Saturday, November 11, 2023

Why Make A Movie And Not Show It? Reasons.

The real cost of a movie goes beyond making it.

Recently, Warner Brothers has gotten a lot of flack for making movies and then putting them in the vault forever and showing them to no one.  Both Batgirl and Coyote v. Acme were filmed and then shelved, with the press gleefully reporting that the studio "took a writedown" on both films, as if somehow that was profitable.  If so, studios could make billions simply by making movies and then not releasing them.  Such is not the case, however.

But like clockwork, the great ignoratti of the Internet chimes in with, "That's how they make money, with tax write-offs!"   But as I noted time and time again, you can't deduct your way to wealth - it simply isn't possible.  You can - and should - deduct losses from your income.  But losses are not money in your pocket, they are money you spent.  If I could deduct my way to wealth, I would go to Vegas and then lose as much as possible and "deduct" my losses and get rich!

No, just to be clear, it doesn't work that way.

Granted, studio accounting is something of a dark art and there are unique and fascinating schemes used by studios to cry poverty even as they rake it in.  For example, it is well known that, as a star you never settle for a "percentage of the net" as studios can use rogue accounting methods to show they never had a net profit.  So instead, you negotiate for a "percentage of the gross" which is far easier to calculate.  Of course, the real superstars just ask for millions, up front, payable in cash, so they don't get screwed over by spurious accounting of the gross.

And by the way, if you don't know the difference between gross income (or "revenue") and net profits, I don't want to know you.   The same yahoos who think a "writeoff" makes money also confuse gross and net - and have no idea what a deduction even means.  Sadly, the popular financial press compounds this error by confusing the two terms, often for sensationalist click-bait titles. "Acme corporation claims to be broke, yet they had revenues of $1B last quarter!"  True, but their net profit was a negative $100M or in other words, a loss.  Profits matter, overall revenue is often irrelevant.

I digress, but I've seen this firsthand where a CEO obsesses about revenue and loses sight of the ball - net profit.  A client was ecstatic that their company was approaching $1B in revenue, which put him in the big-boys club.  So they tried to pump up revenue without thinking about net profit.  The company lost money the next year, and they nearly went bankrupt and the CEO went packing.  Oh, and they never broke that meaningless $1B revenue barrier.  Profits matter 100 times more than revenue.  And don't get me started on "market share" - the epitaph of many a decent company.  Ask Volkswagen about this.

But getting back to topic, why would a studio shelve a movie without releasing it?  Well, there are a lot of costs involved in marketing a movie - often equal to the cost of producing the movie itself.  And even if "principal photography" and whatnot is "wrapped" there is still editing, dubbing, music, and special effects to be added - these can easily exceed the filming budget, particularly in these days of CGI.

It is unclear whether these "shelved" movies were actually finished or just done with filming or somewhere in the process.  Getting back to a "percentage of the gross" if your "star" demanded, say, 5% of the gross receipts, well, you save that 5% by not showing the movie (but inviting a lawsuit, instead).  You might spend $150M making a movie, but another $150M would have to be spent to market it and distribute it. If the movie is going to be a "box office bomb" then you are better off cutting your losses and shelving the movie, rather than throwing an additional $150M at it to market it.  So you pull the plug and cut your losses.  Better to "write off"" $150M than to "write off" $300M.

These additional expenses are often why we see movies called "box office bombs" even as their gross revenue exceeds production costs.  Marketing and other costs can exceed production costs, so even if a movie makes money on paper, it loses money, in real terms, once all costs are accounted for.

But of course, we're talking "box office" in an era of streaming.  And this is where it gets interesting to me.  Streaming services today are largely "all you can eat" subscription services, where you pay one monthly fee and watch all you want.   For someone who doesn't watch television much, well, it ain't much of a bargain.  We tend to subscribe to one channel for one month in the winter, see all we wanted to see, and then unsubscribe.  Lately, we haven't been doing even that.

They put the first episode of "The Gilded Age" on YouTube, apparently to induce us to subscribe to watch the rest.  It was produced by the "Downtown Abbey" people and is pretty much the same tired old soap opera - with the obvious love interest, class struggles, scandals, and the cliffhanger endings of each episode to get you to "see what happens next!"  After watching the one episode of this Upstairs, Downstairs, American Style, I could write the entire script for three seasons, in my sleep. No thanks, Netflix - or whatever streaming channel wants me to watch this dreck.

But getting back to streaming, how do you quantify profits for a show that is streamed?  Sure, you can count the number of views, but how does that correlate to income?  The users pay the same fee, regardless if they watch one episode or binge-watch all of them - or watch none at all!  It takes the dark art of studio accounting to new murky depths.

And I suspect that these streaming services which are crying in their soup and claiming to be "losing money" are doing so only through accounting shenanigans.  Disney+ for example, claims to be losing money.  Are they?  Or are they "losing money" only because they are paying royalties for Disney films to the studio branch, which shows those as profits?  Hard to say, but it may be one explaination.

But maybe the answer is right there - the streaming services have morphed from movies to soap operas.  When Netflix lost its STARZ contract to the vast library of old movies, it had no choice but to come up with "original Netflix content" as the major studios weren't about to give away their content for cheap - if at all.  So we get endless "controversial" comedy specials and these horrible soap operas set in different time periods and different venues.  Coming up next!  Trailer park boys running a meth lab in 19th Century Jolley Olde Englande - a period drama where the protagonists cruise around in a hopped-up landaulet carriage while whacking mobsters from rival gangs.  Will Tony ever marry Suzanne?  Stay tuned!  Might as well cut to the chase, as they say.

So releasing "movies" on streaming services, which made "sense" during the pandemic era, makes less sense today, as you can rake in hundreds of millions in ticket sales in just a few weeks with a "blockbuster" movie, and then make money in secondary channels - pay-per-view, overseas sales, DVD sales and rentals, streaming, cable, and finally, network television.  I suppose there are revenues to be had from the coconut telegraph as well, if it is still in working order.

So, releasing direct-to-streaming movies makes less economic sense.  You may damage the overall brand or franchise by flooding the market with more cheaply made product.  Disney is sort of experiencing this with its Star Wars franchise.  While they have largely gone the soap opera route with its streaming "series" not all of them have been hits.  And some of the more recent movies are, well, if you missed them, you didn't miss much.  That's the problem with these franchises, they just don't know when to die.  Kids today are going to the movie theater and watching "franchise" films that were originated decades before they were born.

Maybe it is just me, but I would be kind of sick, as a teenager, of watching the 15th sequel to Casablanca back in 1978.  Each generation wants to see something new and relevant to their era, not to their parents' or grandparents'.

Speaking of kids, that is the prime audience for movie theater ticket sales.  The movies that make it to the theaters these days are all aimed at the under-25 audience (if even that old).  You read horror stories about kids in theaters playing with their cell phones or goofing around, loudly, during the movie.  It is bad enough that the only films showing are all explosion movies based on comic book characters, it is even worse that the behavior of the fellow patrons makes the whole experience cringe-worthy.  Besides, why watch in some shoebox theater when you have a big television at home - right?

But the studios don't want to show movies on television - they'd rather shelve them!  Kinda makes no sense, but then again, Hollywood never did.

I think the real reason they shelved these films is that they sucked and would be an embarrassment to the studio.  Batgirl is the umpteenth sequel to a movie "franchise" based on a forgettable comic book and hokey 60's television show (which, oddly enough, was more faithful to the original source material than the later "dark" movies and comic books).  Coyote is based on a humorous New Yorker article, which is pretty thin gruel to make a movie from.  Neither will be missed much.

But perhaps they could be re-worked as period dramas - just chop them up into three seasons of episodes where the plot advances at a plodding rate, throw in a love-lorn-lost subplot and "Wa-La!" you've got the next Netflix "hit" on your hands.

Or, like Disney, make a "live action remake bomb" of a beloved but largely forgettable animated movie from decades past.  Those seem to be doing well!

But make no mistake about it, losing money is losing money and you don't "make money" from write-downs or write-offs, or as we call them in tax law, deductions.   Hollywood accounting methods are creative and may be used to show stars or investors - or the tax man - that they never made money.  You can shift expenses from one project to another, or charge "overhead" to a particular project and make it look less profitable.  But at the end of the day, you actually have to make money, in order to keep the lights on.  And making a movie and shelving it, is not a profit center for anyone.  At best, it reduces your tax burden or allows you to screw over investors on another film.

But it doesn't make you money in the long run.  Somewhere, sometime, you have to turn a profit.