Economics of Movies
By Arnold Kling
One of my favorite examples to use in a first-year economics class is the movie business. For one thing, it’s easy to explain adjusting for inflation when you talk about comparing the box office receipts of movies of different eras. For another, the process by which movies and movie theaters make money is interesting.
Jonathan Last has a book review on this topic.
In 1947, Hollywood sold 4.7 billion movie tickets. The studios were hugely profitable movie factories.
…In 2003, only 1.57 billion tickets were sold, a third the number 56 years earlier, while the real cost of making movies increased some 1,600 percent…
The physical production of the movie was $103.3 million. Prints cost $13 million; insurance, taxes and customs clearance came to almost as much. The studio spent $42 million for advertising in North America and a bit more than half of that for the rest of the globe. On the back end, Disney paid out $12.6 million in residual fees and figured in $17.2 million for overhead and $41.8 million for debt service–for a total negative cost of $265.3 million, more than double the studio’s take of the box-office receipts.
So how did Disney make money? The answer is in the clearinghouse. Disney never expected to profit from the theatrical release of Gone in 60 Seconds, but it did count on harnessing a whole river of money–from the rights to the intellectual property it had created.
By 2002, Buena Vista Home Entertainment International, another division of Disney, had reaped $198 million in sales and rentals from Gone in 60 Seconds videos and DVDs.
For Discussion. Of the various parties involved in the movie industry, which ones earn the highest economic rents, and why?