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.





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