How Hollywood should be run (according to FORTUNE)

Fortune Magazine has written an interesting article on how G- and PG-rated films are generating the lion's share of income for studios, despite being the smallest percentage of films created in 2003. Here's the highlights:

940 films were released in North America in 2003 (an average of nearly 19 per week)
29 films (less than 3%) were G or PG, 646 (nearly 70%) were rated R
Of the top 20 highest-grossing films, only 4 (Matrix Revolutions (#9), Matrix Reloaded (#4), T3 (#8) and Bad Boys II (#11)) were rated R (about 2/3 of 1%).

Fortune posits that, since G-rated films have a higher return on investment(ROI), Hollywood is misunderstanding their audience and should be creating more G- and PG-rated films, since more people will buy tickets and/or DVD's. I think they're way wrong. The success or failure of a film depends on three things: buildup of demand, repeat viewings and run longevity.

Allow me to explain. By way of information sourcing, I am using 2003 Domestic and 2003 Worldwide grosses as presented by Box Office Mojo.

In the modern movie world, there is almost nothing more important than the opening weekend box office grosses. The success or failure of a movie is almost universally predicated on the three-to-five day period following its release. This tells the studio a number of things - did the hype pay off, is the star/studio/product still bankable and is this sequel-worthy? The answers to these questions can change after release, but it doesn't happen often. Let's look at the top 10 opening weekends (domestically) of 2003:

1. Matrix Reloaded - ($91 million - 32% of final gross)

2. X2 (X-Men United) - ($85 million - 40% of final gross)

3. Return of the King - ($73 million - 19% of final gross)

4. Finding Nemo - ($70 million - 21% of final gross)

5. Bruce Almighty- ($68 million - 28% of final gross)

6. Hulk - ($62 million - 47% of final gross)

7. 2 Fast 2 Furious- ($50 million - 39% of final gross)

8. Matrix Revolutions - ($48 million - 35% of final gross)

9. Scary Movie 3 - ($48 million - 44% of final gross)

10. Pirates of the Caribbean- ($46 million - 15% of final gross)

Each of the above movies had some form of hype attached to it, whether it was a built-in audience (1, 2, 3, 7, 8 and 9 are all sequels), a reliable brand (#4 is a Pixar film, #6 is a cartoon character), a name actor (#5 starred Jim Carrey), or awesome promotion (#10 is a Disney thrill ride and had an awesome promo commercial). These films were bound to open huge and, as a result, got all the attention and all the headlines. However, each of these films also came with enormous price tags, meaning they needed something else to deliver good ROI.

There are hundreds of movie reviewers out there and I think there are 3 people on the planet who base their decision to go to a movie on the opinions of said reviewers. People will go to a movie if one of the following is true: They like the actor, they like the series, they like the genre or a friend tells them it's good. Good word of mouth leads to two things: more people going and repeat business. The percentage of gross listed next to the top 10 movies is very telling on this score. Three films in the top 10 (ROTK, Nemo and Pirates) earned less than 25% of their total grosses on the opening weekend. A more recent example of this is The Polar Express, which needed a few weeks to find an audience, but has remained steadily in the top 5 week-to-week for a few months. ROTK and Nemo benefited from great advance hype, strong word of mouth and hordes of loyal Tolkeinites and Pixaronians coming back again and again. Pirates made its way almost entirely on strong word of mouth (another example of this is Titanic). It doesn't matter what a movie is rated, if it sucks, it sucks, and the moviegoing public will make sure that it fails miserably.

This is one case where the family-friendly argument holds water, as a family buying 4 tickets to Finding Nemo is spending more than 2 twentysomethings going to Matrix Reloaded. Where non-family films catch up is ancillary business, as twenty- and thirtysomethings with disposable income and spare time will not only attend the movie in a theater (often more than once, if the film is really good), but will buy the special-edition DVD, a t-shirt, register on the website, and jump into various other money-sucking promotions. The family of 4 identified earlier may bypass spending $50 to take everyone to the theater and wait 6 months to buy the DVD for $25 at the neighborhood Wal-Mart.

So, I think I've proven my argument that buildup of demand, repeat viewings and run longevity are the three pillars of movie success. Fortune's argument goes on to state that Hollywood is mismanaging their studios. I think they're wrong and here's why:

Fortune states that 4 R-rated movies are in the top 20. This is correct, but it's important to note that only 3 films (Nemo, Elf and Cheaper by the Dozen) in the top 20 are G- or PG-rated. 13 films (including Mojo's #1, ROTK) are rated PG-13 and I wouldn't take my kids to see any of them. Moreover, 37 of Mojo's top 100 are R-rated, while only 24 are G- or PG-rated films. Granted, if there were more G- and PG-rated films, the ratio would probably change by sheer volume. I also question Fortune's source number, since 940 seems awfully high. Mojo lists the top 507 highest-grossing domestic films, so I suspect that includes a number of straight-to-video and arthouse films, many of which are fringe-extreme in their content and receive R ratings. That skews the statistics a bit.

It is also important to note the Worldwide grosses. No studio could reasonably expect North American take to move many of today's overpriced films to profitability, so the global market must be considered. Take 2003 champ Return of the King, which cost $144 million to make and market, but only earned 34% of its $1.1 billion dollar gross in North America. Using Mojo's 2003 Worldwide grosses as the basis, the top 20 consists of 2 G-rated films (Nemo and Brother Bear), 1 PG film (Elf), 7 R films (both Matrixes, Last Samurai, T3, Bad Boys II, Love Actually and American Wedding) and 10 PG-13 films. Elements of films that lead to sterner ratings in the states play better in other parts of the world.

Finally, let's look at some actual ROI figures for 2003. Calculation is very simple: Gross/costs (costs are production + marketing):

ROTK Domestic 262% Worldwide 777% (This means that ROTK earned almost 8X what it cost to make the movie)
Nemo Domestic 261% Worldwide 665%
Pirates Domestic 169% Worldwide 363%
Reloaded Domestic 141% Worldwide 369%
Bruce Almighty Domestic 209% Worldwide 417%
X2 Domestic 143% Worldwide 271%
Elf Domestic 298% Worldwide 379%
T3 Domestic 63% Worldwide 180% (Arnie plays better overseas)
Revolutions Domestic 75% Worldwide 230% (So does Keanu)

So, Fortune, I think Hollywood's got it right and you need to do a bit more research.