Movie Business's Spotlight Moment: Research Aims to Improve Profitability



By: Tan, Tom
Published on: 08/26/2013
Posted on: 08/26/2013
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Abstract:
The movie business just made its debut in America's gross domestic product figures, helping growth trend upward. Making films or movies are now part of a 'new' investment class called "intellectual-property products." The contribution of movies to ITOM researcher Tom Tan of SMU Cox and co-authors comes as no surprise. Their novel research shows how to more effectively manage movies' production stages, and in the process create a better bottom line. While most movie research focuses on the uncertain demand side, Tan focuses on supply-side factors such as production stages and their length, finding areas where managers can add to profitability.

The movie business just made its debut in America's gross domestic product figures, helping growth trend upward. Making films or movies are now part of a 'new' investment class called "intellectual-property products." The contribution of movies to ITOM researcher Tom Tan of SMU Cox and co-authors comes as no surprise. Their novel research shows how to more effectively manage movies' production stages, and in the process create a better bottom line.

Films like Avatar, Titanic and Despicable Me 2 will formally bolster the U.S. economy in the future. Annual box office revenues reached $10.6 billion in the United States/Canada in 2010. The rest of the world voraciously consumes blockbuster American films as well. The industry even created a trade surplus of $11.7 billion, more than those of the management and consulting, legal, and insurance services sectors. The movie and television industry provided 2.4 million jobs and $140 billion in wages in 2008.

Big, Followed Business

The authors observed significant variation in box-office performance and budgets across movies in the 300-plus-movie sample. A small number of movies involve the lion's share of revenues and costs.  Average U.S. box office revenues for a movie are $47.78 million, and opening weekend revenues are $13.5 million on average, or 28% of total gross revenues. For reference, today's blockbusters such as Ironman 3 grossed $1.2 billion and Marvel's Avengers $1.5 billion, both earning more abroad than domestically.

A good amount of movie industry research relates to forecasting its uncertain demand.  The authors, who focus on supply-side factors, say that understanding how the product development process relates to market success can help studios and filmmakers better plan their production process. Many time-to-market studies focus on the electronics industry, which is quite different from creative industries, with their multi-stage product development process. This research attempts to link marketing and operations management in the movie industry. The study consists of Hollywood movies released in the U.S. market from January 2005 to December 2009, including their advertising data, which extended into the early parts of 2010.

Consumers are more aware of the release of movies through the Internet and social media. This makes understanding delays' impact on product success even more salient. Tan notes, "Consumers know about the status of movies from a number of websites. Information is spread more quickly and publicly and is quite a difficult challenge to prevent. But studios can focus on better improving their production process so they are on time. They can control this aspect of the process."

The authors' study examines the relationship between the box-office success of a movie as well as production timing of specific, well-defined stages. Movie-making is divided into a series of five stages: development, pre-production, filming, post-production, and distribution. Development time, developing the movie idea or story, is not included in the study as it is not as well defined and measurable as the other stages. The authors found that 1% additional duration of production can lower box office revenues by 0.94%, or nearly 1% on average.

An Extra Day Can Matter

Owing to its length, post-production can bottleneck the entire production process, according to the research. Of the four production stages, post-production tends to be the longest, with an average duration of about 205 days. Distribution is the second longest stage with an average duration of 161 days, followed by pre-production (158 days) and filming (111 days). Based on the average total production time of 633 days, or two years and nine months, and average gross box office revenues of $48 million, a one-week delay translates to an average $4,880,000 box-office loss.

Across the four movie production stages, pre-production and filming are the most labor-intensive. However, a stage with high labor intensity can generate higher quality improvements, and benefit from additional time. "If a movie is delayed then make sure that quality compensates for the delay," says Tan. "A focus on quality can compensate for the loss of days."

The pre-production task of hiring a crew and casting the film is highly labor-intensive and time-consuming. The number of crew in The Matrix Revolution (2003) exceeded 700 people, according to Filmreference in 2011. Paramount’s action movie Sahara (2005), with its 20 producers and four credited screenwriters, created coordination complexity, which contributed to a box-office loss of approximately $144.9 million. In contrast, post-production and distribution are less labor-intensive because they involve few cast or crew. Specifically, the post-production stage—editing, readying the film for distribution, and audience testing—is generally a lengthier and critical stage where time can be lost but also economized. The distribution phase with advertising involved is also noted by the researchers as a place where profitability can be dampened by taking too long.

One day can matter depending on how long the movie has already been in production, according to the authors' findings. The negative impact of production time is stronger if the production time is longer than the average of roughly 633 days. For example, if production time is 800 days, "firms need to watch out," advises Tan. "A one-day delay for movies that have exceeded the average production time results in an even bigger loss for box-office revenues."

When multiple firms are developing related products and consumers are aware of and waiting for these products, time is of the essence. A longer time-to-market may reduce a movie theme’s timeliness and possibly a shorter selling period, which squeezes box-office revenues. Delays may generate negative publicity about the movie, which can hurt box-office revenues. For example, Columbia’s All the King’s Men (2006) starring Jude Law and Kate Winslet announced a delay two months before its planned Christmas release date, and generated widespread negative buzz. It lost approximately $45 million. Delays can become self-perpetuating and begat more delays in other stages or shift resources to other projects. A shorter time-to-market is a key source of strategic early-entry advantages. 

Advice to Managers

The authors discovered that total production duration has a larger negative impact for successful movies than for moderate and low-revenue movies. Also studios should invest more resources in speeding up the post-production and distribution phases. To this end, they recommend the following:

  • Simplifying production procedures,
  • Eliminating unnecessary steps, and
  • Increasing parallel processing (e.g., performing post-production editing in parallel with filming).
 

Shaving off production time in the right places can save time and add to profitability. Given that average distribution time is about 160 days and average box-office revenues are $48 million, a 10% reduction in distribution time (16 days on average), is associated with a 3.8% revenue lift, or $1.82 million. (Results show that an additional 1% of distribution time is associated with 0.38% lower box-office revenues on average.) The authors model that increasing opening weekend by 100 theaters is associated with approximately a 4% revenue lift. Said another way, reducing distribution time by 16 days is equal to securing an additional 95 theaters during opening weekend.

The findings apply to other industries with multi-stage production processes having similar to making and producing films. Tan observes that the video gaming industry has very similar production characteristics as the movie business, where the combination of delays and consumer buzz from cult followers can have negative outcomes. Other creative industries that require a significant upfront investment and have extremely uncertain demand can learn from the study as well.

The paper, "How Long to Squeeze the Creative Juice? An Empirical Study of the Impact of Movie Production Timing on Financial Performance" is authored by Tom Fangyun Tan of SMU Cox Business School, Southern Methodist University and Jehoshua Eliashberg and Kartik Hosanagar of The Wharton School of Business, University of Pennsylvania.

Written by Jennifer Warren.

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