Most people have seen at least one movie from Hollywood, likely more because watching movies is prime entertainment and we all enjoy being entertained. Long after you have seen the movie, you might wonder about how does the economics of Hollywood work? You enjoyed the movie, but how does Hollywood make money? One person who works in the industry offers insights in the book The Hollywood Economist – The hidden financial reality behind the movies by Edward Jay Epstein published by Melville House, NY, 2012.

In 2007, the major studios had combined revenues of $42.3 billion on which about 1/10th came from American theaters, the rest came from the backend which includes DVD sales, multi-picture output deals with foreign distributors, pay-TV and network TV licensing.

Prior to the invention of TV and soon the TV was available to almost every home in America, people went to the theater to watch movies. This is when the star system of actors, directors, writers and other talent were under exclusive contract to one or another studio. The Supreme Court of the US broke up the system and the Hollywood studios had to divest themselves of the theater chains. When the studio system was in affect the major studios specialized in one area – MGM (musicals and romantic comedies); Paramount (historical epics); Warner Bros ( gangster stories); 20th Century Fox (social dramas); Universal (horror movies); Disney (cartoons).

When the system changed and movie studios had to divest, it was about the same time as TV came in. Technology both helps and hurts the industry. Technology allows more people to see movies in the comfort of their own homes, and the 3 networks CBS, ABC and NBC all have movies as part of their programming.

If you had invested in movie theaters, the biggest change had happened. The theaters went from a 100% monopoly to 10% which exists today. It went from a time when movie companies’ promotion or advertising or marketing of their movies would send millions of people to the theater to the biggest audience is the teen market. In addition to the biggest market is the teen market, the movie theaters are dependent on people buying popcorn and drinks at the theater. The popcorn and drinks market is a very high margin business and the butter and epically the salt ensures drinks are purchased.

If the biggest market is the teen market, then next logical question is what drives the teen market in general to go to the movies? As the theater owners discovered, while large theaters evoke all kinds of imagery, if they are cut up to multiplexes, more money can be made as a popular movie can be shown multiple times during the day. Back to the question what drives teenagers. A top answer would be sex, but movies industry has a number of factors to consider. The rating industry, if there is to much sex, teenagers can buy tickets or R rating decreases sales. Another consideration is Wal-Mart. The biggest retail store sells the most everything. In 2007, the 6 studios took in $17.9 billion from DVD sales, Wal-Mart account for $4 billion or 25% of the sales. A R rating on a DVD means Wal-Mart has to assign it to the adult section or sales are reduced because teenagers cannot buy them.

What do teenagers like? action with some violence added. The more action, the better. A movie with action will motivate teenagers to go to the theaters and examining box office receipts tells the story over and over again. The studio has to find and recruit audiences for each and every movie released with national advertising. Teens were used with expensive 30 second ads. Teens have great advantages over adults. Teens typically cluster around the same TV programs on cable networks such as MTV. Second once in the theater, teens buy a lot of popcorn and drinks. Thirdly, teens buy electronic games, sports equipment, fast food which makes them an appealing audience for tie-in that help publicize studio movies.

In 2009, the studios were so proficient at finding, activating and driving the teen market into multiplexes that 70% of the audience that went to wide-release movies were under 21 years of age. Teens were more excited by car crashes than big name stars.

Walt Disney made the movie Snow White and the Seven Dwarfs in 1937, it had all the elements of perfect movie. The movie was aimed at children, but it was re-released every 7 years to new children. The movie was the first movie to gross $100 million. The movie showed the propensity of children to see the same movie over and over again. The movie was the first official soundtrack including Some Day My Price Will Come which became a hit record. The characters became multiple licensable characters first toys and later you will see them in theme parks.

The formula for the best performing movies are:

1. They are based on children’s fare stories, comic books, serials, cartoons or theme-park ride.
2. They feature a child or adolescent protagonist
3. They have a fairy-tale like plot in which a weak or ineffectual youth is transformed into a powerful and purposeful hero.
4. They contain only chaste, if not strictly platonic relationship between the sexes which ensure the PG13 rating
5. They include characters for toy and game licensing.
6. They depict only stylized conflict.
7. The end happily, and often lends themselves to sequels.
8. They use conventional or digital animation to artificially create action sequences, supernatural forces and elaborate settings.
9. They cast actors who are not ranking stars.

Linking to dividend paying stocks, there is still a great deal of money to be made in the movie industry telling stories as evident by the takeover of Warner Bros by Paramount SkyDance. If you like the movies, it just means as you get older you shift how and where you watch movies. The where and how changes how revenue comes to the Hollywood studios but movies will be made, just the major box office movies may not reflect your current tastes, but there are moments in each movie that you will like. It is good if you watch movies for a wise variety of reasons, but also pay attention to how movies make money.

There are more questions than answers, till the next time – to raising questions.