SIDEBAR: Cut! Cut! Cut!

Contrary to popular perception, most Tinseltown projects operate under strict budget controls

"From the outside, Hollywood and everybody in the industry is perceived to be classically irresponsible and just completely careless, where we simply grab a big bundle of money and run out to the desert and start making things until we run out of money and demand more," producer Hal McElroy says. "Actually, the whole process is incredibly disciplined. For example, in making The Lord of the Rings, every single frame of those three films was broken down into its constituent parts, and then individually budgeted and then pre-visualized in the form of drawn storyboards. It was also then recorded with a rough soundtrack just using guide actors saying the words, test music was included. They made three films in what are called animatics before they even started producing anything. It contained the cost, which is how they were able to make three films for what was variously described as something like $250 million."

In Hollywood and the television industry today, McElroy says, it is impossible to get the money to make a production unless you have drawn up a budget that may run a hundred pages long, and you have agreed to the cent exactly how much the project will cost. The kind of rise and fall clauses found in the construction industry would be totally unacceptable.

Certainly there are still occasional cost blow-outs - which naturally make the headlines - but McElroy says because all production is project-financed, and to get that finance the project must first be broken down into constituent parts, the industry is on the whole highly disciplined.

SIDEBAR: The Good, the Bad and the Ugly

The pros and cons of the Hollywood Model

Overall, the Hollywood Model is one producer Hal McElroy says has all manner of readily recognizable advantages that most people would agree easily outweigh all disadvantages combined. Still, the disadvantages do exist and must be minimized. McElroy says there is plenty that is bad and ugly, as well as good in the reality of what really happens in Hollywood today.

"The good is that you can put a circle around your costs if you've done your job in a disciplined and professional fashion," he says. "You can establish very clear timelines and very clear costs, your need for personnel, equipment, facilities and so on. That's all the good part of it, and that's all very healthy. It enables you to for example joint-venture finance [a project], or off balance-sheet it, or raise funds in particular for that project, which is separate from your general operation. That means you can quarantine your risks and make the risks only attach to this particular project. Since you've got all your personnel on contract they can be terminated at fairly short notice, so that if things start to go wrong you can close it down, and you can cut your losses."

Also on the plus side of the equation, McElroy sees a very real leap in creativity. And the fact that the system is less hierarchical than the studio system results in overheads that are relatively low. Today R&D is conducted before capital investment is risked, new technology and new techniques are embraced rather than avoided, specialization is encouraged, the product range is increasingly diverse and the products of all of those efforts create synergy by feeding other businesses such as TV networks and theme parks.

On the downside, under the Hollywood Model corporate history and corporate knowledge are lost. "If you've got rid of many of the people that kept alive the knowledge bank - because much of it is calculated in the brain rather than records - then the corporation itself is diminished," McElroy says.

Production tends to be ad hoc and impermanent, hence always fluid and volatile; there has been a huge rise in production costs; and the industry is now much slower to react, hampered by the need to assemble talent and team before moving ahead on any project. Profits are also down.

"In Hollywood, because costs have gone through the roof and the cost of marketing has gone through the roof, the market hasn't expanded at the same rate. You now have a situation where films are routinely released to achieve a media awareness so they can sell more DVDs. The profit centre has shifted from theatrical distribution - in other words, films in theatres - to DVDs," McElroy says.

"And the profitability of the studios overall has declined significantly and they are only in the 2 to 5 percent sort of range. Now these are massive machines, and so these are not inconsiderable sums of money. And of course they're driving other businesses and they're theoretically building synergies. But there are some commentators that say that the sort of media colossus days are numbered because in fact they are over-scale, they're gigantic edifices that are just now defying gravity."