« Greg Mankiw hot off the presses | Main | *American Homicide* ($40, even though the release date is listed as 10/15) »
the unusual economics of the film industry
Per Alex's kind introduction yesterday, I'm his brother Nicholas and I'm guest blogging for the week.
I'm not an economist but if I have learned anything from my brother (and i have learned lots) it's that economics affects us all. And i don't mean that in the obvious way that the economy affects us all. I mean that the academic and esoteric economic theories that are studied in graduate university courses have a very real world and every day practical application.
One interesting thing that I've always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer. For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less. You spend less to make something, you charge less for it. Makes complete and obvious sense. Not so in the film business. I am an independent film producer and I make films that typically cost somewhere between $5M and $10M. But when I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film. It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film. There is no price advantage to the consumer for choosing to see a less expensive film. This naturally makes it terribly difficult for smaller films to find an audience. I find this quite fascinating and I can't readily think of another industry like it.
A few years ago Edgar Bronfman Jr, during the time his family briefly owned the Universal film studio, suggested that theaters actually charge different admission prices for different pictures so those films that cost less to make had correspondingly lower ticket prices than the mega-budget studio pictures. He was roundly ridiculed by the industry. But truth be told I actually think the less-the-warm reception his proposal received had more to do with the fact he was an 'outsider' who had bought his way into Hollywood than on the actual merit of the idea itself. Sound like good economic practice to me.
Posted by Nicholas Tabarrok on October 7, 2009 at 07:44 PM | Permalink
Comments
That's an interesting point. I've tried to think of any industries to compare it to, the most obvious being the music industry. But while the price of a CD or digital download has been essentially standardized, there is great disparity in the price of a live performance.
On the other hand, what would the effect be of introducing different price levels at your average mega-plex? Moviegoers tastes are very subjective. No doubt many enjoy big-budget films with big-name stars attached. However, there are also many who loathe such films, and the majority, of course, who just like a good film regardless of the budget. What would different-tiered pricing signal to the average moviegoer? It could inadvertently pass along the message that it somehow isn't as high a quality as the $12 movie. While the cost to see a movie has certainly increased it is still a relative bargain for roughly 2 hours of entertainment. In fact, for many people the true cost is the time it takes to see the movie, rather than the price itself. The lower price would signal that the movie is in less demand, and less worth a moviegoers time, and they may pass just on price alone.
Posted by: jmumich at Oct 7, 2009 8:05:28 PM
It is quite odd how often I seem to go to a theater that is practically empty. There are small discounts for earlier shows, but why not have radically different prices over the life of a movie. First couple weekends of a blockbuster would be pricey and then have the price fall off over time. Less popular movies would be a justifiable value, rather than a waste of time.
Posted by: Charlie at Oct 7, 2009 8:07:09 PM
I have always figured that this fact would serve as a relative disadvantage for the more expensive film - the end product is roughly the same (90 - 120 minutes long) but the $100M film needs to do "something" that attracts 20 times as many viewers than the $5M film.
So what is the "something" that very, very expensive films do differently? Is it money mostly spent on hiring a well-established cast? Are people really drawn to movies by very expensive special effects? For my part, I can't usually tell the difference between a $5M and $100M film, except that the former is likely to be more story-driven.
Posted by: Geoff NoNick at Oct 7, 2009 8:22:53 PM
Film making is indeed unusual in that price-per-view (and hence revenue) is generally inflexible. Larger budget films can increase revenues in ways smaller films can not. For example, large studios (who generally produce the expensive films) can more easily arrange for distribution to more screens.
Personally, I think the inflexible pricing of movies in movie theaters is cutting deeply into the industry's revenues. A creative movie theater owner might offer to auction seats in an under-filled theater. This is an unorthodox representation of a classic economic scenario: capital is fixed at a level higher than current demand requires and variable cost is very low - firms need to lower prices to maximize profit. Auctions or price discrimination are two bread-and-butter ways to get there.
I think my company (link in my name) has an industry report on film making in the US, if you're interested.
Posted by: C.Thorm at Oct 7, 2009 8:25:04 PM
This is an interesting perspective. I never really thought about it, but it does sound like staunch industry tradition is stifling free-market pricing here in a sense. Bronfman's suggestion would be a breakthrough, but even better: let the market set the price. A low-budget but highly reviewed and widely anticipated comedy like The Hangover shouldn't charge less for tix just because it cost less to make--it should charge its profit-maximizing equilibrium price. Now that I'm really thinking about it, it seems utterly outrageous that movie tickets all cost the same!
Posted by: David at Oct 7, 2009 8:29:29 PM
On the other hand, if I pay top dollar for a sports car, I'm likely to get more enjoyment out of it than I would by paying a few grand for a used sedan. There is at least some relationship between the production cost of the product and how much utility I gain from it.
I find that's not so, however, with films. Indeed, the reverse is often true. I got negative utility, for example, from Michael Bay's first "Transformers" movie, which cost the GDP of a small South American country to produce.
But I've gotten a great deal of utility from Vincent Price's Poe films, which Roger Corman made for about the price of a Yugo.
(Of course, I suspect taste varies far more with movies than it does with automobiles, which is why the movie industry is, on top of everything else, so unpredictable. See Arthur De Vany's book "Hollywood Economics: How Extreme Uncertainty Shapes the Film Industry" for a "black swan" take on the economics of filmmaking.)
And when we look at the most profitable movies ever, few of them were actually expensive to make. (Hint: "The Blair Witch Project" is still No. 1 by a wide margin.):
1. The Blair Witch Project (1999)
2. Rocky (1976)
3. American Graffiti (1973)
4. Snow White and the Seven Dwarfs (1937)
5. The Rocky Horror Picture Show (1975)
6. Gone With The WInd (1939)
7. Saw (2004)
8. E.T. The Extra-Terrestrial (1982)
9. My Big Fat Greek Wedding (2002)
10. The Full Monty (1997)
Still, if George Lucas had kept making movies like "American Graffiti," maybe each would have turned a bigger profit than the "Star Wars" films did. But I doubt he would have ever made enough money to build his own ranch.
Posted by: Franklin Harris at Oct 7, 2009 8:33:50 PM
I work in the games industry which has similar economics, at least in the area of big budget (what are called 'AAA' games in the industry) PC and console titles. Most console games that see a boxed retail release sell at the same price point but budgets can vary widely (though perhaps not as widely as in film). This gives the games industry similar dynamics to the film industry: it's a hit-driven business where big budget titles have to target a broad demographic and so risk being 'lowest common denominator' entertainment.
There are other segments of the games industry that are growing in importance where the economics are different - casual games, low budget downloadable 'indie' games, iPhone games, etc. There seems to be a little of this going on in the movie industry (independent movies made for a low budget and released on the web for example) but the distribution model doesn't seem to be as developed as for games.
Posted by: Matt at Oct 7, 2009 8:35:18 PM
You would also think that the expensive films manage to pile on the best of everything, from the best actors and sfx to the best writers and directors. However, this appears not to be the case; they're fun but not intelligent. As an indie film guy you should be pleased that the market niche for intelligent films exists, despite the incentives of economies of scale.
Posted by: athelas at Oct 7, 2009 8:38:14 PM
I'm going to start with questions rather than comments:
1 - do the theaters have the ability/rights to charge different prices for different films or do their agreements with studios demand that all films be priced the same?
2 - do the theaters pay the studios for the rights to show the movies?
2a - if "yes", is the cost for the rights different for different movies?
Comments/Thoughts:
Assuming "yes" to all three questions above, then I think it makes a LOT of sense to charge different prices for different films with the objective to maximize % of seat fill for every showing on every screen in the house. I'm not sure that the answers are all yes though.
Imagine charging $20/ticket on opening weekend of Transformers 2 as well as $5 for a lesser publicized film in its 3rd week.
What about the idea of charging different prices for different film times. $2 Tuesday was a hit at a local theater when I was a kid. We all know that matinees are cheaper. What about if you extend this & say that the 7:30 showing is $20, the 5pm is $12, the 10pm is $15, the 12:30am is $10.
It does seem that theaters could maximize their profits & films could maximize "Box Office Sales" figures with some creative pricing.
Posted by: Andy at Oct 7, 2009 8:39:50 PM
athelas wrote: "You would also think that the expensive films manage to pile on the best of everything, from the best actors and sfx to the best writers and directors. However, this appears not to be the case; they're fun but not intelligent."
That's an outcome of the strange economics. Since you can't charge more for a higher budget film you have to target a broader audience which means lowest common denominator tastes. If you had variable pricing there might well be a market for big budget intelligent films that could target a niche audience who would pay higher prices for a product that catered to their tastes. I imagine there could be a profitable niche in high production value intelligent sci-fi among high-disposable-income high tech workers for example.
Posted by: Matt at Oct 7, 2009 8:47:34 PM
Perhaps I should note one experiment in variable pricing that's come up recently. Lionsgate released Clive Barker's "Midnight Meat Train" exclusively to discount theaters, which normally do not screen first-run features. But this was a clunky substitute to true variable pricing because it limited the number of theaters that could show the film.
Posted by: Franklin Harris at Oct 7, 2009 8:52:18 PM
"the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer."
The price of an airline ticket varies over time, but the cost of transporting a person is the same whether they bought the ticket 6 months or a day in advance.
In the software and internet industry, there are many examples where the cost of production is not correlated to the price, or it may even be inversely correlated with the price (the expensive product costs less).
For example, a product that displays stock quotes may have an expensive version that displays real-time quotes, and a cheap version that displays delayed quotes. A natural way to engineer such a product would be to build the real-time system, then add a component (at extra cost) for delaying quotes for the cheaper product. The delayed quotes cost more to produce, but are cheaper for the consumer. (This example is from Information Rules.)
In the Google AdWords auction system, Google's cost of displaying ads for a given search term is fixed, but the price that advertisers pay varies with demand.
Apple gives away the iTunes and Safari products for free, but charges for other products. Certainly these products aren't free to manufacture, but Apple makes a calculus about long-term profitability and consumers' willingness to pay.
Prices have everything to do with supply and demand, and nothing to do with the cost of manufacturing.
Posted by: Aaron at Oct 7, 2009 9:39:30 PM
"Prices have everything to do with supply and demand, and nothing to do with the cost of manufacturing."
Isn't the cost a component of supply and demand? I'm not going to build a $400 widget if the demand is only willing to pay $300. Instead I'll make a $250 widget and sell it for $300.
Posted by: Some Guy at Oct 7, 2009 9:55:42 PM
In the same way the flexible pricing in the airline industry led to the rise of competition and low-cost carriers, flexible pricing in film would probably give a strong boost to independent film studios. That gives a guess as to why the film industry was so dismissive about the idea of allowing theaters to engage in flexible pricing.
Posted by: Ricardo at Oct 7, 2009 9:58:11 PM
Does it matter that it costs a movie theater the same to show an $80 million picture as it does a $5 million dollar picture? Also, do moviegoers really think that much about production costs?
Posted by: Billy at Oct 7, 2009 9:58:32 PM
@Matt this sort of odd pricing is relevant to the entire software industry, not just the games sector.
How do you reach equilibrium when there's infinite supply?
Posted by: Bill Mill at Oct 7, 2009 10:04:55 PM
It's also a unique industry in that there is no assumption that you are actually going to like the product. You don't know what you are going to get and that's part of the experience. Let's say half the people will be disappointed. The other half do the marketing and advertising for the theater.
People aren't going to go see a cheap movie because it is cheap (except college students). If they are going to see it despite being cheap, why not raise the price? So, the theater wants everyone to make a $12 movie, and the studio tries to create Star Wars and Cars.
But, you can't raise it to the point people won't see it because they are your marketing army. So, maybe the price should go up a buck for each week it's in the theater.
Posted by: Andrew at Oct 7, 2009 10:14:51 PM
The film industry is relatively unique in that the prices of its labor inputs are not highly correlated with the quality of those inputs... at least if Tom Cruise is representative of the 'talent' side.
Posted by: jdd6y at Oct 7, 2009 10:16:10 PM
Read Arthur De Vany's excellent *Hollywood Economics*. It lays out everything a layperson, academic, or insider would want to know about these things.
The unique thing about movies is that no two are alike -- whereas each "copy" of a certain make and model car are basically the same. (And most cars produced are highly similar, at least at the level of sedan, truck, SUV, etc.)
Thus, unlike cars where consumers know that they can be certain that they'll get more or less of some bundle of features -- air conditioning, power locks, etc. -- and trade these off against price according to their tastes, they are totally uncertain about whether or not a given movie has more or less of what they like. Because each movie is unique, they cannot know whether or not it's their cup of tea until they actually pay to see it.
So, they cannot say, "Well, compared to other movies, this movie costs less to see, so it's probably lower-budget, and so probably lower quality on average, but I'm willing to pay less for less."
They can only say, "I have no idea whether I'll like any of these movies, let alone which I'll like more than others. Since I can't tell which is lower-quality ahead of time, I won't pay any more or less for any movie compared to the others."
So we get uniform prices.
A separate question is why prices don't change over time -- once the theater can tell whether a movie is a blockbuster or a dud, i.e. which are in high vs. low demand. It could be a reputational thing, since customers will decry price "gouging." Unlike the case of the price of food or shelter after a natural disaster, though, there won't be shortages of a blockbuster -- there usually aren't *that* many people who want to see it at a given time.
Plus with multiplexes you can expand or contract the supply very easily to meet changing demand (e.g., close down four duds and now have four extra screens for the blockbuster). This obviates the need to raise prices to deal with a shortage.
Posted by: agnostic at Oct 7, 2009 11:06:43 PM
This seems to be an issue in many areas of entertainment. As mentioned above, CDs are an obvious comparison. Books are similar as well - the price range on new hardcover fiction is very small, and moves without much change in magnitude when the paperbacks are released. The model seems to be that quality will be rewarded with volume sales, but how much sense does this really make?
Posted by: law student at Oct 7, 2009 11:12:10 PM
"less features"?
I am sure you meant to write "fewer features".
Posted by: Dave Barnes at Oct 7, 2009 11:19:59 PM
A multiplex that's showing movies for significantly different ticket prices will have to pay for additional staff members to keep people from sneaking into the expensive shows after buying tickets for cheaper ones.
Posted by: Peter at Oct 7, 2009 11:20:54 PM
Why is everyone confused why cheap-to-make films should have the same ticket price as the expensive-to-make films?
Does the lease on the building or the property taxes get any cheaper if you show a cheaper movie?
Does the staff get paid less money if you show a cheaper movie? Do cheaper movies require less staff?
Do you need to sweep the theater less or clean the bathrooms less for a cheaper movie?
Is the projectionist's wages, or the electricity and maintainance on the projector any cheaper for a cheaper movie?
Is liability insurance any less for the cheaper movie?
Is the capital investment on projectors and sound equipment and such less because you show cheap movies on the equipment?
And what about the opportunity cost? Every cheap seat they sell is one less expensive seat they can't sell. Unless there is some huge overcapacity
Basically, when you go to a movie theater, you are not paying for a movie - You are paying for the seat, service, and amenities that the movie theater provides. It is a service, not a product, and the cost of the service doesn't really change even if they where projecting TV static on the screen for two hours.
Posted by: Vehical Driver at Oct 7, 2009 11:40:15 PM
Though certainly not as extensive as the aforementioned *Hollywood Economics* in terms of movie industry coverage, there's a chapter on *Why Popcorn Costs So Much At The Movies* which is a 2008 pop-econ book on pricing I am currently reading, entitled "Why Movie Ticket Prices Are All The Same".
The gist of the chapter is: each movie is different. Contrary to what some might think, the success of each movie is not really predictable and remains unknown until the public openings. It is not very highly correlated with marketing budget, or total movie budget, or star power of actors/directors/screenwriters, or the movie being a sequel/prequel. Thus, it makes less sense to price movies according to its production cost.
I guess this extends to all creative content. No top authors/singers/band produce hits all the time, there are so many big-budget flops and surprise hits from unknowns. I guess that's the way we like it? For if things are much more predictable then it would be much more boring.
Btw, historically there used to be some price variations of movie tickets. For example, in the 1940s different movie grades A, B, C are assigned significantly different prices. But the rise of television with its influx of lower level B- and C-grade movies forced movie industries to focus on producing A-grade movies.
Posted by: David Garamond at Oct 7, 2009 11:53:53 PM
This is an interesting question. "Vehicle Driver" makes good points, but this weird pricing still holds in DVD rental/purchase.
I've always thought in music it would make more sense to let the content generator (i.e. the artist) set the price. The marketplace would be sort of like ebay, skimming off the top. Same for online distribution of movies.
Posted by: mk at Oct 8, 2009 12:01:34 AM
