Arthur De Vany: Hollywood Economics

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Chris Hibbert

Arthur De Vany's Hollywood Economics gives a detailed look at an extreme example of a long-tail industry, the movies. The first half of the book consists of some technical papers that De Vany wrote during his career as an economist. Some of them are quite technical, but they lay the foundation for De Vany's contention that making movies is a highly unpredictable business.

These opening articles demonstrate that there is little predictability in the movie business, and investors, directors, producers, and actors who try to improve their odds by spending more money on special effects, hiring people from the A list, advertising heavily, or whatever else haven't studied the numbers well enough.

The old slogan "nobody knows anything" arises because of the nature of movie releases. Audiences vary from week to week, and they have an always changing menu of movies to choose from. Their reaction may depend on what's in the news, what hits have appeared recently, and whether the blockbuster that came out six weeks ago still has legs. And that's before we try to take account of the intrinsic merit of the story, the acting, how broad the distribution is, etc. Every week is a new tournament with some old and some new players. The audience can't make a judgment about any particular movie until they see it, and they don't make their evaluations from a clean slate.

The statistics deriving from this chaotic process produces the now familiar power law distribution. 70% of movies made are unprofitable, but the business makes money on the whole. most of the 30% that make money barely do better than breaking even; only a few a really successful, and the business of Hollywood is all about trying to make enough movies and give yourself enough chances that you can capture one of the few runaway successes. De Vany talks about how how studios, actors and directors should structure contracts so that the right people have the right incentives, and the right people make money when there is a hit. He then analyzes some actual contracts to show that they follow his rules: star players give up some straight pay for a share of the distant upper tail. The contracts talk about events that are meaningful for less than one movie in a hundred, but that's where all the money is, and one hit in that category can make you rich.

After he's laid the groundwork in the first half of the book, De Vany talks about the breakup of the Hollywood studio system at the end of the 1940's. I had no idea the anti-trust crusaders had even done this. The golden age of the Hollywood studio system was ended by a series of anti-trust cases (culminating in the Supreme Court) that denied the studios the ability to own movie theaters, and restricted the kinds of contracts they could write with independent theater owners. The result was that the studios lost certainty about being able to place the films they made, so they had to be much more careful in deciding what movies to fund, and couldn't plan a season's production coherently. De Vany shows how poorly the courts understood the movie business, and that they didn't achieve any of their objectives in terms of making the business fairer for independent distributors, theaters, or production companies.

I found the book to be fascinating, though quite dense. If the technical analysis in the first half of the book seems daunting, I recommend skimming it; just pay attention to his conclusions, since you'll need them to appreciate the findings in the second half of the book. I suspect there are many lessons that are applicable to other people trying to make money in other long-tail businesses. (Most of the discussion about long-tail is about making money by exploiting the long thin tail, but someone's making money from the tall, rich head of that curve.) The dynamics of other businesses are different, so you'll have to figure out what the drivers are for your uncertainty. De Vany does a great job of explaining the vagaries of the movie business, but not every business is an iterated tournament in which some of the contenders are new each week, while others have advantages or disadvantages due to their recent performance. There's a limit to the number of movies that can be playing in first run theaters every week, so some have to be dropped in order to make room for the constant flow of new releases.

I found this book after reading De Vany's blog for a while in 2005 and 2006. His articles on the movie business were quite interesting, but there's also a bunch of interesting material on evolutionary fitness, health, and sports.