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.

Going back to DVDs for the moment, today there is a worldwide format for DVDs, but when the system was invented, it was tape and the battle was VHS or Beta. This was a multi-billion dollar question and for a time, studios put them on both but VHS won. There were 2 competing companies and both had advantages and disadvantages. The consumer had to buy a machine to hook to their TV and then they could watch the videos.

Studios make so-called replication output deals in which studios get paid large amounts from Japanese and other foreign manufacturers to support their formats. Consider rivals Toshiba had HD-DVD with Sony had Blu-ray. Toshiba offered Paramount and DreamWorks $150 million to put out the HD-DVDs and not use the Blu-ray format. At that time, consumers had to go to the electronics store and buy a DVD player what format was going to be the winner?

Paramount used the payment as a reduction in cost of goods, which meant no revenue sharing with writers, directors, actors and other participants. In March 2008, Toshiba abandoned the HD-BVD format and the movies re-released the same movies in the winning Blu-ray version. One of the reasons Sony’s Blu-ray format was it put 1,400 MGM exclusively on Blu-ray. At the time, MGM’s library was put up for sale, mainly private equity funds from Wall Street invested with Sony putting in $300 million for a share and the right to issue the movies in Blu-ray. Comcast put in $300 million for a pay per view channel it was launching.

Another side of the movies is rental of the movie once it has been released. The theater moves on to other movies, but you can buy or rent the Cassette or DVD. The company most people remember is Blockbuster Video which had over 9000 stores. The problem with Blockbuster was it charged high late fees. One person who did not like it was Reed Hastings. The story goes he was charged $40 late fees. After he sold his software business, he was looking for opportunities. One idea he had was Amazon was in the book business through mail, maybe he could do the video business. He examined the US Post rate for cassettes, it was $4.00. That was a no go, but technology was changing and DVDs were coming out. The cost of sending a DVD was 32 cents, a business was born, you know it as Netflix. (Lesson the thing that irates you, think of a solution, and with technology you might find a solution). It also helps that the competition or Blockbuster does not see the future the way you do. Blockbuster had all the advantages – millions of customers, massive revenues, a talented CEO, a household brand. Unfortunately by 2010 Blockbuster declared bankruptcy and by 2019 only one store remained.

If a studio is making a movie it has an official budget which is often leaked to the trade papers which shows the cost of the movie. Studios also do a great deal of deal-making to ensure revenues will come in whether the movie makes money or not. In the book, the movie Lara Croft: Tomb Raider staring Angela Jolie, the official production was $94 million, but the studio’s outlay was $8 .7 million. How did that happen?

First, Paramount received $65 million from Intermedia Films in Germany for 6 countries: Britain, France, Germany, Italy, Spain and Japan. Paramount had the rights to the rest of the world.

Second, some of the scenes were shot in Britain, Many countries in the world give tax breaks to investors if the film is shot in that country. The country receives the spinoffs effects or the work the people behind the camera do. For Laura Croft, Paramount used both Britain and German investors through tax deductions. The use of OPM or other people’s money is widely used in film financing.

Paramount sold the TV rights to its sister company, Showtime.

Product placement is used in movies, now days all the time. The casting of cars started in James Bond’s The Man with the Golden Gun using AMC vehicles in the chase scenes. In Laura Croft it was Chrysler Jeeps, Transporter series the Audi. The way to think about it now is product placement with influencers.

Linking to dividend paying stocks, similar to many industries there are various parts of the industry where it is possible to make money and invest in. We all tend to focus on the outcome, but as you do your research you can see the other parts of the industry and sometimes it is possible to find consistent revenues, growth and increasing your wealth.

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