The blockbuster phenomenon

Steve Bainbridge has an interesting post on summer blockbusters, linking a Variety article. The film companies engage in a costly head-to-head competition and the industry loses. Film industry commentators have been complaining about this for years. Why doesn’t it stop?  There are only so many peak weekends, but some companies could just do something else. Yes, they would be ceding the field to their competitors, but they might make money.

Steve calls this irrationality, and talks about herding, etc. But like so much of behavioral economics (my take here) I think this obscures rather than clarifies what's really going on.

I would call it agency costs. The strategy is suboptimal for movie companies but maximizing for executives: they’re rewarded if they win the blockbuster auction, but not punished if they lose because they're not losing in an unconventional way that courts or shareholders easily can identify as a mistake.

How to fix this seemingly defective governance? We might punish conventional as well as unconventional failure. Then, of course, we’d have to figure out a way to spot “conventional failure,” which is part of the problem that got us here.

Alternatively, we might try to address the main problem, which is to adequately compensate the executives for risk-taking. In other words, give them a reward to offset the potential punishment for failure, particularly including diminution of their undiversified investment in human capital (i.e., getting fired).

This would mean paying the successful executives a lot more than the unsuccessful ones. So much more that some cranky columnist might call it obscene.  Or we could allow them to trade in the shares of their own companies.  There aren't any pure film company plays and, anyway, that would be insider trading and we can't have that. (But then there's the Hollywood Stock Exchange. . . )

Apart from the agency cost issue, this crazy head-to-head blockbuster phenomenon is interesting because it arguably affects how business is portrayed in film -- it's all luck and zero sum games, not skill and wealth creation. As I say in Wall Street & Vine:

filmmakers’ views of the zero-sum nature of business may reflect their own industry. Films compete for the same audience, often at the same peak vacation times, and successful films siphon sales from losers. Thus, filmmakers might assume that business generally does not create social wealth, but transfers wealth from one pocket to another.

And so it happens that one of the more dysfunctional business practices helps shape the image of all business that films burn into the heads of film audiences.

Comments

[Kate Litvak]

I fail to see the problem. Here is a highly competitive industry, where producers go after the same consumers with products of similar quality. So long as the expected revenue of a marginal movie is just high enough to cover marginal costs (and the article doesn’t suggest that expected marginal revenue is below marginal costs), everything fits neatly into a basic micro model. Why would anyone expect anything else in the absence of a cartel? Where is the need for behavioral or agency explanations?

[Amit Bhatiani]

You're right to some extent. A part of it can be explained by agency costs. The simple solution for agency issues has always been incentive alignment, and it's easy to do here. Just move the movie executives to the bottom of the income statement and into the "shareholder's equity" line on the balance sheet. It's that simple. All of a sudden, making "good" movies will matter, cutting costs will matter and enhancing returns to shareholders will matter. In fact, if all movie executives get paid on back-end points as they say in Hollywood, don't be surprised if they start colluding and movies "never" overlap again ;)

[Marc Hodak]

Having worked with movie executives, I can suggest another twist to the agency cost argument, one that I'm sure drives their behavior far more than the threat of derivative lawsuits. Executives make their names (i.e., build their personal capital) off of successful blockbusters. Their personal capital doesn't suffer symmetrical loses on failed movies. Even options on studio shares would be dwarfed by the "personal capital" option value. This is even more true for the directors that these executives are trying to corral. Each of them would gladly spend a billion of other people's money for the chance to hear an critics and audiences wildly raving about their "blockbuster." This has been going on since before Howard Hughes, who was even using his own capital to buy the prestige.

[Larry E. Ribstein]

Good point. This fits with films' tendency to paint people like Hughes as heroes (The Aviator)when they spend infinitely on their art. I discuss this in my article, Wall Street & Vine.