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Movie Math

- The Washington Times - Thursday, May 19, 2005

While "Star Wars" buffs are counting on "Episode III, Revenge of the Sith" to redeem the reputation of the franchise, Hollywood teeth-gnashers are hoping it kick-starts a slumping movie market. Box-office action is down 6 percent from the comparable period last year, and, according to Entertainment Weekly, attendance figures are down for the third straight year.

Sound grim?

Only if your horizon is cluttered by short-term box-office hype.

In February, Edward Jay Epstein blew the lid off Hollywood's dirty little open secret with his book "The Big Picture -- The New Logic of Money and Power in Hollywood." The open secret is this: A movie's theatrical run is only the beginning of its life cycle; many more millions stand to be made in the DVD and television markets and through merchandising tie-ins.

"The permutations are endless," Mr. Epstein writes.

Mr. Epstein calls it the "clearinghouse." It's not "built of bricks and mortar and doesn't have a precise address," he writes, but "it is conceptually an essential -- and utterly real -- part of today's studio."

The clearinghouse works like an interlocking system of offshore accounts. Even the industry's biggest stars may not fully comprehend its back-scratching beauty.

Mr. Epstein offers the 2000 Nicolas Cage movie "Gone in 60 Seconds," a product of the Disney-owned Touchstone Pictures, as an example. It cost the studio $206.5 million to make, factoring in production costs, advertising and overhead expenses. The movie took in $242 million worldwide, $139.8 million of which stayed in theater registers.

That leaves Touchstone about $100 million in the red, right?

How did Disney's Michael Eisner get away with touting the movie as a "hit" in the company's 2000 annual report? The answer is found in the clearinghouse, the highly lucrative after-market that pretty much shatters the industry mythology that attaches to the vaunted opening-weekend and weekly box-office tallies, which took off in the early 1980s.

The clearinghouse not only rescues the bottom line of movies that fare modestly at the box office, but it also keeps a significant chunk of money in studio coffers and out of the wallets of actors.

Follow closely: Buena Vista Home Entertainment International, also a Disney subsidiary, reported $198 million in sales and rentals of "Gone." But only a fraction of that sum was credited to the movie, Mr. Epstein explains.

Buena Vista gave Walt Disney Pictures a $39.6 million royalty cut, a transaction that was treated as though the two companies were separate entities rather than corporate sisters. Distribution fees and other expenses claimed $20 million of that sum.

After various accounting tricks, Mr. Epstein writes, only $18.4 million of "Gone's" home-entertainment take got credited to the movie itself -- which, after deducting manufacturing expenses, left Disney with a $130 million profit on the home-entertainment release.

For Mr. Cage, who was entitled to 10 percent of the movie's video gross, the royalty calculation meant he earned a little less than $4 million, as opposed to $19.8 million. That's not chump change. "Without the royalty system," a former studio executive told Mr. Epstein, "we would go broke."

The studios, obviously, love the clearinghouse system. But there's the issue of movie attendance and fewer rear ends in theater seats: That's got exhibitors worried.

Entertainment Weekly reports that DVD sales are up 15 percent this year. And movies already make far more in the video market than they do in theaters ($24.1 billion vs. $9.2 billion annually).

Exhibitors are so skittish about these figures that Todd Wagner, head of Dallas-based 2929 Entertainment, is willing to give them a piece of the action if his potentially revolutionary business model takes off.

Last month, 2929 signed a deal with director Steven Soderbergh to release six movies -- the first due this fall -- simultaneously in theaters, on DVD and on television. (The company owns, in addition to the Landmark theater chain, the high-definition cable network HDNet, which includes the digital tier HDNet Movies.)

As an olive branch to theater owners, Mr. Wagner is open to charging a premium for DVDs and cable pay-per-views while the same movie is in theaters.

"I don't view this as attacking theatrical runs," Mr. Wagner says. "To me, it's all about consumer choice. Only the movie industry has dictated for 50 years how and when you consume something."

In Mr. Wagner's estimation, the way the movie business works now -- a staggered system of release "windows" that begins with a theater engagement and ends with network television or cable -- is not only choice-dampening ("like hearing a song on the radio and having to wait three months to buy the CD," he says), but wasteful, too.

Why not cut out the middleman, Mr. Wagner asks? Why pay to advertise a movie more than once?

To allay exhibitors' fears, Mr. Wagner cites the example of the black market for DVDs in Russia. Up to 99 percent of DVDs there are pirated and yet the Russian theatrical market has never been stronger, he claims.

"People will always want to go to the theater. It's that communal experience."

The industry may already be trending in the direction Mr. Wagner wants to take it. DVD releases are creeping ever closer to the ends of theatrical runs, as studios try to get more bang for their marketing bucks.

But David Card, an analyst with Jupiter Research, envisions another scenario, one that could add even more fuel to the clearinghouse system and restore distance between movie release windows.

In the past few years, Mr. Card has seen more and more money spent to promote DVDs as products distinct from their theatrical cousins. If that happens, it may be in studios' interest to, once again, wring as much cash as possible from each format.

"It's conceivable the windows will stretch out again," he says. "I'm sure studio execs are puzzling over that."

If the clearinghouse system as limned by Mr. Epstein is any indication, all that "puzzling" will lead to an increasingly baroque scheme of Peter-Paul robbery.

And the rest of us simpletons will be left clucking about our opening-weekend scorecards.