Edward Jay Epstein, industry expert and author of The Hollywood Economist 2.0: The Hidden Financial Reality Behind the Movies (one of the best books on the business of film) says that despite what you read, studios are making money. Here’s how:

The ways that Hollywood loses money are the meat of news reporting on Hollywood. The headlines screamed in early 2012: “Movie Attendance Falls to 16-year Low,” reflecting a secular decline at the box-office that has gone on since 1949; “Hollywood in Turmoil as DVD Sales Drop,” reporting on what had been, earlier this decade, the cash cows of the big studios; and “John Carter a Financial Disaster For Disney,” a $200 million fiasco which led the resignation of the studio chief.

What goes largely unreported is that the studios have found other ways to make money. Despite all the bad press, most of the major studios are making record profits.  Even Disney, the John Carter loss not withstanding, will make more money this year than it ever has before.

Here are five ways that the big studios are now greatly enhancing their profits:

1. Licensing to new media

Since 2010, there has been an explosive growth in license fees for studio-owned recent/still-airing TV series and older series. The big studios have tens of thousands of TV episodes, movies, and animated shorts in their libraries. Warner Bros, for example, has over 30,000. Non-exclusivity is gone for the ones most in demand as their competition heats up between Amazon, Hulu, and Netflix.  Each are buying exclusive rights to compete which each other.  As a top Warner Bros. executive recently wrote me, “license fees that were chump change two years ago are now mind-boggling. Since studios do not pay for advertising or prints on licensed material, almost all the revenues, except for residuals, go directly to the bottom line. As a result, the surging license fees have more than compensated for the decline in DVDs. 

2. Turning VOD Into a bonanza

While pay-per-view never produced substantial profits, the studios are finding a new bonanza: cable video on demand. Studio lawyers are working at a feverish pace to make agreement with cable networks to carry their new movies, which now can be downloaded via HBO and Comcast on iPads, phones and other digital devices.  The money that is flowing in from these deals is expected to adds hundreds of millions of dollars to the studios’ bottom lines in the next two years.

3.   Improving foreign yields

The Hollywood studios have found that their 3D comic-book and fantasy movies have such enormous appeal in many developing markets (Russia, China, South Korea, Brazil) that they could jack up their share of the box-office and greatly increase the yield on their foreign harvest. In China, for example, which now has 2,500 3D screens, the studios have pushed their cut on these blockbusters up from a measly 13 percent to 20 percent. They have also pushed their yields up in many other new markets.

Since a single comic-book movie can generate more than three-quarters of a billion dollars overseas, the increase in the foreign yield results in a windfall (Disney’s Avengers, for example, took in to date  $84 million in China, $59 million in Brazil, $43 million in Russia, and $51 million in South Korea.) So even though the U.S. box office revenue was down in 2011 by 4 percent, the big studios were actually able to make more money by making the kind of fantasy action movies that these foreign markets crave. 

4. Using side letters to cut stars’ salaries

Studios have also managed in recent years to cut  the real cost of movies by paying stars only a fraction of their official “quote,” or asking fee.  For example,  a big-name star may have a quote of $10 million, but will be paid only $2 million. This illusion is performed through a side letter arrangement in which the studio signs a contract paying the star his “quote” while the star simultaneously signs a side letter relinquishing an agreed-upon part of it. Since side letters are secret, the star can pretend to receive far more than he does. Stars accept these drastic cuts because they (and their agents and business managers) would rather make a fraction of their quote than no money at all, as long as the world does not find out. For studios, these side letters substantially decrease the cost of making movies

5. Substituting digital prints

Up until last year, a major cost for Hollywood studios was 35mm prints, the “P” in the “P&A.” They cost, depending on length, about $900 a print, plus several hundred dollars more for shipping, custom clearance, storage and maintenance. So if a film opened on 5,000 screens worldwide it was not unusual for the print charge to run over $6 million. Now, however, movie theaters are rapidly converting to digital projection, and according to Screen Digest, 63 percent of movie theaters worldwide will be digital, by the end of this year.

That means expensive prints soon will be replaced by cheap discs or, in the near future, satellite transmission. So when the digital transmission is complete, the Hollywood studios will  save hundreds of million of dollars in print, lab, custom clearance, warehouse, and shipping costs. At present, studios are channeling  most of the savings into financing the cost of converting the remaining theaters, but, when that is completed, the resulting windfall will go into their pockets.

— Edward Jay Epstein

Read more from The Hollywood Economist.