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Article Excerpt
The motion picture industry has provided a fruitful research domain for scholars in marketing and other disciplines. The industry has high economic importance and is appealing to researchers because it offers both rich data that cover the entire product lifecycle for many new products and because it provides many unsolved "puzzles." Although the amount of scholarly research in this area is rapidly growing, its impact on practice has not been as significant as in other industries (e.g., consumer packaged goods). In this article, we discuss critical practical issues for the motion picture industry, review existing knowledge on those issues, and outline promising research directions. Our review is organized around the three key stages in the value chain for theatrical motion pictures: production, distribution, and exhibition. Focusing on what we believe are critical managerial issues, we propose various conjectures--framed either as research challenges or specific research hypotheses--related to each stage in the value chain and often involved in understanding consumer movie-going behavior.
Key words: motion picture industry; entertainment industry; review; research and models
History: This paper was received June 1, 2004, and was with the authors 10 months for 2 revisions; processed by Steven Shugan.
Introduction
Over the last two decades, the amount of academic research on issues related to the motion picture industry has risen sharply. There are several possible reasons for this. First, the industry has a high economic importance in the global economy. The motion picture industry employs over half a million people in the United States (U.S. Department of Labor 2004). Spending only on theatrical tickets was around $9 billion in the United States (and Canada) and close to $11 billion outside the United States in 2004; revenues from ancillary markets (particularly home video, but also merchandising) are several times higher (Standard & Poor's 2004). Motion pictures are a key driver of the market for entertainment products--currently the number-one export market for the United States. Second, the industry has high cultural significance and attracts quite a bit of attention--motion pictures have a disproportional impact on American (and perhaps world) culture. Unlike any other product, weekend box office statistics are featured in news reports virtually every week. Third, the availability of rich data makes the industry particularly appealing from a research perspective. For example, many new, unique products are released in a relatively short time. The "cradle-to-grave" scope, with data covering the entire product life cycle, provides ideal conditions for marketing researchers. Fourth, industry practitioners rely heavily on tradition, conventional wisdom, and simple rules of thumb, which often have not been--but should be--closely examined. Intriguing puzzles still exist, such as the extent to which traditional contracts among channel partners or uniform ticket pricing policies are optimal. Fifth, insights from the motion picture industry may help to better understand industries that share certain characteristics as well as to examine the interface between technology and experience goods in the digital age (Schmitt 1999, Wolf 1999).
In this paper, we review the rapidly growing body of research on the motion picture industry for two main reasons. First and foremost, we believe that a reassessment of research directions is needed, particularly when many critical issues for practice remain unaddressed. Our goal is to share insights into the motion picture industry to stimulate research that is relevant to management. Second, we are convinced that a greater focus on industry-specific research can benefit the marketing discipline; we hope that our review will exemplify an approach to the development of a research agenda, stimulating similar efforts for other industries.
We focus on the theatrical motion picture industry and divide the paper into three sections--production, distribution, and exhibition--corresponding to the three key stages in the value chain for theatrical motion pictures that precede their "consumption" by movie-going audiences (see Figure 1).
[FIGURE 1 OMITTED]
Different types of entities and individuals participate in each stage of the value chain. The competitive landscape includes vertically integrated major studios, independent production companies, independent distributors, major national exhibition chains, and smaller regional exhibitors and art houses. Studios are often simultaneously engaged in four distinct functions: financing, producing, distributing, and advertising (Squire 2004, Vogel 2001). Here, we consider the first two functions together under the heading "Production." It can be defined as the activities needed to produce one copy (or, in industry terms, one "print") of the movie. The latter two functions are discussed under the heading "Distribution." In essence, these functions encompass all of the distributor's interactions with its two main groups of customers--exhibitors and audiences. "Exhibition" refers to activities performed by theater chains and individual theater sites.
We recognize that the motion picture industry encompasses numerous subsequent revenue windows, including local and global theatrical, home video, pay television, network television, syndication, video games, and merchandising. Although a comprehensive review of nontheatrical windows is beyond the scope of our study, we venture into these areas to the extent that they are relevant to the behavior of players involved in the theatrical arena.
The three sections are structured in a similar way. We begin each with a description of the general process and current status of research. Next, we describe key practical issues which, in our opinion, are worthy of research. We do not intend our descriptions of practical issues to be exhaustive; instead, we set out to highlight what we view as critical issues, for each stage of the value chain, based on our knowledge of the industry, interactions with industry executives and observers, and review of trade publications. We propose various conjectures--inferences based on inconclusive or incomplete evidence--and research challenges. We acknowledge that the conjectures are often speculative. Our aim is to examine the extent to which critical issues have already been studied--and if so, what key findings emerge--and to what extent they have not. Our review shows that the range of methodologies employed in existing research is already quite broad, and includes regression-based econometric techniques, discrete-choice models, and operations research methods. However, our focus is not on the methodologies employed.
Closely related to our theme, but not reviewed in this paper because of the availability of other reviews (e.g., Litman and Ahn 1998), is the literature that deals with consumers and their movie-going behavior. (1) An understanding of audience behavior is fundamental to shedding more light on the challenges faced by producers, distributors, and exhibitors. Attempts to understand what drives movie consumption date back at least as far as 1914, when DeMaday (1929) asked Swiss school children, Why do you like going to the cinema? (Palmgreen et al. 1988). Jowett (1985) provides an informative review of movie audience research in the first half of the 20th century. He observed that "no major American industry ever operated with so little research of its market as did the motion picture industry during the period of its greatest influence, from its early years until the mid-1950s." It was not until the 1940s that the industry began to move beyond anecdotal studies to more systematic research methods, most often regularly administered surveys. In that period, academic researchers such as Lazersfeld (1947) laid the groundwork for further research on movie audiences in areas such as psychology, sociology, communications, and film studies (see Blowers 1991). More recently, conceivably partly in response to Hollywood's increased focus on "the bottom line," interest in the motion picture industry has spread to other fields--particularly industrial organization, economics, strategy, and marketing.
Production
The development of a motion picture is a long succession of creative decisions with far-reaching economic implications for the different players involved. Each movie's development process is unique, but some general observations can be made. The process commonly begins with a story concept based on a literary property, a new idea, or a true event (Vogel 2001, Squire 2004), which can vary from a general idea (a "pitch") to a completed screenplay (a "spec"). In some cases, a studio or producer will ask a writer to develop a new (or adapt an existing) screenplay. Usually, however, with help from a literary agent, a writer submits a first draft of a screenplay for review to a number of independent and/or studio-affiliated producers. If a producer is interested--many screenplays never pass this hurdle--both parties usually sign an option agreement, which gives the producer the right to purchase the complete screenplay and the writer an advance payment (of which the literary agent takes a percentage).
At this point, substantial financing is required to take the project into production. Financing is less problematic if the producer is affiliated with a studio (an example is the deal that Ron Howard and Brian Grazer's production company Imagine Entertainment has made with Universal Studios). By signing a studio contract, a producer usually gives up a wide range of rights relating to sequels, spin-offs, merchandising, and other opportunities, but at the same time increases his chances of securing bank loans or tapping into the studio's own capital, and of securing favorable distribution and exhibition deals for completed movies. Such contracts are beneficial from the studio's perspective because they guarantee the inflow of products from firms with solid track records. Financing is significantly more problematic if the producer does not have a pact or a deal with a studio, which is the case for many projects. In that case, the producer will have to obtain initial financing from other sources, which is particularly difficult when no distribution deals are guaranteed (Vogel 2001).
While they pursue different fund-raising options, producers also have to develop the film along other lines: they recruit the director, cast, and crew; scout possible shooting locations; and design sets and costumes, among other things. Talent agents (such as Creative Artists Agency (CAA) and International Creative Management, Inc. (ICM)) play a key role in these activities. At this stage, producers also determine an estimated production budget, based on such factors as the script, likely postproduction expenses (e.g., for special effects), star salaries, and financing possibilities. After these activities, which are all part of the preproduction phase, the project enters the actual production phase in which the film is shot. This usually lasts a few months. Next, the project enters postproduction, which consists of activities such as editing, dubbing, creating special effects, and adding music. Before it can be released in a particular country, the movie also needs to be rated (e.g., by the Motion Picture Association of America (MPAA) in the United States).
The above description applies mostly to the movie development process in the United States. Movies originating in Hollywood dominate box-office rankings across the globe. However, of the more than 4,000 movies produced worldwide each year, only about 700 are produced in the United States (MPAA 2004, also see Scott 2005). India is the most productive country. Its motion picture industry, sometimes referred to as Bollywood, produced more than 1,000 films in 2001, which together generated over 45 billion rupees (at the time close to $1 billion) in revenues (U.K. Film Council 2002). Overseas markets such as the United Kingdom have become increasingly lucrative for Indian films, sometimes generating nearly a third of total revenues, allowing for higher production budgets. With the notable exception of India, Hollywood products dominate major markets around the world. Even in countries with highly acclaimed local productions, such as France and Italy, non-U.S. movies often account for only a small fraction of box-office grosses (European Audiovisual Observatory 2003).
Financing the development of a movie is an extremely risky decision rooted in artistic and business considerations. However, we believe that:
The Success Rate of the Traditional "Green-Lighting" Process Can be Improved
An important puzzle in the motion picture industry is why movies that flop miserably at the box office ever get made. Caves (2001) provides arguments for why such "ten-ton turkeys" advance through the development process. He suggests that when costs are sunk progressively and information on a project's quality is revealed gradually, rational decision makers can carry projects to completion that realize enormous ex-post losses. The movie The Adventures of Pluto Nash, which cost over $100 million to produce but earned less than $5 million in U.S. theaters, is an example of such a type II error. Type I errors, which involve rejecting a potentially successful project, are also a common practice in the industry: a recent example is The Passion of the Christ, the highest-grossing independent movie to date, which was reportedly turned down by several major studios (Quelch et al. 2004).
It is because of the "triggering" effect outlined by Caves (2001) that mistakes in the green-lighting process--the initial decision to approve or decline a project--are so costly. While maximizing the green-lighting success rate (i.e., minimizing the two types of errors) is extremely challenging, it is staggering to discover how little science usually goes into the process. A senior executive at a major studio described the process as follows: "We bring together all studio department heads. Beforehand, our financial department prepares an overview of key estimates to get a sense of the financial viability. It really revolves around the production costs. That is our most reliable estimate, and that thus forms the basis for our launch decision.... The idea is to work towards the bottom line. We ask ourselves whether we can recover our production costs, and whether there is room to spend on marketing. In the end; though, it comes down to the fact that someone has to sign off on the deal. Someone in the meeting has to put his or her reputation on the line and say 'yes'--regardless of whether the numbers add up" (Elberse 2002).
The green-lighting decision can never be completely foolproof, and the decision should not always be guided by economic analysis. However, due to the advances that marketing scholars have made in the past decades in the general area of new product development (e.g., Urban and Hauser 1980, Wind and Mahajan 1997, Crawford and Di Benedetto 2003), and in particular with expert and knowledge-based computer systems (e.g., Burke et al. 1990, Rangaswamy et al. 1989) already employed by practitioners in creative industries such as the advertising industry, quantitative and qualitative (e.g., linguistics analysis) research methods may facilitate decision making and improve the success rate. Even a marginal decrease in failure rate of the green-lighting process could confer tremendous financial and reputation benefits for studios and other players involved.
Marketing researchers have already made significant progress in developing early-stage box-office forecasting models and decision-support tools, including models predicting success and aiding decision making after the .movie has been completed but before it is released in theaters (e.g., Neelamegham and Chintagunta 1999, Eliashberg et al. 2000, Shugan and Swait 2000). Also applicable to earlier stages of the development process, work by De Vany and Walls (1999) and Collins et al. (2002) provides insights into the probability that a film's revenue will exceed a given threshold value. A team evaluation approach as proposed by Shugan (2000a, b), basing predictions on information about the past performance of production team members, is promising as well.
Another interesting new method involves stock markets simulations. Some marketing researchers have shown that such predictive markets, used to identify winning concepts in the eyes of consumers for other goods (see Dahan and Hauser 2002), can generate, at an early stage, valuable insights into the likely success of motion pictures (Gruca 2000, Elberse and Eliashberg 2003, Spann and Skiera 2003, Elberse and Anand 2005). The Hollywood Stock Exchange (HSX, www.hsx.com) has been the most popular application in the motion picture industry. For example, Spann and Skiera (2003) show that data obtained using HSX, when incorporated into a conventional regression model, lead to a significant improvement in opening weekend forecasts.
One possible reason why virtual stock markets are helpful in assessing demand relates to a key observation about movie consumption--moviegoers appear heavily influenced by others' opinions and choices. "Others" could refer to friends and acquaintances, critics, and other opinion leaders, as well as the market as a whole. The most direct influence is likely to come from people who accompany consumers to the theater. It is well established that movie attendance has a strong social component (e.g., Austin 1986). Weinberg (2005) speculates about the effect of the collective nature of the decision-making process on consumption. He suggests that there might be an elimination rule, whereby a movie is eliminated from the consideration set if any of the group members has already seen it, or if any of the group members vetoes against it. Prior information, opinion leadership, and group composition could impact this process. In essence, the problem involves understanding how to translate individual utility to joint utility.
The large body of econometric research on the many factors that drive the success of motion pictures may provide useful guidance as well (see Litman 1983 for pioneering work in this area, and Elberse 2002 and Elberse and Eliashberg 2003 for recent overviews). Many of these models consider factors under the direct control of a studio and/or producer (e.g., the director, cast, genre, and production budget) and that often form the basis for the green-lighting decision. However, it is important to consider potential endogenous relationships in empirical examinations (see Shugan 2004). For example, a high budget means that the movie can employ high-profile stars, but high-profile stars generally also attract financing--which, in turn, enables a higher production budget. Decisions on which stars to employ and what budgets to set, as well as financial estimates based on both considerations, should consider this endogeneity. Another worthwhile factor to consider at an early stage in the development process is the expected rating--both in the United States and overseas. Leenders and Eliashberg (2004) found that parental guidance ratings for a particular movie often differ significantly across countries. In addition, they found that the relationship between movies' ratings and their box-office success differs across countries.
The following questions may capture some particularly worthwhile research avenues:
* How should agents and other intermediates bring screenplays to the market?
* What screenplays are/should be picked up by studios--and why?
* How is the green-lighting decision-making process currently structured, and how can it be improved? The focus here could be on designing appropriate stage-gate procedures with specific metrics and milestones that allow for shelving or aborting the project, committee composition, and voting rules, among other things.
* What determines the manner in which projects progress (or fail to progress) in the development funnel? How do studios make the trade-off between artistic and business objectives? How can this process be optimized?
* Can accurate forecasting models be developed based on...
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