The Long Goodbye

A red tide is creeping across America. Not the socialist bogeyman conservatives love to hate, but one that has sent shivers through the Hollywood entertainment industry.

The red tide takes the form of 17,000 Redbox vending machines. Typically located at convenience stores, fast food outlets or in Wal-Marts, each box offers some 200 DVDs, with new titles added weekly. Movies rent for a dollar a day. With the US pulverised by economic woe, Redbox has proven irresistible to fans and has been a huge success for Coinstar, the Seattle area company that owns the vending machines.

"It's a good deal," says Kabir, a young Pakistani whom I found behind the counter of a 7/11 convenience store, on a busy corner in a hardscrabble immigrant neighbourhood south of Hollywood. "Just slide your card and return the DVD the next day. I've rented four in the past two weeks."

The last time the US plunged into a recession this deep, back in the 1930s, Hollywood enjoyed a golden age, with the studio system cranking out new films every week.

How remote those glory days seem today, as consumers demand ever-cheaper entertainment, even as the industry that provides it grapples with hard times, technological change and union disputes. Hollywood's tectonic plates are shifting, but in a company town where, as the famous dictum has it, "nobody knows anything", it is hard to predict what the landscape will look like when the tremors cease.

Money is tight. When the Los Angeles County Museum of Art decided to axe its arthouse film screenings because it was losing around US$100,000 ($142,000) a year, cineastes let out a howl. "I am deeply disturbed," wrote director Martin Scorsese in a letter to the Los Angeles Times last month. "For those of us who love cinema and believe in its value as an art form, this news hits hard."

The museum has since backed off, reinstating the film programme - for now at least.

Scorsese's plea seems a metaphor for Hollywood's woes.

Measured by box office takings alone, the US movie business appears reasonably healthy; receipts this year are so far about 7 per cent up on 2008, although takings in the important summer season were flat.

Some recent movie releases have performed particularly well: Transformers: Revenge of the Fallen wiped the floor, and Quentin Tarantino's Inglourious Basterds opened strongly.

But Bruno, Imagine That and Funny People, expensive star vehicles, were less than spectacular performers. NBC Universal's operating profits crashed 41 per cent in the second quarter, savaged by haemorrhaging TV ad revenue and the Will Ferrell bomb Land of the Lost. Even Scorsese felt the slump: the release date for Shutter Island, his latest outing with Leonardo DiCaprio, was delayed from next month to February next year, because Paramount Pictures lacked enough money to market the film.

Beyond the healthy box office figures, Hollywood has big problems. These days many movies are "runaway productions", made in US states other than California, or overseas. The industry has been disrupted by the 2007 screenwriters' strike and protracted negotiations with the Screen Actors Guild, and is grappling with the shift from old to new, web-based media.

In the first half of this year feature film production - gauged by location shoot permits issued in Los Angeles County - plunged 52.5 per cent, compared to last year. Commercial shoots fell 31.1 per cent, TV 4.2 per cent and others [documentary, stills photography and music videos] 26.6 per cent. Overall, permits shrank by 24.5 per cent.

"Commercial shoots were the bellwether for a sagging economy," says Todd Lindgren, spokesman for FilmL.A., which processes the permits. Permits for advertising shoots began to fall in 2006, he says, and have not recovered.

"People are hungry to jump on any positive news but we don't have enough data to know if we've seen the worst."

The dramatic dive in feature film location permits follows a catastrophic decline last year, which Lindgren says was the worst year since FilmL.A. began keeping data in 1993.

Long term, he says, Hollywood is seeing a continuation of steep declines that began when tax breaks, exchange rates and, sometimes, non-union crews began luring movie-makers to Canada in the 1990s.

This trend has accelerated, reshaping the entertainment business as filmmakers decamp from Hollywood to other states and locations as far away as New Zealand.

According to the California Film Commission, the state's share of US feature film production dropped from 66 per cent in 2003, to 31 per cent last year. Lawmakers hope an incentive scheme from January 2011 will lure filmmakers back. Hollywood will get US$100 million a year for five years, assuming California - now US$26 billion in the hole - can find the money.

The impact at ground zero has been brutal. Prop houses, equipment hire firms and other film-related businesses have shuttered, sound stages have gone dark and thousands are unemployed. If the empty street outside Raleigh Studios, near my office and once crammed with film trucks for TV hits like Ugly Betty, is any clue, the prospect is bleak.

According to the State Employment Development Corporation, in July the industry employed 147,500 people in LA County. "If you include ancillary industries that's about 236,500 people," says Jack Kyser, economist for the LA County Economic Development Corporation. "Twelve months ago the figures were 168,000 and 269,000 respectively."

In reality, says Kyser, ripples from Hollywood's slump spread even further, hitting tourism and the apparel industry, both significant employers. "It's been painful."

Finally, there's the Wall Street meltdown. Major media conglomerates such as Sumner Redstone's National Amusements, which owns Paramount Pictures and CBS, have seen their stock value plummet. Hedge fund capital, once a major source of film finance, has evaporated. Advertising dollars, a major driver for new television production, have fled as US consumer spending contracts with the recession. And venture capital, used to finance new media, has shrunk.

Many independent web start-ups have foundered. "The first half of 2009 has been brutal for media ventures," says Aaron Mendelsohn, whose online distribution company, Virtual Artists (a nod to United Artists, a 1919 bid for creative freedom by Mary Pickford, Charlie Chaplin, Douglas Fairbanks and D. W. Griffith), is weathering the tempest.

"It's already a nascent, untested medium," says Mendelsohn. "Put a global recession on top of that, and it's very difficult for a lot of these sprouts to survive."

The slump has driven writers, actors, producers and other talent into unemployment, along with below-the-line crews such as set decorators, stage hands and drivers.

It is dismal picture. But in a tough business where Sammy Glick, the ruthless hustler who claws his way up the greasy pole in Budd Schulberg's insider novel What Makes Sammy Run? is a role model, Hollywood has a record of transcending, then exploiting, threats, like the advent of television or home video. If the present doom and gloom herald a long goodbye to the way things were, there are plenty of signs that Hollywood is reinventing itself.

This involves exploiting new web-based media, even as Hollywood tries to cling on to existing revenues - a strategy challenged by new players like Redbox - and position itself as the dynamic centre of a global industry.

A century after moviemakers moved to Southern California, lured by a mix of benign climate and creative freedom, the industry still fields many strengths.

"This is the hub of the studio system," says Kyser. "You can make a film elsewhere, but post-production is done here, deals are done here, marketing campaigns are devised here, new technologies created. Hollywood has a film culture that would be very hard to transport elsewhere."

Spielberg's collaboration with Peter Jackson on The Adventures of Tintin: The Secret of the Unicorn are commonplace. Scorsese's Silence, with Daniel Day-Lewis, Benicio Del Toro and Gael Garcia Bernal, will also be filmed in New Zealand. Last month Spielberg's company, DreamWorks, announced it had found US$325 million in financing from India's Reliance Big Entertainment, a keenly watched move now that Wall Street has tanked as a money source.

Certainly, Bollywood is no longer a galaxy far, far away: this year US hopefuls for BollyStar 2009 auditioned via the internet. The prize was a singing role in a Bollywood film.

Hollywood is also pushing to open up China as a market - about 20 foreign movies are released each year, a pittance that fuels rampant piracy.

Last month the World Trade Organisation ruled that Beijing must end the stipulation that foreign suppliers operate through state-owned entities.

At the same time the star-driven industry model, a costly experiment that helped drive film budgets to stratospheric levels, may also fall prey to the recession.

One of the recent summer hits that will likely end up on Redbox is District 9, the sci-fi, apartheid thriller produced by Peter Jackson. It is an example of the type of fare that seems to work these days: comparatively cheap at US$30 million and bringing in US$104 million so far in the US alone.

Significantly, District 9 has no big stars. Neither has this summer's monster hit, Transformers. The New Yorker may dish director Michael Bay as "stunningly, almost viciously, untalented", and his picture as an example of "conglomerate filmmaking", but the studios see gold in sequels (Harry Potter and the Half Blood Prince had earned US$922 million worldwide at last count), movies based on comics, TV shows and, in Bay's case, toys. Then there's Ice Age: Dawn of the Dinosaurs, a global smash that continues the run of huge cartoon hits. It helps that such films are major vehicles for product placement and merchandising.

And while it is always dangerous to draw too many conclusions from the shifting sands of Hollywood film production, the big summer performers suggest, as columnist Patrick Goldstein noted in the Los Angeles Times recently, that the era of the star-driven project, with actors earning up to US$20 million per picture, may be over.

Stars failed to save Public Enemies (Johnny Depp), Duplicity (Julia Roberts) or State of Play (Russell Crowe) from tepid US box office business. The last high roller standing, says Goldstein, is Will Smith.

Instead, the talent is being asked to take a return from the back end of a film. That is, after it has made, or lost, money.

For now, Transformers may become the default studio model. Bay's film is everything studios crave: a big winner at the box office, the second part of a growing franchise and a money-spinner in the product sale department. Plus, it doesn't have any big marquee names.

In fact, in the age of Twitter and text messaging, no one is safe. A decade ago, movies that "opened wide", appearing simultaneously on hundreds of screens across the US, could count on a few days' grace in which word of mouth and cunning marketing might build an audience. No more. This (northern) summer's most famous casualty so far is Bruno, where ticket sales plunged on the second day after a big opening.

Box Office Mojo, a tracking organisation, says the US summer of 2009 saw the sharpest audience fall-off in Hollywood history, from the first to the second weekend.

No doubt this is partly due to unpopular films, perhaps hit by Twitter and texting. But these are hard times and US consumer spending has flatlined. And DVD sales, crucial for recouping revenue lost at the box office on expensive films, fell 13.5 per cent in the first half of this year. In stark contrast, rental revenues have soared if the price is right. Netflix, the DVD-by-mail subscription service, made US$408.5 million in the second quarter, a 21 per cent increase, with web rentals up 22 per cent in the past year to US$32.4 million.

But upstart Redbox leads the charge. Its revenue surged 110 per cent in the second quarter. "Redbox has developed an incredibly efficient model that allows them to distribute movies for a lot lower price," says company spokesman Chris Goodrich. "So they pass those savings on to consumers."

The company is also testing the waters in Britain, trialling a version of the service called DVDXpress at 18 Tesco supermarkets. The machines will rent out DVDs at £1.50 ($3.57) a night, reported the Independent newspaper, and if it proves popular the service will be launched nationally.

Instead of reading the obvious lesson - Redbox is a consumer phenomenon - and then working out how to share the boom, the studios ordered DVD wholesalers not to send discs to Redbox until after they went out to retail stores, and to rental outlets such as Blockbuster or Netflix, which charge higher rentals and share profits with the studios.

Redbox has sued Warner Brothers, Universal Pictures and 20th Century Fox, arguing that the freeze-out - Universal for 45 days, Fox for 30 and Warner for 28 - is a "naked restraint of trade".

"All we want is to get movies on the same day they are released to the street for rental," says Goodrich.

He thinks the studios want "to drive up prices". It is hard to disagree. The studios want Redbox to be the last stop on the gravy chain - today's version of the old fleapit cinemas. It is the kind of control freak mentality - the gatekeeper complex - that doomed the record business, as fans downloaded tunes via Napster. Meanwhile, accepting the inevitable, Sony Pictures and Lions Gate Entertainment have cut deals with Redbox.

If the studios believe they can fight consumer demand by bashing Redbox, they are deluding themselves. The studios had a good run with DVDs, as record companies did with CDs. But the jig is up. Rather than battle Redbox, the studios need to find a profitable online business model, much like Apple's Steve Jobs did with iTunes downloads, an initiative that paved the way for the iPod bonanza.

For as studios watch the ebbing of their traditional gatekeeper power - stalling product at each stage of release, theatrical, DVD and TV, to reap maximum revenue - there is much more profit in delivering consumers cheap online product (although buying Redbox might be a good idea, if the studios want to get a beachhead in this burgeoning market).

Hollywood, like other media players, not least the newspaper business, has long pondered the opportunities and threats posed as consumers flock to the internet.

At first it looked as though independent start-ups, flush with venture capital, might make the running. Instead, the recession has allowed studios to grab pole position.

"What we're finding is the traditional gatekeepers, although they're evolving slowly, are starting to put down some flags in new media," says Mendelsohn. "They have the resources to distribute and market original new media content much more powerfully than any independent studio."

He cites CBS. "They've been buying up a suite of digital assets, like TV.com and CNet, that were once independent sites. They've been buying an audience. CBS calls this interactive network - which affords them 150 million unique eyeballs each month - the 'audience network'. They have digital distribution, a digital studio and a powerful sales team, that sold CBS TV shows, to sell sponsorship and advertising around their original web content."

To date, Hollywood has tried to retain old distribution models, such as cinemas, DVDs, TV re-runs and the like, while aggressively trying to create an online presence.

One example is Hulu, a joint venture between ABC, NBC and Fox, which streams TV shows and movies. The Walt Disney Company also has a stake.

Like the news business, wondering how to profit from new media like the Kindle, even as it loses revenue on the web, Hollywood is trying to remake itself.

The net's most popular site for watching video, YouTube, which attracts 437 million visitors a month, is in talks with Warner Brothers, Lions Gate and Sony Pictures about streaming DVDs upon release. The talks may be a sign that the studios - other unnamed studios are also interested - see the web, and not traditional retailers, as their main distribution platform. Apple, Netflix and Amazon already offer streamed movies. If YouTube and the studios reach a deal it may be the opportunity that Google, YouTube's owner, needs to make this popular site profitable.

And even with the barbarians at the gate - in the form of Redbox or Twitter - the studios still hold plenty of aces.

"They can give a sponsor guaranteed distribution and some marketing heft," says Mendelsohn. In-house entertainment divisions at advertising agencies are also digital winners, he says. "They're close to the brands and have been tapped for decades to come up with creative solutions."

This make-or-break transition from film to digital is being felt across the industry. Technicolor, after 94 years as a Hollywood fixture that brought colour to The Wizard of Oz and Gone With the Wind, has vacated Burbank and moved to Sunset Boulevard as part of plans to sink US$200 million into digital post-production and visual effects units in LA, London and Bangalore, India, handy to Bollywood.

The Hollywood facility includes nine digital scanners, at US$1 million a pop, that enable film to be colour-corrected and edited on digital gear, rather than in a laboratory.

The digital process is faster and cheaper. A Digital Production division allows Technicolor to generate visual effects for movies, TV shows, commercial and video games.

Technicolor is also emphasising a system whereby cinemas can show 3D films on existing film projectors, eliminating the need to spend up to US$75,000 on a new digital projector.

Hollywood hopes this will enable dozens of 3D films, due for release in the next two years, to go into wide release.

The December release of Avatar, a futuristic sci-fi movie shot entirely in 3D by director James Cameron, of Titanic and Alien fame, will help promote the introduction of 3D TV by Panasonic, an example of how Hollywood - in this case 20th Century Fox - plans to exploit new technologies to boost theatrical receipts and create home theatres for future product.

Meanwhile, the independents have not given up hope of becoming players in the shift to digital, perhaps as a kind of alternative Hollywood with its own distribution and content, shattering the studios' gatekeeper stranglehold.

To date, this has mostly involved fairly mediocre programming, much of it comedy. Mendelsohn's vision includes the sort of high-quality drama, such as Deadwood, Mad Men or The Wire, spawned by cable TV, which he says has a far more lucrative afterlife, with foreign sales, TV re-runs and DVD, than the one-off "sugar rush" of reality TV.

"I think we're close. I think that sometime soon, maybe within six to 12 months, there's going to be some break-out hit on the web that will be akin to Mad Men, The Sopranos, Sex and the City or Curb Your Enthusiasm ... They will emerge from great writing as great TV tends to do. I hope it's something closer to Mad Men than Jackass."

As the film industry struggles to survive hard times, with thousands of workers now walking the boulevard of broken dreams, this vision of an online drama renaissance may be just the ticket to drive Hollywood into its second century.