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L.A. Confidential

Edward Jay Epstein's new book, The Big Picture, uncovers Hollywood's dirtiest secret: the real economics of moviemaking.

11:00 PM, Feb 22, 2005 • By JONATHAN V. LAST
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A SURVEY of the muck soon to be celebrated at the Academy Awards confirms William Goldman's sad truism: Every Oscar night you look back and realize that last year was the worst year in the history of Hollywood.

It is depressing to watch the quality of American cinema degrade, as if it were some kind of glittery radioactive isotope. But Edward Jay Epstein provides comfort with The Big Picture (Random House, 375 pages, $24.95), offering a compelling backstory to the awfulness we see at the cineplex.

The Big Picture is Hollywood's Moneyball--a groundbreaking work that explains the inner workings of the game. (Movies in this case, not baseball, although each could probably learn from the other.) There is, Epstein argues, a powerful economic reason that movies aren't very good anymore: They don't have to be.

The Big Picture begins with the birth of the studio system at the turn of the 20th century, a world of privileges and profit sources that contrasts strikingly with the current maze of studios, entertainment conglomerates and media barons. It is difficult to imagine now, but Hollywood was once run by a mere handful of men.

They had writers, actors and directors under contract, to whom they assigned projects based on their own whims. They churned out a fantastic number of movies--cheaply--and exhibited them in theaters they owned. And the public couldn't get enough. In 1947, Hollywood sold 4.7 billion movie tickets. The studios were hugely profitable movie factories.

Times have changed. In 1949, invoking the Sherman Anti-Trust Act, the Justice Department forced the studios to divest themselves of their theaters. Over the years actors, directors and other artisans redefined themselves as free agents. Television came to compete with the movies, as did home video. And despite a population boom, movie-going fell out of favor. In 2003, only 1.57 billion tickets were sold, a third the number 56 years earlier, while the real cost of making movies increased some 1,600 percent.

It wasn't just production costs that exploded. Today the average movie costs $4.2 million to distribute and nearly $35 million just to advertise. (The comparable 1947 figures, adjusted for inflation, were $550,000 and $300,000.) Such peripheral costs, Epstein explains, have grown so large that "even if the studios had somehow managed to obtain all their movies for free, they would still have lost money on their American releases."

What happened? Hollywood redefined itself too, Epstein argues--as a clearinghouse for intellectual property, not a factory for making movies. This new business is at least as profitable as the old one, but the "product" on offer is different. To explain, follow Epstein's detailed analysis of the movie Gone in 60 Seconds.

In 2000, Gone, an action-thriller, was released to little acclaim and somewhat disappointing box-office returns. The company that produced it, Touchstone, was (and is) part of the Disney empire. That year, Disney touted the global box-office revenue of Gone as $242 million. Not bad. Even if theaters kept $139.8 million from ticket sales, Disney still took in $102.2 million. Surely there was a profit in there somewhere?

Not necessarily. Consider the expenses. The physical production of the movie was $103.3 million. Prints cost $13 million; insurance, taxes and customs clearance came to almost as much. The studio spent $42 million for advertising in North America and a bit more than half of that for the rest of the globe. On the back end, Disney paid out $12.6 million in residual fees and figured in $17.2 million for overhead and $41.8 million for debt service--for a total negative cost of $265.3 million, more than double the studio's take of the box-office receipts.

So how did Disney make money? The answer is in the clearinghouse. Disney never expected to profit from the theatrical release of Gone in 60 Seconds, but it did count on harnessing a whole river of money--from the rights to the intellectual property it had created.

By 2002, Buena Vista Home Entertainment International, another division of Disney, had reaped $198 million in sales and rentals from Gone in 60 Seconds videos and DVDs. Only $19 million of that sum was credited to the movie itself, though, thanks to the complicated royalty system that Hollywood employs. This reduced number is an important accounting trick since the movie's star, Nicholas Cage, was contractually entitled to 10 percent of the video gross.