The Curious Economics Of The Film Industry
Alex Tabarrok's brother is noodling about the movies:
One interesting thing that I've always found about the film business from an economic point of view is that unlike in any other business I can think of, the cost of manufacturing the product has no affect on the purchase cost to the consumer. For example Honda can make a cheaper car with less features and cheaper finishes than BMW without losing all of their customers to the superior car because they sell their product for less. You spend less to make something, you charge less for it. Makes complete and obvious sense. Not so in the film business. I am an independent film producer and I make films that typically cost somewhere between $5M and $10M. But when I make, say, an $8M film it has to compete at the same price level as the studios' $80M or $100M film. It costs the consumer the same $12 at the multiplex (and whatever it costs to rent a DVD from Blockbuster these days) for either film. There is no price advantage to the consumer for choosing to see a less expensive film. This naturally makes it terribly difficult for smaller films to find an audience. I find this quite fascinating and I can't readily think of another industry like it.
Well, let me take a stab at it.
Look at the art world. The Los Angeles County Museum of Art recently commissioned a $25 million exhibit piece from sculptor Jeff Koons. The sculpture will consist of a life-size replica of a 1943 Baldwin steam locomotive suspended by a life-size replica of a 160-foot tall lattice-boom crane. Reportedly the locomotive will belch steam, the wheels will turn and the whistle will blow periodically.
Now, just because Koon's sculpture cost $25 million to produce doesn't mean it's a Cadillac and Van Gogh's The Starry Night (slapped together with paint and canvas in an underheated garret) is a Yugo.
I suspect the pricing structure for films became set quite early on, back when the theater chains were owned by the studios and the production costs of motion pictures did not vary to a great extent. Film was more like television in that the product had to turn over very quickly to keep an audience coming to the local cinema every week. And the nominal price of admission in those days assured that, for an evening's entertainment, it was the best deal in town. And this remained true regardless of the economic climate.
The idea of having to choose between two movies, one which had a kajillion times the budget as the other, is a fairly modern problem. Financial disparities existed in the old studio system, but not to that degree.
Let me give you an example. In 1939, MGM released a lavish Technicolor spectacle called The Wizard of Oz. It cost $2.7 million to produce, a princely sum at the time. Meanwhile, the poverty-row studio Monogram released Charlie Chan On Treasure Island. That film cost $120,000. So The Wizard of Oz cost about 25 times what Charlie Chan On Treasure Island did.
And that was about as far apart as the financial disparities went in those days.
Flash forward to 1997, when James Cameron's Titanic (with a reported budget of $200 million) went toe to toe with Peter Cattaneo's The Full Monty ($3.5 million). Titanic's budget was nearly 60 times the budget of The Full Monty, they were released about the same time, and they both made a lot of money. In fact, in terms of return on investment, The Full Monty was the better business proposition (in my opinion it was certainly a better movie).
The fact that audiences were willing to pay full price for a ticket to The Full Monty that year, or a ticket to The Blair Witch Project two years later (with its laughable $60,000 budget) means that it's the lavish studio film that is really the sucker's bet. The ones who should be demanding lower ticket prices for indie films are the studios, because lower ticket prices would guarantee lower return on investment for small films, and would ultimately mean fewer indie releases.
Interestingly, studios already charge exhibitors more for blockbuster films. Theater owners have to fork over up to 90% of the gate in the opening weeks of a hotly-anticipated film. By contrast, indie films usually cost the exhibitor half the gate. This helps mitigate the risk of an indie film; exhibitors always hope they've booked the next The Full Monty and will be able to keep half the gate of a packed house and clean up on concession sales.
