In a country that thrives on commercialism and image, the motion picture industry
is an engine of social commentary, celebrity, and enormous cash flows. From the
development of the first kinetoscope to our current star-studded event-movie culture,
the industry has evolved and grown to become one of the largest and most influential
cultural forces in the world today.
Substantial critical analysis and literature exist discussing aesthetic qualities in
film production. This paper does not follow that particular line of inquiry. Instead,
we examine film as an industry focused on profitability, in which all decisions are
based on the ultimate bottom-line. More specifically, the purpose of this paper is to
relate temporal cost decisions and profitability by reconciling the contrasting qualities
of high upfront costs with a high degree of uncertainty of reward at the outset of a
film project. Since the genesis of the industry, the structure of film financing and the
nature of revenue accrual have undergone profound change, wrought both by external
forces and competition from within. In this paper we try to provide an overview of
how the industry actually operates, and an understanding of the seemingly irrational
ways in which decisions are often made.
This paper is organized as follows. It will first explain the political, legal, and
economic forces that led to a shift in contract and cost structure in the feature
film industry. It will then present an economic model explaining how, based on
economic intuition, we should expect costs of feature film production to be structured
once equilibrium is attained. Next, it will give an overview of the current body of
academic literature on forecasting box office receipts, revenues, and other measures
of profitability in the film industry. It will then present an econometric model that attempts to provide empirical evidence for the conclusions of the earlier economic
model. Next will be a discussion of the data compiled, econometric analysis of said
data, and an interpretation of the results. Finally, possible extensions and further
research will be presented, followed by a conclusion.