Monday, August 28, 2006

Tom Cruise's firing and economics

The New York Times has an interesting article out on Tom Cruise and economics here

Interestingly enough, this topic discusses both my undergraduate and graduate thesis, what exactly drives box office revenue. The jist of the article is that there are many factors that go into making a big move, not simply whether Tom Cruise is in it or not (budget, whether it is a sequel, etc.).

In one study, Mr. De Vany and W. David Walls, an economist at the University of Calgary, took those factors into account. Looking across a sample of more than 2,000 movies exhibited between 1985 and 1996, they found that only seven actors and actresses — Tom Hanks, Michelle Pfeiffer, Sandra Bullock, Jodie Foster, Jim Carrey, Barbra Streisand and Robin Williams — had a positive impact on the box office, mostly in the first few weeks of a film’s release. In the same study, two directors, Steven Spielberg and Oliver Stone also pushed up a movie’s revenue. But Winona Ryder, Sharon Stone and Val Kilmer were associated with a smaller box-office revenue. No other star had any statistically significant impact at all.

So what are stars for? By helping a movie open — attracting lots of people in to see a movie in the first few days before the buzz about whether it’s good or bad is widely known — stars can set a floor for revenues, said Mr. De Vany.

One factor not discussed is the impact of "critical reviews." In the review of literature, I did not find one good test of this impact, so this was what my study focused on. My conclusion: critical views had a statistically significant but small impact on movie revenue (probably on the order of 1-2mn of a 100mn dollar movie, depending on the % of positive reviews). Other interesting conclusions were that bad movies are predicted to be failures better by critical reviews than are successful movies. Also, good reviews have a bigger impact on the amount of time the movie remains in the theatre. However, most movies make their most money during the first few weeks becuase the incentives are set up that way. The production companies get the biggest percentage of box office take during the initial weeks (a rough estimate is around 80%) rather than 5 weeks out (less than 50% and it declines the more weeks the movie is in the theatre). Therefore, the movie industry has a built in financial incentive to market big budget, star driven monster movies rather than critically acclaimed movies. This, I believe, explains the well noted drop in the quality of movies over the years and the increasing amount of focus on "event" pictures.

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