The Hollywood Economist

Send in the Aliens

They’re the last hope for the foreign box office.

Illustration by Mark Alan Stamaty.
        Click image to expand.

A persistent media myth is that Hollywood earns most of its money in foreign lands and that this is what accounts for dumbed-down movies. For example, a recent Wall Street Journal article blithely explained, “It’s the foreign box office, stupid. While movie attendance has been stalling in the U.S., it’s growing in other parts of the world, making Prague as much a bellwether for Hollywood as Peoria.” The problem here is that the entire Czech Republic, including Prague, provided Hollywood studios with less than three-tenths of 1 percent of their foreign movie revenues in 2005. The place where the studios look for their profits is not that elusive: It is America. The Hollywood studios make—and have always made—most of their money in the domestic market, a fact that such stories almost always omit. In the first quarter of 2005, according to the studios’ internal data supplied to the MPAA, the six majors and their subsidiaries took in 56.2 percent of their total money in the United States. As for the breakdown, the U.S. share was 50.9 percent of the world box office, 55.5 percent of world video, and 59.9 percent of world TV. (Click here to see the world box office numbers.)

As far as most of Hollywood’s foreign revenue is concerned, it’s a very small world after all. In the first quarter of 2005, just eight countries provided nearly 75 percent of the studios’ total foreign revenue. Britain alone accounted for 20.7 percent of it; Germany, 12.8 percent; France, 9.6 percent; Canada, 8.1 percent; Japan, 7.2 percent; Italy, 6.1 percent; Australia, 5.1 percent; and Spain, 4.8 percent. (Click here to see a selection of foreign box-office numbers.) The other hundred or so countries furnished only a few scraps. For example, in China, where government regulations severely limit distribution and piracy is common, Hollywood studios took in a grand total of $1.5 million (slightly more than one-tenth of a penny per capita) from theaters in the first quarter of 2005. So, it’s not surprising that the studios concentrate their marketing on only the handful of countries that produce the lion’s share of their foreign revenues.

A second misconception is that the foreign box office provides pure profits for the studios. In reality, the foreign box-office number is the theaters’ ticket sales, not the studios’ share of them. Consider a typical action movie, such as Disney’s Gone in 60 Seconds. Its reported foreign box office was a staggering $129,477,395. Of that sum, Disney, according to the Dec. 31, 2003, participation statement, got $55,979.966, and of that figure, it paid out $37,986,053 in out-of-pocket expenses. Of that, $25.2 went for foreign advertising—including $6.5 million for Japan, $3.1 million for Germany, $2.5 million for Britain, $1.4 million for France, $1.1 million for Australia, $997,000 for Spain, and $915,000 for Italy—and another $5.7 million went for foreign prints, $823,000 to dub and subtitle them, and $455,000 to ship them abroad. On top of that, it had to pay $5 million in foreign taxes, $267,000 for converting currencies, and $122,000 for dues to foreign trade associations. After paying these expenses, Disney was left with $17,993,913, which amounts to about 15 percent of the reported $129,477,395 “box office.”

Indeed, not all Hollywood movies do this well overseas. In fact, many, if not most, releases lose money abroad. Clint Eastwood’s Midnight in the Garden of Good and Evil,for example, earned $3.1 million from the foreign box office, while the foreign prints and advertising bill was $6 million, leaving it with a $2.9 million loss. On balance, the studios make a substantial profit from foreign distribution, but it is not possible to determine the profitability of a title in foreign markets without taking into account the cost of advertising and distribution.

A third misconception is that the studios’ share of foreign markets grows with globalization. In the first quarter of 2005, the studios’ revenues from the domestic box office increased by 9.2 percent but their revenues from the overseas box office fell by more than 13 percent. The drop-off was precipitous in six out of the seven key markets on which the studios depend for most of their foreign profit. In Japan, studio revenues fell 49 percent; in Spain, 28 percent; in France, 24.1 percent; in Australia, 26.9 percent; in Germany, 20 percent; and in Italy, 15.6 percent. Only Britain, among the top markets, was up (8.2 percent). (Click here for a table of the foreign box office.)

There are, no doubt, many local factors involved in this decline, but globalization may actually be part of the problem. As late as 2003, studios generally used a so-called staggered rollout for major films: After opening in the United States, films would open in one foreign market after another. With a box-office success in America, the studios had leverage to secure better play dates overseas and to send the stars from country to country to promote the films. Now, however, with the proliferation of video piracy, zone-free DVD players, and Internet file sharing, studios find it risky to delay foreign releases. “Waiting three or four months after domestic [release] to release our bigger pictures [overseas] is not something we can do anymore,” Paul Hanneman, vice president of Fox International, explained to Variety in 2005. So, studios now open major films abroad on the same date as they open in the United States, with the result that it is more difficult to get optimal play dates—and promote them with stars—overseas. As a Warner Bros. executive lamented, “It is now much harder to make big money overseas.”

Whether or not the quest for gold abroad “dumbs down” movies depends on what one considers “dumb.” Before giving a movie a green light, studio executives take into account its foreign prospects. The elements considered likely to kill them are “U.S.-centric stories,” which include ones about high-school proms, American sports, fraternity parties, and ghetto violence. Horror movies and gross-out comedies also tend to do poorly abroad. On the other hand, movies that contain epic heroes—either historical like Alexander the Great or fictional like the Terminator—tend to do well at the foreign box office. But the jackpot element with which studios can really clean up on abroad is aliens from other universes or time periods. For example, George Lucas’ three Star Wars prequels account for a large part of Hollywood’s foreign earnings in recent years. Hollywood has found that fantastic aliens—even ones intent on destroying the Earth as in Steven Spielberg’s War of the Worlds—are more palatable to foreigners than high-school teenagers coming of age or playing baseball.