Patterns in history

As we enter the holiday season, film studio executives (those that remain in their jobs) are wondering if the Movie Santa will bring them nice presents in the form of renewed contracts and increased bonuses, or lumps of coal in the form of another round of cuts and consolidations.

It’s difficult to evaluate from the outside, because the movie industry plays fast and loose with the numbers so it’s been hard to measure historical ups and downs. Box-office numbers, even when adjusted for inflation, which they usually aren’t, now account for only a fraction of a film’s revenue.

Domestic numbers often seem to show patterns that alter radically when fluctuating (and poorly counted) foreign sales are thrown into the mix. So the movie industry, unlike more numerically minded businesses, is never really sure whether its economic viability is rising or falling; it has always seemed more of a gut feeling, at least to people outside the highest levels of the industry.

However, based on my two decades in the business, my knowledge of studio balance sheets and my interactions with the financiers who keep this industry spinning, I’d like to pull back the curtain on Santa’s plans and make the movie business a bit more quantifiable. Here I offer an admittedly impressionistic historical model we may call the Leipzig Hypothesis, which says the film industry’s profitability — based on known milestones — for the last 100 years has followed a wave pattern which peaks with uncanny regularity in the middle years of each decade, then bottoms out in the decade’s last years, only to rise again from the ‘0’ year driven by new innovation.

Ever since 1891, when Thomas Edison patented the kinetoscope — the precursor to the motion-picture projector — innovations in technology and distribution have been driving the movie industry through rising and falling economic cycles.

“We’ll be in this trough for another two years. It won’t be until ate 2011 or early 2012 that we’ll be certain we have emerged, riding the wave of a newly widespread market ore technology”

In the early years of each decade, as an innovation takes hold, the business tends to expand. There’s a sense of renewed optimism among industry executives and bigger movie budgets soon follow, along with higher salaries and richer deals for the talent. The expansion generally peaks around the sixth or seventh year of each decade, when higher spending has taken its profit-reducing toll.

Then, pessimism sets in, and industry leaders call for the business to be reined in. Budgets become smaller and negotiations become tougher amid prognostications about the ill health of the industry. In the final few years of each decade, where we are now, the business contracts, reaching its nadir at decade’s end, when, almost miraculously, the next innovation is born that will start the cycle anew.

Each innovation is an advance in technology or a new distribution market. For example, in 1900, the size of each reel of film doubled, allowing longer, more complicated takes. In 1910, black-and-white movies were enhanced with two-colour tinting, and in 1918 Technicolor was born, followed, in 1927, with the beginnings of synchronised sound technology; silent movies ended in 1929. Then 1940 saw the advent of multi-channel sound, the screen image became much wider in 1950 with the innovation of Cinemascope, and special effects took a leap forward in the late 1950s and early 1960s.

New distribution markets have been the drivers for the past 40 years, beginning with the first multiplex cinemas in 1970, and the creation of HBO and cable television in 1972. Then, in 1976, VHS and Betamax videotape appeared, starting the trend towards in-home entertainment, which became widespread by 1980. The foreign markets exploded in 1990, when films began making more money overseas than from the domestic market, and a new internationalism began to take hold in Studio-land. DVDs were invented late in the last decade, and exploded in 2000.

Presently, we’re in a downturn — which is predicable. As a result, studios have given talent fees a big haircut and have reduced the number of films released by up to one-third. We’ll be in this trough for another two years. It won’t be until late 2011 or early 2012 or so that we’ll be certain we have emerged, riding the wave of a newly widespread market or technology: one that, history tells us, we are not yet clear-eyed enough to perceive, though it’s already on the scene.

Will it be digital downloads to multiple devices? Or 3D and 3D home video?

Perhaps a recapitalised international marketplace? The only certainty is that we’re in a wholly predictable pattern, even though the numbers still fly fast and loose.