Hollywood’s filled with talented storytellers, including executives when they craft creative arguments to portray movie-making as a vibrant business with ample growth opportunities. So it’s no wonder that many of them grind their teeth this time each year when Cowen and Co. Managing Director and Senior Research Analyst Doug Creutz releases his annual report with an alternate view — one that deems movie studios an “investment negative.”
His latest release, out this week, warns that 2017 will bring “another round of punishment for the industry characterized by several big-budget bombs and disappointing performances from mid-budget pictures.”
That’s bracing when you consider his finding that movie operating profits for the seven leading studios declined by 14.6% to $4.18 billion in 2016. Disney accounted for 60.5% of the total leaving two studios — Paramount and Sony — as money losers.
In other words, he pretty much called it early last year when he warned that “the outlook for film industry profitability is looking increasingly dire.”
With his gloomy outlook, and successful track record since he began covering entertainment in 2003, Deadline decided to check in with the analyst to find out more about his views of what’s up — and what’s ahead. Here are his thoughts, edited for length and clarity.
DEADLINE: How have studios responded to your findings?
CREUTZ: When they talk to me, they’re more optimistic about the health of the film market. I don’t know what they really think when they’re lying awake in bed at night. The numbers are what they are.
DEADLINE: What do the numbers tell you?
CREUTZ: People are going to see non-blockbuster, counterprogramming movies a lot less than they were just a couple of years ago. If you try to not do big, giant movies — that’s not good for you. As much as everyone complains about there being too many sequels, that’s what people are going to see. The problem now is that so many are being made, it’s becoming harder and harder to find space– unless you’re Walt Disney and you’ve got a lot of the best ones.
DEADLINE: Some still find space and make money.
CREUTZ: Logan has done quite well. Stuff like Deadpool did well. It’s not that you’re getting outright bombs. But films that do okay are not doing as okay as they used to. Their legs are shorter. Like Lego Batman for instance: it’s going to make money for Warner. But it’s significantly down from what the prior Lego movie did a couple of years ago. It’s not terribly healthy.
DEADLINE: What specifically should studios do to become solid businesses?
CREUTZ: It’s a classic tragedy of the commons scenario. Everybody’s optimal strategy is to go aggressively after blockbusters. But when everybody’s doing that, it’s bad for their collective outcome. In industries where you have overcapacity or shrinking market, typically companies get merged or they go out of business. That’s competition. That’s capitalism.
DEADLINE: Why isn’t that happening?
CREUTZ: All of the studios are owned by larger companies. So there isn’t this overriding financial pressure: “Oh my God, were going to go bankrupt. We better do something.” Paramount could lose money for 50 years and Viacom would not go out of business. It’s small compared to the overall company. There was an option on the table for them to sell Paramount to a Chinese bidder. There were lots of rumors about that. They opted not to. Why? Well, some of this has to do with it being a family business. The movie business is a sexy business to be in. Very prestigious. People have a hard time letting go of those assets. You wouldn’t see a merger unless two of the larger companies merged.
DEADLINE: Fox wanted to do that in 2014 when it offered to buy Time Warner.
CREUTZ: They said that they were going to run the studios separately. My guess is that wouldn’t have lasted very long. It would’ve cost Fox an enormous amount of money; it would’ve been a bad deal for Fox. [Merging the studios] probably would’ve been good for everybody else because competition would’ve been eliminated in the market.
DEADLINE: And now?
CREUTZ: Time Warner’s going to be part of AT&T, so they’re not going anywhere. Lionsgate is not quite in the same position. But now that they’ve got Starz, the movie business is only about a third of their total business. If they have real problems it’s not going to endanger the company. So I don’t know what there is to do. I think it’s going to be tough for a while in terms of profitability unless audience behavior changes again or somebody figures out a new formula.
DEADLINE: You found that Paramount and Sony lost money from movies last year. Both are looking for new studio chiefs, and trying to turn things around.
CREUTZ: Paramount said, “We didn’t invest enough money in our movie business.” Well what does that mean? Does that mean you’re going to make more blockbuster pictures? Great, that crowds the market even more. Does that mean you’re going to make more movies in general and play counterprogramming? Again, that market is way down from what it used to be. So it may be individually rational for Paramount to do that. It probably is. They’ll probably do better than they were. But it’s going to be bad for the health of the market. Sony is headed into the same space in terms of what they need to do.
It’s a tough position. I think the movie-going experience is becoming a little more niche than it had been for a long time. And the industry hasn’t gotten any smaller.
DEADLINE: How about Disney?
CREUTZ: Disney’s doing great but investors expect them to continue doing as well as they are doing — potentially, if not forever, then for the next several years. And they probably will. But in the event that they stumble, it’s going to be bad news for Disney stock. When you’re at 60% of industry profits, it’s hard to see how you go up much from there.
I was having a discussion with somebody this morning: “Now they’re doing all these live-action remakes of their animated films. Isn’t that better for Disney?” I said, “Look, how much better are things going to get?” They had the top five grossing films in the world last year and six of the top 10. I guess they could have 10 of the top 10. It’s possible. But at a certain point it’s like, “Okay, you are the industry, practically.”
DEADLINE: And the rest?
CREUTZ: It’s not like everybody’s going to suffer. Warner did well last year. Of course it was coming after a terrible year. Universal had a very good 2015 but much less in 2016, although it wasn’t awful. Not everybody’s going to flail. The guys who have been flailing – Paramount, Sony for sure, and to a lesser extent Lionsgate – the hole they have to climb out of is bigger than “we just made a few bad films.”
DEADLINE: Let’s look at some specific examples. Was there something Paramount could have done to make Star Trek or Teenage Mutant Ninja Turtles better?
CREUTZ: If Paramount had made better movies they would’ve done better. But it probably would’ve come at the expense of other people’s movies. It wouldn’t be Paramount did better, and the industry did better. It would be Paramount did better, and another guy would’ve done worse. It’s a zero-sum issue. If we’d gone back 10 years and Paramount had bought Marvel and maybe bought DreamWorks, they probably be a lot better positioned than they are now. But they didn’t, and so they’re not.
DEADLINE: China’s theatrical market is growing, and the industry is lobbying for officials to raise their quota on non-Chinese films.
CREUTZ: China’s growing. But the rest of the world is shrinking. And who the heck knows what’s going to happen in China with the way the political environment has changed? I, for one, would not want to be betting my future on American access to that film market remaining unimpeded or getting better. I think there is a fair amount of risk around that. I don’t know what the Chinese will do ultimately. With Trump as president, he’s called out China several times. If they decide they want to retaliate, [movie imports] would be one obvious, high profile place to do it.
DEADLINE: Can’t you measure success outside of the box office? For example, AT&T might be happy if it finds a way to use Time Warner movies to attract wireless customers.
CREUTZ: AT&T can define success however they want. And I’m sure they will. But film profits are film profits. I don’t think AT&T bought Time Warner because they were excited about the film business. They bought Time Warner because they’re excited about the television business. Film is probably for the most part an afterthought for them. Films have been windowed pretty aggressively for a long time in terms of VOD and pay-TV and free TV. It’s really TV and the emerging video-on-demand ecosystem – that’s what AT&T has identified as having a lot of potential by buying Time Warner. You can make a lot of those deals a lot easier and make the consumer experience a lot cleaner. But that’s TV. It’s not movies.
DEADLINE: Would the business be rejuvenated if Apple or another tech company bought a studio? Apple’s an international company, and the film business is international.
CREUTZ: They could. They have enough money to do it. Should they? Does it help them? I don’t think it does. If they were to buy media company I think it would be more about the television business.
DEADLINE: Studios want to collapse windows and show some of their non-blockbuster movies to home viewers via premium VOD within the 90-day period when theaters now offer new releases exclusively. Wouldn’t that help studios?
CREUTZ: It depends on how much demand there is out there among people who would pay a premium and watch the movie at home earlier. I’m not sure there’s that much. It’s certainly going to continue to erode your relationship with the theaters. Theaters are still making money off the concessions. Movies have been pretty well exploited through their windows for a long time. Unlike television, I don’t know that there’s money to be found out there to save things.
DEADLINE: How do studios make up for the lost DVD revenue?
CREUTZ: When big animated films go from 50 million DVDs to 10 to 15 million, I don’t think that you’re making all that up on video-on-demand. You maybe made it up between video-on-demand and 3-D premium and bigger international box office. But that means you remained in place.
DEADLINE: Is the basic problem that TV’s getting better, and people are satisfied to watch it more?
CREUTZ: We’re in a massive golden age for television. There’s so much good TV content that you could do nothing but watch it 24 hours a day, seven days a week, and still couldn’t get through it all. And this is because you’ve had new entrants come in like Netflix and Amazon and they are essentially willing to offer up tons of content at a very reasonable price.
That’s created a double dynamic. There is more demand for content by aggregators. And you really need to have new and splashy programming to attract an audience. There is so much good TV on compared to 10 years ago that that probably is contributing to the issue for movies, although I’m not sure that it is the issue. Video games continue to grow as an entertainment option, and think of all the time people spend online. There are only so many hours in the day.
DEADLINE: Are movies becoming too expensive?
CREUTZ: They’re certainly not cheap. You can’t say for sure. We didn’t do a consumer panel. But when you look at what consumers are doing it does seem to be more and more that they only go to see movies at the theater that demand a theatrical experience.
DEADLINE: Maybe Hollywood just needs to make better movies.
CREUTZ: Making better movies is always going to help you relatively speaking. But when I looked at the 10 top-grossing movies last week, six of them had Rotten Tomatoes scores of 90 or better. That’s a lot of good movies. If you look at the average Rotten Tomatoes scores of the top films over the last 15 years, they’ve been going up. Now maybe that’s some sort of critics’ grade inflation. But if you assume it’s not that, I do think that the studios have increasingly gotten religion: The overall numbers show there has been a concerted effort to make better movies. And yet profits are still down, again. It’s a zero-sum game.
DEADLINE: Some people think that Hollywood could sell more tickets by appealing more to middle America — or political conservatives. Anything to that?
CREUTZ: People want to be entertained. If it’s a good movie and looks fun people are going to go see it. People are going to see the big movies. At the margin is there a little bit of that? I can’t prove that there isn’t. But it doesn’t feel likely to me. When people say that, they usually have a political agenda of their own. If Susan Sarandon was starring in the next Captain America movie, that would be a great test to see if that’s what was really going on. But that’s not happening. So we’ll just have to not know.
DEADLINE: Steven Spielberg and George Lucas predicted a few years ago that movie theaters will become more like Broadway with a few mega blockbusters that stay for a long time and tickets costing $50 or $100. Everything else will be on television. Does that sound plausible?
CREUTZ: The non-blockbuster market is losing dollars and to a certain extent that’s going to TV. At the end of the day, the studio still has to put out a certain number of movies per year to maintain scale. You might see a situation where the budgets become more and more barbell over time where maybe you’re going to make 15 movies and seven will have budgets of $100 million-plus and eight will have budgets of $20 million and under. You hope that one or two of the $20 million movies breaks out but if it doesn’t you don’t really hurt yourself and you keep your product rolling and maybe other movies do better in later windows. And you pray to God that those seven big movies do well.
DEADLINE: Spielberg also said that superhero movies could go the way of the Western. Could there be a change in the zeitgeist favoring movies that perhaps won’t cost as much?
CREUTZ: I’ve never believed in anything like genre fatigue or franchise fatigue. I believe in mediocre product fatigue. If Marvel starts making a bunch of bad movies, if DC continues to make bad movies, if Fox seems to be one-on and one-off right now, if the movies start getting worse then, yeah, people won’t go to see them. It won’t be because they’re tired of superhero movies. It will be because they’re bad movies. … If people in Hollywood are hoping that superhero movies are close to running their course, I think they’ve got a while to wait yet. Maybe a long while.
If you look at a film like Logan, it’s a superhero film – but it really is a Western. Or Deadpool: it’s a superhero film, but it’s also an R-rated comedy. Or Ant-Man was a heist movie. Winter Soldier was a 70s espionage movie. People are increasingly taking these characters, since the characters are draw for a lot of people, and then they’re saying, “We don’t have to make a paint-by-numbers superhero film. We can make whatever kind of movie we want. We’ll just use these characters.” And that’s bringing people to the box office. Adults who want to see good movies are going to these movies.
DEADLINE: So, generally speaking, the string has run out and Hollywood has nowhere to turn?
CREUTZ: Yeah. There are a lot of very smart people in Hollywood. Film quality has generally been increasing over the last five, six, or seven years. They work very hard to wring out every dollar they possibly can.
The flipside, though, is when you look at the long, long, long history of the movie business, it’s one of the few industries in the world that isn’t run strictly from a P&L perspective. It’s incredibly glamorous business and people like to be in the movie business. So it’s always been an industry that’s flirted with overcapacity. Too many movies get made because people want to make movies. People want to be in movies and they want to stand next to people who are in movies. And for most of the history of Hollywood studios were independent entities and would go through these cycles where, when there too many movies being made, some would go out of business. Like what happens in most industries. You have these cycles.
But once all the studios got bought by conglomerates, that existential threat went away. Now the worst thing that happens is that the CEO of the studio is fired and someone else gets put in their place. You’ve had three of those in the last year. If you put three great CEOs in those jobs maybe the studios do better. But I don’t think that, in aggregate, the industry’s making more money. We had the home-video boom which created a lot of extra profits and things were great. We had an international boom that created a lot of extra profits and things were great. But we’ve kind of run the course of those things. we’ve probably had a little too much capacity and right now I don’t see any likelihood of that capacity being reduced. So I think the profits in general are going to continue to be choppy, unless you’re Disney. For now.
DEADLINE: Is the film business dead to Wall Street?
CREUTZ: It’s funny. People are willing to pay a big premium for Disney…. DreamWorks got bought at a big premium. There’s clearly interest out there in content, including the movie business. It used to be that Wall Street would never pay a multiple for studio profits. And that clearly isn’t the case now.
At the end of the day I love writing these notes because most of the companies that own movie studios are getting the vast majority of the profits not from movies. If Universal’s profits are down 70% next year is it going to hurt Comcast’s stock? Probably not very much. It’s some small percentage of their total earnings. Fox, Warner – it hurts them a little more. I think the Warner Bros. film studio is about 10% of Time Warner’s total profitability and inside of AT&T we’re talking a low single digit percentage. Fox, single digits. Paramount doesn’t make any money. From a Wall Street perspective, because they are relatively small pieces of bigger businesses if the film does great it doesn’t draw as much attention as it might do otherwise.
DEADLINE: But there’s more to the business than money.
CREUTZ: Hollywood is an incredibly important industry to this country in a lot of ways. One of the reasons the Chinese are so eager to have their own successful movie industry is because of its cultural power. They want to export their values around the world versus having U.S. values exported everywhere else. That’s how they view it and I don’t think they’re entirely wrong. Even though Hollywood prides itself on being a bastion of progressive values, it still is the establishment and it does have a worldview that not everyone agrees with – not just in this country but in a lot of other countries. To the extent that Hollywood does begin to struggle financially it is important. Not necessarily to people’s stock prices — but it is important.