A Year After <I>Titanic</I>, Movie Studios Have That Sinking Feeling

U.S. box office grosses have fallen nearly 7% from year-ago levels.
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The movie business has taken a

Titanic

hit so far in 1999.

With the first quarter nearly finished, U.S. box office grosses have fallen almost 7% from their levels a year ago, when audiences everywhere flocked to watch Leonardo DiCaprio die a slow, painful death in the North Atlantic. Viewed in terms of admissions, the picture is even grimmer, with a year-over-year drop of more than 9%.

The slowdown has victimized practically all the major studios, from

Warner Bros.

(a unit of

Time Warner

(TWX)

) to

Universal

, which is owned by

Seagram

(VO) - Get Report

. While some of the flops were just bad movies, several well-made and well-reviewed films with big stars have also blown up.

The season's biggest disappointments have included

October Sky

, a coming-of-age story that Universal hoped -- and failed -- to build into a sleeper hit, and

True Crime

, a well-reviewed thriller from Clint Eastwood and Warner Bros. that is almost certain to quickly disappear from theaters after a pitiful $5 million opening weekend.

But the biggest loser, hands down, is

A Simple Plan

, from

Paramount

, a unit of

Viacom

(VIA) - Get Report

. Based on a best-selling book about three men who find $4 million in a wrecked plane, the movie received strong reviews and won an

Oscar

nomination for best supporting actor. It also vanished at the box office, with a total gross of barely $15 million.

Against the comparable weekend a year ago, "we've had one weekend this year that's been up," says Paul Dergarabedian, president of

Exhibitor Relations

, a box office tracking firm in Los Angeles. "It is disappointing."

In another sign that last year's gains were driven largely by DiCaprio's appeal to men and women alike,

Nielsen

ratings for this year's

Academy Awards

broadcast fell by 18% compared to the 1998 telecast. And the ratings drop was even steeper among young people, who are the heaviest moviegoers, according to Robert Frydlewicz, vice president and media research director of the ad agency

Foote Cone Belding

.

"The entire viewing group under the age of 24 was hit hard, with a ratings decline of around 40%," Frydlewicz says.

For the studios, the downward trend is troubling, given that live-action movies are a barely break-even business already. But Hollywood's $3 billion share of the U.S. box office gross accounts for just one-sixth of total studio revenue. The real danger from the dropoff is for exhibitors, who have spent billions of dollars over the last few years to build thousands of new movie theaters nationwide.

Investors have already punished the big chains, which include

AMC Entertainment

(AEN)

and

Carmike Cinemas

(CKE)

, on fears that the U.S. market is overbuilt. Both Carmike and AMC are off more than 40% from their levels a year ago;

Loews Cineplex

(LCP)

has been halved since it was formed in a merger last May.

But the sliding box office numbers suggest that the chains, which are highly leveraged, could have further to fall.

And although the release of the first

Star Wars

"prequel" in May will probably give admissions figures a boost, neither the major studios nor movie exhibitors are likely to see much bottom-line benefit from the film. George Lucas, who owns the movie, will take home most of the profits, though

Fox

(FOX) - Get Report

will take a distribution fee estimated at 15%. In addition, the studios have essentially ceded May and June to Lucas; Warner Bros. doesn't plan to release a movie between April 23 and July 2.

For the theater chains,

Star Wars

looks at first glance like a bonanza. But Lucas is likely to demand a huge cut of the gross during the opening weeks of Star Wars. Traditionally, studios rent movies to theaters, charging a percentage of each ticket sold. The percentage drops during the life of a movie's run, but usually works out to roughly half of a movie's gross over the life of a film.

But Star Wars is likely to do enormous business when it opens, giving Lucas and Fox leverage to demand a much-bigger-than usual cut of the gross. (Last year,

Sony

(SNE) - Get Report

asked chains to give up 80% of the opening weekend's gross from

Godzilla

, which was expected to be the summer's biggest hit.) Any chain that resists faces the risk of empty theaters during the last weeks of May, especially with so little new product from other studios available. So while

Star Wars

is likely to be a runaway hit, it won't solve the chains' crisis.