Hollywood’s Imploding Summer Movie Strategy

Jeff Bridges and Ryan Reynolds star in R.I.P.D., one of the summer's big flops Photograph by Scott Garfield/Universal/Everett Collection

This summer’s movie season kicked off with a dramatic prediction from Steven Spielberg, who lambasted Hollywood for its over-reliance on its “tentpole” business model supported by superheroes, gunfights, and special effects: “There’s going to be an implosion where three or four or maybe a half-dozen mega budget movies are going to go crashing into the ground.”

In other words, Hollywood is exhibiting a classic case of The Innovator’s Dilemma–the tendency for dominant players to improve their products along traditional dimensions. The big six studios are extending a proven business model, targeting mainstream customers with blockbuster experiences of the type they already consume. The summer of 2013 may go down as the apex of that approach. More than 20 movies with production budgets over $100 million have or will be released between Memorial and Labor Day, making it the most mega-budget-filled summer in history.

But just as Spielberg predicted, a row of big budget spectacles have now been categorized as “failures,” meaning they did not recoup at least half their production budget during opening weekend. Those flops include Turbo, After Earth, White House Down, Pacific Rim, The Lone Ranger, and this past weekend’s Elysium. The summer’s biggest flop, R.I.P.D., was produced for $130 million and has so far earned only about $30 million domestically.

Film critic Wesley Morris explained the poor turnout for these movies: “We are finally getting fat on these high-calorie, high-cholesterol summer movies.” But while the failure rate may have increased for now, mega-flops are nothing new in Hollywood, and many of those flicks will go on to recoup much of their costs via international distribution.

The real threat to Hollywood’s tentpole strategy comes from a more subtle shift in what’s now playing in the one theater that will matter most to the industry’s profits in the future: the home theater.

After all, Hollywood only makes approximately 29 percent of its revenue from theatrical distribution. With U.S. ticket sales running flat for the past 10 years, the industry has relied on higher ticket prices for growth in box office revenue, a dangerous strategy. Meanwhile, the biggest slice of the pie comes from home video and streaming, with a 36 percent share. (About 28 more comes from TV licensing, while about 6 percent comes from merchandise and other spin-off products.) But the mass movement from DVD sales and rentals to online streaming has not only depressed home viewing revenue but resulted in a major change in consumption patterns.

With online streaming, viewers are showing that they are open to a much wider range of fare—especially smaller, independent movies, TV series produced for cable, and documentaries. That gives Netflix and Amazon much greater negotiating power to simply refuse to pay big fees for what the studios consider must-see blockbusters. “There is so much to watch that even the highest-demand titles don’t materially swing viewing,” Netflix wrote in a letter to shareholders earlier this year.

These trends are what could leave the studios high and dry while smaller players move in with new business models for financing, production, and distribution. What Spielberg and other critics are really saying is that there’s going to be an implosion when Netflix and Amazon stop paying high prices for mega-budget movies, and consumers won’t care that they can’t stream them. That’s what’s really going to disrupt the industry.

So how can Hollywood break its addiction to the mega-budget movies?

• Make fewer tentpole movies and use the savings to produce more diverse films at lower budgets. For instance, this summer’s The Way Way Back was produced for less than $5 million and has so far earned more than $15 million, even before home video and streaming.
• Find innovative ways to team with independent filmmakers earlier in the production process, rather than waiting until a film is already exhibited at Sundance.
• Before production, do market research to evaluate how the movie will perform in all channels, including on-demand cable and Internet streaming.

Before it's here, it's on the Bloomberg Terminal.