Efficiency in Film Distribution

Abstract

The motion picture industry is indeed a risky sector. The difficulties in predicting success and the sheer amount of production budgets have led to spectacular failures and in some cases even bankruptcies as well. Despite the adverse nature of the industry, there are winners who not only are able to find success but are also capable of doing it consistently. Using data envelopment analysis and finance-related techniques on risk analysis, I compare the performances among a group of major film distributors/studios. I find that one studio, i.e. Disney, consistently operates on the efficient frontier and performed best when it comes to the risk and return analysis. Its strategies are distinct in that it focuses on fewer movies but bigger budgets per movie. It also restricts the genre of movies, with a significant weightage on PG- and PG-13 rated adventure films, with almost all of them, part of serialised franchises.

Keywords:

• Data envelopment analysis
• risk analysis
• efficiency analysis
• technical efficiency
• motion picture industry

JEL CLASSIFICATION:

• L8
• L82

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 The usual contractual run at the cinemas is between 4–8 weeks (De Vany and Walls 1999).

2 William Goldman is considered by many as one of the finest screenwriters whose Academy award-winning screenwriting credits include Butch Cassidy & The Sundance Kid (1969) and All the President’s Men (1976).

3 EuropaCorp SA, the French studio founded by acclaimed French director Luc Besson filed for bankruptcy in 2019 due to mounting losses as a result of its inept handling of the distribution of its films in the US and also after a string of disastrous films, notably Valerian and the City of a Thousand Planets, Their Finest and The Circle (Saul 2019). In the case of United Artists and Carolco Films, their demise was largely attributed to failures by a single big budget project, 1980’s Heaven’s Gate and 1995’s Cuththroat Island respectively.

4 See Barnes (2019) for more.

5 The box-office data was collated on 15 May 2020.

6 The is also the issue of accuracy and consistency of data – some figures of production budget do not include marketing/advertising cost so it is not uncommon to have varying figures from different sources. As such, I use the figures from a single source. I also believed that the figures are likely to include marketing costs as well as production costs.

7 Lionsgate has growth tremendously in recent times, from a small studio focusing mainly on independent films to a titan studio in the last two decades, thanks largely to their efficacy in spotting talent, forming the right partnerships, and making shrewd acquisitions (Crucchiola 2015).

8 For a primer on DEA technique and computations, see Coelli, Prasada Rao, and Battese (1998).

9 Coelli (n.d.) argue that the decision between input or output orientation would depend on which of the two in which the managers have greater control over.

10 An isoquant is a curve that gives all the combination of inputs that can produce a given level of output.

11 The value of TE range between 0 to 1, with 1 representing full efficiency (100%) efficiency while 0, totally inefficient.

12 An isoquant is a curve that shows all the combination of inputs that can be procured from a given budget outlay and input prices.

13 Coelli (n.d.) also use the term overall economic efficiency to denote cost efficiency.

14 For a thorough discussion on the distribution side of the movie industry using the case of Warner Bros., see Fellman (2004).

15 Limited release features are those films that are released in 50 to 70 theaters, with the purpose of either directed at very specific segment of the market or just testing the market without the baggage of high advertising outlays (Fellman 2004).

16 Thanassoulis (2000) in his study on water distribution, acknowledges a list of possible outputs in modelling of the water distribution sector, from the number of connections, the length of mains (pipes), total volume of water delivered to clients, total water delivered to household, total water delivered to businesses and pipe bursts. However, due to strong correlation between them, his model settled for only the number of connections, the length of mains (pipes) and the total volume of water delivered to clients.

17 For the productivity analysis, Färe et al. (1994) demonstrated that the DEA technique can be used to calculate the estimates of Malmquist total factor productivity (TFP) index figures. Basically, the Malmquist index approach is a chained index approach, measuring changes in productivity relative to a base year. The changes can be decomposed into two components, i.e. movements due to changes in technical efficiency (catching up) and movements due to changes in technology (technological or technical change). Further, the changes in a firm’s technical efficiency can be broken down into two parts as well, i.e. changes which are due to pure technical efficiency change (for e.g., managerial efficiency) and changes that are due to scale efficiency (optimality of firm size). Essentially, the Malmquist Index technique derives an efficiency measure for one year relative to the prior year, while allowing the best practice frontier to shift. In my analysis, the period covers from 2015-2019 but the results in Table 4 is a summary of the annual results (2016, 2017, 2018 and 2019). For a more thorough explanation on the Malmquist index technique and its computations, see Coelli (n.d.).

18 This being the case since the box-office revenues for foreign movies tend to be modest.

19 The total factor productivity (TFP) is a multiplicative compound of the technical efficiency change and the technological change.

20 Return to investment of a movie is defined by the difference between the box-office revenue of the movie and the cost of production of the movie divided by the cost of production of the movie.

21 Given Disney’s portfolio of action/adventure and animation franchises, it is very likely that these movies do particularly well internationally. As such, it is not entirely surprising to see that these types of movies having higher ratio of international-domestic box-office breakdowns. For example, Disney’s adventure (comic-book) franchise movies like Avengers: Endgame and animation franchise offerings like Frozen II had domestic-international box office breakdowns of almost 30% : 70% ratio (figure from www.boxofficemojo.com).

22 I tabulated the mean ROI for Disney using global box-office and international-only box-office respectively. The figures are 3.0 and 1.4 respectively as compared to 0.227 in the case of domestic box-office only ROI.

23 In the US, there are 5 rating categories, G (general audience), PG (parental guidance suggested), PG13 (parents strongly cautioned), R (restricted) and NC-17 (no one 17 or under admitted) (https://www.motionpictures.org/film-ratings/)

24 Unsurprisingly, the variable of prior work (i.e. sequels or prequels) has been found to be a significant driver to box-office revenues in many papers. In the case of Disney, the hugely popular comic book franchise series, the Avengers has continuously dominated the box-office with devastating effects since its inception in 2008 starting with 2008’s Ironman. Other successful franchises like The Pirates of the Caribbean series, the Star Wars saga and so on has not only provided Disney with consistent and lucrative share of the box-office but also a huge ancillary income stream (i.e. DVDs, cable tv, streaming, video-on-demand and so on) and merchandising.

25 The issue of demand uncertainty stems from the audiences themselves not knowing what they want until they have actually seen the product (movie) while the issue of product uncertainty lies in the fact that oftentimes, the producer themselves are unable to guarantee exactly what the audience will get until the movie is completed. For more on symmetrical ignorance, see Caves (2000).

26 The said sophisticated system can display the box-office history of any actor, director and so on in a matter of seconds while also able to aid in analyzing the marketplace, release schedule, reviews, demographics, print ads, websites, TV spots and so on (Fellman 2004).

27 Disney’s strategy of offering a continuous string of serialised Marvel comic book film releases has met with astonishing success to date since 2008. According to Bean (2020), the domestic box-office grossing for all the marvel comic universe movies by Disney stands at $8.545 billion domestically while internationally, at $22.588 billion worldwide – data from the movie industry data tracking website The Numbers, confirm the Marvel Cinematic Universe (MCU) franchise to be most lucrative movie franchise of all time.

28 See Hirschhorn (2005) for more.