Gross points strain system

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Ballooning fees paid out to stars, rising production costs and shrinking DVD sales spell big trouble for the movie business, according to a report published Monday.

Medium- to big-budget movies produced by the U.S. studios in 2006 are set to post pretax losses of $1.9 billion after five years of exploitation (from domestic and international boxoffice, DVD, pay TV, etc.), according to a report from Global Media Intelligence, a new U.S.-based division of U.K.-based media analyst Screen Digest.

Although the study was undertaken independently months ago, its findings could fuel the debate about just how profitable the Hollywood studios really are — and provide ammunition to the producers who are arguing that their margins are too thin to raise residuals for the striking writers and other guilds.

New releases of 2004 registered a profit of $2.2 billion, GMI said.

A-list fees, particularly the gross points paid to top actors as well as directors and producers, are a big part of the problem, GMI said.

Such costs totaled $3 billion in 2006 — nearly double that of five years ago. While the studios are in negotiations with writers, actors and directors over fees, salaries are not the main issue — the cost of producing, casting and advertising movies in the present environment simply exceeds the likely returns.

The research says that, despite a recent surge in boxoffice returns, the movie business has seen costs rising faster than revenue for the past several years.

Revenue from DVD sales, which accounted for 75% of growth and significant profits from 1999-2004, has experienced a worldwide decline during the past three years, the report notes.

A detailed title-by-title analysis was carried out for this report, which shows the trend accelerating further in the first half of 2007, with U.S. DVD sales down 12.5% from 2006. International sales mirror this decline.

The report also warns against the hope that VOD and subscription-based TV will be the answer to the falling DVD market.

GMI estimates that while VOD will offer a superior share of the consumer dollar over traditional pay channels — 60% vs. 40% — it will not deliver at the lofty levels predicted in the early days of the industry.

Financing also has become a major concern, according to the report, with the search for outside investment including hedge funds and private equity funding causing problems for the studio system.

GMI believes that such sources of capital are drying up. "Sophisticated investors are becoming aware of just how thin, or even nonexistent, movie profit margins can be," the report predicts.

"Our analysis of the business of the Hollywood studios may come as a surprise to investors and even some people within the industry," report author Roger Smith said.

"We believe there is little chance of the negative revenue trend reversing in the coming years. New technology will not deliver anything like the revenue initially predicted, and as DVD sales continue to decline and the cost of making movies increases, the message is simple: The Hollywood studios must begin a serious attempt to rein in costs, like News Corp.'s Fox has done, if they are to survive."
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