Friday, March 18, 2005
Uniform Pricing
In a comment to this post, Jody linked to this discussion of movie prices. It's interesting enough, but I think is based on a flawed understanding of how studios and theater chains make money. There's a pretty good, if very basic, discussion of distribution at How Stuff Works, here. Here's the problem in a nutshell:
Which brings me to my main point: theater chains are not really rational actors in this market. Or, they are, but not in the way you'd think; they don't always show a movie because they think people will see it--they make all kinds of strange deals with studios, because the fact is, the studios don't have to sell them product. So they'll say things like, you want an exclusive engagement in Knoxville of The Matrix Reloaded for its opening weekend? Well, then you have to guarantee me you'll give me two screens of a revival screening of Battlefield Earth for a full month, so that word-of-mouth will bring kids in (an optimistic plan, to say the least). And there are people who'll see whatever movie has seats available, even if it's John Travolta with dreadlocks; and by making this kind of deal, Warner Brothers gets that extra money, and more importantly, denies another studio the same screen.
Say a hypothetical theater owner decided that Battlefield Earth tickets were only worth $1, not $7.50. And as a result, sent $0.50 to the studio for everyone who saw it, not $3.75. Warner Brothers distributed that movie. Guess which theater isn't even going to get to bid on showing The Matrix, Batman Begins, Million Dollar Baby, or anything else they might want?
Finally, add to the equation that actors and directors get profit participation as well, and you can see why neither theater owners nor studios are anxious to price different movies differently. You don't want a star pissed off because people can see her latest flop for $1.25, while Hilary Swank gets $10.
And last, remember William Goldman's central rule about Hollywood:
Nobody knows anything.
Nobody knows what movie is going to be a hit ahead of time. Nobody knows what movie is going to strike a chord with audiences a particular week. Movies are tracked, and studios have some idea how they'll do, but they get surprised. It's not like other businesses, where past revenues give an idea about future returns; a studio markets and sells ten to twenty completely different products each year. Which will do well? Nobody knows anything!
Example: The Grudge tracked at $25 million for the first weekend (tracking is the studio's prediction of how it will do) and it made $40. They were nearly 100% off. (this info is from Tad Friend's excellent piece about Dave Wirtschafter (head agent at William Morris) in this week's New Yorker; the president of production at New Line makes an appearance. It's not online, but there's an interview with Friend here). Trying to further second-guess audiences by negotiating different ticket pricing deals for different movies is nothing theater owners want to get into (studios can't negotiate ticket prices). So this is an issue where I'm not sure the market (at least the market between studios and theater chains) is capable of making rational decisions.
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- Studios make the most money on opening weekend. After that, profit participation falls. Theaters make the most money after the opening weekend. So a studio wants a movie that makes a hundred million the first weekend, and they don't care how it does after that. A classic example would be The Hulk, which made $62 million its first weekend and dropped to just under $19 million the weekend after that. It made half of its total domestic gross (roughly $120 million) the first two days it was open (and it was in first run theaters for three months).
- Theater owners make more money the longer a movie has been showing; My Big Fat Greek Wedding is the kind of movie they want. It made just over a half a million dollars the first weekend it was open (on 108 screens). Its total domestic gross was nearly $250 million, and every week past the opening, theaters earned a larger and larger percentage of ticket share.
Which brings me to my main point: theater chains are not really rational actors in this market. Or, they are, but not in the way you'd think; they don't always show a movie because they think people will see it--they make all kinds of strange deals with studios, because the fact is, the studios don't have to sell them product. So they'll say things like, you want an exclusive engagement in Knoxville of The Matrix Reloaded for its opening weekend? Well, then you have to guarantee me you'll give me two screens of a revival screening of Battlefield Earth for a full month, so that word-of-mouth will bring kids in (an optimistic plan, to say the least). And there are people who'll see whatever movie has seats available, even if it's John Travolta with dreadlocks; and by making this kind of deal, Warner Brothers gets that extra money, and more importantly, denies another studio the same screen.
Say a hypothetical theater owner decided that Battlefield Earth tickets were only worth $1, not $7.50. And as a result, sent $0.50 to the studio for everyone who saw it, not $3.75. Warner Brothers distributed that movie. Guess which theater isn't even going to get to bid on showing The Matrix, Batman Begins, Million Dollar Baby, or anything else they might want?
Finally, add to the equation that actors and directors get profit participation as well, and you can see why neither theater owners nor studios are anxious to price different movies differently. You don't want a star pissed off because people can see her latest flop for $1.25, while Hilary Swank gets $10.
And last, remember William Goldman's central rule about Hollywood:
Nobody knows anything.
Nobody knows what movie is going to be a hit ahead of time. Nobody knows what movie is going to strike a chord with audiences a particular week. Movies are tracked, and studios have some idea how they'll do, but they get surprised. It's not like other businesses, where past revenues give an idea about future returns; a studio markets and sells ten to twenty completely different products each year. Which will do well? Nobody knows anything!
Example: The Grudge tracked at $25 million for the first weekend (tracking is the studio's prediction of how it will do) and it made $40. They were nearly 100% off. (this info is from Tad Friend's excellent piece about Dave Wirtschafter (head agent at William Morris) in this week's New Yorker; the president of production at New Line makes an appearance. It's not online, but there's an interview with Friend here). Trying to further second-guess audiences by negotiating different ticket pricing deals for different movies is nothing theater owners want to get into (studios can't negotiate ticket prices). So this is an issue where I'm not sure the market (at least the market between studios and theater chains) is capable of making rational decisions.
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