The Hollywood Economist

The Vanishing Box Office

A terminal condition.

Despite the weekly chorus of doom about the decline of the Hollywood box office, the six major studios—Paramount, Warner Bros., 20th Century Fox, Disney, Universal, and Sony—actually took in more money from their movies in the first half of 2005 than they did in the same period in 2004. These studios (and their subsidiaries) earned $3.2 billion at the box office from Jan. 1 to June 30 in 2005 as opposed to $2.7 billion the previous year (click here for a table). To be sure, there was a 7 percent decline in overall U.S. ticket receipts, but the loss came mainly at the expense of independent distributors and studioless studios, which account for more than half of the films released in the United States. So, even though fewer Americans went to the movies in 2005, the big studios did not lose out.

Now the bad news: Whatever the box-office blips, the regular movie audience has been so decimated over the past 56 years that the habitual weekly adult moviegoer will soon qualify as an endangered species. In 1948, 90 million Americans—65 percent of the population—went to a movie house in an average week; in 2004, 30 million Americans—roughly 10 percent of the population—went to see a movie in an average week. What changed in the interval was that virtually every American family bought a TV set, and home entertainment largely replaced theater entertainment.

More important than mere numbers, the nature of the audience changed in this secular decline. When talkie movies arrived, weekly moviegoing became the true national pastime. In 1929, the year of the Great Depression, 95 million people a week went to the movies. Most of these people didn’t arrive at the neighborhood theater to see one particular film. They went to see a three-hour program that included newsreels; short comedy films, such as The Three Stooges; cliffhanger serials, such as Flash Gordon; a “B” feature, such as a Western; and finally, the main attraction. Best of all, this huge regular audience needed no advertising to prod it. The new film’s title on the marquee, the lobby posters of the stars, and the listings for it in the local newspapers constituted all the advertising necessary to sell most movies.

In 1948, when home TV was still a rarity, theaters sold 4.6 billion tickets. By 1958, TV had penetrated most American homes, and theaters sold only 2 billion tickets. The Hollywood studios tried to counter television with widescreen (CinemaScope), noisier (surround sound), and more visually exciting (special effects) movies, but technology did nothing to stem the mass defections. They also tried epic, three-hour movies, such as Ben Hur, Lawrence of Arabia, and Dr. Zhivago, that, although they succeeded individually, had little effect on the weekly movie audience. Even the much-heralded fantasy bonanzas of Spielberg and Lucas could not halt the decline. By 1988, ticket sales hovered at 1 billion.

The studios, realizing that they could no longer count on habitual moviegoers to fill theaters, devised a new strategy: creating audiences de novo for each movie via paid advertising. Audience-creation is a very expensive enterprise—in 2004 the studios’ average cost for advertising a film was $30 million. Studios justified this expenditure on the grounds that huge opening-weekend audiences would help turn a movie into an “event,” generating word-of-mouth and other free advertising that would continue to bring moviegoers into theaters, and, later, into video stores. Titanic, for example, took in only a modest $28 million over its opening weekend. Two weeks later, after it had become a word-of-mouth event, the movie had earned $149 million. It wound up grossing a phenomenal $600 million at American theaters. While no other film has equaled the success of Titanic, such “event” films are what studios depend upon to pay the bills.

What terrifies top studio executives this year is not the 7 percent decline in the overall box-office receipts, but the dearth of word-of-mouth event movies. Even George Lucas’ heavily advertised Star WarsEpisode III: Revenge of the Sith, which debuted on more than 3,600 screens in America, fell to $25 million in just two weekends (after a $108 million opening). The studios’ marketing chiefs look at these numbers and see that they can still drive teens to the multiplexes with ads, but these manufactured audiences, while they may produce pseudo-events in the entertainment media, no longer create the event movies that the studios need.

Meanwhile, with home entertainment poised to make a quantum leap in quality with high-definition television, TiVo-type digital recorders, and high-definition DVDs, the studios recognize they have as much of a chance at stopping the secular shift of audiences from the theater to the home as King Canute had in commanding the tide.