The success of "Avatar", which cost a whopping $237 Million to produce, raises the question: are big-budget movies more "risky" for Hollywood studios? The answer(s) have many market analogies.

"THE NUMBERS" website is a treasure trove of studio budgets and gross revenues for thousands of movies.

My quick-and-dirty analysis reveals:

1) Movies with budgets over $200 million produce a mean gross return on investment of 70% — but the standard deviation is 90%. This is a materially lower return than the entire movie universe which includes lower budget films. One simplistically concludes that Hollywood would be better off producing more films with lower budgets. The seemingly random dispersion of results also suggests that Hollywood lacks significant predictive power of results. This is analogous to index funds' outperforming most active managers.

2) Certain studios are much better than others. In particular, Buena Vista has a noticable number of big losers. Twentieth-Century Fox has had a noticable number of winners. Warner Brothers might be analogous to the highly levered speculator with a large number of very big winners and very big losers.

3) A small number of unlikely films skew all of the results. "Paranormal Activity" cost $15,000 to produce, but grossed $141 million. "The Blair Witch Project" cost $35,000 but grossed $248 million. These films are like the penny stocks that your brother-in-law invested in — and boasts about endlessly. Whereas, you "conservatively" invested in Sony's "Stealth" and "Final Fantasy" and lost a cool $100 million on each.

Finally, the dispersion of results makes one wonder how much market research gets conducted before a company invests $230 million in a film? And whether this research produces any discernible difference.

Rocky Humbert, quantitative analyst, speculator and master chef, blogs as OneHonestMan.





Speak your mind

6 Comments so far

  1. Steve Leslie on January 9, 2010 9:43 am

    My visceral reaction to this is that the studio gets into the movie too deep and can't get out of it. They lose touch with what they ultimately are as a business and just let things get out of control. Bigger is not necessarily better, bigger is bigger. We wee this in business all the time so why should the film industry be any different. AT&T built the personal computer and lost plenty until finally they gave up. Sun Microsystems decided to fight microsoft for years and the scorched earth policy they played eventually destroyed much of the company. Egos are such a huge part of business. How many executives have ultimately destroyed a company all for the sake of some vain legacy.

  2. Jeff Watson on January 9, 2010 11:16 am

    Studio accounting is better fiction than Hemingway. The investors of "Forrest Gump" were shown, by the miracle of creative accounting, that the movie lost money and didn't get any return. "Lady in the Water" cost $75 million to make and had a $70 million advertising budget but only did $72 million at the box office not including DVD sales. Investors were told that the movie lost $100 million and got nothing, just like the investors of "Forrest Gump" Many movies are sold through limited partnerships via brokerage houses. In the early 80's I invested in some really big movies and never received a dime. The lesson I learned is to keep with what I'm doing and to not play in someone else's market.

  3. kim zussman on January 9, 2010 11:25 am

    Art De Vany studied variance in the film industry: http://www.amazon.com/Hollywood-Economics-uncertainty-Contemporary-Politicaleconomy/dp/0415312612

    It appears he is in the black swan camp (which was recently killed by a white one), and the fit De Vany advised exercising according to power law distribution: http://www.arthurdevany.com/?p=1120

  4. michael bonderer on January 9, 2010 12:08 pm

    Or compare to the remarkable number of ‘hits’ in the gas shale markets or off-shore deep-water and soon sub-surface salt dome drilling projects. Using new imaging and sensing technology here pays off way bigger then CGI motion capture and story with far less dispersion.

  5. Nigel Davies on January 9, 2010 2:59 pm

    There seem to be some important figures missing from this, for example the revenues from themed merchandise (eg Rocky dolls). And this of course would be analogous to speculators who are also offering educationala and/or software services.

    This could mean that a box office loser could still be a big winner if the film achieves ‘cult’ status offers suitable opportunities for merchandise.

  6. Andrew McCauley on January 10, 2010 5:40 pm

    An article titled, Randomness in Hollywood by Leonard Mlodinow www.its.caltech.edu/~len/images/FinalRandomPhotoReady.pdf , from the now defunct West Magazine (LA Times) explores the role of chance in the movie business. As the title suggests outcomes are not consistent.

    Two of the Specs, Jim Sogi & Kim Zussman, have made reference to the work of Leonard Mlodinow in previous posts. www.dailyspeculations.com/wordpress/index.php?s=mlodinow


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