Sequels Wrecked Hollywood This Summer. How Did It Fall Into the Trap, and Why Can't It Get Out?

What's next — are we about to see a reshuffling of the major studios?

"Maybe there's a summer where all the big movies tank at the box office, and then what does a Hollywood studio that lives on big movies do? Are Hollywood's good times over?"

Three years ago, this line from director Steven Spielberg made the rounds for a while. But even Hollywood probably didn't expect the warning to come true this fast.

In the 2016 summer season, the average North American gross of the top ten films fell from $283 million to $235 million, a drop of nearly 17%. Four films didn't even clear their production costs in North America — X-Men: Apocalypse, Star Trek Beyond, The Legend of Tarzan and Ghostbusters.

The worst performer among all the big movies was Alice Through the Looking Glass. The film cost $170 million to make, and its North American box office came to a fraction of that — $77 million.

Even Hollywood's box-office structure has fallen out of balance.

Normally the films a studio makes spread out across four tiers: above $300 million, $200–300 million, $100–200 million, and below $100 million. These are, in order, the flagship tentpoles; ordinary big movies built on established genres; films aimed at one particular audience; and "filler" movies, which exist to keep the studio's ties to theater chains and promotional channels alive.

Box-office forecasts aren't always accurate, so the tiers aren't absolute. But North America has never seen a summer like this one: so far only one film, Suicide Squad, has landed in the $200–300 million range.

The Hollywood Reporter used the words "code red" to describe the 2016 summer season. Even Paramount Vice Chairman Robert Moore has come to see the summer that just ended as a hard one.

The vice chairman pointed the finger at sequels and remakes — in other words, at the hottest word in the film market right now: IP. "In this market, we always want to develop projects people already know, but we can't get a handle on what audiences actually want to see. Audiences are getting more and more picky about sequels and remakes," Robert Moore said.

This is a tired subject, and we have no interest in repeating the clichés from an artistic angle one more time. The better question is how Hollywood came to be ruled by sequel blockbusters in the first place, and whether it is even capable of breaking free of that model.

Hollywood's current sequel-blockbuster model began in 1999. The man who changed Hollywood was Alan Horn, who became president and chief operating officer of Warner Bros. that year.

Hollywood at the time had no sense of what a blockbuster was worth. Studios believed that whether a movie cost $150 million or $15 million, audiences still paid the same fixed $5 for a ticket. A big-budget film, in their view, brought nothing extra beyond a higher production cost.

The evidence seemed to back that up. Purely on return, big-budget films looked no different from small and mid-budget ones. In 1997, James Cameron spent $200 million to make Titanic, which brought in $600 million in North America; in 1998, the North American box-office champion, Saving Private Ryan, cost $70 million and grossed $210 million.

Alan Horn believed in the blockbuster anyway. After taking over, he began pushing a strategy of piling most of each year's production and marketing budget onto a small number of films, hoping to manufacture hits. Over the five years from 2007 to 2011, Warner Bros. poured 22% of its production spending into 5% of its films.

The blockbuster strategy worked better than even Alan Horn had imagined. By 2011, Warner Bros. was the only studio in history to post more than $1 billion in North American box office for 11 straight years. And over Horn's 11 years at the studio, Warner Bros. was the top-grossing studio in North America seven times.

The sharp contrast to Warner Bros.' success was NBC Universal. In 2007, after Jeff Zucker became the company's CEO, he began cutting costs hard — fewer expensive productions, expensive TV shows killed outright, and so on.

The result: in 2009 and 2010, Universal Pictures' market share fell to the bottom of the Hollywood Big Six, trailing the fifth-place studio by nearly 50%. NBC also slid from the most-watched network to behind ABC, CBS and Fox. The revenue and profit numbers Wall Street cared about dropped sharply too, and Jeff Zucker resigned in 2010.

By then nobody questioned Alan Horn's blockbuster strategy anymore. Harvard Business School professor Anita Elberse wrote a whole book about it, called Blockbusters.

In 2012, summing up why the strategy worked, Alan Horn put it this way: "Even the most loyal moviegoer sees at most one movie a week, so you have to make sure it's the one you made." That is exactly what the blockbuster strategy is built to do.

A big budget guarantees nothing, of course. Disney's Tomorrowland, 20th Century Fox's Fantastic Four — films that cost hundreds of millions of dollars and died at the box office. Even Alan Horn admitted it: "A bad movie has no hope at all. So first you need a good idea, and then you need to execute it."

Speaking of a good idea: this is where IP comes in.

The word has been worn out. Mickey Mouse is an IP. Teenage Mutant Ninja Turtles is an IP. Mission: Impossible is an IP. Tom Cruise is an IP. The term has been stretched to cover anything some slice of the public already knows or likes.

And because it is already known, IP is treated as a way to lower risk — spending $150 million on a spy thriller may be a big gamble, but swap the lead for Captain America and someone is guaranteed to show up. "In fact, the key to predicting a project's potential value accurately is whether the new idea resembles, to some degree, a proven success that has already been transplanted… which is why people pile so readily onto certain IPs," Anita Elberse wrote in Blockbusters.

And so Hollywood began mass-producing sequels and IP movies. In 1998, only one of the top ten North American box-office films, Godzilla, was a remake. By 2015, of the top ten, only Inside Out counted as original, and The Martian, adapted from a novel, could at best count as half of one.

Among the top fifty North American box-office films, the share of the total taken by sequels and IP movies climbed from 7.37% in 1998 to 62.18% in 2015.

From Hollywood's point of view, every step toward the blockbuster strategy looks like a rational choice: use big movies to draw audiences, use IP to lower risk. Perfect business logic.

But every one of those choices was made from the standpoint of running a company, not from the standpoint of what moviegoers want. So there is nothing surprising about audiences growing tired under the barrage of sequel blockbusters — just as Robert Moore said: "Audiences are getting more and more picky about sequels and remakes."

If audiences are getting pickier about sequels and remakes, why doesn't Hollywood simply go back to how it worked in the 1970s? In that era, often called Hollywood's golden age, the economic downturn pushed studios toward making large numbers of small and mid-budget films, and a generation of directors shaped by the French New Wave rose quickly on the back of it — among them Francis Ford Coppola, who made Apocalypse Now and The Godfather; John G. Avildsen, director of Rocky; Steven Spielberg; and Martin Scorsese.

Hollywood can't go back. Today's Hollywood is no longer the Hollywood of the 1970s. It is already hostage to the blockbuster model, and getting free of it would cost an enormous amount.

If Hollywood forty or fifty years ago was another word for movies, today's Hollywood means a set of sprawling entertainment conglomerates. Movies? Just one small piece of business inside these empires — at Disney, film and TV entertainment accounts for only 14% of total revenue.

Hollywood's expansion began in the 1980s. The arrival of television gave people more entertainment options, and movies stopped being Americans' only way to pass an evening. A shrinking box-office market forced Hollywood to think about its future, and Star Wars, released in 1977, offered an answer. Not because the film itself was so good — because between 1978 and 1983, sales of goods carrying the Star Wars name or characters tripled.

That woke Hollywood up. "The real value of the film industry lies not in how much profit a film itself generates, but in how many chances it creates for the business to work with other fields — television products, theme parks, consumer goods, soundtrack CDs, books, computer games and interactive entertainment. All of them lower cost and risk while raising revenue. The movie is the key to this magic kingdom," Martin Dale wrote in The Movie Game: The Film Business in Britain, Europe and America.

And so a new kind of corporate structure went up: film studios, TV networks, theater chains, publishing houses, record labels, theme parks and game studios all packed into one giant shell, forming today's Hollywood Big Six.

On paper, this structure and the sequel-blockbuster strategy make a closed loop. Because the IP exists, it is easy to turn a film into an animated series, a comic, a novel, a video game or a theme-park ride — and the divisions inside the Big Six that develop those spinoffs then push the film divisions to develop still more IP movies.

Now back to the earlier question of why Hollywood can't go back. Imagine Disney stopped making sequels like The Avengers: without a film behind them, how much merchandise revenue would they lose?

The people running Disney's merchandise business don't want to find out. Last August, Disney announced a $1 billion investment to build a 14.7-acre Star Wars theme park next to Disneyland in California. If the Star Wars series stopped, that park's appeal would take a cut too.

Once a movie's returns are tied to the returns of other businesses, making the film is no longer only the business of the people making it. This is not an exaggeration. Shane Black, director of Iron Man 3, has said the film's villain was originally meant to be a woman, but the studio decided merchandise built around a female character wouldn't sell, so Black had to rewrite the script.

Behind all of it, of course, is the half-hidden figure of Wall Street. Disney's stock fell from $120 all the way to today's $95, and the one stretch where it rebounded was the run-up to a new Star Wars release. At an analyst call last November, Bob Iger spent barely a moment on the quarter's earnings before turning to Star Wars — the subject took up a third of his remarks.

Then there is Jeffrey Katzenberg, founder of DreamWorks Animation. DreamWorks' results were terrible all through 2014, and almost every quarter he had to explain to Wall Street why, and what he would change. In the end Katzenberg proposed turning DreamWorks "from an animated-film company into a diversified, multi-brand entertainment company" — in other words, a company held up by IP and sequels.

Luckily, after selling DreamWorks to Comcast, Katzenberg never has to face Wall Street again.

The other force clamping Hollywood into the blockbuster strategy is globalization. Last summer, some of the people QDaily interviewed in Hollywood already knew they were being carried along by it.

Mark Harris is a documentary director in his early eighties who has won three Oscars. He said: "What kind of movie can cross the language barrier and be accepted in different countries? Simple movies — action-adventure, comic-book heroes, fantasy. More complicated films don't pull as hard in the international market, and they aren't as easy to distribute." In other words, to please the global market, Hollywood has no choice but to keep making sequels and IP films.

There is one more reason Hollywood can't return to its golden age, and it may be the saddest: the people with real creativity have been driven out, because they don't fit the blockbuster strategy.

People who compromised, changed course or simply left after clashing with a studio are everywhere. Edgar Wright was set to direct Ant-Man, then parted ways with Marvel over "creative differences"; afterward Joss Whedon, sometimes called "the George Lucas of television," also left the Marvel Cinematic Universe.

TV producer Tim Marx remembered the old days: "Twenty years ago I could shoot movies non-stop — $10 million, $15 million, $20 million. Making those films was fun. They weren't designed for the international market, just for the domestic US market." Now television has become creativity's shelter instead.

From 1998 to today, the spread of the sequel-blockbuster strategy has remade Hollywood completely. Chasing the IP supply chain and chasing the global market have rebuilt how Hollywood runs; everything now turns on sequels and IP. Until this machine collapses outright, Hollywood has no way out of the blockbuster strategy it runs on.

Michael Wolff once said: "The entertainment business is a gamble, and where there is gambling there are always winners — so hit films become the engine that drives the entertainment industry forward."

But gambling has a rule: in the end the gambler almost always loses. Hollywood once held IP in its hand and thought it had the hard currency of the entire entertainment world. Today the IP the studios still clutch is turning into an old, outdated currency. The last era's billionaires may not have it nearly so easy in the next one.

As things stand, change may have to come from outside.

STX, which QDaily has written about before, is trying to recreate Hollywood's "golden age": tell a good story and sell it. The new company has no sprawling IP-development business and no pressure from Wall Street, and in the view of Adam Fogelson, chairman of STX Entertainment, that is exactly how simply the film business ought to work.

As for the studios still leaning on sequels and IP: "Aside from one or two of them going under, I can't think of what else they can do," said analyst Doug Cruetz.

Graphics: Wu Lingwei