Why Hollywood's Business Model Is Bad News for Creativity

Guest blog: Lynda Obst's "Sleepless in Hollywood" gets it right about what's shaping today's movie business

Once upon a time, six decades ago, when the big Hollywood studios had their stars under contract and owned most of the large theater chains, they made nearly all of their profits from selling tickets at the box office.

Hollywood is now a very different enterprise. Almost all the profits of major studios, such as Warner, Disney and Fox, come from publicizing, branding and licensing entertainment properties across the world, including DVDs, streaming, inflight entertainment, cable television, pay television, games, amusement-park rides and toys.

Each major studio also earns money from licensing out the rights to a library of feature movies, animated shorts and TV series. The lion's share of studios' profits these days come not from theaters but from television.

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For this system to work, the studios need international blockbusters in the multiplexes that can serve as locomotives to pull their licensing packages through Asia, Europe and South America. Blockbusters are most easily found in sequel-friendly action features (e.g., "The Fast and the Furious"), comic-book-based movies ("X-Men," "Iron Man") and animated features ("Toy Story," "Ice Age").

As Lynda Obst lucidly explains in "Sleepless in Hollywood," her fascinating memoir-primer on the movie industry, the current business model is bad news for producers who want to make more creative movies.

Obst, the author of the bestseller "Hello, He Lied" (1996) and producer of a such films as "Flashdance," "The Fisher King" and "Sleepless in Seattle," is well positioned to report on the decline and fall of what she sardonically terms "the old abnormal" — the period between 1980 and 2005 when she and her colleagues made original, dialogue-driven films.

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She is still on a first-name basis with the key players in Hollywood's "old abnormal," and they tell many of their own horror stories. James Gianopulos, a top executive at Fox, tells her that the studio will go on forever cloning sequels to the animated feature "Ice Age."

He explains that the crucial foreign audience is familiar with — and likes — the "Ice Age" characters, giving the franchise the vital virtue of, as Hollywood calls it, "preawareness." As Obst points out, the problem with such international franchise movies is that they consume studios' limited budgets, largely crowding out the dialogue-driven movies that she and her colleagues want to make.

"Could we have dreamed that the music would stop?" she writes poignantly, after it becomes clear that studios were no longer willing even to hear pitches from creative insiders of the "old abnormality" who weren't attached to franchises. Although it is a sad tale of economic displacement in the dream factory, she tells it with humor and flashes of brilliant insight.

She also proposes her own happy ending: Studios could cut down on their budgets for franchises, use internet marketing and make their profits on droves of low-budget, dialogue-driven movies, such as "The Best Exotic Marigold Hotel," which, she says, "has made over $117 million worldwide and cost only $10 million pre-Oscars, without any prior awareness and marketing outside of word of mouth." This sounds hopeful, but is it?

Unfortunately, as Obst knows from reading her own distribution reports, such numbers are grossly misleading. The $117 million that "Marigold Hotel" supposedly "made" isn't what the film or its distributor (Fox Searchlight) earned; it is the gross revenues of the theaters. From that gross revenue, the theaters pay the distributor a "rental" charge that varies between 30 percent and 50 percent of the revenue amount. (China pays as little as 20 percent.)

Even then, from the share that the distributor receives in rentals it must pay out the costs of worldwide advertising, local taxes, prints of the film, custom clearances, dubbing and re-editing for local audiences.

In the case of most films with a theater gross of less than $150 million, these costs consume the entire amount of the rental payments from theaters—so a film may claim to have made millions of dollars when it has really made nothing (though it may receive further revenues, over time, from DVDs, airline showing, video streaming and TV sales). The problem with small movies is that they get a correspondingly small distribution fee, the main source of their profits.

So, alas, as much as the old abnormality might benefit from moving money away from blockbusters and toward more low-budget films, Hollywood itself is unlikely to give the idea a green light. In 2012, after all, the current business model provided the big studios with record profits.

So why change what works? Sure, low-budget movies can turn a profit, but they can't provide the oceans of revenues necessary to pay Hollywood's enormous overhead. Nor can they provide the global blockbusters necessary to fuel the studios' licensing machinery.

I wish that Obst had included the distribution reports on the films she herself produced. They would show the money that came in and the money that went out on each film, and the tally might have given greater weight to her anecdotal observations.

But in an industry in which even extras must sign non-disclosure agreements — as I found out when I was an extra in "Wall Street: Money Never Sleeps" — she is simply playing by the rules. Even so, "Sleepless in Hollywood" is a great read that illuminates what is really shaping today's movie business.

An earlier version of this article appeared in the Wall Street Journal.