The Determinants of Movie Rental Revenue Earnings

Article excerpt

INTRODUCTION

The average budget of making a motion picture for release in the United States has risen to almost fifty million dollars per movie. This rising cost has resulted in motion picture studios seeking multiple sources of revenue including domestic box office, foreign box office, product placement, merchandising, video sales, and video rental revenue. A single movie can be the difference between millions of dollars of profits or losses for a studio in a given year (Simonoff & Sparrow, 2000). The purpose of this research is to analyze the motion picture industry with a focus on the determinants of video rental revenue. This manuscript is divided into four sections. First, a survey of the related literature is discussed. The second section provides the model specification. The third section puts forth an empirical evaluation of the determinants of video revenue for 214 films released during the year 2006. The final section offers concluding remarks.

SURVEY OF THE LITERATURE

The literature on the determinants of video rental revenue is in its infancy but expected to be highly correlated with the determinants of box office revenue. Many researchers have developed models that explore the potential determinants of motion picture box office performance. Litman (1983) was the first to develop a multiple regression model in an attempt to predict the financial success of films. The original independent variables in the landmark work include movie genre (science fiction, drama, action-adventure, comedy, and musical), Motion Picture Association of America rating (G, PG, R and X), superstar in the cast, production costs, release company (major or independent), Academy Awards (nominations and winning in a major category), and release date (Christmas, Memorial Day, summer). Litman's model provides evidence that the independent variables for production costs, critics' ratings, science fiction genre, major distributor, Christmas release, Academy Award nomination, and winning an Academy Award are all significant determinants of the success of a theatrical movie. Litman and Kohl (1989), Litman and Ahn (1998), and Terry, Butler, and De'Armond (2004) have replicated and expanded the initial work of Litman. None of the extensions of Litman's work has focused on video revenue financial performance.

One area of interest has been the role of the critic (Weiman, 1991). The majority of studies find that critics play a significant role on the success or failure of a film. Eliashberg and Shugan (1997) divide the critic into two roles, the influencer and the predictor. The influencer is a role where the critic will influence the box office results of a movie based on his or her review of the movie. Eliashberg and Shugan's results suggest that critics do have the ability to manipulate box office revenues based on their review of a movie. The predictor is a role where the critic, based on the review, predicts the success of a movie but the review will not necessarily have an impact on how well the movie performs at the box office. Eliashberg and Shugan show that the predictor role is possible but does not have the same level of statistical evidence as the influencer role.

King (2007) explores the theoretical power and weakness of critics on the box office performance of movies. The substantial market power of critics is derived from the following: (1) Film reviews are widely available in newspapers, magazines, and websites. The ubiquitous availability of critical reviews in advance of a movie release creates positive or negative energy in the critical opening weeks; (2) Film critics regard themselves as advisors to their readers. They are often as explicit in their recommendations as Consumer Reports is about other consumer purchases; (3) Film critics are likely to be considered objective. There are too many critics and too many films for serious critical bias to develop. …