The Economics of Filmmaking

Popular culture works in devious ways. On the one hand, pop culture brings good fortune to some artists, actors, directors and sportsmen. On the other hand, the vast majority, lured by the desire for fame and the fortune of the high life, often end up never reaching the dream. . The film industry provides a very particular example of a market with both very high rates of risk and reward. Rarely do we ponder on the economic principles of cinema while munching popcorn at the Odeon but like other markets, the movie industry too is guided by these.

Lumiere to Tarantino

Like other major Western innovations such as the automobile, chemicals and the airplane, cinema emerged at the dawn of the 20th century and was the first form of industrialized mass-entertainment. From the 1910s onwards, each year billions of tickets were sold. The average film length increased considerably, from eighty feet in 1897 to seven hundred feet in 1910 to three thousand feet in 1920. One reel of film held about 1,500 feet and had a playing time of about fifteen minutes. In the depression-struck United States, film was the tenth most profitable industry within the economy, and from the 1900s to the 1930s France it was the fastest-growing industry operating at 6% per year on year growth, followed by paper and electricity. While in pre-war Britain the number of sold cinema-tickets was almost 20 million every week.

The Wolf of Hollywood

The profits from a successful movie can be very huge. Yet the losses from a $250 million film can be large as well. Every production involves a huge burden, of what economists call “sunk costs”. On average, some 65–75 percent of movies made will lose money for their investors. Approximately 15–20 percent will break even; only 5–10 percent will be profitable.

Furthermore, making movies is not only a costly business but a time-consuming one. The process of developing a movie property— beginning with the basics of story and characters, through scriptwriting, pre-production and pre-visualization, budgeting, shooting, post-production and visual effects, and on to distribution—can take 36 months or more.

These two properties are easily reconciled with the axiom of finance. The riskier something is, the more you expect to get from it. However, investing in film production is not as straightforward as investing in stocks and bonds markets. Firstly, it is not “sterile” – movies are a product. Secondly, there is an awful lot of politics going on. For example. there’s the famous case of Fahrenheit 9/11 (2004), the Michael Moore blockbuster which the Walt Disney Company tried to undo despite it “testing through the roof” with the sample audiences. Moore’s agent Ari Emanuel alleged that Disney’s boss Michael Eisner had told him he wanted to back out of the deal due to concerns about political fallout from conservative politicians, especially regarding tax breaks given to Disney properties in Florida like Walt Disney World (where the governor was the then US President’s brother, Jeb Bush). Disney also had ties to the Saudi Royal family, which was unfavourably represented in the film: a powerful member of the family, Al-Walid bin Talal, owns a major stake in Eurodisney and had been instrumental in bailing out the financially troubled amusement park. Disney denied any such high political ball game, explaining they were worried about being “dragged into a highly charged partisan political battle,” which it said would alienate customers.

The economics of the film industry are changing. Ticket sales are down (1.28 billion, in 2011, in America - the smallest number since 1995) even though Hollywood is making more ostentatious films for new, fast-growing markets. The share of Americans who attend a cinema at least once a month declined from 30% in 2000 to 10% in 2011. Meanwhile, television, once the unglamorous sister, is enjoying record earnings and unprecedented critical acclaim. As a result the market strategy has changed for the cinema industry– film series like the Avengers or the Hobbit, now resemble more inflated versions of TV series. Due to the advent of more sophisticated technology it would seem logical to make films which are cheaper to produce. In reality according to Michael Lynton the boss of Sony Pictures, the opposite has occurred. A move from analogue to digital film enabled fastidious directors to shoot more takes and touch them up afterward, using up expensive production and editing time. Studios have also started to make more “tent pole” films, which are big releases that can support the bottom line like a pole holds up a tent. These typically rely on expensive special effects, rather than compelling scripts, to attract a global audience. They often cost $200m to make and another $50m-100m to market.

Gravity of Cinema

Meanwhile, the film industry is an important source of jobs for people with a variety of skillsets from highly qualified workers to those with equally crucial vocational skills. Some 70% of the production workforce are graduates and, at £32,500, the average salary per annum is significantly above the national average. As moviemakers are highly mobile, they share a talent for seeking out cheap locales, accompanied with cheap labour, consequently turning them into profitable production studios. This has been done in order to satisfy what economists’ dub “the efficient allocation of resources”. As true with Los Angeles in 20th century, as is now with “Game of Thrones” sceneries.

There are also economies of synergy. Film provides a safe haven for many different artists that would not have otherwise found steady income. As such, it can be seen as a merit good, perhaps that is why many countries heavily subsidise their filmmaking industries. One way which governments see the film industry as a merit good is the way in which they purport the ideological messages that the ruling government authority espouse. Notoriously, the infamous Joseph Goebbels of Nazi Germany, along with the Soviet Union are two historical examples of state governments using cinema to celebrate their totalitarian ideologies.

The Gold Rush

With all its glory, what does cinema really stand for? In my view, the cinema industry provides an excellent example of how an accumulation of wealth in a few hands distorts the economic reality and does not create additional value. With huge money available for some filmmakers and little pressure to make original movies, there is incentive for repetition and mass production. With the availability of Video On Demand and illegal downloads, people will only pay for films which “look good on a big screen”, such as the newest Bond or Transformers. Thus art-house movies are neglected and languish in the lack of funds. This leads to fall of average quality of movies. Although some will argue that this is what the consumer wants and we should not interfere, one has to ask a question: “What will remain?”. In 5 years time, will anyone even remember the Hobbit Trilogy? If not, then why even bother with such movies?

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