Box-Office Payola?

Chris Anderson, the editor-in-chief of Wired magazine, has a long-running website called The Long Tail. Now he has just published his book of the same name, and it’s doing great. (Congrats; I haven’t read it yet, but it sounds good.) What caught my eye on his website was this fascinating note (end of the post) from an anonymous writer regarding movie box-office figures, how and why they may be inflated, and why they often fall so dramatically after one or two weeks. Here’s what the anonymous source had to say:

I happened to be riding to work with an exec from one of the major studios this morning, and he mentioned that the studios are increasingly making deals with theaters to inflate opening numbers. In particular, they will give the theaters very high revenue share for the first X days of the movie (he mentioned 100% for the first 3 days), incentivizing the theater to maximize the number of screens the movie’s shown on, inflating opening numbers.

The particular example of Superman and Pirates were actually the ones he brought up — that Superman’s decline was partially due to the theaters’ incentive period running out.

I have no idea how true or prevalent this is, but something you might want to look into. This would be done for movies which the studio considers potential “hits”, increasing discrepancy between them and normal movies.

To me, 100% of the take even for three days sounds ludicrous, but I could certainly imagine the promise of inflating the real figures by 25% for an additional 5 or 10% of the short-term take. I’ve always assumed the reported box-office figures were pretty much made up, anyway. But, as widely as these figures are reported these days, essentially serving as the best marketing a movie could hope for, I would think there’s plenty of value in paying to drive up those first-week numbers as high as possible. It’s hard to imagine anyone in Hollywood objecting, really: studios and producers all want to look more successful than they are, and actors and directors get to negotiate their next deal based on inflated figures.


Trent

That doesn't make a bit of sense. It is the studio that pays the marketing cost, not the theater owner. Why would paying the theater owner more in any way increase opening weekend sales?

Historically the ratio has been the other way around. Theaters get less of a take the opening week (while the studios recoup marketing costs, and because the higher traffic makes up for the lower share) and increasingly higher percentages with each passing week. This is why theater owners loved Titanic - long legs that kept people coming back in the later weeks when the theaters got a bigger share.

If this is going on it would seem not only unusual but unusually stupid on the part of studio management.... so now that I think about it, they may be doing it after all.

Mango

I'm trying to work that out as well, Trent. The theory that incentivising the theatres to show it on more screen inflates ticket sales sounds a bit hokey. More screens does not necessarily translate to more viewers; once everyone who wants to see the movie has a seat, there is zero value to anyone from adding more seats.

The 100% thing is also a tip-off that the 'anonymous source' might be a fraud; the studio's aren't giving up tens of millions in revenue to get a marginal boost in box-office figures.

Dusty

Maximizing the number of screens opening weekend could help immunize the studio against poor word of mouth and reap the greatest benefits from the marketing, buzz and publicity push that tends to drop off once the film actually opens, as everybody moves on to the next product. 100% seems dubious, though, as some of these films will make a relatively large part of their domestic gross opening weekend, although that total is becoming an increasingly smaller part of the revenue stream and perhaps it pays off down the line in terms of ancillary and foreign markets to have a film acquire that air of success, even if you take a big hit upfront. It's hard to imagine you'd spend $50 million on advertising and then another $50-130ish million to hit the #1 spot target.

From Mango: "More screens does not necessarily translate to more viewers; once everyone who wants to see the movie has a seat, there is zero value to anyone from adding more seats."

Of course, but no one really knows what number of seats are required before it opens. Ideally, you'd want to have just enough screens and showtimes so that anyone who wants to go would be able to and that the theaters would be at or near capacity. If you underestimate, you run the risk that people will go see another option at the time and venue they want to attend rather than wait for the next available showtime.

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theberle

Why do we measure movie populartity by box office revenue rather than people in the seats?

I think we should do the same for sporting events: report the revenue the owners are pulling in rather than the number of tickets sold/given away.

Maya

I've never understood why we measure movies in box office rather than tickets sold. Does that mean when I go to a movie in my hometown [where movies are $6] it matters less than when I go to the Arclight in Hollwood [$12-$14]. Why is there no Soundscan for movies? The same holds true for books I understand, "bestsellers" are determined by a murky set of criteria and not exactly what book has sold the most copies across the board.

princesaud1

Are Western economies mostly revenue generated through scams upon mass markets? If box office revenue(demand) for a finite supply(a "blockbuster movie"), then merely issue tickets for that one movie. Even if, person intended to buy and did actual view another "lesser movie". For example: Little Man starring the Wayan brother(a USA numerical minority group, Americans of african descent attempt to reach). Tickets 10,000,000 for Little Man sold in three days.
Are instead recorded at box offices as movie tickets for Superman movie,(a eurocentric marketing reach) Continuing "blockbuster movie" deception for Home video rentals higher demand and more Superman toys to be sold. Oh so popular, as it were. Really a great scheme.

princesaud1

Are Western economies mostly revenue generated through scams upon mass markets? If box office revenue(demand) for a finite supply(a "blockbuster movie"), then merely issue tickets for that one movie. Even if, person intended to buy and did actual view another "lesser movie". For example: Little Man starring the Wayan brother(a USA numerical minority group, Americans of african descent attempt to reach). Tickets 10,000,000 for Little Man sold in three days.
Are instead recorded at box offices as movie tickets for Superman movie,(a eurocentric marketing reach) Continuing "blockbuster movie" deception for Home video rentals higher demand and more Superman toys to be sold. Oh so popular, as it were. Really a great scheme.

Stephen

I don't believe the 100% number either, but I think I have a few answer's to Trent's question about how an increased number of screens can lead to an increased number of viewers.

Consider the poorly informed movie goers who show up to the movies and decide what to see when they get there (frequently asking the box office attendant what they should watch, much to the frustration of the people behind them in line). These people are more likely to go and see a movie if it is on mulitple screens, because that means there are more showtimes and thus there is more likely to be a showing starting soon.

The other group includes people like me, who probably spend a little too much time planning our theater experiences. I try and avoid sold-out shows because it means I have to get there ludicrously early and will have a lower chance of getting good seats (I am picky about where I sit). For instance, when I heard Superman Returns was doing poorly and Pirates 2 was selling out everywhere last weekend, I saw Returns and decided to wait on Pirates -- even though I wanted to see Pirates more.

I am curious how much having the #1 movie is actually worth, though. Considering movies are making a larger percentage of their total theatrical revenue in the opening weekend, we would expect the value of "winning" a weekend to be depreciating.

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smili

More screens shuts out competition. Nobody else wants to open against you.

I agree with the comments on the buzz of a big opening week.

ptkelly

Few points:

1. there are public movie chains which break out this number, haven't looked at it recently to divine the trend (ticker: RGC among the largest)

2. studios give theatres more split on big hits to make up for the overwhelming # of duds they are forced to take at lower splits.

3. dvd sales, which generate an overwhelmingly greater profit for the studios tend to follow box office numbers - the buzz drives people to buy the dvd and retailers/rental chains to stock it. it therefore behooves the studios to get as much "screen inventory" as possible in order to drive the opening weekend # and follow-on dvd sales.

all these things combined lead to the potential for increased share with the theatres for big hits, but over the long run the average share has remained steady.

ptkelly

OK, so here are a couple #s:

For RGC, its "cost of film rental" , i.e. what it shares with the studios was from '05 to '01 = 53,53,54%,54%,55%

so a slight increase in what they get to keep.

For PIXR, on Finding Nemo, the company's take from the box office was in the neighborhood of $100 (after theatre share, after marketing, after distribution). whereas it's take on the DVD was around $170m. for a less successful film at the box office, the ratio can be far greater than 2:1.

dachisb

The reason is due to the different revenue model studios are working with,

The theatrical run for movies is now simply a promotional tool for the DVD release. Large revenue impiles that the film was popular, thus more people will want the DVD. The margins they make on DVDs are very high, so even a total bomb can make most of its money back in rentals and purchases.

For example, the time difference between movie releases and DVD releases has been steadily dwindling over the last few years. A recent film by Steven Soderburgh (sp.?) was released on DVD and in theatres at the same time.

zbicyclist

I don't think it's even remotely fraudulent for studios to pay extra for theatres to put the movie on extra screens.

The box office figures are based on who saw the movie and how much they paid. The only fraud is involved in THOSE figures.

Rather than say "inflate opening numbers", it would be less prejudicial to say "increase opening numbers".

This really isn't any different from Pepsi or Coke paying for display space at the end of the aisle so they sell more soda. For new products, they may both incent the supermarket to take on the product ("slotting allowances") and offer artificially lower prices to consumers to get them to try and to create good word of mouth.

There's a nice article on whether "more screen lead to more box office" or "more box office leads to more screens" in a recent Marketing Science by Robert Krider et al.

Economically, it may make sense. The theatre owner takes on additional risk for putting the movie on multiple screens -- there's reward if the movie is a big hit, but if the movie's a stinker there are problems. So, the movie distributor is paying extra money to cover the risk. That's not "payola".

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scott cunningham

This is hard to believe. Whoever said the studios were giving 100% revenue for the three opening days to theaters in exchange for opening up more screens has to be lying. I think distributors get 100% of the revenue in the opening days, and then that gradually goes exhibitors' way over time. Since most pictures make the lionshare of their money in the opening weekend, it's rare for a Titanic event to unfold. Movies are a tournament game, for the most part. See Art de Vany's excellent book, HOLLYWOOD ECONOMICS, for some of that

But, it does make sense that studios would offer incentives for distributors. Movie demand is driven by information feedbacks because movies are differentiated products and willingness to pay depends on experience. I don't really know what my willingness to pay for X-Men 3 is unless I see it, so I rely heavily on critics and friends to help me decide ex ante. Large opening weekends are important, therefore, since no one knows yet how the movie will do, and the information feedbacks haven't really started yet.

But you can't trick the public for long. De Vany shows how well the information conduits work. So I can't imagine a rational distributor would pay theaters millions in lost revenue just to open the movie on many screens when the survival of a movie experiences a steep decline after the first week anyway.

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scott cunningham

That second paragraph should begin with, 'it does make sense that studios would offer incentives for EXHIBITORS to open more screens since opening weekends are so critical to a movie's success."

Ken D.

A point that I don't believe has been mentioned yet -- movie theaters make a bundle off concessions. I don't know the figures, but it is possible that they do quite nicely off the opening weekend of Superman IX or P of the C VI even with little or no cut of the ticket per se.

SteveSailer

The box office numbers that come out Monday afternoon are quite accurate. (The ones released on Sunday are estimates, but are generally are within a few percent.)

Movie studios and theatre chains obviously will work out deals on how they split revenue from ticket sales. There's nothing scandalous about that.

The economic structure has been changing over time -- too much new theatre capacity was stupidly built in the 1990s (driving many chains into bankruptcy), so the studios held the whip hand for a while in the early part of this decade as theatres competed for films to show. Now, there isn't such an oversupply of seats and screens, so studios may well have to be offering more incentives to theatres.

Edward Jay Epstein's recent book "The Big Picture" explains the economics of Hollywood as of 2003.

SteveSailer

I think the blog posting is closer to the opposite of the truth: the studios traditionally get almost the entire ticket revenue from the first weekend, while theatres get the concession profits. The theatre gets to keep a higher proportion of the box office in subsequent weeks.

This has an unfortunate incentive of encouraging studios to put more of their artistry into the trailer and marketing campaign than into the movie, since they make a higher profit on first weekend ticket sales than on later tickets bought by customers lured in by good word of mouth.

Adam L. Barr

I'm glad somebody mentioned concessions. It's my understanding that is where theaters make most of their money. I'd like to know why tickets are continually rising despite the fact that theaters are making good money from this new phenomenon of having commercials play before the movie begins.

dmswitze

There is so much about the movie exhibition industry that most people don't know. I did my doctoral disseration on the industry, so I have some facts. First, the profit made by an average theater is about the same for concessions as for box office (in terms of the dollar amount generated). It's just that on box office sales, theaters are only keeping just under 50%; while on concessions, they're keeping about 83%.

There are two kinds of contracts: declining rate and fixed rate. In a fixed rate, the percentage of box office paid by the theater is the same over all weeks. This is used when the movie is potentially risky and the theater does not know if the movie will have "legs". In a declining rate contract, which most movies are (over 85% of contracts), the percentage paid by the theater to the movie distributor declines over time. It's a throwback to the days when movie theaters only had one or two screens, and it was a way of getting the theater to keep showing one distributor's movie for a third or fourth week instead of dropping it for a new and more expensive movie. No theater pays 100% of the box office revenue -- that's ridiculous. And the highest rental rate paid right now, in the first week, is 70% -- for the top movies. Distributors wanted to go up to 75 or 80, but theaters wouldn't have it. And ticket prices are rising at about the same rate as inflation...

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