TV, Film Cos.: Go Back To The Future

The fourth Shrek film recently fell far short of projected opening weekend box office sales -- and some theaters were selling tickets for a record $20. Was the culprit Shrek fatigue, an unrealistically inflated value proposition or a flood of competing entertainment choices?

Try all of the above.

The situation underscores the dilemma vexing Tinseltown and other media mired in a system of ROI assumptions at odds with today's digital realities.

Films and television are being produced and are competing as if it was 1980. They are setting themselves up for perpetual economic shortfalls that cannot be sustained. They are not in sync with the interactive behaviors and preferences of consumers and marketing partners. The film industry provides a clear example.

The collapse of consumer spending on DVDs resulted in a -4.3% decline in annual revenues in 2009 at the film divisions of majors, such as Disney, Time Warner, News Corp., Viacom and Sony. It was the second consecutive annual decline and the third in the past five years, according to a Bernstein Research report.



Hollywood studios responded with deep cost cuts, reduction in the number of films produced, a giant leap onto the 3D bandwagon and increased reliance on hit franchises such as Shrek.

The strategy has failed to hold up as studios continue to ignore the fundamental shift in consumer habits and values. Many consumers are content to view films and other content on video game consoles and Web sites, and prefer more social interactive pastimes. Consumers have demonstrated they will judiciously spend their time and money on what is most relevant.

The means of accessing content and communications has become as important to them as the end product. It's all about the entire interactive experience, which is why Apple has become the most valuable media and tech-related player with a $222 billion market cap.

That said, there is little about either film or television that is truly interactive.

Shrek Forever After generated a mere $71.2 million its opening weekend, nearly half of the $122 million generated by the launch of the third Shrek film three years earlier. The addition of 3D technology failed to drive the fourth Shrek film as it has Avatar and Alice in Wonderland, suggesting the premium-priced fad is wearing thin.

Even as the global box office (which saw revenues climb 7.6% last year) offsets deteriorating home entertainment trends and as the post-recession rebound in ticket sales temporarily boosts revenues, studio executives should focus on how to reposition their businesses digitally.  Instead, they respond to competitive challenges through a waning business paradigm.

The same phenomenon also threatens television. There is little evidence in this spring's upfront unveiling of new series and ad pricing that the broadcast networks comprehend their marginalization. Each of the Big 4 continues to spend as much as $3 billion annually producing and marketing new programs, most of which fail. They have yet to figure out how to solicit paid revenues for their content online, settling instead for retrans fees from cable operators, as long as they remain in a competitive position to pay them.

Never mind that the Big 4 continue to lose 6% of their audience every year and are struggling just to make up the 20%-plus revenues lost last year during the depths of the recession. With audience and advertisers' fragmentation eroding any hope of substantive organic growth, there are no efforts being made to reinvent the broadcast TV network model.

Genuine change at the Big 4 could include producing and selling programs on demand across all platforms, accelerating interactive content across all screens wrapped in social media, and loosely employing a Google-like auction for the pricing and placement of commercials.

Those prospects surely have not been lost on Comcast executives who will face having to radically revamp or dismantle NBC TV's losing ad-dependent business when it becomes 51% controlling owner of NBC Universal next year.

Earlier this week, reports surfaced (which the company denied) that Disney has been negotiating to sell its ABC TV Network to private equity. It is a viable option, given that all broadcast TV networks will increasingly be a drag on overall corporate earnings with diminishing returns and fading brand value.

The economic impact of playing by old rules in a new world will become even more profound as media companies seek to buy and sell assets (think MGM) whose worth has been thrown into question by the digital transformation. 

With more than $160 billion in ad spending and more than $800 billion in corporate enterprise value at stake, according to Needham analyst Laura Martin, film and television players need to make a full-blown commitment to getting in the digital game with a bottom-up overhaul. It's increasingly evident that just nibbling around the edges of change is not an option.

5 comments about "TV, Film Cos.: Go Back To The Future ".
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  1. Jerry Foster from Energraphics, June 2, 2010 at 3:08 a.m.

    The studios are shooting themselves in the foot by not having their films available for $4.99 online within 4 weeks of being in theaters at a "reasonable" price of less than $10 per person (first world countries). People who know how to use torrent sites and/or speak other languages will download a pirated version of a new film within 4 days of the premiere if the product isn't being offered reasonably by the studios online.

  2. Bruce May from Bizperity, June 2, 2010 at 10:22 a.m.

    Paula Lynn rightly points out that medium income of $30,000 places severe limits on the financial models. Positive GDP hides the underlying truth that there is a growing divide between the average American and those with incomes above six figures. Are the studios out of touch with this underlying reality? I think so. Even the, the bigger reality is the evolution of the digital ecosystem and again, they don't get it. It was only a few years ago that film and television executives routinely belittled online media and that attitude hasn't really changed much. This technology is highly disruptive. We've seen what has happened to the music industry and the newspapers. Film and TV are getting their turn. The only way forward is with new financial models. If the old guard cannot adapt then they will be replaced with younger, more innovative firms. There is plenty of pain to come.

  3. Thomas Siebert from BENEVOLENT PROPAGANDA, June 2, 2010 at 11:19 a.m.

    There are good points in this piece, but it's worth pointing out that while "Shrek 4" opened lower than the previous two sequels, positive word of mouth led to a drop of only 19% for the second week.

    It's $57MM was more than enough to keep it the #1 movie in America, easily beating out two big-budget high-profile Memorial Day releases, "Prince of Persia" and "Sex & the City 2" (the latter likely to be the biggest bomb of the summer, following near-unanimous terrible reviews).

    I think it's not the cost so much as it was franchise fatigue, but now that the film's quality has been endorsed by both generally favorable reviews and terrific word of mouth (it got an "A" from cinemascore -, "Shrek 4" is poised to dominate both the family film and 3D category at least until "Toy Story 3" in two weeks.


  4. Chris Edwards from Cox Media, June 2, 2010 at 1:01 p.m.

    I'm not sure this is the case. There is a lot of research (particularly regarding TV) that shows that what people say they want is a lot different from what they actually do. They may say they want more interactivity and they may say they want to watch TV on the internet, but the reality is that they are watching TV on TV sets more than ever before. TV is a social medium. People like to watch it with friends and family. If they can't find something to view on the big TV with the others, only then will they seek out viewing on the internet.

  5. Douglas Ferguson from College of Charleston, June 2, 2010 at 2:35 p.m.

    Great analysis, as always. It's hard to disagree with Diane.

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