Making Money Making Movies

HBS professor Anita Elberse talks about the state of the international motion picture industry, movie piracy, and how to capture screens in foreign markets.
by Manda Salls

What makes a movie click with an audience? How important is buzz in the success or failure of an entertainment product? Should worldwide releases of movies be done over time, or all at once?

Those are the kinds of questions that interest Harvard Business School professor Anita Elberse as she investigates the drivers of success and failure of media and entertainment products such as motion pictures and video games. Her paper, "Demand and Supply Dynamics for Sequentially Released Products in International Markets: The Case of Motion Pictures," written with Josh Eliashberg, appeared in the summer issue of Marketing Science.

Elberse discusses her research on the entertainment industry in this e-mail interview.

Salls: Briefly describe the state of the motion picture industry today.

Elberse: The U.S. theatrical motion picture industry looks very healthy. Last year, the number of movie admissions was the highest since the late 1950s, and box office revenues grew to $9.5 billion. Internationally, box office grosses are even higher—also at record levels. Total grosses for 2003 will probably not be far behind. All of this is good news for Hollywood studios such as Paramount or Universal that produce and distribute movies.

More and more, fears of piracy impact decisions that industry executives make regarding release strategies.

However, a different picture emerges for theatrical exhibitors such as AMC or Regal. Most industry experts agree that the U.S. is overscreened, that there is excess screen capacity. Many exhibitors are or have been in financial difficulties, and have had to close theaters or screens, resulting in a decline in the total number of screens since 2000. Internationally, there is some room for growth in screens (and capacity is increasing in many countries, mostly through the rise of multiplexes), but tough times might be on the horizon for foreign exhibitors as well.

Q: Are there fundamental differences between the U.S. and international motion picture markets?

A: Yes, I think there are important differences. As I mentioned, the availability of screens is a relevant difference. In fact, our study empirically supports the widely held assumption that the U.S. is overscreened and key foreign markets are underscreened. This difference has consequences for the relative power of studios and exhibitors and, therefore, the extent to which Hollywood studios can determine the rules of the game.

Another key difference concerns the extent to which markets are influenced by piracy. Piracy is a global problem, but I think it is particularly detrimental to box office grosses in many Asian countries. More and more, fears of piracy impact decisions that industry executives make regarding release strategies.

Obviously, locally produced movies play a relevant role in foreign markets. For example, locally produced movies account for over a third of the total market in France. Nevertheless, across the globe, Hollywood movies typically account for the lion's share of admissions. In that respect, audience tastes in U.S. and international markets are actually fairly similar.

Q: What opportunities do you see for entertainment marketers who want to ensure a film's success overseas? How important is advertising in this mix?

A: A first step in ensuring a movie's success overseas is to ensure its success in the U.S. Even though foreign box office revenues are now often higher than domestic revenues, a movie's performance in the U.S. remains a key driver of what happens overseas. It determines how much attention audiences give the movie, how keen exhibitors are to free up screens on which to show it, how much space foreign journalists allocate to reviewing it, and so on.

As conventional wisdom suggests, the key drivers of success in the U.S. also apply to foreign markets. Marketers need to find a mix of movie attributes (e.g. genre, star power, and director power) that appeals to audiences and exhibitors, and they need to carefully plan its release in light of the competitive environment as well as seasonal trends.

Advertising is a crucial element in this mix. Our research shows that a movie's advertising support is an important predictor of the number of screens on which that movie opens as well as the revenues it generates. In other words, advertising not only drives the behavior of audiences, but also that of exhibitors. The latter is particularly relevant in foreign markets, where there is a shortage of screens.

Q: Some studio executives appear to favor simultaneous releases of movies around the world, fewer of the phased rollouts we've seen traditionally. Does your research support this strategy?

A: There are several factors that drive a preference for simultaneous worldwide releases. It allows studios to faster recoup investments, to limit piracy from cannibalizing revenues, and, so it is believed, to capitalize on the buzz that a movie has generated in the U.S. Our study provides evidence for the latter: We show that the longer a movie's foreign release is delayed, the less it will be able to benefit from the momentum generated in the U.S. Buzz, it appears, quickly wears out.

There is an important caveat. Our study suggests that foreign exhibitors—not foreign audiences—mostly drive this effect. Shortening release times can thus be a useful aspect of a push strategy but, ironically, it has little value as a pull instrument. Given that shrinking release times can also have important disadvantages for movie marketers (e.g., it necessitates additional costs of movie prints, limits possibilities to adjust failing marketing strategies, and has several practical drawbacks), studios and exhibitors might leave money on the table if they solely pursue shorter release windows.

Q: Every Monday morning we hear about the weekend's top movies at the box office. Are opening-weekend numbers an accurate indicator of longevity?

A: No, although it depends on how you define longevity. The number of weeks that a movie survives in theaters is not a very useful measure, because it mostly reflects the choice for either a "platform" or "sleeper" release strategy. The former is common for releases by major studios, whereas the latter applies more to those by independent studios.

Advertising not only drives the behavior of audiences, but also that of exhibitors.

Industry insiders mostly look at first-week grosses as a percentage of total box office grosses, a measure often referred to as a movie's playability. In recent years, with studios pursuing bigger first weekends by opening on a large number of screens, the average playability has decreased. A drop in revenues of 50 percent in the second week or more is quite common. This has particularly severe consequences for exhibitors, who collect a higher share of box office grosses in later weeks, but only a limited share, typically 10 percent, in these early weeks.

Q: Do your findings have implications for the video market?

A: The video window, particularly DVD sales in recent years, has developed into a significant additional source of revenue for movie studios. However, what works for the theatrical window does not necessarily work in the same way for the video window. I think it is important to consider characteristics of audiences in both markets. Who goes to the theater? Who buys or rents videos? There obviously is some overlap, but I think the two markets are less similar than some industry observers seem to think. Therefore, within each country, the theatrical and video window can be closely aligned. Across countries, the delay between video windows should be largely driven by the delay between theatrical windows. It should also take into account seasonal fluctuations, such as a peak in video sales prior to Christmas.

Q: What other research are you working on?

A: I am working on several other studies on media and entertainment marketing. For example, with my colleagues Josh Eliashberg and Teck Ho, I show that there is a relationship between consumer expectations (i.e., buzz) before a movie's release and its subsequent market performance. The project revolves around data from the Hollywood Stock Exchange, a popular online market simulation where tens of thousands of people trade movie stocks every day.

In another project, with Josh Eliashberg and Mark Leenders, I assess to what extent key strategic issues for motion picture industry executives have been addressed in academic research, and where new research is most needed.

Finally, I have started a project on portfolio management in creative industries, which I hope will lead to insights on how companies should manage their pipeline of movies, video games, or other entertainment products in order to maximize the probability of success in the long run.

About the Author

Manda Salls is a Web editor and content developer at Harvard Business School's Baker Library.