Entertainment and Media: Markets and Economics

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Entertainment and Media Markets and Economics

• Uncertainty and the Winners Curse

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Uncertainty and Information

• Randomness
• Do all movies lose money?
• Do movies fail randomly? Chaos, complexity and
  movie stars
• Modeling randomness probability
• Variance and the winners curse

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More Losers than Winners?

• Movie success for the studios
• The numerical majority of movies lose money
• ? Based on Hollywood Accounting
• ? Not really when foreign box, video, TV and
  other release windows are counted

Production
Distribution
Exhibition
30-60
Costs
0?
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Predictable Failure - Gigli
Weekend Gross Change
Theaters Average Gross-to-Date Week
Aug 1-3 3,753,518
2,215 1,694 3,753,518
1 Aug 810 678,640 -81.9
2,215 306 4,432,158
2 Aug 1517 18,702 -97.2
2,142 256 4,450,860
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Overall 5,600,000 U.S. (apx)


1,000,000 foreign (Thats all folks..)
Costs? Bennifer 25,000,000
Other 29,000,000
Promotion 22,000,000
Distribution ? Did this film make money? Can
it? Will it ever? (No, no and no.)
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No Theory Explains Delgo
Delgo is a 2008 computer-animated fantasy film.
The film was produced by Fathom Studios, a
division of Macquarium Intelligent
Communications, which began development of the
project in 1999. Delgo grossed just 694,782 in
theatres against an estimated budget of 40
million, according to box office tracking site
boxofficemojo.com. The film was released
independently with a large screen count (over
2100 screens).
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Forrest Gump Lost Money

• Forrest Gump (1994) (Paramount Pictures)
• US Box Office 330M
• Foreign Box Office 350M Total, About
  830M
• Soundtracks, etc. 150M
• Net profit - 62M (!) A
  disappearing act?
• U.S. Box ? 50 to Exhibitors (Theaters)
• Paramount Receives Approx 191M
• Distribution Fee 32 62M
• Distribution Cost 67M
  (Advt., Prints, Screening, etc.)
• Advt. Overhead 7M (10
  of Distribution Cost)
• Production Negative Cost 112M
• (Tom Hanks, Robert Zemekis, 20M (8 of
  GROSS, each)
• Studio Overhead 15M
• Interest on Negative Costs 6M
• Net Profits from the Project -62M
• Winston Groom, Author 19 of NET 0
• Eric Roth, Screenwriter 19 of NET 0
• Coming to America (1988) The Art Buchwald
  Case(Buchwald was settled so studios could avoid
  opening up the booksto embarrassing scrutiny.)

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Harry Potter and the Order of the Phoenix,
2007 lost a ton of
Gross 609M Minus Distn. 398M Expns.
192M Net 206M Costs
316M Intrst 58M Loss ( 167M)
http//io9.com/5747305/how-much-money-does-a-movie
-need-to-make-to-be-profitable
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Entertainment and Media Markets and Economics

• Reasons for Failure in the Movie Business

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Producing Flops (R.Caves)

• Sequence of small failures can add up to a large
  loss.
• Multiple stage production, large SUNK cost at
  each
• Each stage is sensibly funded. Failure comes at
  the end of the chain.
• By then, the costs are sunk.

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Growing a Ten Ton Turkey

• In prospect, 5 stages in sequence
• 1 2 3 4 5
  Release
• Costs 20 20 20 20 20
  ECost 100
• Revenue 0 0 0 0 0
  100 ERevenue 100
• After a disappointing first stage, ER falls by
  10
• Looking forward, costs needed to complete the
  project.
• Costs 20 20 20 20 20
  ECost 80
• sunk
  ERevenue 90
• Ex post Total cost 100M, Total Revenue if
  expectations
• are met, 90. Note the crucial role of SUNK,
  nonrecoverable costs
• (i.e., the output of those costs cannot be sold
  on any market)

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Art for Arts Sake (The Alamo)

• Production function view of inputs indifference
  to final product
• Creative production view the masterpiece
  (e.g., directors)
• Incentives internalized.
• A problem of moral hazard Separation of
  decision from costs of those decisions.
  (Principals and agents)
• Noteworthy examples
• Bonfire of the Vanities
• Heavens Gate
• Gigli (Production cost 25M(JB) 29M
  Marketing 20M Box Office lt 6M
• (J Lo/Ben star vehicle. Which problem
  sank this film?)
• John Carter (goes to Mars)

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Ishtar!
LOS ANGELES In 1987, shortly before the release
of Ishtar, Columbia Pictures realized the film
was going to flop in catastrophic fashion. But
rather than cut advertising spending to minimize
the financial damage as the studios top
marketer advised Columbia did the opposite,
pouring even more money into ads. The reason?
The studio was desperate to stay on good terms
with the two stars of Ishtar, Warren Beatty and
Dustin Hoffman. Ego trumps logic in Hollywood,
said Peter Sealey, who was Columbias marketing
chief at the time.
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Art for Arts Sake
John Carter Opens Friday 3/9/2012 Budget
350M U.S. Open 30M
Foreign Open 71M
Studios have repeatedly pledged in the 25 years
since to modernize their clubby business
practices, but the more Hollywood promises
change, the deeper it seems to fall into its ruts
as evidenced by John Carter, a big-budget
science fiction epic from Walt Disney Studios
that opened Friday and flopped over the weekend.
Disney spent lavishly (some say foolishly) on the
movie in large part to appease one of its most
important creative talents Andrew Stanton, the
Pixar-based director of Finding Nemo and
Wall-E.
Considering China and Japan are the largest
markets in the Asian Pacific region and have yet
to open, John Carter could ultimately be in for a
respectable final tally. Still, historical
comparisons seem to suggest that the best case
scenario is around 300 million overseas, which
combined with its middling domestic performance
isn't going to be nearly enough to put this one
in the black.(BoxOfficeMojo, 3/12/2012)
Ishtar Lands on Mars, New York Times, Page B1,
3/12/2012
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Unpredictable Failure

• Wisdom
• Audiences and box office are uncertain
• Stars have power to make movies succeed. Helena
  (Kim Basinger) gets boxed.
• Better wisdom
• Movies are complex systems
• Complexity mixes order and chaos
• Even with stars, movies are unpredictable

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Order and Chaos

• Audience behavior
• Pure randomness ? movies do equally well
  (rolls of the dice)
• Information cascades ? chaotic behavior and
  herding
• Actual behavior embodies both Complex system

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Dynamic Movie Systems

• Dynamic systems evolve through time

• State variable (movie success, however measured)
  X(t) takes a value
• at each point in time. We
  follow it through time .
• X(t) is determined by X(t-1) and new
  information Z(t)
• The process must start somewhere (e.g., opening
  night, Z(0) the
• general climate of the area, mood of the
  audience, events of the day).

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Stable and Chaotic Systems

• Stable systems
• Not necessarily predictable, but regularly
  behaved
• Dont depend very much on where the process
  starts
• Chaotic systems
• Totally unpredictable
• Depend crucially on where the process starts
• Trivial differences in the starting point
  produces wild differences and oscillations in the
  state variables.
• Seems to characterize big movies.

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The End Results of Chaos

• Power law
• distributions
• of rewards

A very large proportion of movies make very small
amounts of money. A few randomly occurring ones
make very large amounts. Seems consistent with
outcomes for the movies market. Note that the
graph is about box office gross, not profit and
not about secondary release windows.
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Strategies for Dealing with the Risk of Failure
in the Movies

• Portfolio? Not if the previous analysis is
  correct.
• Hire a really big star?
• Movie as brand name? (The Matrix, Harry Potter,
  Shrek, James Bond series )
• Profit Sharing Contracts This reallocates risk
  it does nothing to reduce it.

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Movie Riddles (S. Ravid)

• Making Movies is hugely risky, and almost all of
  them lose money.
• Why do they keep making movies? Nobody knows.
• Why do they keep paying megabucks for big stars?
• Why are so few G and so many R movies made?
• Why do they keep making big event movies (like
  THE ALAMO, John Carter, The Lone Ranger)?
• Strategies for avoiding risk.

Are They all Crazy or Just Risk Averse? Some
Movie Puzzles and Possible Solutions, A. Ravid,
Rutgers.
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Lone Ranger vs. Despicable Me 2
Big Budget (375M) 48M Vs. Animated
Sequel 142M
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Regression Results Ingredients of Movie Success?
Based on N 175 Movies, ca. 2000.
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Economic Analysis Why Are There So Many Summer
Blockbusters?

• Hotellings location theory works
• The studios are risk averse
• Vendors crowd to the middle of the customer
  (timing) space
• Studios are being fooled by endogeneity
• The season does not produce the movie success
• The studios crowd the movies they most expect to
  succeed into the summer release window. Movie
  choices make the season appear successful.
• Large studios are absolutely risk averse. Failure
  in an off season big release will send a long run
  adverse signal.
• Small studios and indies can afford this kind of
  failure
• E.g., Hunger Games November 2013, 2014, 2015.

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Is Risk Aversion a Good Theory?

• Movie makers are risk averse.
• Studios are public corporations
• Stock holders can be risk averse, corporations
  need not be.(SONY can diversify against movies.)
• An incompatibility between agents (risk averse
  movie makers) and principals (risk loving
  stockholders).

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Star Power

• Natural response by movie makers to avoid blame
  for failure.
• Failure occurs for many reasons and no reason
• Conventional wisdom stars make a movie
• Better wisdom - audiences make the movie.
• Current trend (somewhat) away from stars.

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The Stars the Thing?

• DeVany and Walls, et. al. Stars do not guarantee
  success.
• On average (not always) stars do help to keep
  movies out of the bottom.
• The conclusion is uncertain
• Kim Basinger Boxing Helena
• Tom Hanks the Da Vinci Code, The Lost Symbol
• Sandra Bullock (not Angelina Jolie) in Gravity

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Fading Star Power

• Star Driven Films in Share of Top 25 Grossing
  Films
• 1987 44
• 1997 60
• 2007 13
• Other Drivers
• Franchise (Batman, Harry Potter, Bourne, Bond)
• Awards
• Buzz comedies/musicals
• Media/grassroots
• Special Effects
• Creator

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Car Chases?

• Why so much violence (and sex)
• R rated movies have lower average box than G and
  PG.
• Sex doesnt sell. Violence or violence and sex
  do OK on average, but have LOWER VARIANCE. Risk
  avoidance.
• SV are rarely major flops. Low variance, so
  AGENTS keep their jobs.

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Really Big Movies

• Titanic, Pearl Harbor, Alamo
• Big budgets ? lower variance (Superman Returns
  260 million)
• Big stars often make big budgets Sandra Bullock
  (Gravity) starts at 20M then adds a of
  revenues. More than 75M.
• Big Budget is definitely not a guarantee (see
  John Carter, Lone Ranger).

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Traditional Movie Success Model
-------------------------------------------------
LHSLOGBOX (Based on 62 movies,
2010) -------------------------------------------
----- Variable Coefficient Standard Error
t-ratio ---------------------------------------
--------- Constant 14.0582 .94003
14.955 LOGBUDGT .70488 .20434
3.450 STARPOWR .00680 .01540
.442 SEQUEL .64860 .32555
1.992 MPRATING -.12656 .16306
-.776 (PG,PG13, R) ACTION -.29625
.33730 -.878 COMEDY .00299
.29845 .010 ANIMATED -.74281
.47975 -1.548 HORROR 1.03248
.43203 2.390 --------------------------
----------------------
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Internet Buzzes John Carter
By the time John Carter had its Los Angeles
premiere last month, the film had suffered months
of ridicule on the Internet and had taken on a
funereal aura. Ive never had something healthy
get treated like a corpse, Mr. Ross told
Variety. Mr. Stanton brushed off skeptics at the
premiere, saying, You just gotta trust us.
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Do Online Reviews Matter?(Not the same question
as does buzz predict success?)
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Online Reviews Dont Matter
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Domestic Box Office Receipts Place Your Bets on
Movie Success
(Killed by Blanche Lincoln during financial
reform debate)
http//www.cantorexchange.com/getdoc/85d6d736-f286
-434e-b96e-6998d41ee0f8/Box-Office-Contracts.aspx
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Entertainment and Media Markets and Economics

• The Winners Curse

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The Winners Curse

• Bidding situation (sealed bid auctions)
• Publishing (Jack Welchs book)
• Offshore oil leases
• Broadcast frequencies
• Baseball, football, basketball, hockey players
• Art (The masterpiece effect)
• General Result High bidder bids over the value
  of the property leading to Winners regret.

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The Winners Curse Theory

• Common value, uncertainty in the value
• Bidders have private estimates
• Correlated because of some public information
• Based on some private and some public information
  (oil and gas leases, spectrum for cellular)
• Estimates may be unbiased with respect to the
  true value, but still randomly distributed
  bidders have different information and different
  private assessments.
• Winner might just be the most optimistic but in
  all cases
• Expected maximum valuation gt true
  value

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The Winners Curse
True value
The Winner
Distribution of estimated values
If (1) Estimates are distributed above and
below the true value (2) Each bidder bids
their evaluation of the valueThen The winner
is sure to bid too high. The more
bidders there are, the worse is the problem.
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Possible Examples of the Winners Curse In the
Publishing World

• Bill Clinton Between Hope and History 70
  returned
• Johnnie Cochrane Journey to Justice 3.5M
  advance, 350,000 of 650,000 unsold
• Whoopie Goldberg 6M advance, total failure
• (?) Jack Welch 6M. Hillary Clinton, 8M
• Why?
• Trade publishers integrated into large publishing
  firms organizational complexity and separation
  of decisions from ultimate consequences
  (corporate levels)
• Incentives of publishers. Signalling value of
  advances to celebrity authors and large first
  printings.
• Market characteristic winner take all markets,
  most entrants fail, with or without a celebrity
  author.

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Winners Curse Application?
50 Shades of Grey The first book of a
trilogy, it was published by a tiny independent
press in Australia, and distribution in print has
been limited and sluggish, leaving bookstores
deprived of copies. The lions share of total
sales (more than 250,000 copies for all three
books) has come from ever-discrete-book
downloads, which have propelled Fifty Shades of
Grey to No. 1 on the New York Times e-book
fiction best-seller list for sales in the week
ending March 3 and No. 3 position on Amazons
best-seller list. Now American publishers
have just concluded a battle over the rights to
re-release the book in the blockbuster fashion
they think it deserves. This week, Vintage Books,
part of the Knopf Doubleday Publishing Group,
known for its highbrow literary credentials, won
a bidding war for the rights to all three books,
paying a seven-figure sum. On Monday, the
publisher will release new e-book editions of the
trilogy. Weeks later will come a 750,000-copy
print run of redesigned paperback editions.
Release windows
NYT, March 10, 2012, p. B1.
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The answer might well be that its not, at least
if youre talking strictly in terms of profits.
Instead, we may well be looking at an example of
the dreaded phenomenon known as the winners
curse. Economists have long noted that in
auctions for investments like land rights, which
have an actual dollar value that one can
calculate, the winners often overpay. The reason
for this is simple. In an auction, the highest
bidder wins. And the higher someone bids, the
more likely it is they have overestimated the
worth of whatever they are trying to buy. If 10
companies are competing for the mineral rights to
a piece of North Dakotas oil patch, whoever has
the most Pollyanna-ish projections about
tomorrows crude prices and recovery rates is
probably going to come away the winner. But if
the oil doesnt flow as expected, then he ends up
the loser. Hence, the winners curse. I
sincerely doubt Ballmer is making this purchase
based purely on economics. Sports teams might be
more profitable than in the past. But they are
also a status symbol for the global ultra-richa
circle of people that, as you might have heard,
has expanded in recent years.. His bid might be
cursed. But he probably doesnt care.
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The Next Big Curse at Sothebys
No common value.No true valueSothebys has
planted informationSealed bid auction. Did not
sell.
?
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Entertainment and Media Markets and Economics

• Uncertainty in success of large multistage
  projects. Probable elements of failure in some
  bidding situations.