Invest nearly five years and $10 million in a new product. Spend another $6 million to advertise it. Then fight for shelf space, and watch it disappear from the market in less than a month.
That was the sobering formula for many a motion picture released in 1987, when the number of new films surged about 17% over the previous year, judging from data published by the trade publication Daily Variety. That takes production back to mid-1970s levels, but at that time new films were released in fewer theaters in each metropolitan area.
The cruelest consequences can be documented in Manhattan, where construction of new theaters has not kept pace with the soaring number of films, yet a successful opening is still deemed critical to a film's nationwide success.
Even though most American film makers and film stars live in Los Angeles and the influence of the city's premier movie-theater district in Westwood is enormous, film distributors still rate Manhattan as the most important market because of the concentration of nationally influential film critics and news media.
Booking Configuration Counts
Manhattan is also a much more concentrated movie market than sprawling Los Angeles; and a burst of theater construction here in recent years has given film makers plenty of new places to exhibit their movies. By comparison, Los Angeles County boasts 549 screens while the five boroughs of New York City have about 300.
Manhattan has about 110 screens and there were about 40 movies playing at them during a randomly selected, four-week period in November and December. On the surface, it would seem that there are enough theaters to go around.
But a number of those movie houses are devoted to "art" or "specialty" films, which reduces the number of theaters available to Hollywood distributors that try to book three to six screens simultaneously for a film seeking broad commercial success.
Nor will exhibitors agree to just any booking configuration. The theater operators insist on "clearing" an area of competition, refusing to accept a movie unless they have it on an exclusive basis in a given geographic area of the city.
Distributors, for their part, rank five Manhattan locations in descending order of preference: the East Side, Broadway, the Upper West Side, Greenwich Village/34th Street and 86th Street East.
The crunch probably won't ease any time soon. Even though old theaters are occasionally subdivided or rebuilt, new theater construction in Manhattan appears unlikely because of the high cost of land and zoning prohibitions in some sections of the city.
"The premier market is constrained," said one venture capital fund executive, who has invested in a movie-theater company instead of movie production. "Is that not a classic example of (limited) shelf space?"
In Manhattan, the jockeying for good theaters is not haphazard. Distributors and theater owners typically form alliances, which they prefer to call "relationships." Major distributors such as Paramount Pictures or Warner Bros. have regular access to the most coveted theaters, while independents such as De Laurentiis Entertainment Group have a more difficult time securing screens.
During the week of Nov. 15, for example, the major distributors (Columbia, Disney, MGM/UA, Orion, Paramount, Tri-Star, 20th Century Fox, Universal and Warner) had about 18 films playing on 64 screens, while independents had about 29 films on 56 screens, with some films changing midweek. For the four-week period beginning Nov. 15, a review of Manhattan movie advertisements reveals that:
- Loews Theatres, which has some of the city's most desired movie houses, showed no independents' films on its 16 screens.
- Thirty-one percent of Loews' screens were devoted to "The Running Man," a popular Arnold Schwarzenegger film released by Tri-Star Pictures, which acquired the Loews chain a year ago. Box-office leader Paramount Pictures filled 47% of Loews' screens for three of the four weeks, leaving just four screens available to other distributors.
- Independent film producers fared much better with Cineplex Odeon, the largest chain in the market with 28 screens in 20 Manhattan theaters. During the four-week period, 11 independently produced movies filled 40% of Cineplex's screens.
- If analyzed by neighborhood, however, the independents had scant access to the prized East Side theaters, where only two independent films appeared on seven Cineplex screens during the four-week period. In contrast, independent films filled 66% of Cineplex's screens in the Broadway district, traditionally associated with "action" movies.
- Two of the 11 independent titles appearing in Cineplex theaters happened to be movies distributed by Cineplex itself: "Sign 'o the Times" and "The Glass Menagerie."
- Cineplex, a Canadian theater company and film distributor, is 50%-owned by MCA, the parent company of Universal Pictures. If combined, the pictures of Cineplex and Universal Pictures accounted for 14% to 29% of Cineplex's screen offerings during the four-week period.
Nothing in the antitrust laws precludes distributors from showing their own films in their own theaters or from channeling films to a certain movie-theater owner, according to Fred E. Haynes, acting chief of the Justice Department's antitrust division unit that deals with motion picture industry matters.
"We have taken the position that a 'track' relationship or 'marriage' does not violate the antitrust laws," Haynes said in a telephone interview. The government lawyer noted, however, that "most of the major distributors are subject to the 'Paramount' decrees, which require licensing (films) theater by theater and on the merits, without discrimination in favor of affiliated theaters, circuit theaters or others."
Haynes said he was reluctant to comment further because the antitrust division has "an active investigation" into film licensing practices by Paramount in Texas.
How They Invest
The Paramount decrees are a series of agreements reached by the major film companies with the federal government to settle antitrust cases in the 1940s and 1950s that resulted in the dismantling of major firms that engaged in film production, distribution and theater ownership. But, as Haynes and other antitrust specialists point out, the companies were dismantled not because they were "vertically integrated," but because they conspired to fix admission prices in local markets.
The Paramount decrees made Hollywood studios leery for several decades about their chances of winning Justice Department approval to re-enter the theater business. Not until 1981 did a major distributor, Columbia Pictures, invest in a theater chain (Walter Reade Organization, based in New York)--and not until 1986 did other distributors flood into the business, just as a number of regional theater circuits were going up for sale. Sales flourished because owners were aging or eagerly accepted the inflated prices underwritten by Wall Street's infatuation with the entertainment industry.
In addition to MCA and Tri-Star, two other majors have recently plunged back into the theater business. Gulf & Western's Paramount Pictures division has acquired three theater chains and agreed to sell one-half interest to Warner Bros., the film subsidiary of Warner Communications Inc. Late last month, the Justice Department said it would not oppose Paramount and Warner operating as partners in theater ownership.
All told, movie distributors now control about 14% of the nation's screens, but the major distributors have tended to invest in theater circuits with large market shares in such metropolitan areas as New York, Chicago, Los Angeles, Washington and Atlanta.
These major distributors have found several reasons to invest. By owning theaters, the distributors have the ability to nurture one of their own films that takes longer to find its audience. The distributor also ends up with more of the box-office revenue if it owns the theater. Home video contracts--of increasing importance to the movie industry--now often require that before a film is released on cassettes it be theatrically released in New York, Chicago, Los Angeles or certain other big cities, increasing the importance of theaters in those markets.
The big distributors have the financial ability to refurbish or construct new theaters for the chains they've acquired and have undoubtedly contributed to the building spree begun by leading theater chains such as United Artists Communications and American Multi-Cinema. Since 1980, indoor theater screens increased 46% to nearly 21,000, according to the National Assn. of Theatre Owners.
In percentage gains, film production during this decade very nearly kept pace with theater construction. For the year ended Oct. 31, the number of films distributed in 1987 rose to 466, up 45% from 1980, according to the trade publication Variety, which tracks films rated by the Motion Picture Assn. of America's Classification & Rating Administration.
Independents account for the increased film production, according to Variety, which found that the number of films from the larger distribution companies declined 13% over the past three years. A. D. Murphy, Variety's longtime industry analyst, attributes the film production surge both to Wall Street's five-year bull market, which made money readily available to independents, and to the explosion of new theater construction in most parts of the country.
As a rule of thumb, theater companies typically are willing to spend about $14 or $15 per square foot annually to rent space for a theater, one chain executive explained. But in Manhattan, some theater owners are believed to be paying as much as $30 to $36 per square foot.
Owners of residential-commercial buildings in Manhattan can command $60 to $70 a square foot from retailers for prized space, according to Sandy Hornick, zoning director of New York's city planning department, who observed that building owners would be likely to seek the highest-paying tenants.
Hornick acknowledged that zoning does restrict theater construction in some areas of the city: A 2-year-old ordinance, for example, bars new theaters in a six- to eight-block area near 59th Street and Third Avenue--an area identified by distributors as Manhattan's top movie-house district.
The scarcity of screens, combined with cost barriers that might deter newcomers, might seem to explain the decision of Loews and Cineplex Odeon to raise admission prices last month to $7 over the loud protest of Manhattan moviegoers, including Mayor Ed Koch.
But a Los Angeles theater owner observed privately that the ticket prices might have been raised to help defray the costs incurred when Tri-Star acquired Loews for nearly $300 million, and Cineplex Odeon paid $211 million for the two Manhattan chains that it acquired in the past 18 months.
A local trade group, the Metropolitan Theater Owners Assn., has defended the price increase as needed to offset renovations and higher rents. But to the movie-going public, the exhibitors may appear to be demonstrating their upper hand, just as they seem to dictate terms to the movie distributors.
In Manhattan, for example, most theater owners refuse to set any "floor"--which would guarantee the distributor some portion of the box-office receipts, no matter how badly the film performed. In most markets, however, "floors" are established, often beginning at 70% of the first week's receipts, and declining in percentage in ensuing weeks.
The typical agreement in Manhattan allows the theater owner to take his overhead costs off the top, plus 10% of any additional box-office revenue--with the remaining 90% going to the distributor, according to Cineplex Odeon Chairman Garth H. Drabinsky.
Distributors complain that theater owners have another lucrative source of income in New York because the theaters often insist on placing a distributor's ads, for which a commission is collected or a rebate received. In effect, the theater company uses its own in-house agency to contract for large amounts of advertising at a wholesale rate, but charges distributors a "retail" rate, said one distribution executive with more than 30 years of experience. "Any rebate on his contract (goes) to his exhibition company, which is nothing short of stealing," the executive complained, although insisting on anonymity.
Theater chains may place ads for distributors in other markets, but "this is the only place that the advertising is so much," one major movie company executive said, in an effort to explain the distributors' resentment.
He noted that a full-page Sunday ad in the New York Times can cost upward of $32,000, and a "modest" campaign in New York can cost $150,000 the first week, so a 10% commission for placing the ad would amount to "$15,000 which goes directly into the exhibitors' pocket, over and above what they'll take in at the box office."
Theater owners do not deny the practice, but they refuse to discuss it publicly.
"I'd rather not touch that," said Bernard Myerson, the longtime president of Loews Theatres.
"It's a historical thing. It was there 50 years before I came along," Cineplex's Drabinsky said.
As explained by one distributor, the industry practice in New York allows the distributor to place his own ads and keep any rebates or commissions if the distributor secures 10 theaters or more for a single picture at theaters in the metropolitan area.
Privately, theater owners as well as distributors contend that the sums at stake provide some enticement for theaters to book exclusive or limited runs, to pocket the advertising commissions and rebates. For that reason, and because the sophisticated moviegoers in Manhattan also like foreign and "specialty" films, "Indies do get a very good shake when it comes to New York," one distributor said.
As far as the actual division of revenue between theater owners and distributors, it makes no difference whether the film distributor is major or independent, according to Drabinsky. "It's the same 90-10 (split) for every film," the Cineplex executive said.
William C. Soady, president of Universal Pictures Distribution, concurred. Terms "are not any worse for independents; they can't get any worse than that," Soady said.
"We usually lose money in New York," Soady said, but he added that Manhattan is critical to a film's national success because "it is the media capital of the world, and film critics perceive how a picture's being treated by a studio by the quality of the East Side and West Side theaters (booked)."
Directors, stars and producers also influence the negotiations for certain theaters. Richard Attenborough, who directed "Cry Freedom" for Universal Pictures, recently requested the Ziegfeld in New York "and I was thankful I was able to do it," Soady said.
The Ziegfeld belongs to the Cineplex chain that is 50%-owned by MCA, but MCA officials say that their investment doesn't sway negotiations.
But even a cozy relationship won't revive a failing picture, as the exhibitors and distributors point out.
The Universal release "Cross My Heart" opened in five Manhattan theaters, accompanied by a full-page Sunday ad in the New York Times.
One week later, the $10-million film remained in just two Manhattan theaters--both owned by Cineplex. In one theater the film shared its billing with a re-issue of Disney's animated classic, "Cinderella." By the third week, the film had disappeared from Manhattan.
Yet Alan Greisman, one of the film's executive producers, said he has no quarrel with Universal's handling of "Cross My Heart." When choosing a distributor, Greisman said, he would "absolutely" choose a major over an independent "because they have the best relationships with the best theater chains; they have the most money to spend. The name of the game is to get out there to open up with enough clout to sustain (a long run)."
The Greisman film had a broader crack at the Manhattan market, for example, than "Hiding Out," a $7.5-million teen-age action film starring Jon Cryer. "Hiding Out," distributed by the independent De Laurentiis Entertainment Group, managed to open in just two theaters owned by a small Manhattan chain in the Broadway district and the Village.
"We had a lot of problems getting good theaters in New York. After the first week, we were out of one," said Martin L. Tudor, the film's executive producer. De Laurentiis "tried hard," Tudor said, but "their obvious problems hurt them," alluding to the company's recent financial losses.
There are entertainment industry executives who say a shakeout among film distributors will be speeded by the limited "shelf-space" found in Manhattan and other key markets.
"It's a form of retailing," said one former banker to the industry. "If you get away from the glitz and glamour, it's a form of retailing where the store . . . doesn't have to buy the inventory. They contract to sell it for you, but if it doesn't work, they've got a button pushed and somebody else's comes in, so they've got no vested interest per se in that particular unit of inventory."