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Why Hollywood’s Star-centric Revenue Model Doesn’t Work

BY Charles Borland | Partner Content | Apr 23, 2019
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Conventional wisdom in Hollywood says that star power has a direct impact on box office revenue. The bigger, and thus more “bankable”, the star, the higher the box office tally. This view has taken such deep root in Hollywood that producers often hitch their movie concept to a star well before an actual script is written. However, not only is there no evidence to support this notion. The evidence that does exist points to stars having virtually no discernible effect on a film’s box office performance. Why then does the star myth still loom so large? Because it masks the fact that Hollywood often has no real business model.

Simply put, a company that hasn’t clearly defined its target market doesn’t have a very strong business model. Most entities in Hollywood, from the biggest studio to the smallest production company, don’t have clearly defined target markets. Instead, Hollywood’s default strategy is the spray-and-pray method, whereby multiple genres of films with wildly differing production budgets are made in the hopes that a sufficient number will make enough money to offset the losses incurred by the rest. In other words, content is a commodity, making differentiation among content creators extremely difficult.

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To illustrate this point, quickly name three movies from each of the following major studios: Sony, Paramount, Universal, and Warner Brothers. Tough, right? Disney is different. We can all do it. Why? Because it has a clearly defined target market for its movies–families.

This scattershot approach to business means Hollywood pins its hopes to achieve positive ROI on maximizing revenue from any given movie. That’s because the three biggest drivers of any production budget are star salaries, visual effects (VFX), and locations. And if you have a movie with a big star (or stars), lots of visual effects, that is shot in multiple locations, you can rest assured that film will also have a massive Publicity & Advertising (P&A) spend. All that means generating revenue in the first release weekend and subsequent theatrical window is paramount. Big budgets mean big marketing spends, which do usually mean big revenues. But big revenues don’t necessarily translate into large margins. And there’s the rub.

However, some companies in Hollywood buck this trend. Blumhouse and Pixar are two examples.

Jason Blum figured out that, as a genre, horror films show a positive ROI. That’s because horror films are frequently filmed in one location, don’t require stars, and often don’t require VFX. Additionally, Blum understood that the horror audience was underserved, so he set out to remedy that.

With small budgets and a hungry audience, Blumhouse quickly became the most profitable production company in Hollywood. Blumhouse’s films may not generate as much revenue as a Marvel film, but when one of your films has a production budget of $15,000 and that film rakes in over $108 million in its first North American theatrical window,you don’t care. That’s what happened with 2009’s Paranormal Activity. Blumhouse’s business model is focused on cost discipline, which is only made possible because the production expenses associated with the genre allow it.

At the other end of the cost spectrum is Pixar. Pixar production budgets usually soar well past the $100 million dollar mark (and the Incredibles 2 production budget was estimated at $200 million), yet it’s consistently the most profitable studio in Hollywood. By keeping its high-quality resources under tight control –notably creative labor, including writers, directors, and animators, and costs for software like Renderman, used for VFX–Pixar is able to minimize execution risk. Thus, Pixar generates a much more consistent product than the Hollywood norm.

Notice that star power is not at the core of either Pixar’s or Blumhouse’s respective business models. Instead, stories are.

READ MORE: Disney May Not Remain Content’s King. Here’s Why.

One reason the action, science fiction, and fantasy genres don’t show a consistently positive ROI is because production costs are so high. The production budget for Marvel’s Avengers: Infinity Warwas estimated at between $316 million and $400 million. By contrast, the budget for Blumhouse’s 2017 hitGet Outwas roughly $4.5 millionInfinity War may have generated roughly eight times more in total box office revenue, but it also cost almost ninety times more to produce. And these figures don’t even take into account P&A and overhead expenses.

The problem with huge star-packed budgets lies not only in the margins but also in audience targeting. Because their budgets are so massive, major studios have to target all four basic movie-marketing target groups (men and women, both above and below 25 years old) to even hope to break even in that first theatrical window. This means it’s incredibly difficult to produce content that Fandom truly craves. These are the adults who flock to Comic-Cons the world over. Such audiences are obsessive, online, and often highly educated, which means they drive word of mouth. They crave deep, rich, grown-up content, yet Hollywood feeds them a consistent diet of watered-down PG and PG-13 rated fare. These fans are underserved.

Content studios specifically built and designed around new technologies such as Virtual Production(VP) workflows could solve this problem for Hollywood. (See my earlier article on VP here.) VP marries real-time rendering processes with live motion and performance capture techniques, creating the same workflow as a conventional film shoot but with much less variability and fewer inefficiencies. Additionally, for or over twenty years, VP costs have been falling drastically. Therefore, it’s now possible to target these underserved audiences, much as Blumhouse does, and consistently execute, much as Pixar does.

For now, however, Hollywood seems content to use VP technology as a toy on a project-by-project basis rather than as a technical platform with which to construct new business models. This is unfortunate. An opportunity to demolish Hollywood’s ill-conceived, revenue-focused star system and replace it with a more lucrative story-centric and character-driven system is at hand. Yet Hollywood still sees throwing spaghetti at the wall as the best way to conduct business.

This article was originally published on Techonomy

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