The Movie Industry Today The Players

• Production – Studios contract with known producers – Studios finance indie producers • Distribution – studios • Exhibition – Theaters – Ancillary markets Demand for Flickers

• Prices and elasticity – Demand for hit movies is inelastic – Demand for complementary goods is not • Babysitter • Dinner • Parking/transportation • That really good buttered popcorn – Demand for “regular” movies is elastic • Rush hour specials • Student/senior discounts Markets for Movies

• Historically theaters were the only market for movies • Technology → ancillary markets • Culture + technology = – Piracy – Impatience – I don’t want to wait six months to rent/stream anymore Marketing

– Distributing • Sequential patterns (decreasing order of MR/time) – Theater – Streaming/video on demand – DVD/Blu-ray – Pay TV – Network TV • Decreasing theater release window over time Release Patterns Markets for Movies

• Ancillary markets – Decreased average cost of distributing • A DVD is cheaper to produce than a film print • Electronic version is even cheaper – Increased revenue streams – Profits are not necessarily increased • Costs have risen faster than revenues • Who are customers in ancillary markets? – Marginal viewers who would not go to theater anyway – Viewers who substitute streaming/rental for trip to theater Markets for Movies • Ancillary markets – Change in source of revenue over time 1980 1990 2000 2018

Theatrical box office 52.4% 25.0 29.4 16 Domestic 29.6 15.9 15.2 5.6 Foreign 22.8 9.1 14.2 10.4 Home video 7.0 38.6 38.2 27 Pay cable 6.0 8.3 7.8 8 Network TV 10.8 0.8 1.5 46 Syndication 3.8 4.6 3.9 (merch and Foreign TV 2.5 7.6 6.9 digital “Made for TV” films 17.5 15.2 12.3 3%) Financing a film – Major Studio • Bank loan on distribution contract • Invest own capital – Independent producer • Presales • Deal with major studio – Funding requires that movie be cast (function of agent) • Storyline • Actors • Directors • Estimated budget The Box Office Dollar Gross Theater take, 9.0% participants, 8.0% Nut, 10.0% Negative costs and profits, 23.0%

Distribution fee, 24.0%

Publicity, 20.0%

Distribution expenses, 6.0% This is what’s available to finance the cost of the film Distributor-exhibitor contracts • exhibitor covers “nut” before splitting box office – rent, utilities, insurance • sliding % of box office gross • territorial exclusivity for theater • advances and floors – Advance: non-refundable down payment – floor required by distributor to protect against bomb. Distributor-Exhibitor Relations

Example of distributor rental calculations

Week 1 Week 2

Box office gross (one week) $16,000 $6000 Less “nut” - 1500 -1500 Theater “net” revenue 14,500 4500 Min rental (70% box office gross) (11,200) - 4200

Max rental (90% of “net”) -13,050 (4050) Theater operating revenue 1450 300 Distributor Costs • distributor fee is cost to access distribution pipeline • ≈ 1/2 of fee pays for distributor costs – overhead – annual operating expenses – other publicity and promotional expenses • remaining 1/2 of fee is “profit” – provides cash flow to finance other films – compensates for risk of financing movie – covers losses of box office bombs – only at box office can a film generate negative return, because box office attendance determines revenue – ancillary market distribution contracts are written to guarantee TR > TC Marketing • Advertising – Often as much as 50% of total cost – Advertising = f(competition) • Competition = f(release date) • release strategy – wide release requires lots of ads – slow build-up can rely more on word-of-mouth ads Supply and Demand • Seasonal admission cycles

Normalized Domestic Movie Ticket Sales: 2006

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

Percentage of Week Ending of Week July 8th Percentage 0.20 7-Jan 28-Jan 18-Feb 11-Mar 1-Apr 22-Apr 13-May 3-Jun 24-Jun 15-Jul 5-Aug 26-Aug 16-Sep 7-Oct 28-Oct 18-Nov 9-Dec 30-Dec

Week Ending Date

Profit and the Box Office

• Profit = Total revenue – total costs • TR = box office + ancillary • TC = production + distribution + publicity 2018 Studio Share Domestic Box Office Mkt Box Office Number of Studio Share Gross (mils) films Buena Vista 26 % $3092 13 Warner Brothers 16.3% $1940 49 Universal 14.9% $1772 23 Sony/Columbia 10.9% $1304 28 20th Century Fox 9.1% $1082 17 Paramount 6.4% $757 12 Lionsgate 3.3% $389 20 STX Entertainment 2.3% $297 10 Focus Features 1.4% $167 13 MGM/UA 1.4% $164 3 Fox Searchlight 1.2% $145 6 Top Six Studios 2018 • 74.5% of domestic box office • Averaged 23.7 releases • Average production cost $140 million • 23.7 x $140 = $3.3 billion • On average 25% of cost recovered at domestic box office, 75% from ancillary sources • Average box office take for distributor = 42% • for studio to recover $825 million in costs from box office, its box office gross must be $825/.42 = $1.96 billion • Total 2018 box office $11.8 billion • Each studio needed 16.6% (1.96 bil/11.8 bil) share of market to break even 2018 Studio Share Domestic Box Office Mkt Box Office Number of Studio Share Gross (mils) films Buena Vista 26 % $3092 13 Warner Brothers 16.3% $1940 49 Universal 14.9% $1772 23 Sony/Columbia 10.9% $1304 28 20th Century Fox 9.1% $1082 17 Paramount 6.4% $757 12 Lionsgate 3.3% $389 20 STX Entertainment 2.3% $297 10 Focus Features 1.4% $167 13 MGM/UA 1.4% $164 3 Fox Searchlight 1.2% $145 6 The 2018 Box Office

Total $300 $200-$300 $100-$200 % of all films million or million million films that released more earned $100 million or more 873 6 8 20 2.3%

The average film cost approximately $140 million to make last year. At 42% distributor box office take the break even domestic box office was $333 million. In 2018 there were five films that had a domestic gross in excess of $333 million. 2018 Domestic Box Office Leaders Break World % from even dom Box domestic Opening % open Prod bo (est) office box wknd wknd to Cost not incl Film (mils) office (mils) dom bo (mil) marketing

Black Panther $1346.9 52% $202 28.8% $200 $476.2 Avengers: Infinity War $2048.4 33.1% $257.7 38% $300 $714.3

Incredibles 2 $1242.8 49% $182.7 30% $200 $476.2

Jurrasic World $1309.5 31.9% $148 35.3% $170 $404.8

Aquaman $1142.9 29.2% $67.9 20.4% $160 $381

Deadpool 2 $778.9 70.9% $125.5 22.6% $110 $262 Hollywood Economics

Arthur DeVany

Arthur DeVany London: Routledge, 2004 Survival of the fittest

• How long does a movie last? Likelihood of remaining in Top 50 Who produces the movies?

• The movie Lorenz curve • The studio Lorenz curve • A top-heavy industry Equitable distribution 2018 Studio Share Domestic Box Office

Mkt Box Office Number of Studio Share Gross (mils) films Buena Vista 26 % $3092 13 Warner Brothers 16.3% $1940 49 Universal 14.9% $1772 23 Sony/Columbia 10.9% $1304 28 20th Century Fox 9.1% $1082 17 Paramount 6.4% $757 12 TOTALS 83.6% $9947 142 % of INDUSTRY TOTAL 4.0% 84.3% 16.2%

* Percentage of US based studios What did Buena Vista do right?

Produce five of the eight movies that grossed $200 at the domestic box office Release strategies

• Wide release versus slow build up • Performance by release strategy • Good movies have legs • Dogs slink away Performance over time

• Two-thirds of movies earn their max box- office revenue in first week • Slow releases are the exception • Second week is usually the week of widest release for most movies A bomb And a hit

Star power

• Why stars are paid so much • How valuable is a star?

• Can a big name save a big bomb? The expectation of a movie’s performance is dominated by unlikely events

That is, nobody really knows what to expect

What makes a hit?

• Rating, Genre or Star? • Predicting performance Since film rentals are approx one half same of box- mean office but diff revenues, std dev a gross return of 2 would be the break even point The current philosophy

• Minimize risk by offering something familiar – Sequels, stars, franchises • Diversify – Major studios are parts of conglomerates • Brand your product – Think toys, video games, etc Summary

• The movie industry is built on the blockbuster model – Stars are the safest bet among a selection of risky bets – Because movies are experience goods, subject to the ever changing whims of the audience, copycat producing is a safe bet – Tension between artist and financier Summary

• The importance of ancillary markets • Studios finance and distribute • Marketing costs depend on competition and release strategy • The bulk of the box office dollar goes to the distributor Questions?