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Entertainment and Media: Markets and Economics. Professor William Greene. Entertainment and Media: Markets and Economics. Uncertainty and the Winner’s Curse. Uncertainty and Information. Randomness Do all movies lose money? Do movies fail randomly? Chaos, complexity and movie stars

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entertainment and media markets and economics1

Entertainment and Media: Markets and Economics

Uncertainty and the Winner’s Curse

uncertainty and information
Uncertainty and Information
  • Randomness
  • Do all movies lose money?
  • Do movies fail randomly? Chaos, complexity and movie stars
  • Modeling randomness; probability
  • Variance and the winner’s curse
more losers than winners
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







predictable failure gigli
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 8–10 $ 678,640 -81.9% 2,215 $ 306 $4,432,158 2

Aug 15–17 $ 18,702 -97.2% 2,142 $ 256 $4,450,860 3

Overall… $5,600,000 U.S. (apx)

$1,000,000 foreign

(That’s 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.)

no theory explains delgo
No Theory Explains Delgo

Delgo is a 2008computer-animatedfantasy 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).

forrest gump lost money
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.)

Gross $609M

Distn. $398M

Harry Potter and the Order of the Phoenix, 2007

lost a ton of $

Expns. $192M

“Net” $206M

Costs $316M

Intrst $ 58M

Loss ($167M)


entertainment and media markets and economics2

Entertainment and Media: Markets and Economics

Reasons for Failure in the Movie Business

producing flops r caves
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.

growing a ten ton turkey
Growing a Ten Ton Turkey

In prospect, 5 stages in sequence:

1 2 3 4 5 Release

Costs: 20 20 20 20 20 E[Cost] = 100

Revenue 0 0 0 0 0 100 E[Revenue] = 100

After a disappointing first stage, E[R] falls by 10%

Looking forward, costs needed to complete the project.

Costs: {20} 20 20 20 20 E[Cost] = 80

{sunk} E[Revenue] = 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)

art for art s sake the alamo
Art for Art’s 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

Heaven’s Gate

Gigli (‘Production’ cost $25M(J+B) + $29M+ Marketing $20M Box Office: < 6M

(J Lo/Ben star vehicle. Which problem sank this film?)

John Carter (goes to Mars)


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 studio’s 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 Columbia’s marketing chief at the time.

art for art s sake
Art for Art’s 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

unpredictable failure
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
order and chaos
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
dynamic movie systems
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).

stable and chaotic systems
Stable and Chaotic Systems
  • Stable systems
    • Not necessarily predictable, but regularly behaved
    • Don’t 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.
the end results of chaos
The End Results of Chaos

Power law


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.

strategies for dealing with the risk of failure in the movies
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.
movie riddles s ravid
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.

lone ranger vs despicable me 2
Lone Ranger vs. Despicable Me 2

Big Budget ($375M) $ 48M


Animated Sequel $ 142M

regression results ingredients of movie success
Regression Results: Ingredients of Movie Success?

Based on N = 175 Movies, ca. 2000.

economic analysis why are there so many summer blockbusters
Economic Analysis: Why Are There So Many Summer Blockbusters?
  • Hotelling’s 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.
is risk aversion a good theory
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).
star power
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.
the star s the thing
The Star’s 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
fading star power
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

The Hollywood Reporter, 5/2/08, “Do Stars Matter?”

car chases
Car Chases?
  • Why so much violence (and sex)
  • R rated movies have lower average box than G and PG.
  • Sex doesn’t sell. Violence or violence and sex do OK on average, but have LOWER VARIANCE. Risk avoidance.
  • S&V are rarely major flops. Low variance, so AGENTS keep their jobs.
really big movies
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).
traditional movie success model
Traditional Movie Success Model


LHS=LOGBOX (Based on only 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


something new internet buzz predicts success
Something New:Internet Buzz Predicts Success

Fandango: Cant Wait (3 weeks before:Trailer Addict.com, ComingSoon.net , RottenTomatoes.com


Variable| Coefficient Standard Error t-ratio


Constant| 12.8609*** .89991 14.291

LOGBUDGT| .25576 .17820 1.435

STARPOWR| .00124 .01278 .097

SEQUEL| .24900 .26549 .938

MPRATING| -.18257 .12990 -1.405

ACTION| -.89758*** .28645 -3.133

COMEDY| -.01613 .23589 -.068

ANIMATED| -.73797* .37859 -1.949

HORROR| .41049 .35873 1.144

PCBUZZ| .22554** .09695 2.326

CNTWAIT3| 2.73281*** .88540 3.087


internet buzzes john carter
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. “I’ve 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.”

domestic box office receipts place your bets on movie success
Domestic Box Office Receipts: Place Your Bets on Movie Success

(Killed by Blanche Lincoln during financial reform debate)


the winner s curse
The Winner’s Curse
  • Bidding situation (sealed bid auctions)
    • Publishing (Jack Welch’s 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 Winner’s regret.
the winner s curse theory
The Winner’s 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 > true value

the winner s curse1
The Winner’s 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.

possible examples of the winner s curse in the publishing world
Possible Examples of the Winner’s 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.
winner s curse application
Winner’s 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 lion’s 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 Amazon’s 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.

the next big curse at sotheby s
The Next Big Curse at Sotheby’s

No common value.No true valueSotheby’s has planted informationSealed bid auction.

entertainment and media markets and economics4

Entertainment and Media: Markets and Economics

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