Tuesday, July 26, 2011

Box Office Divergence

This is an update to the earlier entry about the future of the movie industry. Since then, the movie Harry Potter and the Deathly Hallows Part 2 (which I will use the shorthand Harry Potter 7b since it is the second part of the 7th Harry Potter movie) claimed the opening weekend record. A closer look at the internals, however, will show that while Harry Potter 7b broke the opening weekend record in nominal terms, it did not break the opening weekend record in real (inflation adjusted) terms.

We have detailed movie data from 1980 forward, and we have limited data going as far back as 1928.

Here is an updated chart showing the highest opening weekends by year in nominal terms.

The new opening weekend record set by Harry Potter 7b does not change the wave labeling of the chart. Instead of a simple zigzag downwards from 2008 - 2021, we are looking at a complex wave downwards, perhaps going from 2008 - 2024.

Here is the chart of the highest opening weekends by year in real terms (that is, adjusted for inflation and 3D).

Going from 1975 all the way until 2008, we find that in every case where a movie broke the opening weekend record in nominal terms, it also did so in real (inflation adjusted) terms as well. This is one of the defining characteristics of bull markets -- stocks go up in both nominal terms and in real terms. This trend continued until 2008 with The Dark Knight setting a new opening record. With Harry Potter 7b, we have the first instance of a movie breaking the opening weekend record in nominal terms, but not in real terms. This is a "box office divergence", which is signalling a large degree trend change is in progress.

The movie industry has developed a number of divergences as of late, which are all signalling increasing weakness in the coming years.

1 -- We are already tracking a divergence between opening weekends and inflation adjusted revenue. Inflation adjusted revenue peaked in 2002, but opening weekends continued to rise.

2 -- We are seeing the beginning of a divergence between domestic (United States and Canada) revenue and international revenue. This year has seen movies such as Fast Five, Hangover Part II, Pirates of the Caribbean: On Stranger Tides, and Harry Potter and the Deathly Hallows Part 2 perform far better on the international markets than in domestic markets. While the domestic movie market is declining, the international market is surging. Domestic revenue may have peaked in 2009 in nominal terms, but international revenue continues to steadily rise.

3-- We are seeing a divergence in the opening weekends when comparing nominal terms versus real terms. The Dark Knight represents the orthodox peak in opening weekends, as the movie still has the record in real terms.

In terms of opening weekends in nominal terms, the high point set by Harry Potter 7b is best recognized as a B wave, as non-confirmations are one of the defining characteristics of B waves. The decline from 2008 - 2024 is a complex wave with an expanded flat for wave w and a zigzag for wave y.

We are in position to get a more accurate projection for the highest opening weekend a movie will get in 2016 in nominal terms. There is almost always a fibonacci relationship between waves A and C in an expanded flat. The ratio most likely to unfold is wave C = 4.237 * wave A. Since wave A dropped the nominal opening weekend by a factor of (158 / 125) = 1.264, then wave C is expected to drop the nominal opening weekend by a factor of 5.355. We therefore expect that the highest nominal opening weekend in 2016 will be around $31 million.

In real terms, the opening weekend over time traced out an ending diagonal from 1990 - 2008. This speaks of increasing weakness brought upon the movie industry by "The Great Deflation" starting in 2000 as the bulk of the increasing weakness started after 2002.

The implications for "The Great Deflation" in the movie industry is that in the coming months and years, wage deflation, combined with rising unemployment, will result in declining box office revenues in both nominal terms and real terms. Expect most of the movie theaters to close their doors forever in the coming months and years as "The Great Deflation" unfolds in full force. By the time the low is reached in 2024, there will probably be the same number of theaters in operation at that time as there was in 1974.

In the near term, expect a massive amount of speculation next year that The Dark Knight Rises will break the opening weekend record. However, I can boldly assert that we will not see anymore opening weekend records for at least the next 25 years. By the time The Dark Knight Rises opens in theaters, we will already be in the "heart of the economic abyss" with "The Great Deflation" unfolding in full force and the job market will be in a full scale collapse.

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