How to Save the Movies: A 2012 Box-Office Game Plan

 Illustration: Asaf Hanuka

Just before Christmas, the unthinkable occurred: Hollywood studios, the fabled masters of managing headlines, ran out of spin. There was no getting around the cold, hard truth that movie attendance had tumbled to a 16-year low and that the domestic box office was in trouble. Revenues for 2011 topped out at $10.21 billion, down at least 3.4 percent from 2010, following six years of relative growth. There were a string of embarrassing and costly studio misses, from Mars Needs Moms to Cowboys & Aliens, although the year ended on a high note with a strong holiday, led improbably, some might have guessed given Tom Cruise's ups and downs, by Mission: Impossible -- Ghost Protocol.

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Particularly absent from the multiplex in 2011 were young people. "For the first time, I do think we are seeing a meaningful shift in habits. People are going to the movies less," says Universal Pictures chairman Adam Fogelson. "Everyone has to take a look in the mirror and figure out what needs to be done to correct it. It's on the part of the studios to make films people feel they need to see in a theater, and it's also incumbent on theater owners to look at the experience they are offering the customers."

Throughout 2011, many studio executives insisted the domestic revenue gap would close, but it didn't. True, the dip was exacerbated by having no Avatar in the first quarter of 2011, but something more ominous was afoot. Mega-opening weekends were few and far between, spawning the sardonic joke that $20 million was the new $100 million opening. Meanwhile, the downturn at the U.S. box office continues to degrade the ever-tenuous distributor-exhibitor relationship. Coupled with the battle between studios and theater owners over premium VOD -- which came to a head over Universal's Tower Heist-- the tension is sure to escalate as Hollywood questions whether ticket prices are too high and theater owners blame the product, harkening back to the cliche, "It's the movies, stupid." Finger-pointing aside, studios and theater owners together will have to face these challenges in 2012:

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MAKE BETTER MOVIES

There wasn't a single all-audience event film in 2011 that became a runaway sensation or a pop-culture phenom like Inception in 2010. Hollywood knows it's got a problem: "First and foremost, you have to make pictures that people are interested in. If you put forth an interesting portfolio, the audiences will show up," says Paramount chairman-CEO Brad Grey, whose studio did the best job in 2011 in terms of getting moviegoers to turn out, coming in No. 1 in market share. But even Paramount, like other studios, relied heavily on proven franchise titles to drive its business in 2011, between Transformers: Dark of the Moon, Paranormal Activity 3 and Ghost Protocol. Universal's Fast Five chalked up $626.1 million globally -- a series best, despite it being the fifth outing. "This was a franchise that was basically declared dead," Fogelson says.

The overall belt-tightening that began with the collapse of the DVD market continues, and the heydays of the big producer deals are over, leaving the studios to exert more control over the process and pour most of their money into less-risky franchises. But exhibitors worry that moviegoers are growing impatient with Hollywood's love affair with the familiar and shortage of original ideas (hello, Avatar!). In 2011, for the first time ever, all of the 10 top-grossing films domestically were franchise titles and spinoffs, including Thor and Captain America: The First Avenger. There are even more franchise titles in 2012 than in 2011 -- 28 vs. 25 -- including the final Batman and Twilight films. Lionsgate hopes to jump into Twilight territory with The Hunger Games, likewise based on a popular young-adult book. If Games, opening March 23, works, it will mean a film trilogy. The continued growth of the international marketplace -- where presold concepts and Hollywood event films are more popular than ever -- is another chief reason for the obsession with franchises. While the box office in some European countries is suffering the same woes as in the U.S., the so-called B.R.I.C. countries -- Brazil, Russia, India and China -- are on fire. Combined, the six major Hollywood studios collected $13.53 billion in ticket sales at the foreign box office in 2011 -- an all-time record and up 7 percent from the $12.7 billion earned in 2010.

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RISING TICKET PRICES

During the Great Depression, the box office prospered. People badly needed an escape and going to see a movie was relatively affordable. That pattern repeated itself after the economic collapse of late 2008, and in 2009 domestic box-office revenues jumped the $10 billion mark for the first time, clocking in at $10.6 billion and up 4.3 percent over 2008. But something else happened in 2010 that some believe is at least partially responsible for today's downturn: Theater owners, energized by the advent of modern-day 3D and the wild success of Avatar, raised prices more than usual. The average ticket price for the first quarter of 2010 rose 8 percent to $7.95, one of the biggest jumps in history. The average ticket price for 2010 ended up at $7.89, a sizable 5 percent increase over 2009 (consumer prices rose 1.5 percent in 2010). The average ticket price for 2011 was $7.96 (though that's not a final figure, since fourth-quarter stats aren't yet available). Those increases may seem incremental on paper, but suddenly, going to the movies is that much more expensive, particularly in urban areas (and if you multiply that increase by a family of four … well, you get the picture). "Judging by letters to newspapers from around the country, anecdotal evidence suggests people feel they can't afford to go to the movies," one studio executive says. The National Association of Theatre Owners strongly disputes that prices are the culprit, noting that revenues and attendance were up year-over-year in the second and third quarters of 2011 (i.e., spring and summer), indicating that moviegoers turn out for the right title. NATO's Patrick Corcoran, director of media research, notes that audiences weren't deterred when the average ticket price jumped to $8.06 in the second quarter of 2011, fueled by 3D releases.

THE DISAPPEARANCE OF YOUNG PEOPLE

The flight of teenagers and younger adults from the multiplex will be a hot-button issue in 2012 if the exodus continues. Movie after movie played older in 2011, contributing to diminished box-office earnings. It's a trend Fox executive vp distribution Chris Aronson has been tracking for more than a year. He believes young people are directly impacted by price. "Who has the least amount of disposable income? The price-value ratio seems off," he says. For years, younger fanboys were arguably the most important demographic to Hollywood, but that's changing. Of those turning out for the opening weekend of Thor, a surprising 72 percent were over the age of 25. And while Universal knew its adult comedy Larry Crowne, starring Tom Hanks and Julia Roberts, would skew older, it didn't expect 71 percent of the opening-weekend audience to be over the age of 50, prompting one veteran box-office observer to proclaim, "My goodness, there are bristlecone pines younger than this movie." Films that succeeded in wooing younger demos undeniably fared better at the multiplex, including Transformers: Dark of the Moon and holiday hit Ghost Protocol, both from Paramount. One rescue measure being considered? Allow texting, the favorite sport of younger generations. One U.K. theater chain already has tested the practice with success, and there's a new performing-arts center in Bellevue, Wash., that plans to allow texting when it opens its doors in 2014. Among U.S. circuits, AMC is considering testing the practice as well.

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THE DIMINISHED GlOW OF 3D

While the three films that jumped the billion-dollar mark in 2011 -- the latest installments of Harry Potter, Transformers and Pirates of the Caribbean -- and other event pics were directly fueled by the upcharge for a 3D ticket, not all is peaceful in 3D land. In the U.S., 3D attendance began dropping off in 2011, with some films seeing only 40 percent to 50 percent of their grosses come from 3D screens, compared to 60 percent to 70 percent in 2010, indicating that consumers can't justify paying the extra charge. The strength of 3D in Russia, China and Latin America minimized the damage, however. (DreamWorks Animation's 3D toon Puss in Boots became the envy of the town after it grossed $50 million in Russia alone.)

All told, 36 films were released in 3D in 2011, and more than 40 are expected in 2012. "Too much has been made of 3D both in terms of being a savior, and as something that is failing. What's happened is that 3D has settled into a more sustainable range," says NATO's Corcoran.

Paramount is one studio that has begun aggressively marketing the 3D aspect of a film, and the effort is paying off. Roughly 60 percent of the grosses from Dark of the Moon came from 3D screens following a huge publicity push by director Michael Bay, who even teamed with 3D maestro James Cameron to discuss the importance of the technology.  Universal's Fogelson points out that top filmmakers aren't likely to abandon 3D anytime soon -- as evidenced by both Martin Scorsese and Steven Spielberg releasing their first 3D films in 2011, Hugo and The Adventures of Tintin, respectively -- but the question of whether new releases should be converted to 3D after they are shot in order to boost box-office grosses isn't going away in 2012.

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EXPLOITING RERELEASES

Whether the runaway success of Disney's rerelease of The Lion King in 3D was a onetime victory or a sign of good tidings to come will be answered in 2012 as four iconic films are likewise given the 3D makeover: Beauty and the Beast (Jan. 13), Star Wars: Episode I -- The Phantom Menace (Feb. 10), Titanic (April 6) and Finding Nemo (Sept. 14). With the demise of the DVD market, Hollywood studios are looking for any means to exploit their libraries, and 3D rereleases are a relatively simple answer (the conversion process reportedly costs $10 million to $20 million). The rerelease of Lion King earned an astonishing $163.8 million worldwide, prompting Wall Street analyst Eric Handler, of MKM Partners, to prepare a report saying that classic rereleases could boost the U.S. box office by $200 million to $300 million annually.

All the way around, 2012 will be a critical year for the movie industry. But if the domestic box office continues to slide, all bets are off.

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