At the same time, the media’s fixation on the box-office race diverts its attention from the ongoing transformation of Hollywood’s business. It neglects the reality that today, the six major studios get less than 20 percent of their total revenue from showing their films in American movie houses. Most of their money comes from another, nearly invisible source: licensing their intellectual properties. Each studio has a vast library of thousands of movies, animated shorts, and TV series it licenses out to worldwide cable networks, pay-per-view TV, and broadcast television. A top executive at Time Warner recently did the math for me, demonstrating that between 85 and 90 percent of its entertainment earnings comes from licensing its movie and TV titles to television; it is more or less the same story at the four other largest studios. (Paramount, because it ceded its television production arm to CBS when they split, is the only major studio without a television production arm.) The reason that licensing is so immensely profitable is that studios do not have to pay advertising, print, or logistical costs, as they do when distributing a movie to theaters. Almost all money received—except for residuals paid to actors’ and others’ guild pension plans—goes to the bottom line. The same is true with the new business of licensing products to Internet companies, such as Hulu, Netflix, Apple’s iTunes Store, and Amazon, for streaming. The continued cranking of this money machine depends on the studios’ retaining absolute control over these intellectual properties—a requisite that, given the threat of digital piracy, is reshaping strategies for how they release movies. For example, the studios’ entire system of “windows,” in which a film’s payoff is optimized by delaying for many months its release on video, pay television, and other platforms, may have to be compressed, if not entirely abandoned, to counter this threat. There is also new urgency to studios’ international diplomacy, since minimizing the availability of pirated copies requires the assistance of governments. No matter what political opinions their movie stars espouse, the corporate executives behind the scenes now must play nicely with those in power.

The screenwriter William Goldman famously explained the economics of Hollywood this way: Nobody knows anything. By focusing on the box-office race that is spoon-fed to them each week, journalists may entertain their audiences, but they are missing the real story. By neglecting the changing economics of Hollywood—and the politics that flow from it—they leave their audience, much like a movie audience, in the dark about what is really shaping Hollywood. 

 

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Edward Jay Epstein is the author of The Hollywood Economist and The Big Picture: The Logic of Money and Power in Hollywood.