Customer Reviews

Hollywood Economics: How Extreme Uncertainty Shapes the Film Industry (Routledge Studies in Contemporary Political Economy)

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De Vany presents a profound and imaginative treatment of the economics of the movie business, one that has implications, not only for similar businesses such as publishing and music, but for our understanding of the dynamics of culture. When Richard Dawkins coined the term "meme" he unwittingly paved the way for tons and tons of sexy but shallow commentary on human culture. Though that is not what he set out to do - "meme" never shows up in the book - De Vany has given mathematical form to the behavior of movie memes and has demonstrated that it is the people who are in change, not the memes.

In the words of screen writer William Goldman, "nobody knows anything" about what happens to movies once they are released to the theatres. Most movies don't even break even, much less make a profit - not in theatrical release, which is what De Vany investigates. [These days, movies make money on DVDs and TV, but that's another story, told by Jay Epstein.] That's no way to run a business, but the problems are inherent in the nature of movies as a business venture. The deep and ineradicable condition of the business is that there is no reliable way to find out whether or not your movie has a market other than putting it on screens across the country and seeing if people come to watch.

Does having "bankable" names on the marquee guarantee that the movie will make bank? No. Does opening big on thousands of screens with PR from here to the moon guarantee that the movie will make bank? No. Does a small opening mean the film is doomed? No. Hence Goldman's remark.

But all is not chaos. Or rather it is, but chaos of the mathematical kind. De Vany shows that about 3 or 4 weeks into circulation movie dynamics (that is, the dynamics of people coming to theatres to watch a movie) hit a bifurcation. Most movies enter a trajectory that leads to diminishing attendance and no profits. But a few enter a trajectory that leads to continuing attendance and, eventually, a profit. Among these, a very few become block busters.

And those few come to dominate the statistics of movie economics. From the point of view of statistics based on the normal distribution those few are movies outliers and should be discounted. De Vany develops a statistical framework - he calls it the stable Paretian model - that gives proper attention to those block busters. The model is stable in the sense that it exhibits the same structure at all scales.

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De Vany devotes particular attention to the structure of the movie business. During its glory years the industry was organized by the studio system. The studios owned both the means of production and the means of distribution. Stars, directors, writers, and craftspeople, all were on staff at the studios. When it came time to release films, the studio's distribution system went to work and the films went out to theaters owned by the studios and to independent theaters with long-term booking arrangement. The system worked well.

But in the 1950s an anti-trust action was brought against the studios and they were ordered to divest themselves of their theaters and stop the cozy booking arrangements. The result of that was that was that they lost the stars, directors, writers, and producers - who became independent contractors - and the costs of production went up. And those increased costs were passed on to the movie-goer.

De Vany argues, convincingly, that the studios were not a cartel that drove up prices for their own benefit. Rather, their arrangements, their ownership of theaters, helped them cope with the extreme uncertainty of the business. They had just enough direct control over exhibition practices to stabilize their income so that they could afford to keep the talent on staff. Once that stability was taken from them, they had to let the talent go. And that, in turn, meant that, each time a film was to be made, someone had to go out into the marketplace and put the team together, thus incurring transaction costs that didn't exist in the studio system.

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An excellent book. Note that it's thick with mathmatics. But it also has lots of charts. You can read those even if you can't make sense of the equations.

How can you predict the success or failure of a film? Even if you can't predict with perfect accuracy, can you predict which movies will probably be a hit? For example, does a star guarantee a hit? Do big budgets matter? Do ratings ensure a certain level of profit? Does a movie's gross receipts in its first week predict its total gross over the entire run?

The media clearly shows that movie makers go for big stars in expensive racy or violent films that are widely distributed from the first week they open. This is what Hollywood thinks creates true hits. But think twice about trusting Hollywood instincts: Arthur De Vany looks at the empirical evidence on movie revenue and concludes that this conventional wisdom should be rejected.

De Vany shows that while stars and big budgets do indicate a movie's revenue scale, they do not predict its success. Big stars have made expensive turkeys (e.g. Waterworld starring Kevin Costner) while on the other hand huge hits have been produced without stars (e.g. Home Alone). One of the more interesting conclusions is that the old movie studio system understood implicitly that this business was unpredictable. Until the antitrust laws were used to break them up, the studios contracted stars, script writers, directors, distribution networks and movie theaters in order to own the entire stream of revenues all their movies would generate.

This way the old studio bosses could diversify their risk in what was essentially a portfolio of movies. They knew that they could not predict which of their films would be a hit so they insisted on owning them all and on managing costs so that the hits would pay for the turkeys, while leaving shareholders with a healthy return.

These results are fascinating and have a wide range of application beyond Hollywood, particularly in uncertain hit-or-miss industries as unrelated to the movies as are gold mining and oil drilling.

One word of warning. Despite what the blurb says, the book is technical. Each of the twelve chapters is a peer-reviewed academic paper in economics making full use of all the quantitative analysis tools available to a professional researcher. To get the full message, you need enough basic statistics to understand conditional probabilities, first and second moments, cumulative functions, linear regression, etc. However, each of these chapters also comes with an intro and conclusion worded in plain English. So as long as you're willing to trust the peer reviews, you don't actually need to do the math yourself.


Vincent Poirier, Dublin

This rather dense and scholarly book that contains some good insights into how markets for information differ from markets for physical goods. But few people will want to read the whole book. Much of the book was originally published as papers in economics journals. It's better organized than that suggests, but the style is mostly oriented toward professional economists.

Much of the book can be summed up by the conclusion that nobody knows anything about how successful a movie will be. The typical film loses money, and the expected returns are heavily dominated by rare films that are huge successes.

He says through much of the book that returns on investment in movies have infinite variance, and only at the very end admits that that's not literaly true, and then provides a more credible description of the variance as unstable and generally increasing over time.

His argument that Hollywood makes too many R-rated films takes a good deal of effort to follow. Table 5.3 is confusing, because it shows a mean return on R-rated films as much higher for the returns on PG13 films. This sounds like the opposite of his conclusion. It took 13 more pages before I figured out that that was due to some high rates of return on low budget R-rated films that had little effect on aggregate profits. It appears that his conclusion ought to have been that Hollywood makes too many high-budget R-rated films, and too few low-budget R-rated films.

His description of the antitrust cases that transformed the movie industry provides convincing evidence that the courts were confused and didn't help the independent exhibitors that the lawsuits were allegedly designed to help. The arguments about how they affected consumers are less clear.

Hollywood Economics: How Extreme Uncertainty Shapes the Film Industry by Arthur De Vanyn (Routledge) (Hardcover)
What do stars do for a movie? Aside from earning a higher least revenue, a star movie has only a slightly higher chance of making a profit than a non-star movie De Vanyn shows. If the star's agent extracts the higher expected profit in the star's fee, then the movie almost surely will lose money. This De Vanyn calls the curse of the superstar.
Opening big and leading at the box office is a momentary success. A movie has to attain or sustain box-office dominance over many weeks to make major money. The size of the opening does not predict how the ensuing battles will evolve or how much money the film will take in. Why do executives compete so strongly for stars when they can assure no more than a higher expectation of a movie's least revenue? It seems to be based on a belief that the opening predicts how much a movie will make. That turns out to be false, as this study shows.
The articles are grouped into four parts: dynamics, wild uncertainty, judges and lawyers and extremes. There are three chapters in each of these parts. De Vanyn writes a brief introduction to each part noting the main issues, techniques and results of the papers contained therein. De Vanyn has not sacrificed rigor or completeness; these are refereed articles, published in scientific journals and their results have been independently confirmed and replicated by other authors many times over.
De Vanyn also provides a couple of new chapters that were not published previously. One of these concerns artists, primarily actors and directors. It examines how productive they are and how they are paid. De Vanyn establishes the Price-Evans law of artists, estimate the half life of a star and see if one can separate luck from talent in career patterns. In another new work for this book, De Vanyn puts all this work into a more complete model, a model that begins to bridge the gap between standard management and economic models and the reality of the business.
In the Epilogue he muses on how one might manage a business where nobody knows anything. It is here that De Vanyn takes up the fundamental flaws his research reveals about the way the modern corporate studio manages the movie business.
Finally perhaps we will see why conventional models fail spectacularly to explain the movies and why De Vanyn had to invent a new kind of economics to come to grips with this endlessly fascinating business. Perhaps De Vanyn has built a consistent and fundamental model of the industry that is of interest not just to scientists, but to movie fans and moviemakers, too. And De Vanyn shows that these models can be applied to other industries as well.
In science, as in the movies, creativity takes you to unexpected places. This study is exciting because we get unexpected and wonderful discoveries. It is hard to imagine at the outset that by applying high-brow mathematical and statistical science we end up proving Goldman's fundamental truth that, in the movies, "nobody knows anything."
None of these results is more surprising than finding out that, hard-headed science puts the creative process at the very center of the motion picture universe. There is no fool proof formula. Outcomes cannot be predicted. There is no reason for management to get in the way of the creative process. Now tell then that! Character, creativity and good story-telling trump everything else. Now let's see some fresh movies made!

Must read book for those interested in how increasing uncertainty is affecting business. De Vany focuses on the movie industry - an apt choice considering that many industries are moving towards similar models: lose networks of agents and talents coming together for projects and then disbanding. Author recommends viewing movies (extends to all highly uncertain projects ?) as probability distributions but in the end "character, creativity and good-story telling trump everything else."

This book makes it very apparent that the movie business truly is a numbers game. The path to success is to make a lot of movies. The only way to tilt things in your favor is to have star power to protect the lower end of the upside, and to focus on G and PG rated movies to boost your overall audience. However, since Hollywood makes mostly R rated movies, screenwriters probably have a better shot at success by writing those. It's a paradox!

I skipped the high-falutin' parts with integral calculus...BUT: Anyone who is investing a nickel in ANY entertainment medium should read this book. The buying public is discerning, fickle and SMART. Crap stinks and the first to catch a wiff of a film that stinks are like Paul Revere coming out of the theater. On the other hand, a great film can fizzle due to any number of peculiar reasons such as distribution decisions or competing releases. There is also interesting treatment of the demise of studio-owned movie houses and an argument in favor of lifting the ban.

William Goldman ("nobody knows nothin'", or something like that) has it figured out: write screenplays and wait. The Princess Bride, case in point. He even wrote the book AFTER the movie hit big.

Let somebody else put his money into film production. There is a fine line between genius and lunacy...the buying public determines which he is.

Complex, thought provoking book that helps One building the gut level instincts that eventually will be used in making a decision about which movie to produce.