Entertainment and Media: Markets and Economics

1. Entertainment and Media: Markets and Economics Uncertainty and the Winner’s Curse

2. 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

3. 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?

4. 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.)

5. 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).

6. 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.)

7. 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

8. Entertainment and Media: Markets and Economics Reasons for Failure in the Movie Business

9. 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.

10. 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)

11. 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)

12. 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 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.

13. 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

14. 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

15. 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

16. 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).

17. 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.

18. 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.

19. 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.

20. 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.

21. Regression Results: Ingredients of Movie Success? Based on N = 175 Movies, ca. 2000.

22. 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: Released in November 2013, 2014, 2015.

23. 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).

24. 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.

25. 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

26. 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

27. 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.

28. 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).

30. Traditional Movie Success Model ------------------------------------------------- LHS=LOGBOX (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 --------+----------------------------------------

33. 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.”

34. http://minimaxir.com/2016/01/movie-revenue-ratings/ UPDATE 1/11/15: On a discussion on Hacker News, it was suggested that the blockbuster movies and the indie movies cancel each other out, i.e. blockbusters have a positive correlation and indies have a negative correlation. For the blockbuster cluster alone, the log-correlation is 0.23 (not weak but not great positive correlation). For the indie cluster alone, the log-correlation is -0.12 (same as original analysis).

37. Do Online Reviews Matter?(Not the same question as does buzz predict success?)

38. Online Reviews Don’t Matter

39. 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

40. Entertainment and Media: Markets and Economics The Winner’s Curse

41. 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.

42. 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

43. 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.

44. 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.

45. 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.

47. The answer might well be that it’s not, at least if you’re talking strictly in terms of profits. Instead, we may well be looking at an example of the dreaded phenomenon known as “the winner’s 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 Dakota’s oil patch, whoever has the most Pollyanna-ish projections about tomorrow’s crude prices and recovery rates is probably going to come away the winner. But if the oil doesn’t flow as expected, then he ends up the loser. Hence, the winner’s 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-rich—a circle of people that, as you might have heard, has expanded in recent years.. His bid might be cursed. But he probably doesn’t care.

48. The Next Big Curse at Sotheby’s No common value.No true valueSotheby’s has planted informationSealed bid auction. Did not sell. 

49. Entertainment and Media: Markets and Economics Uncertainty in success of large multistage projects. Probable elements of failure in some bidding situations.