Making Movies: How The Film Industry Deals With The Uncertainty Of Success

Motion pictures are fragile products with unpredictable and often brief lives. According to Arthur De Vany and David Walls, writing in the latest issue of the Economic Journal, less than one in six films lasts more than two weeks on cinema screens and only one in twenty lasts longer than fifteen weeks. More than 80% of the revenues earned by 300 films released in 1995 were earned by just four films. Stars and big budgets guarantee only that a film''s run will begin on many screens. From then on, its run is like a parachute jump: if the movie doesn''t open, it's dead.

De Vany and Walls' research quantifies the stark uncertainty of motion picture revenues and shows how the industry is organized to deal with it. The industry is geared to adapt the number of engagements and the prices charged to cinema operators to the information revealed in weekly revenue reports. There is no other way to discover how good a film is than to put it on screens and let the audience decide.

Film audiences make hits or flops and they do it not by revealing preferences they already have, but by discovering what they like. As audiences discover their preferences and tell their friends, they generate ''information cascades'', in turn producing complex revenue dynamics. Information cascades can carry a film to explosive growth or to swift failure. This ''dynamic demand discovery'' requires adaptive supply and pricing and the film industry''s contracts and licensing terms are designed to support these adaptations. De Vany and Walls'' statistical analysis of the film industry reveals that the distribution of revenues among competing films follows a dynamic path so complex and variable that the only model capable of accounting for them is the Bose-Einstein distribution of statistical physics. Audiences tend to behave over the course of a film''s run like the particles falling into urns in a Bose-Einstein process: it is equally likely that the particles (audiences) will fall into a few urns (movies) as it is for them to be distributed in any other way.

Ultimately, the probability that a new viewer will go a particular film depends positively on the number who have already seen it and on the distribution of viewers over all the other films it is competing with. These dynamics let films leverage early successes (in revenue terms) into greater success in later trials. The Bose-Einstein process leads to extreme inequality in the final distribution of total motion picture revenues.

These results show that conventional thinking about the revenue expectations of motion pictures is misleading. It is no use speaking of an average or expected revenue, even for films expected to be blockbusters. Big stars and budgets affect the number of opening engagements. But after opening, a film must make it on its own and a large number of engagements can as easily lead to rapid death as to great success. Genre too has no predictive value.

'Bose-Einstein Dynamics and Adaptive Contracting in the Motion Picture Industry' by Arthur De Vany and W. David Walls is published in the November 1996 issue of the Economic Journal. De Vany is Professor of Economics and Mathematical Behavioural Sciences at the University of California, Irvine; Walls is Assistant Professor of Economics and Finance at the University of Hong Kong.