Monday, August 8, 2016

The Hollywood Economist 2.0

Ever wanted to know the economics of the movie business? Then The Hollywood Economist is for you.

I really enjoyed the book, as Epstein goes into a lot of financial detail about various aspects of the movie business. He covers studios, theaters, actors, pay TV, and new over-the-top operators like Netflix.

I learned a heck of a lot about things I was already wondering, as well as things I hadn't thought to wonder about. For example, I now understand why nudity is so rare in American movies.

Another great book that covers this topic is The Curse of the Mogul. Curse doesn't go as deep into the movie business as does Hollywood Economist, but it covers more media topics like books and websites.

Consistent with what an investor might expect, the excess profits in the industry tend to go to the actors. These are the "brands" that consumers are willing to flock to. The Big 6 studios appear to compete away any excess profits (by paying big money to actors) with the exception of the franchises they own/develop, which can be very lucrative since they can draw customers regardless of the actors. (This last point makes clear why a distribution company like Netflix may have become a content creator, whereas conventional wisdom may suggest a focus solely on its distribution strength, but moats may be easier to build in franchise creation rather than distribution.) The theater owners are basically snack food retailers, who draw in customers by paying more for loud, bright entertainment than they take in as ticket receipts.

There also appears to be a lot of what I would call anti-trust behaviour in the industry. For example, studios will receive payments from hardware manufacturers to only allow distribution on certain types of devices (e.g. Blu-Ray vs HD, Beta vs VHS). They also slyly co-ordinate dates so that big blockbusters don't go head to head, without actually having to talk face to face.

The most angering part of the book is the studio tax scheming that legislators fall sucker to. Studios will do things like sell the movies (with an option to buy back of course) to citizens of countries where there are big tax breaks (Germany and Canada being examples), and then buying them back at a discount as the previous owners pocket the tax break. In some ridiculous cases, no filming need be done in the country offering the tax break, and so the added profit accrues at the taxpayer expense by mere paper shuffling. One day governments may treat all industries equally (excise taxes on externalities like carbon/pollution aside), resulting in a more productive labour force, but it seems unlikely to be in my lifetime.

I highly recommend The Hollywood Economist to anyone interested in these topics.

1 comment:

@safiskusai said...

I have run a movie theater both operationally and financially for many years and it really is a fascinating one. There are things that happen in it that i've never heard of in any other industry. The distributor side of things is probably the most interesting especially with how they charge rental for their movies to the theaters. Most studios charge based on a sliding scale the shifts based on how well their movie does, they give an estimate up front that they expect you to pay and then revise that upwards and downwards later on... you really never know how much you are paying for the product.

Movie picking is quite interesting too, the studios try to strongarm you into taking their movies over others and holding them for much longer than is profitable for the theater, often times if they feel you have snubbed them they will block you from taking future movies.

Coordination of blockbusters isnt really as shady as you would think, prospective dates for movies are planned sometimes over a year in advance and they are timed so as to make the most of their money respective of the studios slate as well as how crowded the slate of other studios movies are respective to the target audience of the movie. Having 2 rated R comedies at the same time makes no financial sense, movies would never make money, however the consumers will still generally crave both as long as they are decent.

The studios have changed a great deal in recent years from a financial standpoint. Disney and Universal I really see as the only two that matter. Their planning and long term strategies have paid off greatly, however they also have different models than the other studios as their movie business helps spawn more business for their other business lines like theme parks, merchandise, cable network content, etc. Paramount and Sony have been incredibly turbulent in recent years due to lack of direction, hacks, and corporate tumult. I personally wouldnt be surprised if they didnt exist in their current states in 5 years, most likely would merge with someone else. Fox and Warner sort of trudge along and change their strategies every year trying to keep up with Disney and Universal. Warner has struggled coming off several large franchises like Harry Potter, LotR, & the Hobbit and had adopted a scorched earth policy releasing as many movies as it could and has recently tried to mimic Disney's Marvel with its DC comics division which has been a struggle. FOX has been deeply reliant on properties it doesnt actually own like the Marvel properties it had licenses for like Xmen, Deadpool, and Fantastic 4 as well as Dreamworks Animation movie that it distributed for them which will soon go to Universal due to their purchase.

I foresee a lot of consolidation in the next few years. Hopefully this helps the studios fix some of their strategy, as the exhibitors are at the complete whim of the studios actually creating content people want to see. Hopefully this wasnt too long winded. I might check out the book though, it sounds interesting, the topic sure is.