Box office vs. Xbox

Consumer Spending Hollywood is not having a very jolly holiday season so far. Last weekend not only was the worst weekend of the year in terms of total box-office grosses, it was the worst since September 2008. Dividing the weekend’s grosses by the average ticket price, in fact, suggests the number of Americans actually going to a movie theater over the weekend was the lowest since right after the terrorist attacks of September 11.

It isn’t just a one-week phenomenon, either. Data from the MPAA show that total theatrical admissions — butts in seats — have fallen fairly steadily since 2002, with a brief spike in 2009 due to the release Avatar, the highest grossing movie of all time.

Ticket-price inflation and the introduction of 3D, for which theaters have been able to charge a premium, have largely masked the effect, allowing gross receipts to hold steady or even grow over that period. But the overall erosion of the audience really ought to be a bigger concern for the studios than their public comments would suggest. 

Especially so since the phenomenon isn’t confined to the box office. DVD purchases have declined even more sharply that theatrical admissions over the past few years, at a rate that no amount of price inflation, even the Blu-ray price premium, has been able to mask.

To hear most studio execs tell it, the decline has only one identifiable cause: piracy. But that’s always been too simple an answer; in its way simply another means of papering over the audience fall off. Some of the decline is no doubt due to piracy. But some is also due to ordinary competitive factors, which unlike piracy are actually under the studios’ direct control.

Just as last weekend’s movie lineup was laying an egg at the box office, Activision’s Call of Duty: Modern Warfare 3, became the fastest-selling entertainment property in history, reaching $1 billion in sales in just 16 days, one day faster than Avatar reached that milestone. Activision estimates that about 30 million people have played a Call of Duty game since the franchise launched in 2003 — a period during which movie audiences shrank.

It’s at least as plausible that some of the audience erosion experienced by Hollywood is the result of shifting consumer investment in entertainment choices as it is to be all the result of piracy. In addition to rushing out to buy the latest Call of Duty game, consumers continued to pour money this holiday season into video game hardware, scooping up more than 1.7 million Xbox 360 consoles in November, including more than 1 million over the Thanksgiving weekend. Consumers aren’t going to the movies as much or buying as many DVDs not just because of piracy but because they’re doing other things with their time and entertainment.

While the studios may not want to acknowledge those shifting investment patterns as a cause of their woes, preferring to keep the focus on piracy, some policy makers have begun to take note, and it’s beginning to reshape their response to the piracy problem.

Last month, the Swiss Federal Council concluded after reviewing the available data that any decline in revenue being experienced by movie and music producers could not be laid exclusively at the feet of online piracy, and that no further legislative actions were necessary to address the problem.

From the English language version of the Council’s press release:

The report describes the current situation. For one thing, according to existing studies, up to one-third of over 15-year-olds in Switzerland download music, films and games without paying for them. For another, in spite of numerous media reports and public awareness campaigns, a majority of internet users still do not know which offers are legal and which are not.

The percentage of available income spent in this area by consumers remains constant. However, shifts can be seen within this budget. For example, money saved by consumers at exchange platforms is still being spent in the entertainment sector. However, that available amount is now being put towards concerts, going to the cinema and merchandising instead of music or film recordings.

This development is impacting the large foreign production companies most of all as they are being forced to adapt to changed consumer behaviour. The fear that this development could have an adverse effect on the national creation of culture remains unsubstantiated, however, because of the shifts outlined above. For these reasons, the Federal Council concluded that there is no need for legislative action.

The Swiss government’s concerns, of course, were narrow and parochial: Is the loss of revenue from movies and music impacting tax revenue? And, is it harming Swiss cultural production?

In both cases, the Council’s answer was no: so long as overall consumer entertainment spending remains steady tax revenues are not affected, and whatever damage is being done is happening mostly to foreign producers. But the rebuke ought to send a chill through anti-piracy lobbyists everywhere. Simply pointing to lost revenue and crying piracy may not be enough anymore to get a sympathetic hearing from policy makers.