Entertainment and
Media: Markets and
Economics
Uncertainty and the Winner’s Curse
5:A - 1(49)
Uncertainty
Uncertainty and Information
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5:A - 2(49)
Randomness
Do all movies lose money?
Do movies fail randomly?
Chaos, complexity and movie stars
Modeling randomness; probability
Variance and the winner’s curse
Uncertainty
More Losers than Winners?
Movie success for the studios
Production
0?
Costs
Distribution
Exhibition
30-60%
The numerical majority of movies ‘lose’ money
 Based on Hollywood Accounting
 Not really when foreign box, video, TV and
other release windows are counted
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Uncertainty
Predictable Failure - Gigli
Weekend
Aug 1-3
Aug 8–10
Aug 15–17
Gross
% Change Theaters
$ 3,753,518
2,215
$ 678,640 -81.9%
2,215
$ 18,702 -97.2%
2,142
Average
$1,694
$ 306
$ 256
Overall…
Gross-to-Date Week #
$3,753,518
1
$4,432,158
2
$4,450,860
3
$5,600,000 U.S. (apx)
$1,000,000 foreign
(That’s all folks…..)
Costs?
Bennifer
$25,000,000
Other
$29,000,000
Promotion
$22,000,000
Distribution ?
Did this film ‘make money?’ Can it? Will it ever? (No, no and no.)
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Uncertainty
No Theory Explains Delgo
Delgo is a 2008 computer-animated fantasy
film. The film was produced by Fathom
Studios, a division of Macquarium Intelligent
Communications, which began development of
the project in 1999.
Delgo grossed just $694,782 in theatres against
an estimated budget of $40 million, according
to box office tracking site boxofficemojo.com.
The film was released independently with a
large screen count (over 2100 screens).
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Uncertainty
Forrest Gump “Lost” Money
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Forrest Gump (1994) (Paramount Pictures)
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US Box Office
$330M
Foreign Box Office $350M
Total, About $830M
Soundtracks, etc. $150M
Net profit
-$ 62M (!) A disappearing act?
U.S. Box  50% to Exhibitors (Theaters)
Paramount Receives Approx $191M
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Distribution “Fee” = 32%
Distribution Cost
Advt. Overhead
Production “Negative” Cost
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5:A - 6(49)
$ 62M
$ 67M (Advt., Prints, Screening, etc.)
$ 7M (10% of Distribution Cost)
$112M
(Tom Hanks, Robert Zemekis, $20M (8% of GROSS, each)
Studio Overhead
$15M
Interest on Negative Costs
$ 6M
Net Profits from the Project -$62M
Winston Groom, Author 19% of NET = 0
Eric Roth, Screenwriter 19% of NET = 0
Coming to America (1988) – The Art Buchwald Case
(Buchwald was settled so studios could avoid opening up the books
to embarrassing scrutiny.)
Uncertainty
Harry Potter
and the Order
of the
Phoenix, 2007
lost a ton of $
Gross
$ 609M
Minus
Distn.
Expns.
“Net”
Costs
Intrst
Loss
$ 398M
$ 192M
$ 206M
$ 316M
$ 58M
($ 167M)
http://io9.com/5747305/how-much-money-does-a-movie-need-to-make-to-be-profitable
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Uncertainty
Entertainment and
Media: Markets and
Economics
Reasons for Failure in the
Movie Business
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Uncertainty
Producing Flops (R.Caves)
Sequence of small failures can add up to a large loss.
Multiple stage production, large SUNK cost at each
Each stage is sensibly funded. Failure comes at the end of the chain.
By then, the costs are sunk.
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Uncertainty
Growing a Ten Ton Turkey
In prospect, 5 stages in sequence:
1
2
3
4
5 Release
Costs: 20 20 20 20 20
E[Cost]
= 100
Revenue 0
0
0
0
0
100 E[Revenue] = 100
After a disappointing first stage, E[R] falls by 10%
Looking forward, costs needed to complete the project.
Costs: {20} 20 20 20 20
E[Cost] = 80
{sunk}
E[Revenue] = 90
Ex post: Total cost 100M, Total Revenue if expectations
are met, 90. Note the crucial role of SUNK, nonrecoverable costs
(i.e., the output of those costs cannot be sold on any market)
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Uncertainty
Art for Art’s Sake (The Alamo)
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Production function view of inputs – indifference to final product
Creative production view – “the masterpiece” (e.g., directors)
Incentives – internalized.
A problem of moral hazard: Separation of decision from costs
of those decisions. (Principals and agents)
Noteworthy examples:
Bonfire of the Vanities
Heaven’s Gate
Gigli (‘Production’ cost $25M(J+B) + $29M+ Marketing $20M
Box Office: < 6M
(J Lo/Ben star vehicle. Which problem sank this film?)
John Carter (goes to Mars)
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Uncertainty
Ishtar!
LOS ANGELES — In 1987, shortly before the release of “Ishtar,” Columbia
Pictures realized the film was going to flop in catastrophic fashion. But
rather than cut advertising spending to minimize the financial damage — as
the studio’s top marketer advised — Columbia did the opposite, pouring
even more money into ads. The reason? The studio was desperate to stay
on good terms with the two stars of “Ishtar,” Warren Beatty and Dustin
Hoffman. “Ego trumps logic in Hollywood,” said Peter Sealey, who was
Columbia’s marketing chief at the time.
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Uncertainty
Art for Art’s Sake
John Carter Opens Friday 3/9/2012
Budget
$ 350M
U.S. Open
$ 30M
Foreign Open $ 71M
Considering China and Japan are the largest
markets in the Asian Pacific region and have yet
to open, John Carter could ultimately be in for a
respectable final tally. Still, historical comparisons
seem to suggest that the best case scenario is
around $300 million overseas, which combined
with its middling domestic performance isn't going
to be nearly enough to put this one in the black.
(BoxOfficeMojo, 3/12/2012)
Studios have repeatedly pledged in the 25 years since to
modernize their clubby business practices, but the more
Hollywood promises change, the deeper it seems to fall
into its ruts — as evidenced by “John Carter,” a bigbudget science fiction epic from Walt Disney Studios that
opened Friday and flopped over the weekend. Disney
spent lavishly (some say foolishly) on the movie in large
part to appease one of its most important creative
talents: Andrew Stanton, the Pixar-based director of
“Finding Nemo” and “Wall-E.”
“Ishtar Lands on Mars,” New York Times, Page B1, 3/12/2012
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Uncertainty
Unpredictable Failure
 Wisdom
 Audiences and box office are uncertain
 Stars have power to make movies succeed.
[Helena (Kim Basinger) gets boxed.]
 Better wisdom
 Movies are “complex systems”
 Complexity mixes order and chaos
 Even with stars, movies are unpredictable
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Uncertainty
Order and Chaos
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Audience behavior
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Pure randomness
 movies do equally well (rolls
of the dice)
Information cascades  chaotic behavior and herding
Actual behavior embodies both: Complex
system
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Uncertainty
Dynamic Movie Systems
Dynamic “systems” evolve through time
State variable (movie success, however measured) = X(t) takes a value
at each point in time. We follow it through time ….
 X(t) is determined by: X(t-1) and new information Z(t)
 The process must start somewhere (e.g., opening night, Z(0) = the
general climate of the area, mood of the audience, events of the day).
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Uncertainty
Stable and Chaotic Systems
 Stable systems
 Not necessarily predictable, but regularly behaved
 Don’t depend very much on where the process starts
 Chaotic systems
 Totally unpredictable
 Depend crucially on where the process starts
 Trivial differences in the starting point produces wild
differences and oscillations in the state variables.
 Seems to characterize big movies.
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Uncertainty
The End Results of Chaos
Power law
distributions
of rewards
A very large proportion of movies make very small amounts of money.
A few randomly occurring ones make very large amounts.
Seems consistent with outcomes for the movies market.
Note that the graph is about box office gross, not profit and not about
secondary release windows.
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Uncertainty
Strategies for Dealing with the
Risk of Failure in the Movies
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Portfolio? Not if the previous analysis is correct.
Hire a really big star?
Movie as brand name? (The Matrix, Harry Potter,
Shrek, James Bond series …)
Profit Sharing Contracts: This reallocates risk; it
does nothing to reduce it.
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Uncertainty
Movie Riddles (S. Ravid)
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Making Movies is hugely risky, and almost all of them lose
money.
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Why do they keep making movies? Nobody knows.
Why do they keep paying megabucks for big stars?
Why are so few G and so many R movies made?
Why do they keep making big “event” movies (like THE ALAMO,
John Carter, The Lone Ranger)?
Strategies for avoiding risk.
Are They all Crazy or Just Risk Averse? Some Movie Puzzles and
Possible Solutions,” A. Ravid, Rutgers.
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Uncertainty
Lone Ranger vs. Despicable Me 2
Big Budget ($375M)
Vs.
Animated Sequel
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$ 48M
$ 142M
Uncertainty
Regression Results:
Ingredients of Movie Success?
Based on N = 175 Movies, ca. 2000.
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Uncertainty
Economic Analysis:
Why Are There So Many Summer Blockbusters?
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Hotelling’s location theory works
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Studios are being fooled by endogeneity
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The studios are risk averse
Vendors crowd to the middle of the customer (timing) space
The season does not produce the movie success
The studios crowd the movies they most expect to succeed into the summer
release window. Movie choices make the season appear successful.
Large studios are absolutely risk averse. Failure in an off season big
release will send a long run adverse signal.
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Small studios and indies can afford this kind of failure
E.g., Hunger Games: November 2013, 2014, 2015.
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Uncertainty
Is Risk Aversion a Good Theory?
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5:A - 24(49)
Movie makers are risk averse.
Studios are public corporations
Stock holders can be risk averse, corporations
need not be.
(SONY can diversify against movies.)
An incompatibility between “agents” (risk averse
movie makers) and “principals” (risk loving
stockholders).
Uncertainty
Star Power
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5:A - 25(49)
Natural response by movie makers to avoid
blame for failure.
Failure occurs for many reasons and no reason
Conventional wisdom – stars make a movie
Better wisdom - audiences make the movie.
Current trend (somewhat) away from stars.
Uncertainty
The Star’s the Thing?
DeVany and Walls, et. al. Stars do not
guarantee success.
 On average (not always) stars do help to keep
movies out of the bottom.
 The conclusion is uncertain:
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5:A - 26(49)
Kim Basinger – Boxing Helena
Tom Hanks – the Da Vinci Code, The Lost Symbol
Sandra Bullock (not Angelina Jolie) in Gravity
Uncertainty
Fading Star Power
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Star Driven Films in Share of Top 25 Grossing Films
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44%
60%
13%
Other Drivers
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5:A - 27(49)
1987
1997
2007
Franchise (Batman, Harry Potter, Bourne, Bond)
Awards
Buzz: comedies/musicals
Media/grassroots
Special Effects
Creator
Uncertainty
Car Chases?
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5:A - 28(49)
Why so much violence (and sex)
R rated movies have lower average box than G
and PG.
Sex doesn’t sell. Violence or violence and sex do
OK on average, but have LOWER VARIANCE.
Risk avoidance.
S&V are rarely major flops. Low variance, so
AGENTS keep their jobs.
Uncertainty
Really Big Movies
 Titanic, Pearl Harbor, Alamo
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Big budgets  lower variance (Superman Returns:
$260 million)
Big stars often make big budgets: Sandra Bullock
(Gravity) starts at $20M then adds a % of revenues.
More than $75M.
Big Budget is definitely not a guarantee (see John
Carter, Lone Ranger).
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Uncertainty
5:A - 30(49)
Uncertainty
Traditional Movie Success Model
------------------------------------------------LHS=LOGBOX (Based on 62 movies, 2010)
--------+---------------------------------------Variable| Coefficient
Standard Error t-ratio
--------+---------------------------------------Constant|
14.0582***
.94003
14.955
LOGBUDGT|
.70488***
.20434
3.450
STARPOWR|
.00680
.01540
.442
SEQUEL|
.64860*
.32555
1.992
MPRATING|
-.12656
.16306
-.776 (PG,PG13, R)
ACTION|
-.29625
.33730
-.878
COMEDY|
.00299
.29845
.010
ANIMATED|
-.74281
.47975
-1.548
HORROR|
1.03248**
.43203
2.390
--------+----------------------------------------
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Uncertainty
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Uncertainty
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Uncertainty
Internet Buzzes John Carter
By the time “John Carter” had its Los
Angeles premiere last month, the film
had suffered months of ridicule on
the Internet and had taken on a
funereal aura. “I’ve never had
something healthy get treated like a
corpse,” Mr. Ross told Variety. Mr.
Stanton brushed off skeptics at the
premiere, saying, “You just gotta trust
us.”
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Uncertainty
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Uncertainty
5:A - 36(49)
Uncertainty
Do Online Reviews Matter?
(Not the same question as does buzz predict success?)
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Uncertainty
Online Reviews Don’t Matter
5:A - 38(49)
Uncertainty
Domestic Box Office Receipts
Place Your Bets on Movie Success
(Killed by Blanche Lincoln during financial reform debate)
http://www.cantorexchange.com/getdoc/85d6d736-f286-434e-b96e6998d41ee0f8/Box-Office-Contracts.aspx
5:A - 39(49)
Uncertainty
Entertainment and
Media: Markets and
Economics
The Winner’s Curse
5:A - 40(49)
Uncertainty
The Winner’s Curse
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Bidding situation (sealed bid auctions)
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5:A - 41(49)
Publishing (Jack Welch’s book)
Offshore oil leases
Broadcast frequencies
Baseball, football, basketball, hockey players
Art (The masterpiece effect)
General Result: High bidder bids over the
value of the property leading to Winner’s
regret.
Uncertainty
The Winner’s Curse: Theory
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Common value, uncertainty in the value
Bidders have private estimates
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Correlated because of some public information
Based on some private and some public information (oil and
gas leases, spectrum for cellular)
Estimates may be unbiased with respect to the true value,
but still randomly distributed – bidders have different
information and different private assessments.
Winner might just be the most optimistic but in all cases
Expected maximum valuation > true value
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Uncertainty
The Winner’s Curse
True value
Distribution of estimated values
The
Winner
If:
(1) Estimates are distributed above and below the true value
(2) Each bidder bids their evaluation of the value
Then: The winner is sure to bid too high.
The more bidders there are, the worse is the problem.
5:A - 43(49)
Uncertainty
Possible Examples of the Winner’s
Curse In the Publishing World
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Bill Clinton: Between Hope and History: 70% returned
Johnnie Cochrane: Journey to Justice: $3.5M advance, 350,000 of
650,000 unsold
Whoopie Goldberg: $6M advance, total failure
(?) Jack Welch $6M. Hillary Clinton, $8M
Why?
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Trade publishers integrated into large publishing firms; organizational
complexity and separation of decisions from ultimate consequences
(corporate levels)
Incentives of publishers. Signalling value of advances to celebrity
authors and large first printings.
Market characteristic – winner take all markets, most entrants fail, with
or without a celebrity author.
5:A - 44(49)
Uncertainty
Winner’s Curse: Application?
50 Shades of Grey
The first book of a trilogy, it was published by a tiny
independent press in Australia, and distribution in print has
been limited and sluggish, leaving bookstores deprived of
copies. The lion’s share of total sales (more than 250,000
copies for all three books) has come from ever-discrete-book
downloads, which have propelled “Fifty Shades of Grey” to
No. 1 on the New York Times e-book fiction best-seller list for
sales in the week ending March 3 and No. 3 position on
Amazon’s best-seller list.
Now American publishers have just concluded a battle
over the rights to re-release the book in the blockbuster
fashion they think it deserves. This week, Vintage Books, part
of the Knopf Doubleday Publishing Group, known for its
highbrow literary credentials, won a bidding war for the rights
to all three books, paying a seven-figure sum.
On Monday, the publisher will release new ebook editions of the trilogy. Weeks later will come a
750,000-copy print run of redesigned paperback editions.
Release windows
NYT, March 10, 2012, p. B1.
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Uncertainty
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Uncertainty
The answer might well be that it’s not, at least if you’re talking strictly in terms of profits. Instead, we
may well be looking at an example of the dreaded phenomenon known as “the winner’s curse.”
Economists have long noted that in auctions for investments like land rights, which have an actual
dollar value that one can calculate, the winners often overpay. The reason for this is simple. In an
auction, the highest bidder wins. And the higher someone bids, the more likely it is they have
overestimated the worth of whatever they are trying to buy. If 10 companies are competing for the
mineral rights to a piece of North Dakota’s oil patch, whoever has the most Pollyanna-ish projections
about tomorrow’s crude prices and recovery rates is probably going to come away the winner. But if
the oil doesn’t flow as expected, then he ends up the loser. Hence, the winner’s curse.
I sincerely doubt Ballmer is making this purchase based purely on economics. Sports teams might
be more profitable than in the past. But they are also a status symbol for the global ultra-rich—a
circle of people that, as you might have heard, has expanded in recent years.. His bid might be
cursed. But he probably doesn’t care.
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Uncertainty
The Next Big Curse at Sotheby’s
No common value.
No true value
Sotheby’s has planted information
Sealed bid auction.
Did not sell.
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
Uncertainty
Entertainment and Media:
Markets and Economics
Uncertainty in success of large
multistage projects. Probable
elements of failure in some
bidding situations.
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Uncertainty