Arnold Kling

Economics of Movies

Social Security Privatization:... Medicaid and Nursing Homes...

One of my favorite examples to use in a first-year economics class is the movie business. For one thing, it's easy to explain adjusting for inflation when you talk about comparing the box office receipts of movies of different eras. For another, the process by which movies and movie theaters make money is interesting.

Jonathan Last has a book review on this topic.

In 1947, Hollywood sold 4.7 billion movie tickets. The studios were hugely profitable movie factories.

...In 2003, only 1.57 billion tickets were sold, a third the number 56 years earlier, while the real cost of making movies increased some 1,600 percent...

The physical production of the movie was $103.3 million. Prints cost $13 million; insurance, taxes and customs clearance came to almost as much. The studio spent $42 million for advertising in North America and a bit more than half of that for the rest of the globe. On the back end, Disney paid out $12.6 million in residual fees and figured in $17.2 million for overhead and $41.8 million for debt service--for a total negative cost of $265.3 million, more than double the studio's take of the box-office receipts.

So how did Disney make money? The answer is in the clearinghouse. Disney never expected to profit from the theatrical release of Gone in 60 Seconds, but it did count on harnessing a whole river of money--from the rights to the intellectual property it had created.

By 2002, Buena Vista Home Entertainment International, another division of Disney, had reaped $198 million in sales and rentals from Gone in 60 Seconds videos and DVDs.

For Discussion. Of the various parties involved in the movie industry, which ones earn the highest economic rents, and why?

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CATEGORIES: Economic Education

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The author at Houston's Clear Thinkers in a related article titled The real economics of Hollywood writes:
    This Jonathon V. Last-Daily Standard article reviews Edward Jay Epstein's new book, The Big Picture (Random House 2005), which examines the fascinating and ever-changing economics of moviemaking. To give you an idea of what's going on in Hollywood econ... [Tracked on February 24, 2005 7:58 AM]
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B. Scot writes:

Nick Cage was paid 20 million for Gone in Sixty Seconds, his highest yet. We can only dream of having such opportunity cost dilemmas.

Jim Glass writes:

There was a longer and more informative article on all this recently in the New Yorker.

Here are excerpts and here's the whole thing.

At least Cage acted in a whole movie for his $20 mil. For "Shrek 2" Mike Myers, Eddie Murphy, and Cameron Diaz each got $10 million just for doing a few days of voiceovers.

From the article:

Thomson believes that profit participation has done the movies a lot of damage, because it allows people to profit from the success of an investment with no risk to themselves on the downside. [And] "creative control" is another source of trouble.



One of the things about profit participation is that the actors who are paid millions to "open" a movie get to keep their advances against profits even if there aren't any profits.

This cost has done a lot to kill off smaller movies, and to create films like the Matrix sequels that are designed to open on 18,000 screens worldwide simultaneously, so that “by the time we’ve all seen that it sucked, it’s a hit.”

BTW, Final Cut, the book about the making of Heaven's Gate, has been reissued and is a great read about how Hollywood works.

Lawrance George Lux writes:

The Producers. They line up the Cash, distribute Cash flows, work on the Cuff for Advertising and Distribution, get first cut of the pie, and quadruple their initial gain if they can establish a viable Video/DVD market for the Product; all this while working on the next property. lgl

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