Economics of the Movie Business

ECONOMICS OF THE MOVIE BUSINESS . RISK SHARING

Introduction

Most of the movies that are eventually released are cofinanced . This is a term that is used within the movie industry to describe those films for which there are more than one firm that share both the cost of production as well as the revenues . Nearly one-third of all the movies that are released are cofinanced . Various studies have shown that the main reason for cofinancing is to manage and share risk . Most of the major studios are in the category of publicly traded

firms where the investors are free to carry out their own diversification decisions . Not always is the cofinancing decision related to the movie returns as the studios rarely cofinance highly risky films NOTEREF _Ref \h 1

Demand is difficult to predict and thus financial risk remains to be a characteristic of the film industry since most of the cost is incurred long before the demand can be actualized . It 's thus the reason that most of the authors in this field have argued that the key variable that shapes the industry is the financing strategy adopted . Mainly , there are three ways in which cofinancing would reduce risk associated with the movie production . First , the cofinancing of the relatively risky films by the studios would give them the opportunity to participate in the less risky projects . Second , cofinancing would allow studios to fine tune their portfolios thus gaining the advantage of covariances of the gains across the movies . The third advantage of cofinancing is the simple law of large numbers to share a potential loss

Data collection

The data to be used here in this is the information provided forth in Goettler , R . L and Leslie ,

(2004 ) where information on over 3 ,826 movies was exhibited in the US between 1987 to 2000 . The primary source of the data was the Internet Movie Database (IMDb . The analysis focused mainly on ownership choices of the major studios . Out of the 3 ,826 movies examined , 1 ,305 were produced by the major studios

The analysis here focuses on ownership choices that have been made by the major studios . Movie profitability has been based on the return on investment , RIO , which is defined as the revenue divided by the cost Revenue in this case was measured as the North America box office revenue and cost was obtained from the production budget . Film 's negative cost , which is the standard measure of production cost was also used . Other cost such as advertising are in most cases proportional to the cost of production and were thus not evaluated in this kind of study . Thus the ROI evaluated here was basically the relative profitability of the films but not the absolute profitability . Also the measure of revenues in this study excluded some revenues such as foreign box and video revenue . It would be ideal to use all the revenue sources but the approach would have limited the number of films in the analysis...