Boing Boing has a great post that talks about why box-office revenue might be declining. It's not so much that movie quality has gone downhill, but that the MPAA (movies) is acting like the RIAA (music) and assuming that their customers will try to pirate the product.
I would argue that the average movie quality has certainly declined because of two things: formula-based movies and audience splintering. Formulaic movies, like Little Black Book and A Lot Like Love in the rom-com genre, may make back the money it cost the studios to produce them, but they don't inspire much loyalty among viewers. Aside from a few blockbusters like Lord of the Rings, few movies have wide ranging appeal. As the target audience becomes more specific, the studio assumes less revenue and is less than forthcoming with cash and time for production. Thus the final product suffers from a rush job and fails to deliver on the promises made in the slick, funny trailer.
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