It was a really bad year for people who love good movies – because there weren’t that many – but Hollywood is still making big bank.

Hollywood’s record box office belies studios’ falling profits

Hollywood is headed toward another record year at the box office thanks to a lineup of blockbuster films, such as the private lives of pets and foul-mouthed superheroes.

But while projections of $11.3 billion (U.S.) in ticket sales in the U.S. and Canada would seem like a cause for celebration, the rosy numbers mask underlying challenges in a cinema business that is facing rapid changes in a period of digital upheaval.

Higher costs of making and marketing big movies, as well as plummeting home video revenue, have dragged down studio profits. Once-bankable home entertainment sales — including DVDs and video on demand — have dropped more than 30 per cent since 2010, according to Digital Entertainment Group.

The home video fall-off has made theatregoing even more vital to the studios’ bottom line. With expanded streaming and video game options in the home, fewer young consumers are watching movies on the big screen. And the box office has increasingly become a winner-take-all game, with grosses hoarded by a handful of dominant films Finding Dorysuch as Disney’s Finding Dory and The Secret Life of PetsUniversal’s The Secret Life of Pets.

“It’s deceiving,” said Adam Goodman, a film industry veteran who previously led production at Paramount Pictures. “If you look at the box office, it looks healthy. But it’s just a couple of titles that are having this success.”

Profits among the seven biggest studios fell 17 per cent during the first nine months of the year to about $3 billion, according to a recent research report by investment firm Cowen & Co. More than half those profits went to just one studio, Disney, the report indicated.

While international growth remains a bright spot for the industry, Hollywood’s largest foreign market — China — experienced a dramatic slowdown in box-office receipts this year.

In the U.S. and Canada, box-office revenue is expected to grow 2 per cent this year, but the increase is deceiving, inflated by ticket prices, not by more people going to the multiplex.

The number of tickets sold is expected to remain flat, at about 1.3 billion, according to industry estimates. That would be down 6 per cent from 1.4 billion tickets sold in 2006, according to the Motion Picture Association of America.

The head winds have pushed studio executives and theatre owners to rethink one of the fundamental pillars of the movie business: so-called theatrical windows.

Warner Bros. Pictures and Universal Pictures have engaged in talks with theatre chains to shorten the gap between a movie’s theatrical release and when people can watch it on home video, an idea that previously has caused revolts in the cinema industry.

One proposal would make new movies available in the home two to four weeks after theatrical release for about $50 each, people familiar with the talks say. That would be a dramatic shift from the current 90-day wait.

Film executives have long looked for ways to shorten the time consumers have to wait to buy or stream movies once they’re mostly out of theatres, a gap known as the “dark zone” when studios lose billions to piracy.

But only recently have they made progress in warming theatre owners to the idea. Cinema owners have long resisted tweaking the window, fearing doing so would discourage many consumers from watching films on the big screen.

In response to the challenges, cinemas have tried to boost sales with better accommodations, such as recliner seating, high-end food and beverages, and premium screening technology.

“You’re seeing a premium experience surface and take hold, with luxury theatres and inflated ticket prices,” said 20th Century Fox domestic distribution chief Chris Aronson.

Some analysts believe raising ticket prices to pay for the improvements may be keeping some consumers away from theatres.

The average ticket price (including matinees) hit $8.51 in the third quarter, up 3 per cent from a year ago, according to the National Association of Theatre Owners. Patrons in major cities often pay twice that amount.

Studios also have been forced to adapt to the rising competition from streaming services and premium television shows. They are focusing more heavily on costly franchise films with lots of spectacle that are more likely to lure people out of their homes. If the movie isn’t a must-see, executives say, audiences opt to stay home and wait until it comes out on iTunes or Netflix.

That means more industry dollars are concentrated among a smaller number of films than before. In the last two years, the top 10 movies have accounted for more than a third of the total box office. In 2011, the 10 biggest movies made up only 24 per cent of the domestic grosses, according to entertainment data firm comScore.

“It’s definitely more concentrated, and it’s higher highs and lower lows,” said Greg Foster, chief executive of Imax Entertainment.

The risk of failure also has increased. This year, the major studios fielded high-profile films that almost nobody went to see. For example, Billy Lynn’s Long Halftime Walk, a $40-million movie with an Oscar-winning director in Ang Lee, multiple stars and a wide release from Sony Pictures, grossed less than $2 million in the U.S. Twentieth Century Fox’s Keeping Up With the Joneses, starring Jon Hamm and Zach Galifianakis, wiped out with $15 million. Even Disney fielded a big turkey with AliceThrough the Looking Glass.

The swift and hard landing for such titles is partly because of social media. Audiences now know very quickly whether a movie is worthy of their time and money.

Goodman, now president of Le Vision Entertainment, said studios need to rethink how they pick movies. But that’s a difficult task given the lack of sophisticated data about what audiences want to see.

“The historical data setup until recently was pretty reliable,” Goodman said. “Now you may as well throw a dart against the board and pick something.”