Entertainment Industry Economics: Entertainment Industry Economics


How do we spend our leisure time?: How do we spend our leisure time? Entertainment Distinct from Recreation (biking and hiking) http://www.bls.gov/news.release/atus.toc.htm


Entertainment Industry : Entertainment Industry Movies TV Music Broadcasting (Radio, TV, Cable) Publishing Live Entertainment Theater (Broadway), Symphony, Sports, Theme Parks Video Games Gambling Other (Adult Entertainment)


Adult Entertainment : Adult Entertainment Legal Pornography Strippers Phone Sex Gambling Illegal Prostitution Drugs


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Size of the markets: Size of the markets


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Hollywood Statistics: Hollywood Statistics What factors are important to the demand for a particular movie?


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Slide10: http://www.reference.com/browse/wiki/List_of_highest-grossing_films Highest gross, with and without adjusting for inflation


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Movie Demand : Movie Demand Number of admissions Demographics By age


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Movie Supply : Movie Supply Number of movies Types of movies by ratings Number of theaters Number of screens


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Slide33: Miniplex:2-7 screens; Multiplex: 8-15; Megaplex: andgt;15; Total 6,012 theaters


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Van Nuys Statistics: Van Nuys Statistics What factors are important to the demand for a particular porn?


Size of Porn Industry: Size of Porn Industry 'Last year (1996) Americans spent more than 8 billion on hard core videos, peeps shows, live sex acts, adult cable programming, sexual devices, computer porn and sex magazines.' (Schlosser 1997)


Video Rentals: Video Rentals Video Rentals: 1985 75million 1992 490 million 1996 665 million (Schlosser 1997, citing AVN) 'According to Fishbein, there are well over 800 million rentals of adult videotapes and DVDs in video stores across the country. 'And I don't think that it's 800 guys renting a million tapes each,' he says.' (CBS 2004)


Video Rentals: Video Rentals That corner is the pornography business, which generated some $4.1 billion in 1998 and accounts for almost a third of all video sales and rentals in the United States. (Economist 1999) Vivid is the most powerful studio in America’s porn-film industry. Nationally, adult videos bring in $2 1/2 billion a year, according to Adult Video News, and account for more than a quarter of all sales and rentals at the typical video store. (Economist 1998)


Video Rentals: Video Rentals In the United States in 2002, adult video and DVD rentals and sales accounted for 29.1% of the gross income in stores that carry both mainstream and adult products, for a volume of over $3.95 billion. This figure includes transactions in retail outlets but does not include sales through mail order or over the Internet. (Free Speech Coalition 2005)


Employment: Employment 'It employs in excess of 12,000 people in California. And in California alone, we pay over $36 million in taxes every year. So it's a very sizeable industry,' says Bill Lyon, a former lobbyist for the defense industry. (CBS 2004)


Cable (Pay Per View) : Cable (Pay Per View) 'If all pay-per-view entertainment available in the U.S. is lumped together, sex comes second — after first-run movies but before concerts and sporting events. According to entertainment industry analyst Dennis McAlpine, a partner in McAlpine Associates, the 'buy rate' for in-home pay-per-view adult entertainment delivered via cable or satellite is between 5 percent and 10 percent. The buy rate goes up as the content becomes more explicit, topping out at about 20 percent. (Ironically, one of the largest providers of in-home adult entertainment is Direct TV, which is owned by Rupert Murdock’s News Corp. News Corp. also owns conservative Fox News.)


Cable (Pay Per View): Cable (Pay Per View) Satellite and cable operators, according to Kagan Research, earn just under $800 million a year from adult movie subscriptions and pay-per-view orders, roughly 40% of pay- TV on-demand revenue. All of the leading cable and satellite TV providers - including Dish Network, DirecTV, Comcast and Adelphia offer adult content (Adelphia offers soft-core programming only). (Free Speech Coalition 2005)


Hotel (Pay per view): Hotel (Pay per view) In hotel rooms, however, the buy rate skyrockets to as much as 50 percent, according to recent estimates. McAlpine said although that represents only 5 to 10 percent of any hotel chain’s bottom line (but as much as 70 percent of in-room profits), erotic entertainment is still a significant revenue generator because it requires no investment on the hotel’s part. Under contracts with LodgeNet and On Command, the two largest purveyors of on-demand in-room entertainment, hotels receive a percentage of each pay-per-view purchase.' (AVN 2005)


Hotel (Pay Per View): Hotel (Pay Per View) An estimated 40 percent of the nation's hotels offer adult movie options, according to a 2004 report by Citizens for Responsibility and Ethics in Washington (CREW). Adult movies account for about 90 percent of pay-per-view revenue, says the CREW report. Based on estimates provided by the hotel industry, at least half of all guests at hotels such as Marriott and Holiday Inn pay to view adult movies. These orders result in approximately $190 million a year in sales. (Free Speech Coalition 2005)


Online: Online


Slide58: Vivid, with revenues of $25m, makes 12 big movies a year, and releases a total of 150. (Economist (1998) Around 10,000 porn films are now being produced in America every year, compared with 3,000 five years ago. (Economist 1998)


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A Brief History of Hollywood: A Brief History of Hollywood Studio System (1920~1960) Vertical Integration (Studios own theaters) Block booking, blind booking Actors under contract to one studio Mass production, little creative input Product differentiation (studios specialized in genre)


Major Studios: Major Studios 5 Major Integrated Studios MGM (Lowes), RKO, 20th Century Fox, WB, Paramount 3 Major Nonintegrated Studios United Artists, Columbia, Universal


Exhibition Contracts: Exhibition Contracts Block Booking Booking multiple films for play at the same time from the same studio Blind Selling Booking films without having seen them.


Antitrust : Antitrust Paramount Cases Forced the integrated studios to sell their theaters. Forced the majors to change their exhibition contracts. Movies were licensed individually. It became a movie by movie, play date by play date, short term contract.


Modern Hollywood : Modern Hollywood Project by Project Finance, producers, distributors, exhibitors (theaters) are different for every picture. Studios Still Play a role, but many more avenues to production, distribution and theatrical release


A Brief History of Van Nuys: A Brief History of Van Nuys Stag loop films Nudist movies and 'Informational Movies'. ERA of Porn Chic- Deep Throat 1971 80’s revival Gonzo (no plot) POV porn Internet Amateur


The Modern Era of Porn: The Modern Era of Porn Corporatization When Paul Thomas accepted his best-director award at the pornography industry’s 2005 awards ceremony, he commented on the corporatization of the industry by joking: 'I used to get paid in cash by Italians. Now I get paid with a check by a Jew.' Ignoring the crude ethnic references (Thomas works primarily for Vivid, whose head is Jewish), his point was that what was once largely a mob-financed business is now just another corporate enterprise.


Labor Contracts in Hollywood: Labor Contracts in Hollywood Artists (actors and directors) Studio years: Options contracts for 7 years. Modern Era: Fixed Fees Fixed Fees plus participation Where participation is in gross revenues, or net revenues (profit).


Why use profit sharing contracts?: Why use profit sharing contracts? Agency Problems Aligns Star’s incentives with producer’s Risk Sharing Films have become riskier, depends on star versus studio relative risk aversion Asymmetric Information Stars no better than studio about films prospects Contracting costs Easier to payoff on backend than to raise the money upfront


Wages in Hollywood : Wages in Hollywood Scale: Controlled by Screen Actors Guild Performer $788/day Extra Roles $122/day Arnold Schwarzenegger 30 million PLUS contingent fees for T3 John Travolta: 150,000 Pulp Fiction next film 10 million Alicia Silverstone: 250,000 Clueless next film 5 million


Porn Contracts: Porn Contracts Most Contracts are fixed fee, per scene. Performers do not retain any rights over their performance. No residuals


Wages in Porn: Wages in Porn Females typically are paid $900-$1,000 per scene with one male. Males are paid about $250 Savannah $4,000 per sex scene and $1,000 for posing for the video box cover


What we know about Hollywood: What we know about Hollywood Extreme Uncertainty (unique products, unique competition) A Few Movies Make Most of the Money Word of Mouth Matters Most Power Laws and Tipping Points Too Many Rated R movies Big Budgets Hurt Profits Star Power?


Do Stars Matter? : Do Stars Matter? Modern contracts allow stars to capture all the rents. Stars often increase gross revenues (or do they?), but do not increase profits. Higher gross revenues may be a function of larger budgets, independent of whether that budget is spent on Stars or something else.


Movie Supply : Movie Supply Distributors tightly control supply. Most movies are launched first in theaters on Fridays. Window Theaters Cable? Video (roughly 5-6 months later) TV Oscars?


Rentals : Rentals Movie rental firms paid $70 per copy and got to keep all receipts. Around 1998 distributors charged $3-8 per copy but shared receipts with the rental firm


Hollywood vs. Van Nuys: Hollywood vs. Van Nuys A Comparative History Simpson 2004


Data Sources : Data Sources www.mpaa.org


Other methods of viewing movies: Other methods of viewing movies DVD VHS Cable Internet


Legal Matters : Legal Matters Hollywood Antitrust


Slide81: Porn First Amendment Law California v. Miller (1973)