The Hollywood Economist

I just finished reading the 2nd edition of the book, The Hollywood Economist by Edward Jay Epstein. It discusses the economics of the movie business – how studios finance and distribute films, how movie theaters make money, how revenue is divided and disbursed, why almost no movie ever hits profit on paper, and so on. Today I’d like to offer a combination book review and musings on some of the issues raised.

You may be wondering whether a book like this is worth a screenwriter’s time. After all, we’re not involved in things like financing and distribution. However, we are independent contractors, and I believe it behooves us to understand the industry in which we work. Moreover, the feature film business is in a period of radical change that will likely have a big impact on what kind of movies get made in the future. The Hollywood Economist is the perfect business-of-Hollywood book for a screenwriter because it discusses the economics in the language of lay people. (It also explains why you’ll never see any income from those net points in your contract.)

There are some problems with the book, however. First, it has a few unsettling errors, such as when it’s discussing the box office for Gone in Sixty Seconds. The movie grossed $242 million, which the book then refers to repeatedly as “almost half a billion dollars” when in fact it’s less than a quarter billion. This may seem minor, but when the subject is economics, you want the author to be a little more detail oriented!

The other problem, which is unavoidable, is the information becomes quickly dated. The first edition of the book was published in 2010; the second was published in 2012. Many of the examples and illustrations are from movies at least five years old. Much of the data ends at 2007 because it comes from reports published by the MPAA that were stopped at that point (more on this in a minute). That means that today much of the information is over seven years old.

Another example of the problem: updates for the second edition included Netflix and their move into streaming. But the book didn’t anticipate Netflix’s move into original programming, or that television would quickly overtake features in Netflix’s streaming business. What does this mean for feature film streaming sales? Even just two years later this book is too old to offer help. All of this is part of the fast-changing nature of the business right now, and any book will quickly become dated. How I wish there was an up-to-the-minute version of this information!

Still, you can learn a lot about the movie business from The Hollywood Economist. For example, you’ll learn that theatrical box office is a very small part of studio revenue these days. In 1980, theatrical accounted for 55% of a movie’s revenue, while in 2007 it had dropped to 20.4% of revenue. Meanwhile, Video/DVD rose from 2.2% in 1980 to a peak of 22.8% in 2004, only to drop to 17.9% in 2007.

This is one of those areas where the numbers stop in 2007 because the source was MPAA reporting that ended that year. I think it is very likely the MPAA stopped revealing this data because of the dramatic drop in home video revenue. The MPAA is in the business of promoting the movie business. This means they like to report the good news and avoid reporting bad news.

2007 was seven years ago. What’s happened since? A few clues come later in the book. At one point, Epstein notes that MGM’s net receipts from DVDs fell from $140 million in 2007 to just $30.4 million in 2010. Later he mentions that Time Warner’s home video revenue dropped 30% between 2007 and 2010. That’s not a good sign, particularly considering the book makes very clear how home video was the underpinning of feature film financing for the last two and a half decades.

Add in reduced income from pay TV as channels like HBO, Showtime and Starz focus more on original programming than features. The book notes that pay TV channels were buying half as many movies in 2009 as they were in 2005. Considering all this, we may start to understand why studios have cut back production so much in the last few years, and why the mid-budget movie has largely vanished.

The book traces the historically changes in the industry. Much of this you might be familiar with – how movies exploded in the twenties. How by 1948 two thirds of the U.S. population went to the movies at least once a week. How television destroyed that business model.

Here’s where Epstein makes an interesting point. After television upended the industry, studios found they had to create an audience for each movie. They did this through advertising. And that’s how teen boys became the primary movie audience. They were the easiest to reach because they clustered around a handful of TV programs. But today that has shifted – teen boys have become the most difficult audience to reach with advertising. And, I would say, the industry has been slow to react by changing its product to target different audiences.

Another interesting topic the book looks at from a unique perspective: the battle over day-and-date releasing. Epstein explains how, for a variety of reasons, it is in the best interest of the studios to release movies on pay-per-view and streaming at the same time they’re released in the theaters. This will, of course, hurt theatrical attendance, but that would be a small price to pay for the studios.

It would not, however be a small price to pay for the theaters. Epstein explains that theaters are really in the business of selling popcorn and sodas. He quotes a studio executive estimating that a 10% drop in attendance would cause two thirds of American theaters to go out of business.

A chilling thought for those of us who love seeing movies in theaters.

The book is an interesting read and a useful primer on how revenue flows into studios (and doesn’t flow to production companies and talent). Unfortunately, it only starts to address the issues of importance to the feature film business. We’ll all have to stay tuned to see how this plays out.



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 Next week I plan to do a "mail bag" post where I answer reader questions. If you have a question for me, leave it in the comments!