An Analysis of the Film Industry in United States

When it comes to the U.S. motion picture industry, legendary screenwriter William Goldman put it best when he said “Nobody knows anything.” For the most part, this statement is true, and it’s this fact that makes the economics of filmmaking such a risky business. The economics of filmmaking just do not work and what you see could best be described as the “dysfunctional economics” of filmmaking, but through various articles, case studies, and videos such as De Vany &Walls, Arundel Partners, and The Trillion Dollar Bet–it’s easy to see how and why people continue to wrestle with the economics behind this industry.

As De Vany & Walls theorize, “Nobody knows what makes a hit or when it will happen.” This means that the only time you’ll know whether or not a movie is going to be a success is after it has been released! As De Vany & Walls also point out, “Film audiences make hits or flops and they do it, not by revealing preferences they already have, but by discovering what they like.

” This is when an information cascade begins to form–which will either boost a film or sink it. So the question remains, how can you attempt to economically quantify, measure, or model a film in such an unpredictable industry?

One of the best analogies for the economics of filmmaking comes from the documentary, The Trillion Dollar Bet in which three brilliant economists, Fischer Black, Myron Scholes, and Robert Merton discover a mathematical breakthrough that revolutionized modern finance.

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Their model worked in theory as well as in the real world. But it was only a matter of time before their theories collided with the reality of unforeseen events–events that their model could not handle. The same rings true for the economics of filmmaking. There is no silver bullet or ultimate model, which can gauge human emotions, interests, or tastes. There is no crystal ball that could have told studio executives, theater owners, or licensees that My Big Fat Greek Wedding or There’s Something About Mary would have been such astronomical successes. These are just some of the issues that make the economics of filmmaking so hard to predict and control.

The average cost to produce and promote a Hollywood film in 2004 rose above $100 million for the first time ever. It is obvious that films today are becoming too expensive. In some cases it’s the cost of A-List actors and special effects that have inflated film budgets. In other cases it’s the cost of shooting in various locations as well as wrapping films way past their original deadlines. For the most part, it appears that studio executives are willing to cut big checks for so-called “bankable” stars, but as you will see later on in this paper, De Vany & Walls don’t feel the same way about “star power” as do most studio executives.

The well-known Walt Disney Company case study as well as interviews with Michael Eisner video offer two very intelligent avenues of thought with regard to how you can manage some aspects of the of economics of filmmaking. Unlike Rupert Murdoch, Michael Eisner will never “bet the farm” when it comes to business decisions, such as greenlighting a movie. So it’s no surprise that when Eisner came to Disney in the early 1980s, he also brought with him the philosophy that lower-budget films are the way to go. This strategy worked, and produced some successful films including Down and Out in Beverly Hills, Ruthless People, and Three Men and a Baby–the first Disney film to ever break the $100 million dollar box office mark. His philosophy continues to this day with low-cost films such as Freaky Friday and Bringing Down the House. Of course Disney and Eisner still greenlights bigbudget films, but the knife cuts both ways on these films. Just look at Pirates of the Caribbean (a hit) and The Alamo (a flop).

Eisner believes in pushing creativity across the company. He feels that he’s able to do this thanks to a seasoned management team that understands Disney and understands the creative process. What Eisner ultimately does is place the film and its creative components in a “financial box.” By doing this he makes sure that the initiative is conducted within a financial box that sets reasonable fiscal parameters for its development in order to optimize profitability and returns. If the box starts to fall apart, Eisner comes in and nails it back together, before problems arise. These two ideas, which Eisner has religiously followed throughout his career, are some of the ways in which the risks associated with the economics of filmmaking can be hedged.

The fact is that you don’t need a big star that can “open” screens with a global box office appeal.” While it is true that the casting of a major movie-star might initially create some buzz, it is not a necessary ingredient for success in the movie industry. The biggest thing that a star can usually bring to an opening weekend is ‘screens’. They allow the studio to get their product in as many movie theaters as possible, what happens after the picture released depends on the quality of the product and public interest as stated in the theories of DeVany and Walls. One of the example is was when

Tom Hanks decided to write (the music as well), produce, and star in That Thing You Do. Hanks decided to take on this venture after a series of hits, Sleepless in Seattle, Forrest Gump, Apollo 13, and Toy Story. It would seem that with the string of successes mentioned above that his next venture would be an astounding success, it was not. In fact a movie headlined by Ralph Fiennes (not exactly the biggest of stars… Maid in Manhattan) called The English Patient won the Academy Award for Best Picture in 1996. It was Hanks wife, Rita Wilson that really took it to heart that it is not necessary for a big star to be in a movie for it to be successful. After taking notice of an ad in the newspaper of a play (that was only going to performed that one night), she decided to attend the performance. Needless to say, she managed to make that small unknown play into the popular phenomenon, My Big Fat Greed Wedding.