• There are two basic types of deals:
gross and net participation.
• In the former, participants are
entitled to a share of the total
revenues- or “rentals”“ t l ” received
i d by
b
the studio in specified markets at
various points in the film’s
earnings.
Appendix V:
Star
Compensation
714
• In its richest (and rarest)
form, called “dollar one,”
participants are entitled to a
share of all the revenue
received by the studio’s
distribution arm
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
715
715
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• In Saving Private Ryan, Tom
Hanks and Steven Spielberg
each had 16.75% of the
revenues from the first dollar
received (dollar one). This
formula resulted in $30
million for each just from the
theatrical distribution
http://newsgrist.typepad.com/photos/uncategorized/ryan.jpg
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
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716
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
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1
• In most cases, gross participants
are entitled to a share of the film’s
revenues only after the film earns a
specified amount or other
requisites are met.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
718
718
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• So when Hanks and
Spielberg got $30 million
each for Saving Private
Ryan, the film’s budget,
which had been $78 million,
million
became $138 million.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
720
720
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• All gross participant payments are
considered a deferred “production
cost” and are retroactively tacked
onto the budget of the film.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
719
719
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• By treating the stars’ share of the
gross rentals as a production
expense instead of as a distribution
of the earnings, studios further
push back the “breakeven”
breakeven point at
which less favored participants can
begin to collect.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
721
721
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
2
• The contribution that stars
make to a film’s earnings is
more difficult to predict.
• Leonardo DiCaprio appeared in
g year:
y
three films in a single
Titanic, The Man in the Iron
Mask, and Celebrity.
http://www.omnileonardo.com/pic
s/t/html/tit201.jpg
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
722
722
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Titanic : $900 million in
worldwide theatrical rentals,
• The Man in the Iron Mask: $80
million
• Celebrity: $3
$ million.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
724
724
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
723
723
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• DiCaprio could not, on its own, guarantee
a large opening audience, even for two
films that followed closely in the wake of
Titanic.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
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725
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
3
Julia Roberts (1997)
• My Best Friend’s
Wedding, earned
$127.5 million in
theatrical rentals
• Everyone
E
Says
S
I
Love You, earned
only $12 million
Terminator 3
• Arnold
Schwarzenegger
received a fixed fee of
$29.25 million for
Terminator 3 , $1.25
$1 25
million of perks, and
20% of all the gross
revenues produced by
the film worldwide
after it reached its cash
breakeven point.
http://i.timeinc.net/ew/dynamic/imgs/031209/145249__
bestfriendswedding_l.jpg
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
726
726
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• The average earnings per film
for the top ten stars of 2003
was roughly 30x what the
equivalent stars had earned in
1948 under the old studio
system (corrected for
inflation).
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
728
728
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
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727
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Stars also began creating their
own personal production
companies
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
729
729
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
4
• Tom Cruise’s production company,
Cruise-Wagner Productions has coproduced several of his own moviessuch as Vanilla Sky, Mission
Impossible, and The Last Samuraiand some of the movies made by his
ex- wife, Nicole Kidman
• Even when not acting as coproducers, stars often have
the contractual power to
choose, or block, many of the
people who will work on a
production
http://news.bbc.co.uk/olmedia/675000/images/_677043_tom_150.jpg
730
730
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in Hollywood,” New York: E.J.E.
Publications, Ltd., Inc., 2005
• In Terminator 3, for example,
Schwarzenegger had the right to
“preapprove” the director and the principal
cast, his hairdresser, his makeup man, driver,
his stand-in, his stunt double, the unit
publicist, his personal physician, and his
cook
732
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power732
in
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
731
731
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Most of these top stars also
have had only limited formal
education, having dropped
g and even high
g
out of college
school to pursue their
careers.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
733
733
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
5
• Films that use outside
financing must obtain
essential-element
element” insurance
“essential
on stars.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
734
734
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• If productions are unable to get
such star insurance, they
cannot get the completion
bonds that banks and outside
financiers require.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
736
736
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• While insurers cannot guard
against all contingencies,
they attempt to minimize
their risk by refusing to
insure actors who have a
history of temperamental
behavior, depression, risk
taking, or other problems.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
735
735
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Hollywood writers’ book about
Hollywood- such as Budd Schulberg’s
What Makes Sammy Run, F. Scott
Fitzgerald’s The Last Tycoon,
Nathanael West’s The Day of the
L
Locust,
Willi Faulkner’s
William
F lk ’ “Golden
“G ld
Land”- often expressed contempt, if not
outright loathing, for the values of the
studios.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
737
737
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
6
• The same contempt also pervaded movies
about Hollywood: The Big Knife, The
Bad and the Beautiful, Barton Fink, The
Players, and State and Main, the studio is
constantly portrayed as run by philistines
maximizing their earnings on the back of
the writer’s integrity.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
738
738
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Instead of being tethered to studios
by seven-year contracts, stars are
now auctioned off- with the help
of savvy agents- to the highest
bidder for each film.
739
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power739
in
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Since there are fewer super-stars
than film projects, they can
command eight-digit fees.
• In this new era, stars, not studios,
reap the profit their brand names
bring to a film.
740
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power740
in
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
741
7
Brand Name Stars
Stars
• Actors, directors
• Characters(“James Bond”)
• Creating stars requires major
marketing investments.
www.swschwedt.de/kunden/
bondnet/pictures/DrNo.jpg
742
The Star System
• Well established in
music and theatre
since at least the
18th century.
century
• The world’s first
movie star was
Mary Pickford,
mid-1910s.
• Instead of attempting to brand the
actors in the ppublic mind,, the
studios of the early 1900s
branded their products with their
own names.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
743
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
Florence Lawrence
http://www.geocities.com/Hollywood/Hills/2440/index-e.html
744
• The first celebrated
movie actress,
Florence
Lawrence was
Lawrence,
referred to in press
releases as “the
Biograph Girl”
while she worked
for Biograph
Pictures
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in Hollywood,” New York:
E.J.E.
745
Publications, Ltd., Inc., 2005
8
• Brand-name actors were
effectively the property of the
studios, just as Mickey Mouse
and Pluto.
• In old Hollywood “studio” system,
popular actor had long-term
employment contracts.
• Demise of the studio system after
19 0 made
1950
d stars essentially
i ll free
f
agents whose salary reflects their
market value.
Epstein, Edward Jay, “The Big Picture, The New Logic of Money and Power in
746
Hollywood,” New York: E.J.E. Publications, Ltd., Inc., 2005
• Stars compensation
based on bargaining
strength.
–John Travolta,
when washed up
got $140,000 for
“Pulp
l Fiction”
–then jacked up his
price to $10
million per film
–2007: [ ]
747
http://www.kinoweb.de/film2001/FastAndTheFurious/pix/ffb.jpg
Rewards for Actors
http://www.rponline.de/layout/fotos/303x380/TRAVOLTA_
GEBURTSTAG_FRA505402cb47296d0.jpg
748
• Vin Diesel earned $700,000
for The Fast and the Furious,
g hit and
which was a huge
made $143million at the
box office
• For his next movie, he
commanded $10 million
http://cinecover.free.fr/other/the_fast
_&_furious_front2.jpg
Grover, Ronald. “The Fast and Furious Spenders,” Business Week Online.5 October
2001.
749
9
• In addition, “Profit participations”
began with a 1950 agreement
between Jimmy Stewart and
Universal
•Stewart shared the
film’s risk and profit
www.dfwbands.com/ bands/jimmy_stewart.html
750
Do Financial Rewards Matter
at the top?
• Stars cannot afford to fail.
• Gross participation contacts are
only
l weakk incentive
i
ti schemes
h
to
t
performance
• But they are an incentive to
participate in the marketing of a
firm.
751
Are “stars” worth the money?
But are “stars”
worth the
money?
Two competing hypotheses:
1. Stars capture most of their
value added.
added
2. Stars are a “signaling device,” by
which the producer signals the
quality of the project to the studio, to
outside financiers, and to reviewers.
752
753
http://www.aarrgghh.com/media/cash.jpg
10
• Star studded films bring in more
revenues
• Statistical studies show that stars or
big budgets are associated with
higher revenues but not with higher
profits
–Low budget films have higher
754
RoI.
• A star’s presence by
definition increases the
expected revenue of a film,
but it will not reduce the
riskiness of ggross pprofits
(unless the star takes
substantial contingent
compensation.)
•
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
756
Cambridge: Harvard University Press, 2000
• Regression analysis of 200 films
seem to show stars play no role
in the financial success of a film.
755
• Star may be hired because the
industry faces uncertainty and
executives wish to be
“covered” in case a project
fails.
• Executives may care about
revenues and high visibility
instead of profits, and big
budgets predict revenues.
757
11
Leading Reason for overpayment of Stars
• Star projects have better
chance to gget funded
758
• Do media
companies have an
incentive to make
the investment in
performer’s
f
’ career??
• Yes if long-term
contract
•
• If selecting a given record is
proportional to the fraction of
previous consumers who picked it(a
bandwagon effect), then the
statistically predicted distribution
off sales
l levels
l l for
f “hit” records
d
closely matches the distribution of
Record Industry Association of
America Gold Records over three
decades.
759
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
Cambridge: Harvard University Press, 2000
The Old Hollywood Studio
System
http://tommymagazin.de/img/img_03755_2.jpg
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
760
Cambridge: Harvard University Press, 2000
• Studio could designate roles the
actor was to perform, impose a
change of name,
name control the
performer’s image and likeliness in
advertising and publicity, and
regulate interviews and public
appearances.
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
761
Cambridge: Harvard University Press, 2000
12
N
Long-Term Contracts
• Used in the pop record industry. The
artist performed exclusively for the
studio for seven years, with the
g the option
p
studio holding
(exercisable every six or twelve
months).
• Either to renew the contract with an
escalating salary or to terminate.
•
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
762
Cambridge: Harvard University Press, 2000
TV Long-Term Contracts
• TV show producers hire actors
with an option on each actor’s
services for five to seven years
Litwak, Mark. Dealmaking in the Film and Television Industry.
763
Los Angeles: Silman James Press, 1994, p. 139
N
–During this time, negotiations
are shaped
h d bby th
the actor’s
t ’ clout
l t
and the stipulations of a
“favored-nations” clause.
Litwak, Mark. Dealmaking in the Film and Television Industry.
764
Los Angeles: Silman James Press, 1994, p. 139
• If one actor negotiates better
terms, every actor with a favorednations clause benefits.
• Thus,
Thus every actor enjoys the
star’s “clout” as an essential
performer.
Litwak, Mark. Dealmaking in the Film and Television Industry.
765
Los Angeles: Silman James Press, 1994, p. 139
13
• Do superstars rise strictly on
the basis of talent?
• Much of it is fads and
bandwagon effects.
keanua-z.com/ webpix/tedlogan.jpg
766
• This means that superstardom
might occur simply from a
lucky accident, by acquiring
some fans, whose choices are
observed by other fans.
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
768
Cambridge: Harvard University Press, 2000
• Consumer uncertain about taste
and quality.
• Rational other people’s choices
as a cheap indicator of likely
quality.
• Also consumer may simply get
utility from following the
popular style.
Source: Caves, Richard E. Creative Industries: Contracts Between Art and Commerce.
767
Cambridge: Harvard University Press, 2000
Stars and Superstars Model
• In some areas (film, TV, sports, etc)
small differences in talent result in
extreme differences in reward
• The minute talent differences are
rewarded exponentially rather than
linearly, resulting in a highly
skewed distribution of rewards (be it
money, professional commendation,
etc…)
MacDonald, Glenn M. “The Economics of Rising Stars”. The American Economic Review
Volume 78
769
14
Applications of Star and Superstars
Model
• But this model isn't confined to
entertainment industries
• This
Thi iis what
h t often
ft happens
h
in
i
media / IT / business in general,
and its effect is just more
pronounced in creative realms
MacDonald, Glenn M. “The Economics of Rising Stars”. The American Economic Review
Volume 78
770
Industry Structure and Talent
• The labor market in business
industries is remodeling itself the
same way as it did in Hollywood
–In old Hollywood,
y
actors and
directors would work for 1 studio
for a set number of years
–Much like the employer-employee
relationship in the past
772
DeVany, Arthur. “Contracting with stars when “nobody knows anything”. Hollywood
Economics 2004
Creative Industry Structure:
Hollywood
• Like most creative industries,
Hollywood is a kurtocracy…
• …a few individuals have
immense power andd wealth
lh
• This elicits the question “what
caused it and why does it stay
that way?”
DeVany, Arthur. “Contracting with stars when “nobody knows anything”. Hollywood Economics771
2004
Industry Structure and Talent
• Now, in Hollywood as in the creative
business realms, a group assembles
itself for 1 project
–A
A studio might partner a producer,
director, and an actor make 1 movie
together
–Just like companies now partner
contract workers, consultants, and
773
outsourced vendors
DeVany, Arthur. “Contracting with stars when “nobody knows anything”. Hollywood
Economics 2004
15
Industry Structure: Business
and Hollywood
What’s an Oscar worth?
• The key similarity is that after the
assigned project, neither the film
industry or business employees
are contractually
ll bound
b
d to stay
with the same firm / studio
• This is a marked shift from the
old more restricted structure
• 60% of best actor and actress
Oscar winners from the past 10
years have seen how their
earnings drop off after their
victories.
Brandon Gray, Career builders? Why Oscar wins don’t always translate into box office success for actors and actresses, February 27, 2006
DeVany, Arthur. “Contracting with stars when “nobody knows anything”. Hollywood
Economics 2004
774
What’s an Oscar worth?
http://theenvelope.latimes.com/movies/boxoffice/env-boxofficeactoractress27feb27,0,6035517.column
775
WHAT'S AN OSCAR WORTH?
• Most of the winners are
already big stars, and an Oscar
has rarely turned a new artist
into a big star.
Box office results for best actor/actress winners
(Averages for the 5 movies before and after a win)
Pre-Win
Post-Win
Career
Actors
Average
Average
Average
2004
Jamie
$47,387,483
Foxx
$49,365,952
(2 movies) $37,366,764
Hilary
Swank
$42,302,893
- $33,138,550
Brandon Gray, Career builders? Why Oscar wins don’t always translate into box office success for actors and actresses, February 27, 2006
http://theenvelope.latimes.com/movies/boxoffice/env-boxofficeactoractress27feb27,0,6035517.column
776
Box Office Mojo, LLC (www.boxofficemojo.com)
777
16
Actors
2003
Sean Penn
Charlize
Theron
Pre-Win
Average
Post-Win
Average
Career
Average
$$24,474,359
, ,
(3 movies) $20,071,498
$14,871,122
$31,091,072 (3 movies) $26,948,066
$29,955,962
Box Office Mojo, LLC (www.boxofficemojo.com)
778
Pre-Win
Post-Win
Career
Actors
Average
Average
Average
2001
Denzel
$70,097,169
$70
097 169 $55,558,239
$55 558 239 $40
$40,148,074
148 074
W hi t
Washington
Halle Berry $59,467,313 $118,947,198 $57,355,360
Box Office Mojo, LLC (www.boxofficemojo.com)
780
Actors
2002
Adrien
Brody
Nicole
Kidman
Pre-Win
Average
Post-Win
Average
Career
Average
$7,104,705 $24,190,899 $22,788,399
$51,283,814 $33,426,697 $43,924,752
Box Office Mojo, LLC (www.boxofficemojo.com)
Pre-Win
Actors
Average
2000
Russell
Crowe
$58 063 118
$58,063,118
Julia
Roberts $112,212,578
Post-Win
Average
779
Career
Average
$89,729,776
(4 movies) $43,359,633
$43 359 633
$72,478,084 $72,203,091
Box Office Mojo, LLC (www.boxofficemojo.com)
781
17
What’s an Oscar worth?
• Box office revenues might not have
gone down because stars had the
freedom to pursue smaller
i d
independent
d t films.
fil
– Philip Seymour Hoffman
– Charlize Theron
782
• How should Disney assess the
risk of hiring stars for its
projects?
• How should it compensate
stars?
783
783
18