Chapter 603: The DVD Industry

By the end of July, the number of North American theaters showing Iron Man had dropped below 400, and its daily box office revenue fell under $200,000. It was practically impossible for the film to make any more major waves in the North American market. Over its fifteen-week run, however, the film had accumulated $381.24 million at the North American box office. It crushed all other summer season films, including Pirates of the Caribbean 2: Dead Man's Chest, taking its rightful crown as the 2006 North American summer season champion.

After losing the throne for two years, Duke once again dominated the summer season.

Iron Man's overseas performance was slightly less impressive. Over roughly the same period, the film pulled in $312.66 million from nearly a hundred countries and regions.

Iron Man's combined global box office reached a staggering $693.9 million.

Although the total box office was incredibly close to the $700 million mark, Iron Man's global revenue growth had already run out of steam. Whether it would ultimately cross the $700 million threshold was something neither Duke nor Warner Brothers could guarantee.

Some definitely wanted to push Iron Man's final numbers past $700 million. In the long run, this would only benefit the plans for the Marvel Series. Marvel's executives had already prepared a sum of capital, ready to deploy at a moment's notice.

In addition, preparations were underway for Iron Man's DVD release. They were just waiting for the film to exhaust its final box office potential in North America before hitting shelves to rake in the cash.

Since the start of the new century, DVDs had become one of the primary revenue streams for major Hollywood production and distribution companies. It was no exaggeration to say that Hollywood relied on DVDs to make money. For massive hits like Spider-Man and The Lord of the Rings Trilogy, first-week DVD sales in North America alone could surpass $100 million. Aside from a few rare exceptions, most films that cracked the top ten on the annual box office charts eventually sold around $100 million in DVDs.

The production costs for DVDs were far lower than the once-popular Videotapes, capping out at just one to three percent of the wholesale price the distributors charged retailers. Even factoring in marketing and other expenses, the profit margins remained staggering.

Generally speaking, studios provided underwriters with promotional funds of around five percent, capping out at no more than ten percent.

Then there were rentals. The revenue sharing for rentals was somewhat more complicated.

First, the rental merchant would provide a base price. This meant that regardless of whether anyone rented the movie, the studio would receive a guaranteed sum from the merchant, roughly $3 to $10 per disc.

From there, rentals worked in a few different ways. Standard rental fees were the primary source of income. Alternatively, if a rented disc wasn't returned on time, the merchant treated it as an automatic sale, charging the customer the full purchase price. Under current industry standards, studios took a cut of $1 to $2 from every rental transaction, with the exact figure dictated by the film's box office numbers.

In other words, the higher the box office, the higher the studio's cut. Therefore, the box office served as the foundation of a film's profitability.

As for direct sales, there was also a per-disc cut. This number was higher, sitting around $5 to $10.

Rental fees weren't tallied indefinitely; contracts stipulated a validity period, usually around fifty weeks. Once it expired, merchants were required to destroy a specific percentage of the DVDs, then either return the remaining stock to the studio or purchase them outright at a fixed per-disc price.

For a single hit movie, a studio could earn $5 to $8 million from just one rental merchant. And that was merely the rental side; the sales revenue was even larger. This meant a hit Hollywood film could rake in tens of millions or even over $100 million in DVD revenue, and nearly all of that was pure profit.

This was exactly why people said Hollywood relied on DVDs to make its money.

However, anyone paying attention to the relevant data knew full well that the golden age of the DVD was nearing its end. A statistical report compiled by Warner Brothers this year revealed that Hollywood DVD sales in the first half of 2006 had dropped 6.3 percent compared to the first half of 2005.

Although Hollywood's DVD industry still maintained a massive scale of nearly $2 billion, it wasn't hard for those with foresight to see that this glory couldn't last much longer. In fact, it was poised for a sharp decline over the next three to four years.

Why was this happening? Had audiences grown tired of Hollywood commercial blockbusters?

The answer was naturally no. The audience for Hollywood films hadn't shrunk, but with the rise of internet video platforms, the teenagers who made up the mainstream movie market were increasingly turning their attention to online streaming and downloads.

No one understood better than Duke that the rise of online cinema would directly shrink the scale of Hollywood's DVD industry by two-thirds.

Hollywood was never short on elites, and many others had noticed this trend as well.

On one hand, studios began seeking ways to slash costs, ensuring every disc could squeeze out more profit. On the other hand, while taking defensive measures, the major studios were also preparing for the day when movies would vanish from silver discs entirely.

The future of home release would inevitably rely more heavily on the internet or video-on-demand services offered by cable and satellite television companies. Data from media research firms showed that this market had already reached $800 million in scale, surging by nearly twenty percent last year alone.

Warner Brothers and Duke Studio were both taking preemptive action, planning a future where they wouldn't wait weeks after a DVD's release to launch the digital or pay-TV versions, but would instead release them simultaneously.

This approach would capture the younger demographics who had no intention of buying DVDs.

Another brewing shift was allowing viewers to download digital copies right after a film's theatrical run ended—and crucially, before the DVD hit shelves. This experiment would allow them to charge customers an extra premium for early access to high-definition copies.

It was safe to say that how to leverage the internet for profit once a film left theaters was currently the focal point of research for all major companies.

Some people had even set their sights on a slice of this online revenue.

As everyone knew, Hollywood had never been a wholesome paradise of mutual love and respect. Soft-hearted people and good Samaritans basically had no room to survive here. This industry attracted countless individuals and companies locked in endless struggles over capital, fame, and profit, and these conflicts manifested sharply among Hollywood's major guilds.

Hollywood's most prominent organizations were the Producers Alliance, the Directors Guild, the Writers Guild, and the two screen actors guilds. Deep contradictions and tangled financial interests existed among these four groups.

Of course, the conflicts were almost always between the Producers Alliance and the other guilds.

Currently, the contract between the Producers Alliance and the Writers Guild was set to expire at the end of 2007. The Producers Alliance, representing the studios' interests, had already initiated preliminary negotiations with the Writers Guild, but talks were not proceeding smoothly. The Producers Alliance had no intention of easily yielding to the Writers Guild's demands.

In 1988, the Writers Guild called upon its members for a massive twenty-two-week strike, using it to wrest a fixed percentage of Videotape and television broadcast revenues from the studios. Now, they had fixed their sights on the films' internet profits.

It wasn't just the Writers Guild; the Directors Guild and the Screen Actors Guild were also demanding a share of the pie. However, they received vastly different treatment. Though they too had major disagreements with the Producers Alliance, there was still room for negotiation, unlike the Writers Guild, which the Producers Alliance had flat-out rejected.

This indirectly reflected the status of writers in Hollywood.

While the script was one of the foundational elements of film production, in a considerable number of projects, it simply wasn't seen as all that important.

Duke knew full well that the Producers Alliance would make certain concessions to the Directors Guild and the Screen Actors Guild, but they would not easily back down against the Writers Guild.

A future strike was utterly inevitable.

He knew the strike was bound to happen, and he knew it would impact his bottom line, but he was powerless to stop it. This kind of clash, rooted deeply in conflicting financial interests, wasn't something a single person or a small group could resolve.

In reality, even if the strike succeeded, the standing of Hollywood writers wouldn't improve much.

Today, everyone—including studio executives—believed that Hollywood cinema's greatest weakness was a lack of originality. It could even be said that the Hollywood system actively suppressed innovation. Producers feared the risks attached to anything new. As a result, they would rather shoot a sequel or adapt a bestselling book or comic than greenlight a supposedly highly creative original script.

Take Duke, for example. If someone pitched him two scripts—one featuring a novel story and unique structure that only required a $50 million investment, and the other a cliché-ridden adaptation of a hit comic that demanded $80 million—he would undoubtedly choose the latter without a second thought.

Ninety-nine percent of Hollywood producers would make the exact same choice.

As for the remaining one percent, even if they accepted a highly creative script, they would generally shelve it. A rare few might find it interesting and toss it onto Hollywood's infamous "Black List," leaving it in limbo for years, slowly waiting for someone willing to front the cash.

Inside the massive factory that was Hollywood, the vast majority of films—even arthouse indies—had to conform to assembly-line rules, and scripts were no exception. Take a project like The Dark Knight: after Duke finished the outline and character designs, he handed it off to his writing team. In total, twenty-two writers participated in drafting that script.

These writers had clear divisions of labor, separately penning the film's political intrigue, romance, and action scenes. Even the dialogue was categorized and farmed out—split into threatening, romantic, humorous, and action-oriented lines, each handled by different specialists.

A film the size of The Dark Knight was inevitably a product of the Hollywood assembly line. With such a massive investment at stake, if it weren't produced using this industrialized model, the executives at Warner Brothers would have completely lost their minds.

As August arrived, preparation work for The Dark Knight grew increasingly frantic. Duke took multiple trips bouncing between Warner Studios, the Hughes Aircraft Plant, and Chicago to inspect the progress firsthand.

Perhaps the runaway success of Batman Begins had brought a degree of promotional value; either way, the Chicago city government threw its full weight behind The Dark Knight, and the mayor even met with Duke twice.

By mid-August, when Duke returned to Los Angeles from Chicago, he met with Heath Ledger, who had been missing in action for over a month.