Another day, another box office disappointment. Or record. Or franchise hit. Or franchise RIP. Or indie sleeper. Or indie sleep-with-the-fishes. What's going on?

Every few years, a single theme dominates all analysis of the domestic box office. In 2013, the focus was on the supposedly (but not actually) unprecedented number of summer box office bombs. 2014 was dominated by then-DreamWorks Animation CEO Jeffrey Katzenberg’s declaration that “movies are not a growth business” (CBS CEO Les Moonves promptly responded that “anyone who is producing content and doesn’t see it as a growth biz is extremely mistaken,” while Time Warner CEO Jeffrey Bewkes quipped that “maybe it isn’t for him”, and so on). 2018 was the year the box office supposedly bounced back, with receipts up 7.4% after declining 2.7% in 2017.

2019 is apparently the year of “franchise fatigue,” with audiences (finally!) recoiling against tentpole/blockbuster/IP-based filmmaking. Hence the box office bombs Dumbo, X-Men: Dark Phoenix, Alita: Battle Angel and Hellboy, the disappointing hauls of Glass, Toy Story 4, Detective Pikachu, Godzilla: King of the Monsters, and MIB: International, and the unexpectedly soft tracking for films such as Fast & Furious Presents: Hobbs & Shaw (which is heading for the lowest opening weekend in the franchise’s past six films and 11 years) and Angry Birds 2.

But this franchise fatigue narrative isn’t true. 2019’s 11 biggest films will likely be Marvel 24, Star Wars 11, The Lion King (remake), Toy Story 4, Frozen 2, Marvel 25, Marvel 23, It: Chapter 2 (remake 3), Aladdin (remake), Fast & The Furious 9, and Jumanji 4 – and these films will pull in more than the top 11 films have ever grossed before (on a percentage or inflation adjusted basis). And what about the non-franchise side of the market? This summer has also been afflicted by the unexpected (and often sizable) failures and disappointments of non-franchise films with evangelist viewers, great reviews, unique stories and signature talent. Examples here include Booksmart, Late Night, Brightburn, Tolkien, Rocketman, The Kid Who Would Be King, The Long Shot and A Dog’s Journey.

But if audiences are tired of franchises, and non-franchises, but love franchises more than ever and still support films like Us… what’s going on?

The answer is simple to track and has three components.

 

#1: What’s Happened to Filmgoing?!

The popularity of theater-going has been in decline for close to 20 years. This year, per capita movie ticket sales in the United States and Canada are likely to fall below 3.45, nearly 35% less than in 2002 (or 1.75 fewer tickets per person per year) and 25% less than the long-term average of 4.5 (more than one ticket fewer). Not for 50 years has a decline in theatrical consumption lasted so long or been so severe. And not since the advent of the theater itself in the 1800s have per capita sales been so low.

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While logic suggests this decline will stabilize eventually (a belief that many erroneously supposed about pay-TV viewing, too), the new floor could be fewer than three tickets per person. A look at demographics shows this probability. Per capita consumption is down across every age segment except 60+ (sounds like pay-TV), with the youngest reducing their consumption by the most (again).

Making matters worse, young filmgoers – unlike young pay-TV viewers – have always watched the most movies. Traditionally, teens and college students reduced their moviegoing as they entered the workforce and built families – with annual attendance falling from a historical eight to 10 films per year, to three to five. Today, however, this group peaks at four to five. As this trend cycles through the population pyramid, the industry is likely to see further reductions in total ticket sales.

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To understand why these groups are rejecting the theater, we need to consider who is driving this decline rather than just their age. In 2002, roughly 27% of Americans were “frequent moviegoers” – attending an average of one film per month or more. Today, only 10-12% of Americans do.

This is important because there’s a widespread claim that ticket sales have declined because Hollywood’s obsessive focus on sequels, franchises, blockbusters and IP (“SFBIP”) has led many people to stop going to theaters altogether. In fact, the segment of the population that doesn’t attend “the movies” has been unchanged since 2002 at one in four, and a greater share of the population goes to the theater today than at any time between 2009 and 2017.

Nearly all the decline in theatrical consumption has instead come from a reduction in the frequency of attendance by the most intense moviegoers. This reiterates the idea of secular decline; those who loved the product most, love it less each year.

Some claim this reduced appetite stems from ever-increasing ticket prices and forced upsells via IMAX/3D-only screenings and VIP seatings. However, this doesn’t hold up to scrutiny. Ticket prices have only increased a dollar in inflation-adjusted terms since 2000 – or 13% – and are roughly in line with ticket prices from the 1980s. And with IMAX, 3D and VIP seating, viewers get better experiences for this $9 than they ever did for $8. And if pricing was really pushing those who attended 12+ movies a year to reduce their purchasing, MoviePass, AMC Stubs A-List, and other all-you-can-eat subscriptions would have solved this problem. In truth, there has never been a discernible correlation between pricing and consumption.

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Two other theories persist behind the 20-30% drop in tickets sold. The first says a material portion of “Frequent Moviegoers” were mostly attending non-blockbusters but no longer have those options. A second says many “Frequent Moviegoers” dined mostly on blockbusters while seeing a handful of smaller films per year, but no longer can. These arguments don’t track, either.

Nearly half the decline in per capita consumption occurred before the shift to SFBIP began. The Marvel Cinematic Universe didn’t premiere until 2008 with Iron Man (the same year The Dark Knight popularized “serious superhero movies”). Avatar came in 2009, as did Disney’s purchase of Marvel. Disney didn’t purchase Lucasfilm until 2012, with its first Star Wars release coming out 13 days before 2016. Much has been written about Pixar’s shift to sequels, but it wasn’t until 2010 that it released its second follow-up – at which point per capita sales were already near a 100-year low.

Indeed, virtually all of the drop in moviegoing over the past 20 years has been from the long, predominantly indie tail of the box office. The top 25 titles, which represent roughly 50% of annual grosses, sell the same number of tickets per capita as they used to.

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It’s true that these films used to include adult dramas and romcoms but are now all SFBIP films. But audiences, as evidenced by the continuity of ticket buying, haven’t been discouraged by this shift. The food on the menu changed but appetites remain unchanged.

It’s also incorrect to claim that because the Big Six studios have each refocused their slates to mostly franchise-focused films, there are no longer enough “intellectual dramas” or “lighthearted comedies” in theaters. In fact, there are more of these films than ever before – orders more.

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The problem, again, is audiences don’t want these films. To point: While refocusing their slates around SFBIP films, the Big Six Studios have reduced the number of titles they release annually by 20% since 2000 (with their share of total films released per year plummeting from 24% to 12%), and yet their market share has expanded from 69% to 81%.

The explanations for this are simple. Over the past 40 years, viewers have added more high-quality screens and sound systems in their homes, the quality of television content has improved, the ability to access this content (e.g. ad free and on demand) has improved, and bigger (and more social) alternative entertainment experiences have emerged, such as Call of Duty and Fortnite. This is similar to the first secular decline of theatrical attendance. Before household TVs emerged, audiences attended the theater 40-70 times per year – after all, it was the only way to watch video news (attendance peaked during World War II). As families added more TVs to their homes (thus allowing family members to individually watch), consumption dropped.

Today, movies earn their keep by displaying content that is best able to defeat at-home consumption and alternatives – to persuade audiences to turn off Netflix, get in their cars, drive to a movie theater with convenient showtimes and available seats, park, buy $10 tickets, sit through 10 minutes of commercials and 20 minutes of trailers as the adjacent seats fill up with strangers, watch the film for 150 minutes while holding off the restroom, then drive home. The only way studios can reliably do this is by offering a spectacle that simply needs to be seen on a big screen (Avengers: Endgame) or has such cultural relevance you can’t wait until the home video release to catch up (Us, or again, Avengers: Endgame). It doesn’t seem to matter if a film like Booksmart is terrific (it is), widely available and evangelized. The role of the movie theater has changed.

But if this is the case, how are so many blockbusters and blockbuster franchises failing?

 

#2: Is Performance at the Box Office Really Polarizing?

It has become commonplace in Hollywood to argue that the box office has become “feast or famine” – that the richest films make more than ever, while the titles that want for more end up languishing in losses. Yet, the data doesn’t support this. As the box office has skewed toward franchises, almost all of the most popular films of the year have benefited. The top five films have seen their average share of the box office grow to 4%+ per film since a low of 3% in 2001 (a 25-33% increase), while the top 6-10, 11-15, 16-20 and 21-25 each saw their median share of the box office grow 10-25%.

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What’s more, it’s even easier for a major film to land in the top 25 films than ever before. During the 1990s, the Big Six studios released an average of 128 films in theaters per year. Over the past five years, that number fell below 100.

And beyond share of total receipts, the 6th to 10th, 11th to 15th, 16th to 20th and 21th to 25th ranked films have each seen their mean (inflation adjusted) domestic box office gross grow by 62-67%. In fact, the top 5 films that have seen the least growth (25%). It’s easier to be in the top 25 and being in the top 25 pulls in more money than ever (despite drops in total ticket sales!). So what’s the problem?

Simply put, these films have become incredibly expensive. For decades, the box office was dominated by blockbusters that cost at most $50MM to make. 1984’s box office champ was Top Gun, 1986 was led by Beverly Hill’s Cop, 1988 saw Rain Man wear the crown, 1990’s victor was Home Alone, while 1994’s was Forrest Gump – and as recently as 2014, the $60MM American Sniper was the highest grossing film of the year.

Today, the box office champ will typically spend more than twice as much just on marketing. It’s true the global box office has grown enormously (China’s box office has grown 900% since 2009, when it was one-tenth the size of the US’s), but net receipts are more modest abroad (45% internationally and 25% in China versus 50-60% in the US) and the lucrative home video market has collapsed.

In addition, filmmaking is mostly a fixed-cost business. Once a film pays back, the profits quickly accrue. The top 25 films might be making 25-60% more than they did in the 1990s, but their cost base has grown much faster. And the need to not just achieve profitability but attract a wide fanbase upon which a “cinematic universe” can be built often results in marketing spend and production budgets that all but ensure a loss unless a film manages to be in the top five or 10 films of the year.

Which brings us to the key thesis of 2019.

 

#3: Franchise Fatigue Isn’t Real

Recently, pundits and creatives have begun to argue that the cause of box office losses, disappointments and declining consumption all stem from “franchise fatigue.” The data clearly rejects this. 2019’s biggest films will all be SFBIP titles – and their dominance could have been predicted, if not in perfect rank order, long before anyone coined the phrase “franchise fatigue.” These films will hold a historic share of the box office, as will the studio most focused on these titles, Disney (which will also generate more revenue than any other studio in history and achieve 3-4x the margins of its competitors).

The right way to think about franchise fatigue is not to consider the titles unable to breathe, but those that are starving the market of oxygen. To start with health, not sickness.

Before 2008, there was no Marvel Cinematic universe. And over its first five years (“Phase 1”), the super-franchise released only 1.2 films per year and averaged $291MM (inflation adjusted) domestically. Since 2016 (“Phase 3”), the MCU has released 2.75 films per year and averaged $450MM per film. And only two of these 11 films grossed less than the Phase 1 average.

The MCU’s ability to increase output by 130% and increase unit performance by 30% should itself defeat the idea of franchise fatigue, especially given it operates in a market where several other comicbook/superhero/franchise films still thrive (e.g. Deadpool and Aquaman). But the more important point is that today, the average film isn’t just targeting a record low of 3.5 tickets per person, down from 4.5+, but the 3.0 tickets left after the Marvel Cinematic Universe.

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And even this view is too narrow. If we zoom out on the Marvel Cinematic Universe and include each of the major studios’ top franchises (definition below the chart), we can see both increasing fan support of franchises and a persistent reduction in how many non-“mega-franchise” tickets are available per year. This isn’t to say the performance of every franchise isn’t variable. Even the most celebrated franchises, such as Star Wars and Marvel, swing widely from film to film. But we’re now in a market where these titles are collectively, on average, sucking up more and more of the box office, even if many of the individual titles are failures. In 2018, aspiring franchises such as Robin Hood and Pacific Rim weren’t going after 3.5 tickets, but 2.3 tickets.

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NOTE: This chart is critically dependent upon assumptions, but the strength of the trend is resilient to methodological changes. Films qualify if (1) They are clearly one of the studios three largest franchises – for example, The Purge, is lucrative to Universal Pictures, but not nearly to the degree of Fast & The Furious, Jurassic World or Minions. As such, it has been excluded while the others maintained. (2) The first picture is excluded unless it was based on an existing franchise/IP – so the first Frozen is excluded, while Frozen 2 and X-Men 1 are included; (3) Disney’s live action fantasies are included only when a remake or spinoff – so The Nutcracker & The Four Realms is excluded, while 2019 The Lion King remake is included; (4) Where a studio, such as Lionsgate or Sony, did not have a third tentpole franchise, it was excluded; (5) Finally, the major studios were allowed to refresh their franchises by decade, thus Shrek can be replaced by Minions.

And as frightening as this chart appears, it’s still overly optimistic about the portion of the annual box office that’s truly available. Pixar’s annual releases have a floor of around 1.5% even when they’re wholly original (e.g. Inside Out or Up), as its films act like a Pixar-brand franchise, and Disney’s Princess series (e.g. TangledFrozen) takes up another 1%. The addition of secondary franchises (such as Universal’s The Purge or Conjuring) further reduces available capacity.

The ever-increasing share of the box office held by major franchises doesn’t mean we won’t see new franchises come and old franchises go, some stall and decline, or would-be blockbusters go unnoticed while sleeper hits dominate the zeitgeist. That’s the circle of life. To view these changes, or the total hit-to-miss rate of franchise filmmaking, as evidence of “franchise fatigue” is to focus on the wrong side of the equation. Audiences don’t control how many franchises are in the market, nor how many films they produce, how frequently, or how well. What they do control is what share of their tickets go to these titles – and this figure keeps going up. [Related essay: ‘Star Wars’ Fatigue Is a Myth (but Disney’s Mistakes Were Real, Costly and Avoidable)]

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And as long as that happens, we’ll see even more attempts at franchises – even if the losses from failure continue to swell and the odds of success decline. The economic imperative has become too strong. Why spend $50MM on a film that, at best, might return $25MM when you could spend $200MM and, if it works, build a franchise that might generate $100MM twice a year from spinoffs, derisk the launch of future sequels, and produce more ancillary profits with merchandise? It no longer matters if audiences don’t want a given franchise – they’re going to get it. And if they’ve already rejected it once, they’ll get it again. What should studios make instead? Non-franchise movies that are wanted even less?

This is why we see such oddities in the marketplace today. Lionsgate wanted its own Avengers, so audiences got a realistic adult take on Power Rangers, as well as Robin Hood (and his Merry Men). The 2014 reboot of Teenage Mutant Ninja Turtles fizzled after its 2016 sequel, so Paramount put it back into development for yet another reboot (and has set up several writers’ rooms to try and crossover its Transformers, GI: Joe, Micronauts, Visionaries, Knights of the Magical Light, M.A.S.K., and Rom franchises). Universal’s first attempt at the Dark Universe failed with 2012’s Dracula Untold, so it tried again with the more expensive Mummy in 2017; it failed, so the studio sent the IP to Blumhouse to try a third time (a picture is due in 2020). Few would have said audiences wanted another Men in Black, but it’s IP and so a new film had to be produced (an anonymous Sony executive told the Hollywood Reporter that “the movie needed a greater reason to be” after it disappointed at the box office). Warner Bros. recently rebooted its Batman film franchise for the third time since 2005 (Ben Affleck first played the titular hero in 2016, Robert Pattison will premiere in 2020). And so on.

This sort of strategy can be viable in a growth market. It won’t work in a contracting one. Audiences today are too ruthless with where they allocate their tickets. And while it helps to have a baked-in audience via IP (at least 5MM people will go to an X-Men film), the baseline interest required for a film to work keeps going up.

Even Disney, which is likely to achieve 30% box office share this year with only eight films (three Marvel films, Star Wars IX, Frozen 2, Toy Story 4, Aladdin and Lion King), is beginning to face the upper limits of how many tickets it can sell before it is simply cannibalizing its own films. Part of the solution here is SVOD.

In the years to come, we’ll see the major studios shift even more of their films from their theatrical slates to direct-to-SVOD (making the idea of PVOD, day-and-date theatrical and home video releases, and shortened theatrical windows all irrelevant). This shift will be driven by double-ended trends. On the front, the theatrical window is only going to become more ruthless in the years to come and remains incredibly expensive due to exhibitor revenue shares and theatrical ad costs. On the back, SVOD will soon become the single most important goal for these media companies (and the primary driver of executive comp).

We see teases of this already with Disney. For one, the company has shifted films such as Noelle Clause and the live-action remake of Lady and the Tramp to Disney+ (one has to imagine titles such as Christopher Robin, Marry Poppins Returns and The Nutcracker & The Four Realms would never have seen theaters had they been produced in 2020). More importantly, Disney’s Marvel Studios has shown no desire to further increase its annual film output despite acquiring the rights to Fantastic Four and X-Men franchises from 21st Century Fox. Instead, the studio will be making miniseries and mid-budget films exclusively for Disney+. To date, most direct-to-SVOD releases have been films without the courage to take their swing at the box office; but in the future, we’ll see those that wisely knew not to.

The other great opportunity is in pricing. As audiences reduce the number of tickets they purchase per year, their willingness to pay for the films they do see should, by definition, increase. Data backs this up. Since 2000, per capita spend on films has been relatively flat at $33-36 per year. This means the consequences of reduced attendance have primarily hit exhibitors – fewer trips means fewer hot dogs and bags of popcorn, but the net receipts to the movie makers has been the same. In the years to come, the major studios should (and likely will) push prices even higher – perhaps through higher minimums or flat per-ticket charges, rather than traditional revenue shares by exhibitors. We might even see a film studio launch its own ticket subscription service, rather than an exhibitor group. After all, if Disney holds 40% of the box office, that’s a far greater share of movies watched than any one exhibitor delivers. Perhaps Disney++?

You can reach Matthew Ball at mb.ball@gmail.com or @ballmatthew