Presentation on theme: "Production and Cost 2:1 - 1(42) Entertainment and Media: Markets and Economics Professor William Greene."— Presentation transcript:
Production and Cost 2:1 - 1(42) Entertainment and Media: Markets and Economics Professor William Greene
Production and Cost 2:1 - 2(42) Economic Foundations for Entertainment and Media Production, Cost and Organization of Firms in E&M Industries
Production and Cost 2:1 - 3(42) Production and Cost Features of Entertainment and Media Firms Conventional economics explains much of production There are special features of E&M production Economic Foundations for Production Production functions – the technology Costs of production – element of competition Economies of scale and scope – market advantages Technological change – markets evolve
Production and Cost 2:1 - 4(42) Characteristics of the Creative Industries What do we mean by the creative industries? Not synonymous with experience goods: E.g., amusement park vs. art Are there distinguishing features? Implications for the organization of market activities: Contracts among producers Market organizations for distribution
Production and Cost 2:1 - 5(42) Caves on Creative Industries Characteristics of production in creative industries that are unlike more conventional production Uncertainty of demand – difficult to resolve using market research Producers emotional connection to the output – art, music Assembly of widely diverse skills for production - movies, sports) Differentiated products – different consumers have very different interests in the same proeuct. The role of time in consumption Durable products and durable rent streams
Production and Cost 2:1 - 6(42) The Production Function Output Inputs – The factors of production The process Labor Capital Materials ? The amount producted, Q, depends on inputs or factors of production. Conventional inputs: Capital, labor, materials used in making movies Unconventional inputs: Music used in distribution and production in stores and offices
Production and Cost 2:1 - 7(42) About Production Functions Factors and Factor Intensity Higher education is very labor intensive, but less so over time. Broadway theater – very labor labor intensive and there is almost no opportunity to substitute capital for labor Major League Baseball – only the game on the field is labor intensive. Most of the rest of the process is very capital intensive. Casino – capital intensive. It takes relatively few people to keep a casino working, and fewer over time.
Production and Cost 2:1 - 8(42) Production Processes Sometimes Allow Substitution Substitution of Factors Live theater – the cost disease results from little opportunity to substitute capital for labor The trend toward animated movies is an example.
Production and Cost 2:1 - 9(42) Now, after 500 performances, our producers have told us and our union that in order to cut costs they will chop our string section in half, releasing five musicians and replacing them with a synthesizer piped in from another room. NYT, OpEd, 7/10/10
Production and Cost 2:1 - 10(42) Multiple Output Processes Managing a multiplex – Two outputs Concessions (the primary source of profits) Movies (the secondary profit center) Casino: Gambling Food and entertainment Professional sports performance The sport: Outcome on the field and the signal for broadcasting Concessions including food and merchandise Music Distribution Performances (public) Music videos Music for private consumption
Production and Cost 2:1 - 11(42) A Theory That Produces Pricing in the Inelastic Region Monopoly Pricing Model for Tickets=Q(P,q,m), P=Price, q=quality, m=market conditions Pricing is cognizant of a second good; Concessions=C(R,P,q), R=concession price Total profit from both Tickets+Concessions Ticket Price might be low to draw people to the concessions. Movie theaters are a prime example. Marberger, D., Optimal Pricing for Performance Goods, Managerial and Decision Economics, 1997, 18, 5, 375-381.
Production and Cost 2:1 - 12(42) Multistage Production Is Common This is not the same as joint production of more than one product
Production and Cost 2:1 - 13(42) Multiple Stages in Production Players Capital Equipment F(x) Capital Equipment Labor F(x) TV Sports Whats better for this process, one firm or two? Disney Pixar, or Disney/Pixar? The game on the field Team The TV broadcast Network The viewer Cable Operator
Production and Cost 2:1 - 14(42) Features of Production in Entertainment and Media Multiple stages of production Outputs as downstream inputs Content creation is often very labor intensive Labor intensive Little substitution Less Technologically Oriented Not always - animation is a major exception Delivery – Exhibition, distribution Capital intensive Technological advance Applications: Books, Movies, TV, Newspapers, Radio, Recorded Music
Production and Cost 2:1 - 15(42) Live Performance Production is Unconventional Production function – One stage Simultaneous production and consumption Feedback between consumers and producers Concerts Big Sports eBay watchers
Production and Cost 2:1 - 16(42) The Costs of Production Fixed cost: Not a function of output. Capital Sunk cost: One time, nonrecoverable costs (Often very significant in the movie business) Variable cost: Variable with respect to output Labor Materials Marginal cost: Avoidable cost of one more (less) unit Operating Profit = Gross Revenue - Costs
Production and Cost 2:1 - 17(42) Cost and Revenue Trends 2002-2004: Revenue growth from $115M to $130M 2002-2004: Cost growth from $111M to $130M 65% due to production and marketing 20% rising home video manufacturing costs 15% due to higher talent participation
Production and Cost 2:1 - 18(42) Box Office Revenue
Production and Cost 2:1 - 19(42) Production Costs
Production and Cost 2:1 - 20(42) Changing Economics for Stars 2005: $10M, $15M, $20M, … 2010: Small or no up front Except for Angelina Jolie – first choice for Gravity but could not agree on a deal. Sandra Bullock got $20M for signing. Unusual now. CB 0 contract (Cash-Break zero – percentage after break even) Far smaller total compensation for start Why? Economics of film making Falling demand for star power in movies
Production and Cost 2:1 - 21(42) Terminator 3 Production $100m Marketing 85m (WB=50m, Sony=35m) Austrian actor 29.25m Rights: WB 50m Sony 75m Profit anticipated (WB) 25m Actual: U.S. Box Office: $150.4M World incl. US: $ 417.3M (#113 all time – on a list that does not correct for inflation, currency, or anything else.) http://www.edwardjayepstein.com/x-rar1.htm
Production and Cost 2:1 - 22(42) Production cost $100M Exhibitors At least $300M Sandra Bullock $ 77M = $20M + 15% x Studio net (45% ) + Misc TV, DVD, etc. George Clooney ? Net so far $231M - ? Promotion and advertising ? Probably $50M - $100M Other distribution ? SUCH FIRST DOLLAR GUARANTEED BOX OFFICE DEALS FOR ACTORS ARE BECOMING RARE, THE HOLLYWOOD REPORTER SAID, BECAUSE STUDIOS NOW WANT TO RECOUP ALL THE COSTS FOR EXPENSIVE PRODUCTIONS BEFORE SHARING THE PROFITS WITH TALENT. BULLOCKS CO-STAR GEORGE CLOONEY, GRAVITY DIRECTOR ALFONSO CUARÓN AND PRODUCER DAVID HEYMAN ARE ALSO BELIEVED TO HAVE BACK END PAY DEALS. HTTP://WWW.INDEPENDENT.CO.UK/ARTS-ENTERTAINMENT/FILMS/NEWS/GRAVITY-STAR-SANDRA-BULLOCK-SET-TO- EARN-70M-WINDFALL-FOR-OSCARNOMINATED-FILM-9157448.HTML
Production and Cost 2:1 - 23(42) CD Costs and Profits CD and Booklet Manufacturing Sales and Distribution Marketing and Promotion Cooperative advt. and Discounts Artist DevelopmentRoyalty to Recording ArtistRoyalty to Composer and Lyricist Overhead and Distribution Operating ProfitLaborDistributionRent (Shopping Mall)Operating Profit Record Label $10.80 Retailer $6.20.75 1.40 2.15.86 1.08 1.29.70 1.94.59 1.36 1.36 2.55.97 Consumer Fixed Costs Variable Costs Sunk Costs Operating Profit
Production and Cost 2:1 - 24(42) Production and Cost Functions?
Production and Cost 2:1 - 25(42) Economies of Scale Working definition: Declining average cost Market based definition: Competitive advantage of large size Sources Supply based: Technical, Demand based: Networks Indivisibilities: Lumpiness
Production and Cost 2:1 - 26(42) Economies of Scale in E&M Cablevision Professional sports Publishing/Movies – Backlists of titles Casinos Movies Television
Production and Cost 2:1 - 27(42) Economies of Scope Cost effect C(Q1,Q2) < C(Q1,0) + C(0,Q2) Not the effect behind vertical integration News media owning the sports team? Sky News motivation for owning Manchester United Applications Cable TV, Internet Mobile phone network Basketball, Hockey
Production and Cost 2:1 - 28(42) Technological Advance Cost Reduction Digital setup in newspapers Synthesized instruments in Broadway Musical Orchestras Digital distribution of movies No Cost Reduction in Performance Industries: Baumols Disease Live theater, Orchestra, Education
Production and Cost 2:1 - 29(42) Digitizing Entertainment – Technical Advance in Delivery of Existing Forms Music MP3 - affects distribution, not creation Pop music without musicians. Literature: E-books – Kindle (Amazon), Nook (B&N) E-zines (Slate.com) Web based news services (NYTimes.com) Movies: Creation – digital equipment, Pixar animation Distribution – transmission without film Exhibition – digital projection (expensive)
Production and Cost 2:1 - 30(42) Labor Saving Technological Change in Poker
Production and Cost 2:1 - 31(42) Book Production Costs
Production and Cost 2:1 - 32(42) Who should bear the cost? (About $100,000/screen) (2013 $50,000-$75,000) Film makers? Distributors? Exhibitors? Equipment makers? New York State?
Production and Cost 2:1 - 33(42) http://www.rollingstone.com/movies/news/how -digital-conversion-is-killing-independent- movie-theaters-20130904
Production and Cost 2:1 - 34(42) 2D Format: Existing projecting systems; 20 new movies in 2008-2010. 3D Format: About 1000 existing projection systems plus 250 IMAX. Requires digital projection. Its not always as good as they say it is… Im not so sure our customers even know we have it… Theater owner, New Mexico. Can it be priced?
Production and Cost 2:1 - 35(42) PRICING MOVIE TECHNOLOGY General Seniors Children Cabin in the Woods (Georgetown) 12 11 9 Cabin in the Woods (7 th & H) (Not digital) 12 9.25 9 Loews on 84 th St. New York 13 9.50 9.50 Titanic Imax 18 17 15 Titanic Real 3D 16 15 13 Wrath of the Titans in Real 3D 16 15 13 Theater owners cannot price digital.
Production and Cost 2:1 - 37(42) 3D - The Next New Thing 2D Format: Existing projecting systems; 20 new movies in 2008-2010. 3D Format: About 1000 existing projection systems plus 250 IMAX. Requires digital projection. Its not always as good as they say it is… Im not so sure our customers even know we have it… Theater owner, New Mexico. Can it be priced?
Production and Cost 2:1 - 39(42) 3D Economics 30 3D Movies Avatar - $250M Benefit: Net addition to profit $80M (Dreamworks) Obstacle: Digital Projection Insufficient screens (3000 needed for an opening) Uncertain financing for theater digital projection (financial crisis) Pricing the Upgrade ($25 tickets) http://www.nytimes.com/2009/01/12/business/media/12film.html?_r=1&scp=2&sq=3D%20+%20%22Coming%20at%20You%22&st=cse
Production and Cost 2:1 - 41(42) Entertainment and media production and costs are formed on the same theoretical foundation as other businesses. But, there are unique features of the production of experience goods.
Production and Cost 2:1 - 42(42) Markets for Experience Goods Demand is different Supply and costs are often similar but often very different (books vs. concerts) Economies of scale and scope, technological change, etc. Complex interdependencies in markets Market structures do not mirror the rest of the economy (large pockets of rent) Demand interdependencies Complex contractual arrangements Vertical integration …