie needed a huge opening weekend to justify its expensive bottom line, but its $36.1 million debut was only good enough for second place, well behind returning number one film Iron Man 2. Remarkably, Robin Hood failed to demonstrate quality legs, winding up with a domestic total of $105.5 million. This tally represents exactly half of the stated production budget. Even if we consider its current global take of $322.3 million, Robin Hood still has not earned enough revenue to match its costs. Domestic earnings must be shared with exhibitors, while overseas earnings are split much more due to various foreign currencies, tariffs and laws in place. Robin Hood was in the red as it exited North American theaters, a theme for the summer of 2010.

Consider even an ostensible winner such as Salt. The action flick that included the unusual casting replacement of Angelina Jolie in place of Tom Cruise earned $118.3 million domestically, but required impressive foreign receipts of $175.7 million to overcome its shockingly large production budget of $110 million. Meanwhile, the film that Tom Cruise chose to do instead, Knight & Day, suffered an absolutely brutal box office fate. The $117 million production attained domestic earnings of only $76.4 million, meaning it shared the same revenue performance as Robin Hood. Cruise continues to be an international draw (I guess people outside of North America don’t care about Oprah’s couch the same way that we do), which is why Knight & Day wound up with $261.9 million globally. Exhibitors in North America, however, locked up over 10,000 theaters for the opening weekends of Salt, Knight & Day and Robin Hood yet had only $92 million to show for it. Also, none of the three movies that cost a combined $437 million to make wound up in the top 20 for 2010 in terms of expected box office.

The scary thought here is that an argument could be made that the three films above could be described as winners if we simply compare global take to production budget, an inaccurate but usually accepted method for determining box office winners and losers. This is how reliant the movie industry has become on international revenue.

Given the above, let’s just focus on domestic performances relative to budgets for other high profile releases. Sex and the City 2, a victory lap for Warner Bros. and a film that Reagen Sulewski hilariously designated as The Skankquel, cost $95 million to produce and made $95.3 million domestically. Prince of Persia: The Sands of Time cost $200 million to produce while earning a pathetic $90.8 million domestically. The A-Team had a $110 million production budget yet earned only $77.2 million. My wife's beloved Scott Pilgrim vs. the World had a budget of $85 million (before tax credits) yet earned only $31.6 million. The Last Airbender cost $150 million while grossing $131.8 million. Killers cost $75 million to create while grossing only $47.1 million. Marmaduke cost $50 million (I have no idea why) while earning a paltry $33.6 million. And the two biggest losers of the summer of 2010 (other than Prince of Persia) wipe all the rest out in this paragraph in terms of scale. Cats and Dogs: The Revenge of Kitty Galore had a laughable production budget of $85 million while grossing a meager $43.6 million. And The Sorcerer’s Apprentice had a ridiculously reckless budget of $160 million against a domestic gross of $63.1 million.

Those are a lot of numbers to throw at you at once, so let’s summarize them. Let’s combine the domestic grosses as well as the production budgets of the disappointing high profile summer releases listed above. Robin Hood, Salt, Knight & Day, Scott Pilgrim vs. the World, Sex and the City 2, Prince of Persia: The Sands of Time, The A-Team, The Last Airbender, Killers, Marmaduke, Cats and Dogs: The Revenge of Kitty Galore and The Sorcerer’s Apprentice earned $914.3 million domestically. These dozen films cost $1.49 billion to produce. When we factor in international receipts, the picture isn’t quite as bleak, but that is a staggering statistic. A dozen films that earned less than a billion dollars domestically had production budgets of half a billion more than that.

In this day and age, there is an imperative for studios to carefully select the correct projects to greenlight. This is due to the unconscionable expense in producing a major studio release. A couple of these movies had production budgets in excess of the gross domestic product of some countries that have hosted Survivor. That’s how much capital is at risk here. When content creators fail to choose correctly, they have hedged their bets by building up the overseas theater industry to the point where they have a safety net.

Inevitably, North American exhibitors are the ones left holding the bag. Since they are entirely reliant upon movie distributors to have a product to sell, they are completely at the whim of movie makers. In the summer of 2010, this meant that they had largely empty auditoriums as people compared the escalating costs of movie tickets against the available product and made the only logical decision. For this reason, summer movie ticket sales were their lowest in over a decade with several overpriced productions failing completely.

The summer of 2011 is comic book movie focused almost to a point of fault. Here’s hoping these action films are more appealing to consumers than The Sorcerer’s Apprentice, The A-Team and Prince of Persia: The Sands of Time proved to be.