Darkside of Hollywood | Lesser known facts about Hollywood economics

42 billion dollars, that is, the amount of money grossed by films at the global box office in 2019. Impressive, definitely surprising, probably not especially when you consider that global box office revenues have increased year over year since 2005.

That was, of course, until covered, as you’d, expect. The pandemic has devastated hollywood, resulting in an unprecedented 71 declining global box office revenue worse. Yet we all have to go another year without daniel craig’s, no time to die a title that has since taken on somewhat of an eerie meaning putting the absence of james bond aside movie ticket sales have actually been on the decline for nearly Two decades, despite a steady increase in population over the same period, so if people are going to the movie theaters less often and they are then what exactly is driving the growth behind global box office revenue? To answer this question, you have to understand the economics of hollywood.

How do movies get funded? What is the role of government subsidies and alternative revenue sources? How can a movie gross more than its budget and still lose money? And finally, what are the economics behind movie theaters and their 20 buckets of popcorn? This episode of economics explained is brought to you by skillshare the platform that i go to when i want to learn everything about literally anything unlike youtube, where tutorial quality can be.

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The undisputed movie capital of the world, this 30 square mile area, plays an instrumental role in shaping western culture. In addition to this chief role, hollywood is also a very material component of the us economy.

If you’ve ever sat through a movie credit reel, it’s. Little wonder why the film and television industry supports nearly two and a half million jobs per perspective, that’s greater than the number of people employed as farmers or miners keep in mind.

These are good paying jobs. According to the motion picture association, the industry pays more than 181 billion dollars in wages each year that’s impressive, because it also means that people employed in this sector earn around 47 more than the national average.

Although when you consider how expensive it is to live in los angeles, that’s, essentially what you’d expect. So what exactly is driving hollywood’s growth 20 years ago? The answer would have been in person movie going.

The studios made the movies the theaters showed the movies. Everyone was happy. Things were simpler, then, but considering that you’re now watching this video on youtube, it’s, probably not a surprise, to learn that the way that we consume content has changed drastically.

As a result, us movie going has been on the decline for nearly two decades, but how can there be growth at the box office if fewer people are going to the movies? The answer is mostly two-fold: increasing inflation and decreasing demand going to the movies is simply more expensive than it used to be.

In 1910, the average price of a movie ticket was a mere 7 cents. Today that number is a relatively staggering 9.26 cents. A 132 fold increase on top of this fewer people are physically going to the movies.

Despite an increase in relative population, notably some recent films like greenland and disney’s, mulan have cut out theatres altogether and are now releasing films online directly to viewers. This may sound like a novel concept, but it’s, not shark tank star and billionaire mark cuban pioneered a very similar distribution concept in the early 2000s, the dawn of online hd video long before disney and netflix it was cuban’s.

Magnolia pictures which released films through the internet and theaters. At the same time, however, it’s worth noting that this concept, wasn’t actually successful, as evidenced by the fact that you probably haven’t seen any movies using this dual distribution model.

Arguably, the biggest beneficiary of all of these technological advancements in the past two decades, excluding you, the consumer, have been the largest film studios, also known as the big six. The big six dominate the box office charts.

Part of the reason why these studios are so big is because they have big budgets: budgets that are often in the hundreds of millions of dollars, but how do movies get funded? Movies? Are companies not just in the profit driven sense, i mean movies.

Are literally companies, just like apple, google and australia? Studios incorporate their films for a number of legal reasons, but the main reason they incorporate is to raise capital. In this way, films are like pre-revenue startups.

They don’t have a product yet and they need funding. Just like the startup world. There’s, an investor ecosystem for the movie world; an investor ecosystem that looks for the same things that all investors look for the opportunity to earn solar returns from a venture managed by an equally solid management team.

Naturally, this raises a couple of questions who provides the funding to the studios and do you need a nine-figure budget to make a wildly successful movie to answer the latter question. First, absolutely not case in point.

The supernatural horror, film, paranormal activity, made on a shoestring budget of just 15 grand the film brought in nearly 200 million dollars. Another notable success is supersize me a documentary about fast food which, in its own right, is also a real life horror film, like paranormal activity.

The movie was shot on a modest budget: 65 000. It also crushed it at the box office raking in over 29 million dollars. Most of the viral success behind these kinds of indie films is attributed to the internet.

Tech savvy filmmakers now have an infinite array of ways to advertise. Their movies sites, like youtube, can make your trailer go viral, and after going viral, you can then sell your movie’s. Rights to a platform like netflix or amazon, prime, but the internet, isn’t only disrupting how films are distributed.

It’s, also disrupting how they are financed, namely thanks to crowdfunding platforms, which enable you to invest in movies and receive royalties. As for producing big budget films, the investors in these movies are usually private, equity firms and hedge funds.

Although it’s not uncommon to also see family officers as investors, as well as ultra high net worth individuals almost always, these investors are limited partners or lps, meaning they take a passive ownership stake and don’t get involved in the Movies production process – this makes sense because hedge funds and private equity firms are often looking to allocate capital towards what financial analysts call uncorrelated return streams, which is a pretentious way of saying, an alternative asset that has an income stream unaffected by the forces that usually affect Other types of traditional assets like stocks, music, is another perfect example of this one that is also very synergistic with the movie industry.

Look no further than any sony pictures movie featuring music from you guessed it. A sony owned record label like columbia records, but even with the financial backing of large institutions, studios rely on two other important funding sources paid product placement and government subsidies paid product placement.

It’s. The reason why you see so many brand advertisements in movies, some of which are just laughably, unbearable, yes, and it’s. The choice of a new generation for studios pay product placement is a critical fundraising tool, one that allows them to retain a larger ownership stake in their movies.

Without it, a studio would have no other choice but to raise more money from their investors, which, in turn dilutes the studio’s ownership. So how big of a deal is paid product placement? Well, if you’re, an indie filmmaker it’s, usually not even a remote possibility.

Good luck, trying to get apple to sponsor your home movie. But if you’re, a major studio, it’s, an entirely different story. Consider the james bond franchise. The upcoming film no time to die will reportedly feature over 90 million dollars in paid product placement, which equates to about 36 percent of the movie’s entire budget.

It’s worth noting that james bond is more of an outlier. Most movies. Don’t receive pay product placement revenue anywhere near those numbers, but perhaps the most interesting thing about paid product placement is that sometimes you don’t even know it’s there and that’s.

The point it’s meant to be subliminal. You’re, not supposed to notice it. The reason films, don’t disclose. Their brand placements is simple: it’s, not legally required. The movie industry argues that making disclosures mid-movie would be disruptive, which makes sense, after all, fans of james bond already know that daniel craig is getting paid to drive that slick, aston.

Martin, the real ethical issue here, one that is arguably criminally overlooked – is paid product placement targeting children, children who are easily manipulated and don’t have any concept whatsoever of the dynamic between brands and their non-transparent advertising case.

In point. The sugary pastry company cinnabon sponsoring the bee movie movies aren’t, even the biggest recipient of paid product placement dollars, not even close, that crown belongs to tv. This lack of disclosure is a double standard that doesn’t receive nearly enough attention if a youtuber is paid any amount of money to promote anything.

The fcc strictly requires a creator to be transparent and disclose such information to their audience. Failure to do so can result in a hefty fine and potentially jail time. On the other hand, film and tv essentially get a pass.

This leads us to our next topic: hollywood’s very powerful lobbying industry and the role of government subsidies lobbyists. For hollywood argue that the movie business is tough, so of course they need a tax break now.

Hearing this alone, as a state legislator should be enough justification to at least pause, because, as mentioned before, if you exclude 2020, hollywood has never done better. As a reminder, global box office revenues haven’t declined in over 15 years.

The idea of a booming movie industry, which doesn’t even make any money on its films needing a tax break is a little ridiculous in and of itself. Even the independent non-profit tax foundation describes these incentives as failing to live up to their promises, to encourage economic growth overall and to raise tax revenue.

These tax breaks are called mpis or movie production incentives. They are exactly what their name implies: tax incentives for the movie industry to incentivize film production, or at least in theory, that’s.

What they’re supposed to do. They’re, provided on a state-by-state basis, and most states have them originally conceived in 1992 by the state of louisiana. The concept was to bring film production jobs to the state and, to their credit, they have created jobs, albeit almost always at a very high cost to the taxpayers.

In massachusetts, for example, one study found that each film job created by the state’s. Mpi program cost taxpayers a whopping, 324 thousand dollars, as any rational economist will tell you, taxpayers always pick up a tab for ineffective government subsidies.

But wait you say what about independent filmmakers? Surely it’s, not only the most powerful studios that don’t actually need these subsidies, who can take advantage of them, unfortunately, not before being eligible to enjoy these sweet tax breaks.

Production companies are often required to spend hundreds of thousands of dollars and as if that wasn’t bad enough, many states even offer mpis with cash rebates on qualified purchases. Now to be clear, we’re, not talking about tax rebates.

We’re talking about production, cost rebates, meaning costs that are incurred by the studio, which the studio then submits to the state for reimbursement, specifically costs that are considered qualified, a percentage of which is kicked back to the studio, typically around 20 to 25 Percent, in a way it’s, the same concept as cash back rewards, except to be eligible for these cashback perks.

You don’t need good credit. You just need to be a big studio. These production costs submitted to the state for reimbursement are sometimes artificially inflated. You tell the state what you paid for the qualified purchase and they send you a check for 20 to 25 of the amount that you claim it’s.

Basically, the honor system – if all of this sounds like it’s prone to abuse, that’s because it is – and indeed it has been abused. Several film directors have been charged with tax fraud for telling state governments one inflated number and paying their production staff a significantly lower number.

As of the time of filming, this video 22 states offer cash rebate programs. The percentage varies from state to state, as does the definition of a qualified purchase. If all of this corrupt corporate lobbying sounds like it’s out of a movie, it’s.

Not if there’s, one movie that’ll, probably never be made by hollywood. It would be on this very subject. If movies can be such a great investment, then why do so many hollywood films never generate a profit for their investors.

Despite having tax credits, hundreds of millions of dollars in funding tens of millions in paid product placement and to top it all off extraordinary sales at the box office which even exceed their budgets, two words: hollywood accounting that’s, not a term that we Came up with it’s, what the industry calls it! Hollywood’s.

Accounting methodology is so infamously opaque that it even has its own wikipedia page. The scheme works by using questionable legal and sometimes illegal expensing systems to reduce profit. Consider a movie studio that also owns a subsidiary costume company.

On the surface it’s, a perfect synergy studios make films, films need actors, actors need costumes. So if you own a studio, why not also own a costume company? It’s? A textbook perfect vertical integration right well, not so fast.

These structures, don’t work in reality, because there is an obvious conflict of interest, namely the studio can mark up the price of their costumes purposefully over billing, their own film. This type of conflict of interest, profit shifting happens all the time.

In hollywood, infamously the creator of spider-man stan lee was promised 10 of the net profits from anything based on his characters. Although the case was later settled, with marvel, lee ultimately never received royalties.

Lee is by no means alone: screenwriter ed solomon claims that his sony-owned blockbuster men in black is still not in the black. This is, after nearly a quarter of a century since its release, and despite grossing, over 600 million of a 90 million budget, not to mention three sequels movie studios have precise meanings assigned to terms like net profit in the practice of law.

The term you see here is what is known as a defined term. Almost all contracts have them and to be clear, there’s. Nothing inherently sinister about defined terms. That is, unless you’re, a film studio that decides to define such important words in ways that are intended to be, dare i say, subjective and thus open to interpretation in the courts.

But this raises a different question: are movie studios really the villain here? One group that would likely say yes would be the venues that show the studios – films movie, theaters movie, theaters or cinemas, as our viewers in the uk like to call them, are not in the movie business movie.

Theaters are in the refreshment business, because amc has the largest theater market share in the us will use them as a proxy for the industry. According to their 2019 annual report, food and beverage sales accounted for nearly a third of the company’s.

Total revenue clocking in at 1.7 billion dollars, even more impressive, the net margins on that revenue 84. This of course, begs the question: if theater companies, like amc, generate over a billion dollars a year in profit from food and beverages, then why does this industry as a whole lose so much money? Well, in a way, the losses are a tad exaggerated.

If you look at the last five years of amc’s, financial performance, it certainly doesn’t, look great sure on a taxable basis. Amc lost 149 million dollars in 2019, but if you add back in depreciation, which you should because it’s, not a real capital expenditure and therefore distorts the real financial picture, you can see that imc had a real net profit of 300 million dollars.

But even 300 million in quote-unquote real net profit of five and a half billion in revenue, isn’t a great business put another way. That means your real net margins are only five percent. So why is this? Food and beverages are obviously not the problem that segment of the business is a cash cow.

The answer to this question has to do with the way theaters charge studios to show their films. In the first week of a film’s, premiere theaters may only receive 20 to 25 of the film’s ticket price, with the remaining 75 to 80 going to the studio in the second week.

The revenue share changes with a higher percentage of revenue going to the theater and less to the studio. By around week, six, the theatre is usually receiving the majority of the movie ticket revenue.

This continues every week until the movie is eventually no longer shown in theaters. This adaptive revenue share is precisely the reason why your popcorn is so darn expensive. If you think that studios are simply squeezing movie theaters.

Well, you’re, not alone disney received a ton of backlash after they told theaters that they’d. Be receiving a zero percent revenue share on all ticket sales during the premiering week of their new star wars, film.

That may not seem like a fair deal, but if you run a movie theater, what are you gonna? Do suppose you own a theater and decide not to show the new star wars film, because you don’t generate any revenue from the ticket sales.

You risk losing potential customers who will take their business to a different theater that is showing the new star wars film. In the eyes of disney’s, critics they are like the monopolizing death star, crushing theaters one galaxy at a time, but to the capitalist jedi.

Looking in from the outside. We can see that such an argument is a difficult one to win disney isn’t a monopoly. They’re, not using darth vader’s, invisible force, choke to strangle theaters into showing their movie.

No, not even close. The reason disney has the pricing power they’re criticized for holding is because they simply make great movies. That is the beauty of the intergalactic system. We call free market economics.

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