Back in July we first revealed something troubling: leadership breadth was collapsing not just across the Nasdaq...
... but the broader market as well:
As the WSJ had calculated, out of a total of 500 stocks, just Amazon, Google, Apple, Facebook, Gilead and Walt Disney accounted for more than all of the $199 billion in market-capitalization gains in the S&P 500. In fact, as of July, just these six firms were responsible for more than half of the $664 billion in value added to the Nasdaq Composite Index as of July.
Since then, the situation became more acute as the leadership thinned even further and as Goldman updated in November, only five firms – AMZN, GOOGL, MSFT, FB, and GE – totaling 9% of the equity cap of the index have accounted for more than 100% of the S&P 500 YTD return. Without these stocks the index would have posted a 220 bp lower total return or -2.2% YTD.
Of course, in the end, not even the thinning leadership was enough to offset the market being dragged down to a negative print, its first since 2008.
While all of the above should be well-known to regular readers, what may come as a surprise is that as go the markets, so go the movies.
According to the WSJ, Hollywood just had its biggest-ever year at the box office in 2015, collecting $11.1 billion in ticket sales, up 7% from the previous year and surpassing the record of $10.92 billion set in 2013. All of the growth, however, occurred at the top of the heap, or in other words, 2015 was a record year "thanks to a handful of blockbusters that left a whole lot of duds in the dust."
‘Jurassic World,’ left, was one of 2015’s blockbusters, Disney’s ‘Tomorrowland’ was among the year’s costly disappointments
But the runaway success of “Star Wars: The Force Awakens” and “Jurassic World” raises questions about the overall health of the movie business. The problem: More films that don’t have the muscle to be megahits are struggling to attract any audience at all.
What may be also little known is that for every megahit like Star Wars there were countless just as expensive flops:
A startling number of big-budget movies bombed in 2015, proving that no amount of marketing can pull audiences into theaters at a time when Netflix queues are long and social media spreads word about a stinker in a heartbeat. The year’s costly disappointments included “Pan” and “Jupiter Ascending” from Time Warner Inc. ’s Warner Bros., “Fantastic Four” from 21st Century Fox ’s Twentieth Century Fox studio, Walt Disney Co. ’s “Tomorrowland,” and “Pixels” from Sony.
It wasn't just a question of marketing: in 2015 eight movies failed to gross even $10 million despite full-fledged advertising campaigns, a record in recent years. In the past, spending $20 million or more to promote a film almost always guaranteed a respectable performance, said Chris Aronson, president of domestic distribution for Fox. But “there is no bottom anymore,” he said.
Another curious parallel: just like the middle class is disappearing in US society, so that staple of solidly profitable, if not blockbuster, 2nd tier movies is also on the extinction list: "worrisome to some in Hollywood is the disappearance of second-tier movies—those that aren’t blockbusters but are solidly profitable. Last year, 22 movies grossed between $100 million and $350 million domestically, down from 31 in 2014 and the fewest since 2006."
“Gigantic hits are actually becoming more common and the midsize hits are becoming rarer,” said Adam Goodman, a producer and former film group president of Viacom Inc.’s Paramount Pictures.
In total, the WSJ calculates that the five most successful movies of 2015 grossed $2.47 billion, accounting for 22% of the year’s total box office. The previous high for the top five was $2.05 billion, or 19% of the overall take, in 2012.
And here comes the punchline: for the other 129 films released nationally last year, the results were anything but impressive. They brought in a collective $8.65 billion, the lowest total for non-top-five movies since 2008, when ticket prices were 14% lower.
In other words, just like in the stock market, a record high portion of Hollywood "gains", or rather box office ticket sales, came from just five movies.
How to explain this curious schism?
Audiences have become “very binary” in their moviegoing choices, said Tom Rothman, chairman of Sony Pictures Entertainment’s motion picture business. “Either a film is relevant to them and penetrates the pop-cultural zeitgeist, in which case the upside is enormous, or it doesn’t rise to that level and they’re out altogether.”
“Many younger people no longer feel compelled to go to the movies as an activity in general,” said Sony’s Mr. Rothman. “Instead, they go to see a particular movie.”
One silver lining: overseas ticket sales, which rose an estimated 5% last year to $27.5 billion according to Rentrak, can help make up for losses at home. “Terminator: Genisys,” for instance, grossed $351 million internationally, compared with $90 million in the U.S. and Canada. But foreign box office more often exacerbates domestic trends. The top five domestic movies were all among the eight highest grossing internationally.
Consider this the movies' equivalent of the "least dirty shirt" phenomenon in markets where foreign capital flows enter the US "just because."
But what is most troubling for Hollywood is the evaporation of creativity and originality when it comes to box office success.
As they have for a number of years, sequels and reboots continued to rule the box office last year. The only exceptions that made the top 10 were animated features, such as Pixar Animation Studios’ “Inside Out,” and Fox’s surprise hit adaptation of best-selling book “The Martian.”
The trend toward sequels, reboots, computer-animated films and adaptations of comic books, toys or videogames is likely to accelerate in coming years as the major studios, increasingly focused on big-budget “event” movies they hope will become blockbuster hits, rely on formulas that have worked for them before.
This trend toward mindless recreation of a successful formula which has worked while undergoing minor tweaks will continue:
there were about 27 such films last year, and nearly 40 are scheduled for release this year and in 2017. Some of them are new installments of successful movie series like “X-Men” and “Fast and Furious” while others, such as “Wonder Woman” and “Ghostbusters” are attempts to create or refresh big-screen franchises.
The appropriate market analogy? Since nothing else is working, take the one thing that still does work, namely parasitic frontrunning of order flow by HFTs and make it better, faster, more profitable: in short - change HFTs technology from microwaves to lasers.
The only good news is that at least unlike the "market", humans are at least still directly involved in the creation of movies. When algos start typing up movie scripts and participating in the obligatory sex scenes, that's when Hollywood execs should quietly exit stage left.