Hollywood Report, Final Part: What Is (Possibly) Irreplaceable About Hollywood?
The answer is the line we quoted before: Hollywood is in the entertainment business, not the movie business. We explain it through the story of one company.
The answer is the line we quoted before: Hollywood is in the entertainment business, not the movie business. We explain it through the story of one company.
A little over two months ago, we spent some time in Los Angeles. The purpose of the trip was simple: to work out what Hollywood had built up in the past that made it Hollywood, and what has happened to it since that has reduced it to a machine for blockbusters and sequels.
The reports we have filed along the way already answer these questions. It has an awe-inspiring, tightly organized industrial system, and the best product of that system is the audiovisual feast you and I have sat through ourselves. Independent production is part of the picture too, but it has been shut out of mainstream screens and goes through independent distribution. From the 1970s on, television drew Hollywood's audience away, and nearly a decade ago, internet streaming split it again. So we wanted to save our last piece for this question: what, exactly, is the future hope of this industrial system? What part of it, exactly, (possibly) cannot be replaced?
To answer it, I thought of two people.
One is Jeffrey Katzenberg, CEO and founder of DreamWorks Animation (DWA). Claudia, a young employee in the marketing department at 20th Century Fox, told me: "Everyone has to report to him on what they're doing. I don't know where he gets all that energy." This Jewish executive is famous for handling everything himself.
Fox handles DreamWorks Animation's distribution in international markets other than China and South Korea. Katzenberg's best-known work in China is probably the Kung Fu Panda series, so much so that anyone introducing Oriental DreamWorks, the joint venture he set up with Chinese partners, has to mention the panda first. He turns up at Fox's weekly meetings: oval face, bald head, never smiling.
Katzenberg's career has been eventful even by Hollywood standards. He is a former Disney employee. Before Disney, he worked at Paramount as an assistant to its president, Barry Diller, and brought the Star Trek franchise back to life. In his ten years at Disney, he produced animated films including Beauty and the Beast and The Lion King, and reached a standing in the industry few could match. So when he fell out with Michael Eisner, left Disney, and co-founded DreamWorks SKG with Steven Spielberg and David Geffen, people thought Eisner had suffered a heavy loss and that DreamWorks' prospects were unlimited.
But you may have heard that DreamWorks is not doing well. Since DreamWorks Animation, with Katzenberg as CEO, was spun off and listed, he has had to explain to Wall Street almost every quarter in recent years why results were poor and how he plans to turn them around.
Poor Jeffrey. Films are products in an unpredictable market, and turbulence is routine. Animated films are the riskiest kind: production cycles are long (the Hollywood norm is about 3 to 5 years); technical costs are high (unlike live-action films, they cannot be revised along the way; they are made in full, and if a core character turns out not to work, everything has to be redone); and the market is nowhere near as boundless as the one for popcorn movies.
What does Wall Street know about any of this? People who judge by financial statements usually end up killing creativity. So two years ago, Katzenberg proposed turning DreamWorks "from an animated-film company into a diversified, multi-brand entertainment company." DreamWorks Animation then bought AwesomenessTV, a short-video company active on YouTube, and reached for the Chinese market, on which everyone has pinned high hopes.
The other person I thought of is Roland Poindexter, executive vice president of television development at 20th Century Fox Animation. When he talked to me about Disney, his tone suggested that "every other studio's business model is stuck in the last century."
History joins up in odd ways. Katzenberg, the former employee, now has to chase his former employer's business model: "become a diversified, multi-brand entertainment company."
We have explained many times how Disney actually makes its money. Put simply, it runs a very long industry chain, long enough to leave an indelible impression of its products on you: films, television, theme parks, merchandise, games and all kinds of cross-over deals. On the first day of July, we met a struggling filmmaker, Kimberly Seilhamer, who is writing the first screenplay of her life. Her film plans sounded muddled; the only thing she could state clearly was that she wanted to create "an animated character like Mickey Mouse." "That's the model that works," she said.
Disney has indeed taken deep root in Hollywood. In Burbank alone, the company occupies several city blocks. "It always acts like the boss, and everyone has to show it respect," said a former Ernst & Young employee who asked not to be named. Several of the major studios are Ernst & Young clients.
But the most persuasive thing is money. Disney's 2014 revenue ranked third among American companies (US$48.8 billion), behind only Walmart (US$483.79 billion) and Apple (US$182.8 billion). Twenty-First Century Fox (parent of 20th Century Fox), Time Warner (parent of Warner Bros.) and Viacom (parent of Paramount) follow close behind.
Of this big pile of money, film, or in the company's official phrasing, Disney Studio Entertainment, accounts for only 14%. Disney's top executives prefer to call popular films "valuable properties." You know the ones: Guardians of the Galaxy, Wreck-It Ralph, Frozen. Guardians of the Galaxy earned the most, and together with Captain America: The Winter Soldier it made up 36% of Disney's 2014 North American box office. Thank you, Marvel.
This intellectual property (IP) plays a bigger role in Disney's overall business than at any other studio. According to the NPD Group, toys based on Hollywood IP sold US$5.7 billion last year, 31% of all U.S. toy sales. Disney accounted for 68.4% of that, or US$3.9 billion. Disney's own merchandise sales have also grown 20% over the past three years.
We once used Frozen as a case study, setting out in detail how much each part of Disney's business contributed to revenue. If you are interested, you can read it here. But let us go back to the question we started with, which now needs rephrasing slightly: why do we see Disney as the model for Hollywood's future?
Katzenberg's moves certainly tell us something. In fact, all of Hollywood is talking about whether it can find a new, more stable "post-theatrical model" (one that does not depend, or does not depend entirely, on theater box office), and the model it currently looks up to is Disney. Disney has spent many years building its complete industry chain, which on this point makes it very un-Hollywood. In today's fashionable language, it is simply an IP company.
In China's film and television production circles, everyone talks about IP, and the word has been distorted and cheapened almost as badly as "dreams" or "passion." IP, as we said above, means intellectual property. It is treated as a magic key that solves everything once and for all: once you own an IP called "Mickey Mouse," you can use it to do anything Disney has done.
When big Chinese companies such as Alibaba, Tencent, Shanda in its day and Wanda today all try to dig something up in Los Angeles, what they want most is this seemingly once-and-for-all mechanism. Just yesterday, we described how much groundwork Tencent laid before launching Penguin Pictures. Disney's groundwork probably took dozens of times longer.
The biggest benefit of an IP-based industry chain is that it extends the life cycle of products. Note: the various products across the chain. At Bank of America Merrill Lynch's 2015 Media & Entertainment Conference last week, Disney Chief Operating Officer Tom Staggs used Star Wars as an example.
The latest film, Star Wars: The Force Awakens, opens this December, and this "property," bought from Lucasfilm three years ago for US$4 billion, has lifted Disney's various businesses. "From theme parks to television to games, everything supports the film in sync, and benefits from the film," Staggs said. Disney now also owns Maker Studios. On September 4 this year, the short-video company spent 18 hours rolling out Star Wars merchandise on YouTube across 15 cities in 12 countries, and in North America 130,000 people queued overnight to buy it.
"If a film comes out late in a toy's sales cycle, the toy sells less, but with Star Wars there's no need to worry about that," Staggs said. This is, first, a high-value IP; and second, Disney is good at "integrating the businesses, using brands, content and sequels across every platform, every business and every region," and at making the most of that advantage.
For a fresh example, look at Universal Pictures' Minions. Minions is the most profitable film in the studio's history. Universal is no ordinary company; it has put out the Jurassic Park series, the Fast & Furious series and Ted. The Minions beat them all.
They started out as supporting characters in Despicable Me (well, a great many supporting characters), but they soon got their own film, Minions, and sold huge amounts of merchandise. The industry called the marketing campaign for the new film "the biggest and most comprehensive ever," and it brought in more than US$1 billion at the global box office (not yet counting China, where the film has just opened).
Around the North American release of Minions, Amazon printed Kevin, one of the Minions, on its parcels. It was the first time the retailer, which wants to move into Hollywood, had run a marketing tie-in with a film character. Worldwide, 7 brand partners made 10 Minions-related TV ads, including one for the vivo phones you can see on Chinese television.
According to The Hollywood Reporter, Universal has issued 850 Minions merchandise licenses, more than three times as many as for Despicable Me 2. Most of the increase came from international markets. Merchandise has kept flowing since the previous film. The spin-off game Minion Rush is still being marketed and sold, with an estimated 25 million-plus downloads over the past two years.
For all this, thank the media company Comcast, which bought all of NBCUniversal's equity in 2013. Jeff Shell moved from Comcast to Universal as chairman, and he saw that Universal needed to build its family and children's business and raise profits through licensing and consumer products.
Comcast-era Universal has proved once again that a full, Disney-style industry chain works, though it is still one step behind Disney: there is no "Minions park" yet. For now, fans can only scream over licensed dolls of uneven quality. And Disney's experience shows that theme parks and resorts bring in more revenue than anything except the multi-channel media networks business: 30% of total revenue in 2014, more than three times the merchandise division.
What could be more tempting than "films with no release window, unaffected by the seasons"? Remember Steven Spielberg's worry, which we mentioned earlier? "One summer, Hollywood will collapse because one film fails." Now the Disney model has become the savior: a complex revenue structure hedges away the risks of blockbusters and sequels.
Disney Chairman and CEO Robert A. Iger (also known as Bob Iger) stressed this on a conference call at the end of last year. "Our brand chain is very broad, with content coming from Disney, Pixar, Marvel, Star Wars, ABC and ESPN, which puts us in a unique position to create value in these turbulent times," he said. "Disney's four consecutive years of record revenue are the proof."
Now do you see why everyone is talking about IP and building parks? The park Universal plans in Tongzhou, Beijing, has been the talk of the town for some time, and even Anji in Zhejiang has opened a Hello Kitty park (thank goodness Hello Kitty never got an animated film). All of these are indispensable steps toward success, and "success" has always been a practical, dull word.
You will probably say we are being precious again: survival is hard enough, so why complain that reality is dull? But surely we are allowed a sigh. Hollywood, which once gave every film lover memories like no other, now has to sell tickets and toys to spread the risk of "uneven creativity." Beyond blockbusters and sequels, this is a sadder kind of dullness.
Word has it that Katzenberg, 65, flies to China every month, sometimes in his private jet. Kung Fu Panda 3 is set for a prime slot over next year's Lunar New Year, and each piece of news like this makes him a little more sure of "success." For those who still cannot build a Hollywood-style industry chain, nothing is more exciting than China's enormous market.
Let us wish them all good luck.
Translated from the original QDaily article. Original publication date retained.