The Business of Making Movies: The U.S. Motion Picture Industry Generates Close to $100 Billion in Revenues, Is One of the Country's Largest Exporters, and Exerts Enormous Cultural Influence Worldwide. but Today It Also Faces Enormous Pressures

By Young, S. Mark; Gong, James J. et al. | Strategic Finance, February 2008 | Go to article overview

The Business of Making Movies: The U.S. Motion Picture Industry Generates Close to $100 Billion in Revenues, Is One of the Country's Largest Exporters, and Exerts Enormous Cultural Influence Worldwide. but Today It Also Faces Enormous Pressures


Young, S. Mark, Gong, James J., Van Der Stede, Wim A., Strategic Finance


Going to the movies has always been one of society's most pleasurable pastimes. Over the past few years, though, enormous changes have occurred in the movie-making business: escalating production and marketing costs, the significant impact of increased piracy, the uncertainty in film financing, the proliferation of digital technology, and the increase in available entertainment options for consumers. These and other factors have implications for the motion picture business, the types of movies it will produce, and how and where people will view them.

Based on research sponsored by the Foundation for Applied Research (FAR) of the Institute of Management Accountants (IMA[R]), this is the first in a series of articles on the U.S. motion picture industry--one of the so-called creative industries. The goal of the series is to provide readers with current information about costs, revenues, and risks in this highly dynamic and influential industry. In this article, we'll discuss how the industry operates, the challenges it faces, and what goes into making a movie.

In a subsequent article we'll discuss the business of selling movies--distribution, the importance of advertising, opening box-office revenues, and the increase in new revenue streams from various forms of mobile technology.

THE INDUSTRY IN PERSPECTIVE

Motion pictures aren't only a significant source of revenue for many countries--they're also instrumental in shaping worldwide impressions of a country's intellectual, historical, and cultural environment. For instance, most moviegoers would have little difficulty associating Akira Kurosawa's Seven Samurai with Japan, Federico Fellini's La Dolce Vita with Italy, or Peter Faiman's Crocodile Dundee with Australia.

Globally, more than 3,000 feature films reached movie theaters in 2006, bringing in $23.8 billion in box-office revenues. And total global annual revenues across all distribution channels such as video and DVD, cable, television, and mobile sources were forecasted to be $450 billion by the end of 2007, according to the Motion Picture Association of America (MPAA). The largest distributors of feature films in 2006 were India with 800, the U.S. with 599, and China with 255.

Let's now look at the organization of the U.S. motion picture business. Six major studios make up the core of the motion picture industry: 20th Century Fox, Walt Disney Pictures, Warner Brothers Pictures, Paramount Pictures, Columbia Pictures, and Universal Pictures. The MPAA represents these studios internationally and plays a number of roles: It advocates for the U.S. film industry, protects producers from copyright theft, and fights piracy. In 2006, the MPAA studios released 203 films (34%), and other, independent distributors released 396 (66%).

Even though major studios have made their name in Hollywood, large, vertically integrated conglomerates own them today. These conglomerates also incorporate a number of other forms of entertainment and media, such as radio stations, cable and network television stations, newspapers, magazines, theme parks, and book publishing (see Table 1). As examples, News Corporation owns 20th Century Fox, Fox Broadcasting Company, Direct TV, National Geographic, and the Sunday Times (U.K.), while Disney owns Walt Disney Pictures, ESPN, ABC, Buena Vista Home Entertainment, and Disneyland. Vertical integration of this magnitude creates enormous barriers to entry for any entity trying to get into the business, in part because they have to gain access to the major distribution channels.

Table 1: The MPAA Motion Picture Studios, Major Subsidiary Studios,
Distributors, and Parent Corporations

MAJOR            MAJOR      DISTRIBUTORS       PARENT
STUDIOS       SUBSIDIARY                     CORPORATIONS
                STUDIOS

20th Century  Fox          20th Century    News
Fox           Searchlight  Fox             Corporation
Film                       International
Corporation                Corporation

Walt Disney   Miramax      Buena Vista     The Walt Disney
Pictures      Films        International,  Company
              Pixar        Inc. … 

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