Curious Case of Rotten Tomatoes - Effects of Quality Signalling in the US
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Curious case of Rotten Tomatoes - Effects of quality signalling in the US domestic motion picture market Master’s Thesis 15 credits Department of Business Studies Uppsala University Spring Semester of 2018 Date of Submission: 2018-06-01 Deniss Dobrovolskis Supervisor: Niklas Bomark 2 signalling + Master’s thesis, SAOE, VT 2018, 15 hp Curious case of Rotten Tomatoes: Effects of quality signalling in the US domestic motion picture market. Deniss Dobrovolskis Handledare: Niklas Bomark Företagsekonomiska institutionen Inlämningsdatum: 2018-06-01 ABSTRACT Quality signalling in motion picture markets is hardly a new topic. It has been covered by many researchers over the years. However, most of the previous studies focused on quality signals in interactions between moviemakers and moviegoers. This study employs a more holistic approach as the author attempts to evaluate effects of quality signals throughout different stages of movies’ life cycle. The author has identified three audiences that movies are presented to; and, each group of audience generates a quality signal for the next audience. Based on the feedback from test audiences, moviemakers decide on when to show movies to professional critics and when to allow them to publish their reviews. Interpretation of these timelines become quality signals for the professional critics who interpret shorter time slot for review publication as a signal of the low quality of the movie and vice versa. Professional critics write their reviews which when published on review aggregators become quality signals for the moviegoers. Reviews generated by the initial moviegoers are interpreted by the moviegoers who intend to watch movies at a later stage. All three assumptions are operationalised and evaluated in a series of linear regression tests in this research on a sample containing 130 out of 134 widely released movies in the US and Canada domestic market in 2017. All of the abovementioned quality signals found to be significant as they could explain at least 40 % of the variance of respective response variables. Key words: Rotten Tomatoes; box office success; judgement devices; quality signals; reviews; motion picture market INTRODUCTION Nature of markets and actor behaviour have been topics of interest for researchers in economic sociology for quite some time (Akerlof, 1970; Aspers, 2009; Beckert and Rossel, 2013; MacKenzie, 2006; White, 1981; Zuckerman, 1999). In his prolific paper “Where do markets come from?”, White (1981) attempted to describe behaviour of a firm in a production market. The author came to the conclusion that firms observe each other and based and take decisions based on the behaviour of other firms. White (2002, pp. 32, 38, 1981) argued that although firms do observe buyer’s behaviour to some degree, however, it is close to impossible to anticipate preferences of each individual buyer and firms treat buyers as price takers and can only accept an offer from the firms. However, the firms still face a fundamental challenge that is present in the markets – asymmetry. This means that the producers know much more information about their products than the buyers who might consume them. Topic of market asymmetry is, therefore, one of the main areas of interest for researchers who operate on the border of economy and sociology analyse challenges of communication product quality from sellers to buyers (Akerlof, 1970; Aspers, 2012; Beckert and Musselin, 2013; Beckert and Rossel, 2013; White, 1981; Zuckerman, 1999). Motion picture market, in particular, seems to be very compelling when it comes to analysing the interaction between producers and consumers (Hsu, 2006; MacKenzie, 2006; Zuckerman, 2003; Zuckerman et al., 2003). One of the aspects that makes this market so attractive for researchers is that it is rather transparent (Brown et al., 2012). The Motion Picture Association of America (MPAA, 2013), which is an industry organization for the content creators for the motion picture, home video, and television in the US and Canada markets, publishes annual reports with comprehensive analysis of theatrical and home entertainment market environments. These reports contain statistics on viewership numbers, financial statistics and major trends in the industry. For the purposes of this paper, I will use the latest available report, which in this case, is for 2017 (MPAA, 2018). And yet, despite such a transparency, motion picture market is still asymmetrical due to nature of the product that is traded in the market. Motion pictures are intangible or experience goods and quality of such goods is not known until after the consumption (Klein, 1998). Movie-goers who are interested in watching quality movies and avoiding low-quality movies and actively seek out available quality signals (Bharadwaj et al., 2017). Therefore, moviegoers consult with various popular web resources for quality signals (Kim et al., 2013) such as IMDb and Box Office Mojo where they can learn about cast, production crew, budget, awards and even get 4 some relevant information about the movies from both regular moviegoers’ and professional critics’ and regular movie-goers’ ratings (Box Office Mojo, 2018a; IMDb, 2018a; Metacritic, 2018). Interaction between audiences and critics (Goff et al., 2016; Zuckerman, 2003, 2000, 1999a) and effects of word of mouth (Bharadwaj et al., 2017; Goldenberg et al., 2001; Hsu et al., 2009; Kim et al., 2013; McKenzie, 2009; Palsson et al., 2013; Rasmussen et al., 2010; Ye et al., 2009; Zhang et al., 2010) have been widely presented in academic literature. One common motif that characterizes most of the previous studies is that the studies used different sources in order to analyse the interaction between critics and audiences and how this interaction affects the success of the movies in the box office. However, as social media has become more and more widespread, some media actors become more influential than others. A very good example of such an influential web resource is Rotten Tomatoes which acts as an aggregator of critical reviews (Rotten Tomatoes, 2018a). According to the LA Times, 36% of the US movie-goers consulted Rotten Tomatoes in 2017 before making a decision on which movie to watch at the cinema (Faughnder, 2017). In a way similar as another internet resource YouTube became institutionalized (Kim, 2012), internet movie review sites underwent evolution from audience- generated reviews (IMDb, 2018a) to reviews generated by professional critics (Rotten Tomatoes, 2018a). Rotten Tomatoes is also recognized by film studios as a legitimate channel for providing the audiences with information about their products (Cavna, 2017a, 2017b; Fritz, 2016). Recently, Rotten Tomatoes ratings have been used by academics as a legitimate source of review valence and volume (Bharadwaj et al., 2017; Goff et al., 2016; Kim et al., 2013). As I have already shown, Rotten Tomatoes is a recognized platform for signalling product quality to the audiences in a very asymmetrical and mediated market. Therefore, in this thesis, I would like to take the logical step and use Rotten Tomatoes rating system as a proxy for aggregated critical reviews and word of mouth generated by the moviegoers. Purpose of this study is, firstly, to explore what techniques moviemakers use to signal quality to the audiences. Secondly, I will employ statistical analysis to understand how effective these technics are. In order to fulfill the purpose of this study, I will start with setting a theoretical foundation on quality signaling. Thereafter, I will establish the context of the study by presenting results of previous research on quality signalling in the motion picture market and some empirical data to describe the state of the US and Canada domestic motion picture market in 2017. When the theoretical foundation is set up and context is presented, I will describe what methodology I will use to analyse data gathered during the course of the study. This section will be followed by a description of results. This paper will be finalised by a section where I will present my conclusions and implication of academia and business practices. LITERATURE REVIEW Producers and product quality According to White (1981), firms in the market can be grouped by the qualities of their products as perceived by consumers. This perception by customers plays an important role because, in accordance with White (1981), producers differ from each another in appreciation of their products by the consumers. However, appreciation by the consumers is (or, probably more precisely, was in the 1980s) hard to quantify, therefore, firms do not act on the market based on consumers’ appreciation. Instead, firms act on observable volumes and payments of their competitors as they are unable to make sense of qualities and/or consumer valuations of the competitors’ products. Since it is significantly more productive to replicate the behaviour of one’s peers than to speculate on valuations, reproduction of each other’s behaviour in order to sustain their niche in the market can be employed as a successful business strategy. Surely, transparency of the motion picture market, where such information as box office revenue (Box Office Mojo, 2018b), consumer behaviour and demographics (MPAA, 2018) and, movie release plans that stretch many years onward (Couch, 2017; Dockterman, 2018; McCluskey, 2017); would allow many movie producers to replicate each other’s behaviour without trying to understand needs and expectations of the moviegoers. However, this might be an oversimplification of the state of the market. Dubuisson-Quellier (2013, pp. 15–16) attempts to reconcile White’s theory with the use of marketing and market research in order to create a better understanding of consumers’ behaviour. Simply put, the author argues that not all firms have resources and manpower to invest in marketing (Dubuisson-Quellier, 2013, p. 7) and, therefore, firms that do not occupy leading position in a particular market are forced to observe and replicate behaviour of the market leaders’ as they are assumed to have better understanding of customer’s expectations (Dubuisson-Quellier, 2013, p.