Joel Kwan is a corporate lawyer based in Los Angeles, California. Currently acting as financial/legal associate for Westwood Group, a specialty finance company, Joel focuses on general regulatory compliance, creditor rights and structured finance. Visit his website to learn more.

Wednesday, January 20, 2010

The Economics of Hollywood Movies

I saw Avatar this past weekend. I have to admit that I have not seen a good action science-fiction movie like this for a long time. This outing at the movies inspired me to look into the blockbuster strategy in Hollywood. The blockbuster strategy started in 1975 with Jaws when the movie was released nation-wide with lots of emphasis on marketing (1). Jaws was the first movie to be advertised on national TV. More recently, a characteristic of blockbuster movies is hefty budgets. The trend has been that the average Hollywood movie cost is on the rise by nearly 7% a year (2). Avatar has set a new precedent: the New York Times estimated total costs of $500 million (3).

For the purposes of satisfying my curiosity, I did two simple regression analyses using the top 20 most expensive movies of all time adjusted in 2008 $US. I wanted to see if there was a correlation between the movie’s budget and the worldwide revenue in the first test, and in the second I wanted to see whether there was a correlation between the movie’s budget and viewer appreciation (estimated using the Internet Movie Database ratings -IMDB).

After running the tests, it seems that total movie budget is not a very good indicator of box office success. According to the first test, the movie budget accounts for a little less than 30% of the revenue stream. It is noteworthy that only 5 movies in the top 20 most expensive movies of all time end up in the top 20 most enjoyed movies of all time (4).

The second test is even less conclusive. The movie budgets accounted for only 20% of ratings by fans on IMBD. Again, out of the 20 top best rated movies on IMDB, none of the 20 top most expensive movies show up in the list.

These tests, although using small samples, show that there is not a very strong correlation between movie costs and revenues and between movie costs and viewer ratings.

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