Book Review: “The Hollywood Economist”

Planet Money” on NPR is one of those shows that, on the surface, sounds really boring.  I mean, it’s a show about the financial markets around the world —  and really, how sexy can that be?  Well, it turns out to be one of my favorite podcasts as of late.  If you like “This American Life,” it has the same kind of laconic humor, but it’s also laced with some great information about how the markets work, how we got into the Great Recession, and how entities like Hollywood make (or lose) money.  Case in point was an interview they did on financing films produced in Hollywood. They invited Edward Epstein on the show to talk about how films like Avatar are the exception in Hollywood.  That is to say, a film like Avatar, Jaws, Star Wars, or Titantic actually make money while the vast majority of films do not.  Huh?  How can that be? I mean if you’re one of those who obsessively follows the box office grosses each week to see who the winners and losers are after a weekend opening, you’re only getting a small slice of the economic picture of how Hollywood finances films.

In The Hollywood Economist: The Hidden Financial Reality Behind the Movies, Epstein really breaks it down, and does so in a way that’s not at all boring.  His prose and writing style are clear and concise, and he’s able to explain the complexities of all the little schemes Hollywood producers use to lure talent, promote a film, pay all the principles involved and, in the end, not make much of a profit on the enterprise. It’s kind of counter-intuitive to think that with all the multi-million dollar payments going to big stars, hot shot directors, screenwriters and the like, most Hollywood movies finish in the red.  Why is that?

Well, there’s some bookkeeping trickery that’s happening.  See, when a film gets the green light, the movie company (Universal, for example) has the money to finance the film outright, but goes with the maxim: “Don’t use your own money when somebody else’s will do.”  So, they get banks, billionaires, and “foreign investors” to bankroll a film. But it doesn’t stop there.  In order to get the money to fund the making of film, the producers of the film (Mission Impossible, for example) have to get  completion insurance to make sure that if the film can’t be completed (i.e., a star gets sick, the director quits, the sets get burnt the ground) before the release date, the insurance company will pay all the fees associated with the film.   The insurance bond is the collateral that secures the financing and once that’s set, all the other elements fall into place that go into making the film — including the all important distributor.

But, you may be asking, how do these films lose money?  The short answer is marketing and promotion to get “butts in seats” every weekend.  Every film opening is like an election.  The goal is get people to come out to the event and “vote” for their favorites by plunking down their money at the box office.  About 50% of a film’s budget goes to marketing and promotion.  That means all the TV, newspaper, Internet ads you get bombarded with are part of the film’s budget.  TV and newspapers are expensive, but they work in terms of generating interest.  And increasingly with the rise in social networking, getting a trailer to go viral is a cheaper way to promote your film, but it’s not as effective as TV that, like radio, works when there’s time and frequency of an ad. The longer a trailer is in commercial stop sets (Time) and the more times that commercial is played in a 24 hour programming cycle (Frequency) the more likely that film’s trailer is going to make an imprint on the mind of a potential moviegoer, get them off the couch, to the theatre, and in the seats eating overpriced popcorn and drinking equally overprices soda.  Basically it’s advertising 101, but if the campaign doesn’t work, the box office take is low, and word of mouth from critics, Facebook friends or Twitter followers is harsh, you’ve missed your chance to make the big dollars.  By the time the movie is released on DVD, On Demand, in-flight entertainment, and HBO or Showtime, the amount the film can recoup has gone from dollars to pennies.  That why when you hear “So and so film made X millions this weekend” it may sound impressive, but when you factor in all the costs associated with making the film, it’s less impressive than it seems.

There is one major factor I left out of this money losing equation:  who goes to the movies and in what numbers?  Since the mid ’50 when 45% of the U.S. attended a movie every week, that number has been dwindling decade after decade.  People still go to the movies every week, but that number has dropped to 10% – with the vast majority of moviegoers being teenage boys.  So, when you’re spending 80 to 100 million on a film (and so is your competition) and trying to make a profit off the venture, you just have to look at the high capital outlay vs the potential market for your film, and you’ll see why there are a high number of comic book related films, horror films, pee pee, poo poo, vomit comedies, and “In a world” type of films released week after week. A film like An Education may win an Academy Award or three, but it’s not going to appeal to teenage boys, so it most likely ended up in the red financially.

For all you aspiring filmmakers, or those who want to work in the film industry, The Hollywood Economist is required reading.  It will not only open your eyes to the business of the film industry, but it will also make an aspiring filmmaker understand why their great idea may be great, but not marketable in today’s filmgoing climate.

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