Sunday, July 24, 2005

The blockbuster is dead all over.

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July 10, 2005
Detroit Is So Hollywood, and Vice Versa

By DANIEL GROSS

THE capital of the American automotive industry and the capital of American entertainment don't seem to have much in common. Detroit wears Brooks Brothers, Hollywood wears Armani. Detroit eats meat and potatoes, Hollywood (when it's not dieting) dines on sushi and low-carb shakes. Detroit is Rust Belt; Hollywood is Botox Belt.

Crucial numbers in Detroit are market share and miles per gallon. In Hollywood, they're box office takes and agents' percentages. In Detroit, silicon can be found in painstakingly engineered auto parts. In Hollywood, silicone can be found in painstakingly engineered body parts.

But in this summer of shared discontent it suddenly seems the two industrial capitals have something in common. Both iconic American powerhouse industries formed in the early 20th century and saw their high point midcentury. Today, both are discovering that the strategy and tactics that until recently brought them huge profits have led them to re-examine their business models. Sure, the woes afflicting the two industries are vastly different - the Big Three automakers are struggling under the weight of health insurance and pension costs while Hollywood studios are buffeted by rapidly changing technologies and consumer tastes. While no Hollywood studio has seen its debt downgraded to junk, their respective plights reveal striking similarities - and perhaps, a similar way out.

Consumers today face an unprecedented array of choices for how to spend their transportation and entertainment dollars. And with each passing year, they seem less likely to choose to spend them on the stuff cranked out of Detroit and Hollywood assembly lines. In the postwar decade, the height of the American century, both rode high. The Big Three - General Motors, Ford and Chrysler - held down an astonishing 95 percent of the United States car market in 1955. In 1948, writes Edward Jay Epstein, author of "The Big Picture: The New Logic of Money and Power in Hollywood," some 90 million Americans, or 65 percent of the nation's population, went to a movie each week. That year, with TV in its infancy and the only real competition radio, Americans bought a whopping 4.6 billion tickets.

But decades of competition from upstarts - Japanese and Korean automakers for Detroit, television, video games and the Internet for Hollywood - have killed these two incumbents by a thousand cuts. In June, the no-longer-so-Big Three controlled just 58.3 percent of the United States market. Last year, according to the Motion Picture Association of America, only about 10 percent of the population managed to make it to the multiplex each week, and the number of tickets sold slumped 2.4 percent to a little more than 1.5 billion. So far this year, according to Exhibitor Relations, attendance is down another 7.8 percent.

In recent years, both industries thought they had settled on surefire formulas to cope with burgeoning competition, globalization and technological change. Develop a big, expensive blockbuster model, market it like crazy, and then return the next year with slightly tweaked, bigger and more expensive models. Sure as "Terminator 2" and "Terminator 3" followed the Arnold Schwarzenegger vehicle "Terminator," Hummer 2 and Hummer 3 followed the Hummer, another Arnold Schwarzenegger vehicle. But in both realms, the strategy has stalled. Just as audiences found "Ocean's 12" a pale imitation of "Ocean's 11," itself a remake of a 1960 film, drivers have turned away from the bigger and ever-less-fuel-efficient S.U.V.'s stamped out by General Motors and Ford. Sales of the battleship-size Ford Excursion are off 26.3 percent this year.

In recent months, quirky foreign makes like the Toyota Prius and Mini Cooper have captured the imagination of trendy buyers bored to tears by Detroit's pedestrian automotive retreads. How precisely does the 2005 Ford Taurus differ from the 2002 Ford Taurus?

Moviegoers apparently are having a similar reaction to Hollywood's buffet of warmed-over dishes. Most of the movies in wide release last week - the 19th straight week in which box office receipts were lower than the same week a year before - were either remakes or brand extensions: "War of the Worlds," "Batman Begins," "Herbie: Fully Loaded," "Star Wars: Episode III," "The Longest Yard" and "Bewitched." What's next, a remake of a lame 1970's-vintage television show like "The Dukes of Hazzard"? Well, yes.

For manufacturers, the sum of all fears is seeing the costs of the basic inputs to your product rise beyond your control. For the auto industry, the price of hot-rolled steel increased from $260 a ton in May 2003 to $535 a ton in May 2005, according to Purchasing Magazine. For studios, the price of Hollywood prima donnas has been rising far more rapidly than the consumer price index. Last year, according to the M.P.A.A., the average cost of making and marketing a film was $98 million - up more than 10 percent from 2003.

Worse, neither Detroit nor Hollywood has been able to pass on rising costs to consumers. The average movie ticket price rose just 3 percent in 2004, and is up just 3 percent this year. Meanwhile, Detroit has had to bribe customers to take cars off the lot with huge rebates. And now both Motown and Hollywood are engaging in gimmicky, unsustainable inducements to bring people in the door. On June 1, General Motors started offering its employee discount to all buyers, a move matched last week by Ford and DaimlerChrysler. In late June, AMC (the second-largest theater company, not the late carmaker) began offering money-back guarantees to coax people to sit through "Cinderella Man." Rival chain Cinemark quickly followed suit.

There's more. Both industries are extremely anxious over the threat of piracy from Asia. Hollywood frets over the quick availability of excellent copies of the latest "Star Wars" film; Detroit frets over the prospect of the Chinese car company Chery marketing its cheap QQ minicar, which GM contends is a brazen knockoff of the Chevrolet Spark.

And once-proud manufacturers in both industries no longer depend on earning profits from selling the products they make through the established distribution channel (dealers for Detroit, theaters for Hollywood) but on related activities. GM and Ford routinely lose money on their United States automaking operations, but are bailed out by their finance arms, General Motors Acceptance Corporation and Ford Motor Credit. They're essentially banks attached to unprofitable carmaking operations. Just so, the studios are really merchants of DVD's, broadcast and pay-per-view rights attached to money-losing manufacturers of movies made to be screened in theaters. According to Mr. Epstein, the author, the Hollywood studios garner just 17 percent of their film-related revenues from theaters.

The salvation of these iconically American industries won't come through gimmicks or slick marketing. Autos and movies are regarded as parochial industries. And to a large degree, Detroit and Hollywood remain insular company towns. But the relentless focus on their struggles in the home market they owned in the 20th century may obscure the success they're having in the markets that they could own in the 21st century. Last year, while United States box office revenues stagnated, box office revenues outside the United States surged 47 percent in dollar terms.

As moviegoers in India, Asia and Latin America flocked to "Shrek 2" and "Troy," the number of international tickets sold rose 13 percent last year. Meanwhile, GM's sales in China have risen 19 percent so far this year. As GM loses ground in Middle America, its market share in the Middle Kingdom has risen from about 8 percent in 2003 to 11 percent this year. Sure, Americans may look askance at the umpteenth version of the Ford Taurus, or at the umpteenth feature movie to revolve around a comic book hero. But as the number of middle-class consumers for Detroit and Hollywood's products continues to grow around the world, Americans may no longer be the target audience.

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