William Greene Department of Economics Stern School of Business New York University
Production and Cost 2:1 - 1(42) Entertainment and Media: Markets and Economics Professor William...
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Transcript of Production and Cost 2:1 - 1(42) Entertainment and Media: Markets and Economics Professor William...
Production and Cost2:1 - 1(42)
Entertainment and Media: Markets and Economics
Professor William Greene
Production and Cost2:1 - 2(42)
Economic Foundations for Entertainment and Media
Production, Cost and Organization of Firms in E&M Industries
Production and Cost2:1 - 3(42)
Production and Cost Features of Entertainment and Media Firms
Conventional economics explains much of production
There are special features of E&M production
Economic Foundations for Production Production functions – the technology Costs of production – element of competition Economies of scale and scope – market
advantages Technological change – markets evolve
Production and Cost2:1 - 4(42)
Characteristics of the Creative Industries
What do we mean by “the creative industries?” Not synonymous with experience goods: E.g.,
amusement park vs. art Are there distinguishing features?
Implications for the organization of market activities: Contracts among producers Market organizations for distribution
Production and Cost2:1 - 5(42)
Caves on Creative Industries
Characteristics of production in creative industries that are unlike more conventional production
Uncertainty of demand – difficult to resolve using market research
Producers’ emotional connection to the output – art, music Assembly of widely diverse skills for production - movies,
sports) Differentiated products – different consumers have very
different interests in the same proeuct. The role of time in consumption Durable products and durable rent streams
Production and Cost2:1 - 6(42)
The Production Function
Output Inputs – The
factors of production
The “process”
Labor
Capital
Materials
?
The amount producted, Q, depends on “inputs” or factors of production.Conventional inputs: Capital, labor, materials used in making moviesUnconventional inputs: Music used in distribution and production in stores and offices
Production and Cost2:1 - 7(42)
About Production Functions
Factors and Factor Intensity Higher education is very labor intensive, but less so over time. Broadway theater – very labor labor intensive and there is almost no
opportunity to substitute capital for labor Major League Baseball – only the game on the field is labor intensive.
Most of the rest of the process is very capital intensive. Casino – capital intensive. It takes relatively few people to keep a casino
working, and fewer over time.
Production and Cost2:1 - 8(42)
Production Processes Sometimes Allow Substitution
Substitution of Factors Live theater – the “cost disease” results from little opportunity to substitute capital for labor The trend toward animated movies is an example.
Production and Cost2:1 - 9(42)
Now, after 500 performances, our producers have told us and our union that in order to cut costs they will chop our string section in half, releasing five musicians and “replacing” them with a synthesizer piped in from another room.
NYT, OpEd, 7/10/10
Production and Cost2:1 - 10(42)
Multiple Output Processes Managing a multiplex – Two outputs
Concessions (the primary source of profits) Movies (the secondary profit center)
Casino: Gambling Food and entertainment
Professional sports performance The sport: Outcome on the field and the signal for
broadcasting Concessions including food and merchandise
Music Distribution Performances (public) Music videos Music for private consumption
Production and Cost2:1 - 11(42)
A Theory That Produces Pricing in the Inelastic Region
Monopoly Pricing Model for Tickets=Q(P,q,m), P=Price, q=quality, m=market conditions
Pricing is cognizant of a second good; Concessions=C(R,P,q), R=concession price
Total profit from both Tickets+Concessions Ticket Price might be low to draw people to the
concessions. Movie theaters are a prime example.
Marberger, D., “Optimal Pricing for Performance Goods,” Managerial and Decision Economics, 1997, 18, 5, 375-381.
Production and Cost2:1 - 12(42)
Multistage Production Is Common
This is not the same as joint production of more than one product
Production and Cost2:1 - 13(42)
Multiple Stages in Production
Players
Capital
Equipment
F(x)
Capital
Equipment
Labor F(x)
TV Sports
What’s better for this process, one firm or two?
Disney Pixar, or Disney/Pixar?
The game on the field Team
The TV broadcastNetwork
The viewerCable Operator
Production and Cost2:1 - 14(42)
Features of Production in Entertainment and Media
Multiple stages of production Outputs as downstream inputs
Content creation is often very labor intensive Labor intensive Little substitution Less Technologically Oriented Not always - animation is a major exception
Delivery – Exhibition, distribution Capital intensive Technological advance
Applications: Books, Movies, TV, Newspapers, Radio, Recorded Music
Production and Cost2:1 - 15(42)
Live Performance Production is Unconventional
Production function – One “stage” Simultaneous production and consumption Feedback between consumers and producers
Concerts Big Sports eBay watchers
Production and Cost2:1 - 16(42)
The Costs of Production
Fixed cost: Not a function of output. Capital Sunk cost: One time, nonrecoverable costs
(Often very significant in the movie business) Variable cost: Variable with respect to output
Labor Materials
Marginal cost: Avoidable cost of one more (less) unit Operating Profit = Gross Revenue - Costs
Production and Cost2:1 - 17(42)
Cost and Revenue Trends
2002-2004: Revenue growth from $115M to $130M 2002-2004: Cost growth from $111M to $130M
65% due to production and marketing 20% rising home video manufacturing costs 15% due to higher “talent participation”
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Box Office Revenue
Production and Cost2:1 - 19(42)
Production Costs
Production and Cost2:1 - 20(42)
Changing Economics for Stars 2005: $10M, $15M, $20M, … 2010:
Small or no up front Except for Angelina Jolie – first choice for Gravity but
could not agree on a deal. Sandra Bullock got $20M for signing. Unusual now.
CB 0 contract (Cash-Break zero – percentage after break even)
Far smaller total compensation for start Why?
Economics of film making Falling demand for star power in movies
Production and Cost2:1 - 21(42)
Terminator 3 Production $100m
Marketing 85m
(WB=50m, Sony=35m)
Austrian actor 29.25m
Rights: WB 50m
Sony 75m
Profit anticipated (WB) 25m
Actual:
U.S. Box Office: $150.4M
World incl. US: $ 417.3M
(#113 all time – on a list that does not correct for inflation, currency, or anything else.)
http://www.edwardjayepstein.com/x-rar1.htm
Production and Cost2:1 - 22(42)
Production cost $100MExhibitors At least $300MSandra Bullock $ 77M = $20M + 15% x Studio net (45% ) + Misc TV, DVD, etc.George Clooney ?Net so far $231M - ?Promotion and advertising ? Probably $50M - $100MOther distribution ?
SUCH “FIRST DOLLAR” GUARANTEED BOX OFFICE DEALS FOR ACTORS ARE BECOMING RARE, THE HOLLYWOOD REPORTER SAID, BECAUSE STUDIOS NOW WANT TO RECOUP ALL THE COSTS FOR EXPENSIVE PRODUCTIONS BEFORE SHARING THE PROFITS WITH TALENT.BULLOCK’S CO-STAR GEORGE CLOONEY, GRAVITY DIRECTOR ALFONSO CUARÓN AND PRODUCER DAVID HEYMAN ARE ALSO BELIEVED TO HAVE “BACK END” PAY DEALS.
HTTP://WWW.INDEPENDENT.CO.UK/ARTS-ENTERTAINMENT/FILMS/NEWS/GRAVITY-STAR-SANDRA-BULLOCK-SET-TO-EARN-70M-WINDFALL-FOR-OSCARNOMINATED-FILM-9157448.HTML
Production and Cost2:1 - 23(42)
CD Costs and ProfitsCD a
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ookl
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Sales
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Mar
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Artist
Dev
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Royal
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Rec
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ng A
rtist
Royal
ty to
Com
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r and
Lyr
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Ove
rhea
d an
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tion
Ope
ratin
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fit
Labo
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tribu
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Rent (
Shopp
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Mal
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pera
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Profit
Record Label $10.80
Retailer $6.20
.75 1.40 2.15 .86 1.08 1.29 .70 1.94 .59 1.36 1.36 2.55 .97
Consumer
Fixed CostsVariable CostsSunk CostsOperating Profit
Production and Cost2:1 - 24(42)
Production and Cost Functions?
Production and Cost2:1 - 25(42)
Economies of Scale
Working definition: Declining average cost Market based definition: Competitive advantage
of large size Sources
Supply based: Technical, Demand based: Networks Indivisibilities: Lumpiness
Production and Cost2:1 - 26(42)
Economies of Scale in E&M
Cablevision Professional sports Publishing/Movies – Backlists of titles Casinos Movies Television
Production and Cost2:1 - 27(42)
Economies of Scope
Cost effect C(Q1,Q2) < C(Q1,0) + C(0,Q2) Not the effect behind vertical integration
News media owning the sports team?Sky News motivation for owning Manchester United
Applications Cable TV, Internet Mobile phone network Basketball, Hockey
Production and Cost2:1 - 28(42)
Technological Advance
Cost Reduction
Digital setup in newspapers
Synthesized instruments in Broadway Musical Orchestras
Digital distribution of movies
No Cost Reduction in Performance Industries: Baumol’s Disease
Live theater, Orchestra, Education
Production and Cost2:1 - 29(42)
Digitizing Entertainment – Technical Advance in Delivery of Existing Forms
Music MP3 - affects distribution, not creation Pop music without musicians.
Literature: E-books – Kindle (Amazon), Nook (B&N) E-zines (Slate.com) Web based news services (NYTimes.com)
Movies: Creation – digital equipment, Pixar animation Distribution – transmission without film Exhibition – digital projection (expensive)
Production and Cost2:1 - 30(42)
Labor Saving Technological Change in Poker
Production and Cost2:1 - 31(42)
“Book” Production Costs
Production and Cost2:1 - 32(42)
Who should bear the cost?(About $100,000/screen)
(2013 $50,000-$75,000)
Film makers?
Distributors?
Exhibitors?
Equipment makers?
New York State?
Production and Cost2:1 - 33(42)
http://www.rollingstone.com/movies/news/how-digital-conversion-is-killing-independent-movie-theaters-20130904
Production and Cost2:1 - 34(42)
2D Format: Existing projecting systems; 20 new movies in 2008-2010.
3D Format: About 1000 existing projection systems plus 250 IMAX. Requires digital projection.
“It’s not always as good as they say it is…”“I’m not so sure our customers even know we have it…” Theater owner, New Mexico.
Can it be priced?
Production and Cost2:1 - 35(42)
PRICING MOVIE TECHNOLOGY
General Seniors ChildrenCabin in the Woods (Georgetown) 12 11 9Cabin in the Woods (7th & H)(Not digital) 12 9.25 9Loews on 84th St. New York 13 9.50 9.50Titanic Imax 18 17 15Titanic Real 3D 16 15 13Wrath of the Titans in Real 3D 16 15 13
Theater owners cannot price digital.
Production and Cost2:1 - 36(42)
Production and Cost2:1 - 37(42)
3D - The Next New Thing
2D Format: Existing projecting systems; 20 new movies in 2008-2010.
3D Format: About 1000 existing projection systems plus 250 IMAX. Requires digital projection.
“It’s not always as good as they say it is…”“I’m not so sure our customers even know we have it…” Theater owner, New Mexico.
Can it be priced?
Production and Cost2:1 - 38(42)
Production and Cost2:1 - 39(42)
3D Economics
30 3D Movies “Avatar” - $250M Benefit: Net addition to profit $80M (Dreamworks)
Obstacle: Digital Projection Insufficient screens (3000 needed for an opening) Uncertain financing for theater digital projection (financial crisis) Pricing the Upgrade ($25 tickets)
http://www.nytimes.com/2009/01/12/business/media/12film.html?_r=1&scp=2&sq=3D%20+%20%22Coming%20at%20You%22&st=cse
Production and Cost2:1 - 40(42)
3D
2D
Production and Cost2:1 - 41(42)
Entertainment and media production and costs are formed on the same theoretical foundation as other businesses. But, there are unique features of the production of experience goods.
Production and Cost2:1 - 42(42)
Markets for Experience Goods Demand is different Supply and costs are often similar but often very different (books vs.
concerts) Economies of scale and scope, technological change, etc. Complex interdependencies in markets
Market structures do not mirror the rest of the economy (large pockets of “rent”) Demand interdependencies Complex contractual arrangements Vertical integration
…