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Making sense of these million-dollar babies--rationale behind superstar profit participation contracts.

Article Excerpt
The article by Eliashberg et al. (2006) provides a comprehensive review of current research on the motion picture industry, with a special focus on managerially relevant issues on the supply side. It walks the readers through the three distinct stages in the movie value chain of production, distribution, and theatrical exhibition, and it points out promising avenues of future research.

The contractual issues between talents and the studios in the motion picture industry are both diverse and complex. Currently, two forms of talent contracts are used: one with fixed payment only and the other with both a fixed component and a profit-sharing component (e.g., a percentage of the movie's net profits or gross revenues). Profit-sharing contracts have become more common in the past 50 years. (1) The enormous amount of compensation generated from such contracts for the superstars is illustrated in a recent lawsuit filed by Peter Jackson, the star director/co-producer of the Lord of the Rings trilogy, against its distributor New Line Cinema (The New York Times 2005). Mr. Jackson reportedly receives around $200 million, 20% of the gross revenue for the trilogy, which has generated over $4 billion. Despite this, he claimed that the distributor underpaid him $100 million for the three movies by conducting self-dealing and preemptive bidding for subsidiary DVD and merchandising rights. Both anecdotal evidence and empirical studies have shown that they have remained a privilege of the superstars, not the lesser-known ones (Slate 2005, Sisto 2003, Watson 2004, Chisholm 1997). The rationale behind this observation is not yet fully understood, however.

In this commentary, I discuss the contractual issues in the movie industry from both the actors' and the distributors' perspectives in light of what we know from contract theory....