The Market for Motion Pictures: Rank, Revenue, and Survival

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I. INTRODUCTION

On any given day in every major city there may from 50 to 100 motion pictures playing on theater screens. Each is unique and its producer hopes it will catch that bit of magic that lights up the screen and the box office. Yet, few achieve this feat and most lead brief, unpredictable lives. Each film competes for screens and audiences during its brief life against a changing array of imperfect and equally unique substitutes. How is one to understand this market? Is there any sense in which this market could be called competitive and how is it organized? What institutions and contracts are adapted to this market environment and how do they shape the results?

We seek to answer some of these questions by examining the relationship between contractual practices and motion picture hazard and survival distributions. Our modeling is based on a large sample of motion picture revenues and theater bookings during their theatrical runs. Our detailed sample of motion picture lifetimes is a rare look at this fascinating industry whose unusual and complex features challenge economic theory in interesting ways. As Smith and Smith [1986, 506] observe, "Given the interesting characteristics of movies as ideal examples of differentiated products and of the institutional arrangements governing their production and distribution, such increased data availability would make this an exceptionally attractive area for applied micro-economic research."

Much of the empirical work on the motion picture industry has focused on the attributes of successful movies. Smith and Smith [1986] examined the impact of Oscar awards on the cumulative rentals of movies released from the 1950s through the 1970s. In more recent work, Nelson et al. [undated] have quantified the value of an Oscar award on movie revenues using a large panel of data and an event study methodology. In a somewhat broader empirical study, Prag and Cassavant [1994] examined the determinants of movie revenues and marketing expenditures. They found that marketing expenditures and quality are important determinants of a film's success, and that production cost, star actors and awards are positively related to marketing expenses.

In the present paper, we attempt to account for the dynamic patterns in the data. Because each film is unique and plays in its own way, its life as a commercial product in the theatrical market is hazardous. Indeed most motion pictures have short and unpredictable lives because audiences must discover what they like and films compete against an ever-changing cast of competitors. For these reasons it is productive to use evolutionary models of survival and death to model the data.(1) We model competition among films in the theatrical market as an evolving rank tournament of survival.(2) Motion pictures live and die in the box office tournament as they are challenged during their run by a randomly evolving cast of new competitors. The challengers come from films previously released and from newly released films. The contending films are ranked by film-goers, and those with high rank survive and are carried over to the next week. Low ranked films fail and are replaced by new contenders.

These attributes of the motion picture market contribute to increasing returns and give the box office revenue distribution the distinctive convex shape of a tournament prize distribution.(3) The leading products command a disproportionate share of the market and they have longer runs. Even then, a film's rank in the tournament is ephemeral and its life unpredictable. "In fact, of any 10 major theatrical films produced, on the average 6 or 7 are unprofitable, and 1 will break even" (Vogel [1990, 29]).

II. THE MOTION PICTURE EXHIBITION MARKET

Once a film is produced, it is distributed to theaters who "exhibit" it for audiences. The distributor chooses a release pattern - the number and location of theaters in which the film is "booked" or licensed to play. Distributors also choose a date at which to release their films for exhibition, looking for high demand periods and seeking to avoid playing against films that are strong substitutes. Distributors time some films for release during Easter and Christmas because they are high demand periods; films also vie for screens during the period preceding the Academy Awards. But, release timing is difficult because finishing a production and editing and preparing copies for release is highly uncertain.

The number of theaters and their locations for the initial release are based on the distributor's a priori estimate of demand. The size of the initial release determines the number of "prints" or copies that are needed for distribution to each of the theaters. The number of viewers who are able to see the film is limited by the availability of seats in the theaters booked in the release. The Motion Picture Antitrust Decrees of the late 1940s limit the distributor's release strategies significantly. All the signatories, the major theater-owning studios during the 1940s, were made to divest themselves of their theaters. Until very recently, no distributors owned theaters. In addition, the decisions leading to the Decrees found illegal certain contracting practices that can limit a distributor's release strategies: generally, long-term contracts, franchises, or repeated licensing between a distributor and a theater are illegal under the antitrust laws.

Most distributors use an auction process to license films to theaters, following the advice of their lawyers who interpret the court rulings to say that an auction of individual licenses, one theater at a time, is the approved method.(4) They send out bid letters announcing the tentative date the film is available to be played and the suggested terms the distributor is seeking. Theaters bid or respond indicating a willingness to negotiate a license and one or several of them are selected, depending on the distributor's release plans. If the film plays better than expected and fills all these seats, there is an economy of scale up to the capacity of the system in each week the seats are filled.

Supply adaptation is dynamic. The supply of seats for a successful motion picture is adjusted by expanding the number of weeks the film runs in theaters where it is booked; the exhibition license includes a "hold-over" clause which specifies a box office revenue in the latter weeks of the contracted run that will cause the run to be extended another week. Lengthening the run conditional on each week's revenue is a source of increasing returns as the film's production, print and advertising costs are fixed with respect to changes in the length of run.

Distributors use the information they acquire from box office reports to adjust the release pattern dynamically to match supply to demand. New exhibitors may seek to play the film if it is drawing large audiences and they can …