Is Steven Spielberg Right About an Imminent Movie Industry Meltdown?

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When Steven Spielberg and George Lucas talk about movies, the entire world listens. After all, these two directors defined the movie industry for more than three decades, giving us such timeless classics as Indiana Jones, Star Wars, E.T. and Jurassic Park. Yet Spielberg now believes that the entire industry is headed toward a major “meltdown,” and that the current streak of bigger, louder and more expensive Hollywood blockbusters is about to implode.

Spielberg’s criticism, backed by his friend George Lucas, is nothing new to film critics, who have long claimed that directors like Michael Bay have disposed of innovation in storytelling in favor of green screen spectacles. However, right after Spielberg’s widely circulated comments, his predictions started to come true.

Four very expensive films - The Lone Ranger, Pacific Rim, After Earth and White House Down - all recently came up disappointingly short of their production budgets. The rest of the summer looks bleak as well - with the paranormal action film R.I.P.D. also forecast to be a bomb.

What happened? Did audiences suddenly lose interest in the explosion-laden big-screen spectacles that have long defined summer blockbusters? Or has the industry reached the saturation point predicted by Spielberg and Lucas, and are these studios headed for a terrible fall that will force them to rethink their movie-making strategies?

The IMAX Avatar Effect

Canadian projector maker Imax (NYSE: IMAX) has had a profound effect on movie making over the past decade. Once restricted to projecting shorter educational documentaries, Imax came out of its shell in the early 2000s, when its film-making process was modified to accommodate longer running times. This allowed the company to start showing mainstream Hollywood films as well.

Meanwhile, James Cameron’s Avatar, released by 20th Century Fox (now part of 21st Century Fox), opened the floodgates for 3D films shown on an Imax screen. In the four years since Avatar’s release, the market has been saturated with 3D Imax films. While some films, like Ang Lee’s Life of Pi, were able to fully utilize the medium to enhance its story, the market became crowded with critically panned 3D Imax cash-in films like Hansel & Gretel: Witch Hunters.

'Theme park ride movies' will displace traditional movies

In addition to 3D Imax films, theaters are adding motion seats from D-Box Technologies. Although this idea of a fully immersive motion picture is good for movies that rely heavily on special effects, it has made viewing non-action movies in theaters a thing of the past.

To Steven Spielberg, that’s a major problem that undermines the foundation of the film industry. He stated that his critically acclaimed biopic, Lincoln, was nearly released on HBO instead of theaters, due to the reluctance of studios to give the film a wide release. Lucas also stated that he expects films like Lincoln to end up on the small screen rather than theaters in the future.

Spielberg also believes that this obsession with 3D Imax and D-Box style entertainment could cause average U.S. ticket prices to rise to $25 in three years.

A desperate need to launch franchises

Marvel and The Walt Disney Company (NYSE: DIS) set the bar high for the rest of the industry with The Avengers last year. Ever since the release of Iron Man in 2008, the Marvel Cinematic Universe was pieced together so lovingly and carefully that fans eagerly anticipated every new film in the series. Joss Whedon, a man known for his passion for comic books and sci-fi, was brought it to tie it all together with The Avengers, and the result was a critical masterpiece with a score of 92% on Rotten Tomatoes, which also became the highest-grossing film in 2012, at $623 million.

Despite achieving huge success with The Avengers and Iron Man 3, Disney failed to learn a crucial lesson from its past failures. Last year, Disney released John Carter, based on a 1912 novel by Tarzan writer Edgar Rice Burroughs. The film cost $250 million to produce but only grossed $282 million worldwide. Disney then followed that disappointing film up with this year’s The Lone Ranger, which cost $225 million but has only generated $147.5 million in global box office sales to date.

Both films were unsuccessful, desperate attempts at launching a new franchise to follow up The Pirates of the Caribbean, which generated a combined a $4.7 billion in revenue over the course of four films between 2003 and 2011.

After the failure of The Lone Ranger, Disney should finally realize that it needs to stop digging in the past and rebooting extremely dated characters. Instead, all it needs to do is rely on the growth of the Marvel Cinematic Universe and its upcoming Star Wars films to carry its film studio division.

Time Warner takes one step forward but another step back

Unlike Disney, Time Warner (NYSE: TWX), the parent company of Warner Bros., desperately needs to create a hit that can connect with audiences. Ever since Harry Potter ended in 2011 and The Dark Knight trilogy concluded in 2012, Time Warner has lacked a major franchise that can generate a reliable stream of annual revenue.

For now, Warner is concentrating heavily on laying the groundwork for a “DC Cinematic Universe” to rival Marvel. The Man of Steel, Zack Snyder’s grittier reboot of Superman, managed to ignite a spark of hope among fans hoping to see a Justice League film, and recent reports indicate that a new film featuring the long-awaited team up of Batman and Superman will arrive soon. In the five weeks since The Man of Steel was released, the film grossed $635 million worldwide, easily surpassing its production budget of $225 million.

However, just like Disney, Time Warner shot itself in the foot by releasing Pacific Rim, a film featuring large Transformer-like robots battling ocean monsters that resemble Godzilla. In the week since its release, the film grossed $178 million worldwide, still short of its production budget of $190 million.

High risks, low rewards

Therein lies the problem with the film industry. To satisfy the demand of audiences expecting 3D Imax D-Box experiences for all their films, movie studios have to prioritize high-budget action films over other genres. They have also shown that they have no problem investing $200 million on these films, which could end up flopping with big losses.

In other words, film studios are facing a high-risk, low-reward scenario that is getting worse, and industry insiders like Spielberg and Lucas are wise to warn that the current generation of films could be headed off a cliff as films get bigger and bigger with no guaranteed returns.

If the film industry crashes, Time Warner stands to lose more than Disney -- 38.6% of Time Warner’s top line was generated by its combined Film and TV division, while 12.7% of Disney’s revenue came from its film studio. Although I don’t expect either company to be hit terribly hard by this year’s summer flops, investors should still keep an eye on the film industry to see if diminishing returns will change how movies are made in the future.

Leo Sun owns shares of Walt Disney. The Motley Fool recommends Imax and Walt Disney. The Motley Fool owns shares of Imax and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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