In a Recessionary Summer, Hollywood's Fondness for the Familiar Only GrowsPublished: August 05, 2009 in Knowledge@Wharton
If you have been to the movies recently, the experience might have brought to mind a comment by that social sage, Yogi Berra: "It's déjà vu all over again." While Hollywood has never been shy about recycling successful films -- 1954's classic A Star Is Born starring Judy Garland, for example, was a remake of a 1937 film, and was re-remade two decades later with Barbra Streisand -- nowadays a significant portion of the industry's production is composed of sequels, prequels and remakes of earlier films. Going to the movies often can seem less like a unique cinematic experience and more like a walk down memory lane.
Consider that four of the top 10 films at the box office over the all-important July Fourth weekend were movie sequels or remakes. (Some 40% of all U.S movie tickets are sold during the roughly three-month period stretching from Memorial Day to Labor Day.) Battling it out to be number one were Ice Age: Dawn of the Dinosaurs, the third installment in the animated Paleolithic comedy series, and Transformers: Revenge of the Fallen, the mechanical (in multiple senses of word) $200 million sequel to 2007's Transformers. Each film grossed more than $42 million during the July 4 holiday weekend. Also in the top 10: The Taking of Pelham 1 2 3, a remake of a 1974 action drama, and Night at the Museum: Battle of the Smithsonian, a sequel to the popular 2006 film, which was still drawing business seven weeks after its theatrical release. All this, of course, was merely the prelude to what was expected to be the movie event of the summer: The July 15 release of the sixth installment in the Harry Potter franchise, Harry Potter and the Half--Blood Prince. The film, which cost $250 million to produce, grossed $255.5 million in its first three weeks at the box office.
Why is Hollywood in love with tried-and-true sequels and established franchises rather than producing original scripts? According to Wharton faculty, the industry's embrace of the sequel is an attempt to minimize its risk during an uncertain time, when the motion picture business finds its usual sources of funding and revenues under pressure from the recession. So studio executives are playing it safe, by avoiding too much risk and giving movie audiences what they're already familiar with.
"Sequels are exactly the right strategy for these economic times," says Eric T. Bradlow, the co-director of the Wharton Interactive Media Initiative. "If you think about how most businesses act during a recession, they tend to be quite risk averse, despite the fact that a lot of times this is actually an opportunity to take risks: The upside potential is higher because the competition can't react as much. But ... sequels are a great risk-minimization strategy."
Box office receipts got off to a fast start this year, maintaining a record-setting pace through late spring. But attendance has been down this summer, with some industry observers suggesting that this year's crop of franchise-based blockbusters has been less appealing than last year's, which included The Dark Knight, Indiana Jones and the Kingdom of the Crystal Skull and Iron Man. "It's been a seesaw all summer," Paul Dergarabedian, president of the Hollywood.com Box Office division, told The Wall Street Journal. "In the spring, I thought we were going to have a record-breaking summer, but now, short of a miracle, I don't see how we could beat last summer's attendance. The long shadow of The Dark Knight is still looming and creating a tough situation." Domestic box office receipts for 2008 (which include the U.S. and Canada) amounted to $9.8 billion, according to the Motion Picture Association of American (MPAA).
Still, to battered consumers who are hungry for value, Bradlow notes, movie tickets seem like a bargain. Last year, the average U.S. movie ticket cost $7.18, according to the MPAA, far less than a football game (averaging $71), baseball game ($23.50) or theme park ($35.95). "That's why movie sales are counter cyclical: To bring a family of four to a movie is still relatively affordable compared to concerts, sporting events and other forms of entertainment, where ticket prices have gone through the roof," Bradlow says.
More Channels Than Ever
The theatrical box-office business continues to thrive even while consumers face an increasing number of distribution channels by which they can access Hollywood's products, such as pay-per-view TV, video-on-demand over the web and cable TV premium channels. Consumers, Bradlow contends, continue to seek out "the joint-consumption experience" that the theater provides. "Watching a first-run movie in the theater is very different than watching it a month or two later on TV at home. There's still something unique about the joint-consumption experience that people get from the big screen. Plus, there's a social status associated with seeing the latest movie. It's a signal of one's social viability."
Jehoshua Eliashberg, a Wharton marketing professor who studies the movie industry, agrees and contends that there will continue to be a consumer demand for the theatrical experience. "There's a school of thought in Hollywood suggesting that in another five or 10 years, everything will go digital. People will then stay home and download the movie from the Internet and the exhibition business will fade out. Personally, I don't believe it. People will still go out to the movies, the same way people still dine out in restaurants when there is food available at home. The idea of getting out of the house for all sorts of leisure activities is still applicable, not only to movies, but to other industries."
Yet not all of Hollywood's outlets are faring so well. Over the last 20 years, the industry has become increasingly dependent upon revenues from home-video sales, estimated to be worth $14 billion in 2008, according to Video Business. (That number does not include consumers' spending on video rentals from brick-and-mortar outlets and online sources, which totaled $7.6 billion.) Last year, overall U.S. home video sales slumped by 8.5%, driven by a significant decline in DVD sales despite the growing popularity of new video formats, such as Blu-ray and digital downloads. DVD sales continued to slow during the first quarter of 2009, according to industry reports, with sales plunging 14%, to $2.9 billion, during that period.
The continuing DVD fall-off has studio bosses worried. "We have been taking a hard look at this business for a while," Disney Chief Executive Robert Iger said earlier this year.
Falling DVD sales have significantly impacted the industry's profitability, says Wharton marketing professor Xavier Drèze. A rough industry rule of thumb, he notes, is that 50% of a film's revenue is derived from its theatrical release -- an amount that essentially covers its production costs. The other 50% -- and all of the profit -- is derived from DVD sales on the backend. But, Drèze notes, "if the [decline] in DVD sales is not compensated for by an increase in rental revenues [from Netflix or direct download], it will put pressure on having a bigger box office. Studios don't care about the plastic disc itself; they care about viewing revenues. If sales decline, but download and rental revenues increase, that's fine."
According to Eliashberg, the decline of DVD sales reflects the increasing penetration of broadband, now found in 57% of U.S. homes, up from 23% in 2003, according to Leichtman Research. Among "active Internet users" the rate is 89%. "That makes it feasible, time-efficient and cost-effective to download a movie directly off the Internet. Technology also permits users to stream movies directly from their computers to their televisions wirelessly, so they don't even need to lay cables. Plus, a growing number of consumers have grown comfortable with the idea of buying digital content in a 'pure' form; they no longer require a hard copy in the form of a DVD or CD-ROM," he says. "There are always consumers who like to touch a physical product, so I don't expect the DVD market to go completely to zero, but I would expect it to be far smaller in the future."
No $500 Million Credit Lines
The ongoing financial crisis has also crimped the major studios' access to credit, notes Eliashberg, requiring the companies to put more of their own money at risk. "If you look back a few years to 2004, investment firms like Merrill Lynch used to routinely provide Hollywood with $200 million to $500 million credit lines to do any type of movies they wanted," he says. "Those credit lines are no longer available, and the cheap money has dried up." According to The Hollywood Reporter, the number of institutions willing to lend to the entertainment industry shrank from 40 to fewer than a dozen in recent months.
Even a Hollywood heavyweight like Steven Spielberg had a tough time raising the necessary $325 million financing to relaunch his DreamWorks studio as a private company after leaving Paramount last year. "If a name such as Spielberg doesn't induce Wall Street to provide funding, that's an indication we're living in a very different environment," says Eliashberg.
In these tough economic times, movie sequels are easier to sell to both prospective financial backers and to the movie-going public because they capitalize on the original movie's brand equity, according to Eliashberg. "People are already familiar with the characters and the cast. That's a marketing advantage. On the other hand, the downside of marketing a sequel is that if the original film performed well, the director and the cast can hold out for more money, so the production cost can go up."
According to Bradlow, "What studios can't afford is to have blockbuster losses. Most sequels have lower risks involved. There has already been at least one film which had some success, so there is already an established fan base. That's not to say that a sequel is going to have a higher upside. But if studio [executives] launch a movie where the risk is low, the cash potential is there and the merchandizing channels already exist, they are less likely to walk into a big box office disaster which could bury them financially when they can least afford it."
Drèze has studied Hollywood's movie sequels as brand extensions of successful films and franchises. The challenge movie producers face, he says, is to create a film that is familiar to the existing audience in order to keep the brand intact, but that also provides a distinct, original experience. "When you order a Diet Coke or Coke Zero, you want it to taste just like the original Coca-Cola. For movies, it's not like that. Sequels need to provide a sense of continuity, but also provide the audience with something new."
That's why many of the most successful movie franchises -- Star Trek, Batman, Star Wars, the James Bond series, Lethal Weapon, to name a few -- tend to be opened-ended and episodic in structure, with the same well-known hero and supporting cast venturing forth in every new installment to face a new challenge or evil nemesis.
This familiar-but-different brand extension formula even extends to the strategy of movie sequel titles, according to research Drèze has conducted. Movie sequels that depend upon a numbered title strategy (such as Rocky II, Rocky III, Rocky IV) tend to be less successful at the box office than sequels that are distinguished by titles that somehow signify a new plot direction (like Daredevil: Taking It to the Streets, or Bridget Jones: The Edge of Reason).
"By having a named sequel versus a numbered sequel," says Drèze, "you can hint at these differences and have the audience [know] what the movie will be about. For instance, Rocky II implies that Rocky is back and he probably will be in a fight. By contrast, Transformers: Revenge of the Fallen implies not only that the Transformers are back, but the bad guys, who were defeated last time, find a way to rebuild their strength. And they might even win this time."
Hollywood, too, hopes it will win this time -- by attracting viewers with offerings that the audience finds new, yet familiar.