Motion Picture Industry the Relationship

Motion Picture Industry

The relationship between opening and total revenue for movies: determining factors

The film industry is big business, involving big budgets with the potential for even bigger profits. The average cost to make and market a major film was $100.3 million in 2006. This figure includes $65.8 million in negative costs and $34.5 million in costs associated with marketing (Motion Picture Association of America, 2007). 2006 saw the worldwide box office reach an all-time high with revenue reported at $25.82 billion. This figure represents an 11% increase from the previous year (Motion Picture Association of America, 2007). Furthermore, in the same year, theater admissions within the United States grew by a margin of 3.3% to a total of 1.45 billion tickets, which marked the end of a 3-year downward trend (Motion Picture Association of America, 2007). The increase in movie ticket prices in the United States only contributed to the invrease in revenue. The average price of a movie ticket in 2006 was $6.55, which marked a 2.2% increase in price from 2005 (Motion Picture Association of America, 2007). Moreover, the number of films being released to theaters is continually increasing as well. In 2006, 607 films were released, which was an 11% increase over the 549 films released in 2005. Overall, all of these statistics are good news for those benefiting from increasing revenues within the film industry.

Since there is much to be gained in the way of profits in the film industry, studios desire to have an idea of how movies will perform in terms of revenue. Upon examination of opening and total revenues for films, it is observed that one does not always accurately and reliably predict the other. In other words, some films report high opening weekend box office revenue but lower total revenue than some films that experienced lower opening weekend revenue. The purpose of the current investigation is to examine factors involved in the relationship between box office opening revenue and total box office revenue for films.

Past Research

Simonoff and Sparrow (2000) conducted a study aimed at determining means of predicting movie grosses. They looked at predicting movie grosses from information that is generally available, including mostly U.S. domestic gross, but also some foreign gross as well. The researchers examined strategies for prediction prior to a film's release, sometimes even early in the production of the film. The question investigated regarded how well studios can predict the revenues for a film prior to its release into theaters. Factors investigated with regards to this question included the importance of star power for ensuring profits, and whether certain types of movies were more likely than others to draw in large profits. In addition, it was investigated whether movies with big budgets were more likely to earn greater revenue (Simonoff & Sparrow, 2000).

The researchers also investigated strategies for the prediction of movie revenue according to factors immediately after the theatrical release of the film (Simonoff & Sparrow, 2000). It is reported by these researchers that opening weekend revenue for a movie usually accounts for 25% of the total domestic box office gross of the film. However, opening revenue cannot be reliably used as a predictive mechanism for total revenue since there are several other intervening factors that can affect the ticket sales of films. These factors include different release patterns for movies, as well as competition, and critical acclaim, or lack thereof, for the film (Simonoff & Sparrow, 2000). Furthermore, events such as the Academy Awards can also impact the revenue earned by films (Simonoff & Sparrow, 2000).

Simonoff & Sparrow (2000) conducted their study on prediction of film revenue using several predictive variables. These variables included the following:

The genre of the movie. Films are classified according to their content into categories. Films are classified as children's, comedy, drama, documentary, action, science fiction, horror, or thriller (Simonoff & Sparrow, 2000).

The rating of the film. Every film is assigned a rating by the Motion Picture Association of America. These ratings include: G (general audiences); PG (parental guidance suggested); PG-13 (may be unsuitable for children under the age of 13-years-old); R (children are not admitted unless they are accompanied by an adult); NC-17 (no person under the age of 17 is admitted); and U (unrated) (Simonoff & Sparrow, 2000).

The national origin of the film. Also whether it is classified as American, English-speaking but not American, or non-English-speaking (Simonoff & Sparrow, 2000).

Variables were used that measured "star power." Two variables of such were used. The first variable was a count of the number of actors or actresses in the film who were on Entertainment Weekly's lists of 25 Best Actors or 25 Best Actresses of the 1990s. The second variable that assessed star power was the number of actors or actresses in the movie that were considered among the top in average box office gross per movie in their careers. This information was available through the Movie Times website (Simonoff & Sparrow, 2000).

The budget for the production of the film. This variable was reported in millions of dollars (Simonoff & Sparrow, 2000).

Was the film a sequel to an earlier movie? The answer to this question was used as a variable in the study (Simonoff & Sparrow, 2000).

Indicators revealing whether the movie was released at a time when box office revenue is generally higher. These times of year include prior to a long weekend, release during the Christmas season, or release during the summer season (Simonoff & Sparrow, 2000).

The total number of screens that the film was shown on during its opening weekend (Simonoff & Sparrow, 2000).

Gross box office revenues for the opening weekend of the movie's release in millions of dollars (Simonoff & Sparrow, 2000).

Roger Ebert's rating of the movie on a scale of zero to four stars, with four stars being the best possible rating and zero being the worst (Simonoff & Sparrow, 2000).

Academy Award recognition for the film, in both nominations and wins. This variable was restricted to the major categories of Best Picture, Best Actor, Best Actress, Best Supporting Actor, Best Supporting Actress, and Best Director. These are considered the categories that are of greatest interest to the general public, and would therefore have the greatest impact on subsequent box office revenue for the film (Simonoff & Sparrow, 2000).

First, Simonoff and Sparrow (2000) investigated prediction of movie revenues using information that is available prior to the film's theatrical release. It was determined that some of the variables discussed resulted in differences in box office revenue. Two of these variables were genre and Motion Picture Association of America ratings. The genre of films was found to be predictive for gross revenues with certain genres, including action, children's, horror, and science fiction. These genres reported significantly higher revenues in general than the other genres (Simonoff & Sparrow, 2000). This is interesting since the most prevalent genres, being comedies and dramas, performed relatively poor in terms of box office revenue in comparison to the other genres. There was also an observed relationship between the rating of the movie according to the Motion Picture Association of America and the film's box office revenue. As the rating of movies goes from G. On the continuum to R, more movies are made, but the movies also typically earn less revenue (Simonoff & Sparrow, 2000).

The reasoning behind the latter finding regarding the relationship between rating and box office revenue is that films rated G. Or PG are well targeted and are appealing to distinct and defined market segments. Films of this rating are usually targeted at children or teenagers. Furthermore, some genres have a very narrow market segment, such as horror films, which are marketable only to a small portion of the teen population (Simonoff & Sparrow, 2000). Some genres that are lucrative, such as action and science fiction, may be cost-prohibitive since budgets for such films can be extremely high. This brings the film budget variable of the study into play, indicating that budget can tie in with genre, which certainly has an effect on the box office revenue of the film (Simonoff & Sparrow, 2000).

Another predictive variable was the language that the film was made in. It is a demonstrated fact that movies that are filmed in English-speaking countries earn higher box office revenues than movies made in non-English speaking countries (Simonoff & Sparrow, 2000). Rating may play a role here as well, since a large proportion of non-English films are rated R. Or U, making them inaccessible to many markets. Non-English movies also have difficulties acquiring distribution in the United States, since movies with subtitles are undesirable to many movie-goers (Simonoff & Sparrow, 2000).

Star Power" was also demonstrated as a predictive variable prior to release of the film, as movies with more notable, popular, and recognizable actors tended to earn higher box office revenues (Simonoff & Sparrow, 2000). Also, movies that were sequels tended to earn higher box office revenues than films that were not sequels, which may be due to the fact that the vast majority of sequels fell into the genres which were demonstrated as the highest revenue-earning groups, including children's, action, science fiction, and horror (Simonoff & Sparrow, 2000).

Interestingly, results indicated that the three timing variables investigated, which were releases prior to long weekend, during summer, or during Christmas, did not demonstrate relation to total revenues (Simonoff & Sparrow, 2000). However, the third quartile grosses were noticeably higher for seasonal releases in comparison to non-seasonal releases (Simonoff & Sparrow, 2000).

One of the most important factors involved in determining the success of a film in terms of box office revenue is the release date (Simonoff & Sparrow, 2000). Simonoff and Sparrow (2000) explain how movie studios often will plan a release date for a film up to a year in advance and leak this info to the media in an attempt to "scare off" competing films. Furthermore, this occurs among major blockbuster motion pictures as well as small budget films, as it is unlikely to find two movies targeting the same audience released in the same weekend (Simonoff & Sparrow, 2000).

Specifically, Simonoff and Sparrow (2000) used a linear regression to predict gross revenues in which some or all of the predictive variables could be incorporated simultaneously. This regression model was used to model the logarithm of the total gross revenue. Results indicated that the model predicted the revenues of some movies well, and other movies not so well. The box office revenue of a children's movie and a movie with a high degree of star power both were significantly predicted by the model. However, the revenue of other films such as big budget blockbusters and surprisingly successful sleep films were not accurately predicted by the model that used pre-release information (Simonoff & Sparrow, 2000). If budget could have been used as a predictive variable, the model may have been more accurate in its predictions. However, the exact numbers involved in the budgets of films are not readily available (Simonoff & Sparrow, 2000).

The opening weekend of a film's release is a very important time that is closely monitored by the film industry. This is due to the fact that movie's open at the height of their success, and the initial strength demonstrated by the box office revenue for films in their opening weekend determines many of the decisions regarding the film's financial future (Simonoff & Sparrow, 2000). This is due to the fact that there is major competition with regards to screen space in theaters, and theaters generally only will keep a film longer than the two-week obligatory period if it has demonstrated initial success in terms of box office revenue.

However, there are some circumstances in which a film with a less-than-stellar opening weekend goes on to experience overall box office success (Simonoff & Sparrow, 2000). For instance, the movie studio may invest in further marketing of the film, possibly targeting campaigns to a wider viewing audience than what was targeted initially. Furthermore, the opening weekend box office results can act as a gauge for the movie studio, indicated whether the marketing strategy was appropriate or whether it needs some adjustments (Simonoff & Sparrow, 2000). Adjustments to the marketing campaign after the theatrical release of a film can ultimately save the movie, resulting in longer theater runs and increased box office revenue.

The results of the study by Simonoff and Sparrow (2000) investigating predictive variables from after the release of films indicated that box office from the opening weekend of a film is highly predictive of total box office revenue to a certain extent. Furthermore, the strength of the relationships between opening revenue and total revenue were different for movies with low total revenue than for those with higher total revenue (Simonoff & Sparrow, 2000). It was demonstrated that it was considerably more difficult to predict total box office revenue from opening weekend revenue for films with limited initial theatrical release. Small-release movies are screened and marketed different, often being niche-market pictures, like independent productions, documentaries, or foreign films, which are limited in where they are shown (Simonoff & Sparrow, 2000). Also, these movies are variable as to how long they run for, which depends upon competition, festival recognition, word of mouth among movie-goers, and critical reviews. The latter two factors are especially influential in determining the length of time that small-release films are kept in theaters and subsequent revenue. One marketing strategy employed by some studios is called "platforming" (Simonoff & Sparrow, 2000). This marketing strategy involves an intentionally slow opening for a film in just a few select cities and then slowly expanding to other centers. This strategy slowly builds up momentum for a film, generally depending heavily on word of mouth and reviews.

Upon examination of the merit of a model that used predictive variables after the release of a motion picture, findings indicated that films that opened on more than 10 screens the first weekend of their release experienced higher total box office revenue. This model factored in genre, first weekend gross, and number of opening screens. Results indicated that the extent to which opening weekend revenue was predictive of total revenue varied according to genre. For example, children's movies do better in terms of total revenue than would be predicted by opening weekend box office revenue, which suggests that the total box office revenue for this genre of film is built up slowly. On the other hand, films in the horror genre generally have strong opening weekend revenue that quickly drops off, resulting in revenues that finish 20% lower than what would be predicted from opening weekend revenue (Simonoff & Sparrow, 2000). Overall, however, knowing the opening weekend revenue for a film provides an excellent means for predicting total box office revenue (Simonoff & Sparrow, 2000). Furthermore, once box office revenue from opening weekend is known, any other information that was previously useful, such as star power or rating, become irrelevant and do not contribute any more in regards to predictive power of the model (Simonoff & Sparrow, 2000).

Simonoff and Sparrow (2000) also examined the predictive effects that Academy Award recognition has on box office revenue of films. How much impact does this recognition have? Results indicated that the number of Academy Awards actually won did not significantly add predictive power to the model. However, the number of nominations a film received did affect the predictive power of the model. The greater number of nominations received, the greater the total box office revenue for the film (Simonoff & Sparrow, 2000).

Overall, the analysis by Simonoff and Sparrow (2000) illustrated that total box office revenue of films can be predicted rather accurately using readily available information. The accuracy of these predictions is especially keen following the opening weekend for movies that opened on more than ten screens (Simonoff & Sparrow, 2000). Nominations for Academy Awards also predict box office success, but only in films that have not been in release for several months prior to the nomination.

De Vany (1997) explained how there is a high level of uncertainty in regards to revenues of motion pictures. The movie industry is likened to a complex adaptive system, in which there is a critical sensitivity of total box office revenues to performance during opening weekend. This sensitivity is seen as a reflection of the sensitivity to conditions considered characteristic of deterministic chaos (De Vany, 1997). Furthermore, if films show particular sensitivity to initial conditions, like competition, season, or peripheral economic events, these conditions have the ability to produce large changes in regards to total box office revenue (De Vany, 1997).

Jaeger (2003) outlined the nature of the motion picture industry as explosive, due to the massive growth of ancillary markets like home video, cable, and foreign television markets. Films with marketing and production costs that are high often entail bigger risks with a smaller chance of return than low-cost movies that are released in non-theatrical markets (Jaeger, 2003). The stream of revenue and net profit that comes from films is greatly reduced due to marketing and promotional costs, distribution fees, overhead, interest and expenses, and gross participation (Jaeger, 2003). Release in theatrical markets is costly. The average negative cost of a studio film, which includes the cost of production, studio overhead, and capitalized interest, was $47.7 million in 2001, and the average initial marketing costs, including prints and advertising, for a feature film is over $20 million (Jaeger, 2003). Therefore, recouping costs for a feature motion picture can be quite a feat (Jaeger, 2003).

In regards to some average statistics, feature films have first run releases of approximately 8 weeks. During this 8-week period, usually between 1000 and 2700 screens are garnered, and the films earn approximately $10 to $40 million in box office revenue (Jaeger, 2003). There are approximately 16 new major studio release films introduced each month into the theatrical marketplace, on an average of about 1650 screens (Jaeger, 2003). On average, most major feature films are able to demonstrate box office revenues of at least $30 million, particularly once all media and territories have been covered. Furthermore, many feature films are able to generate at least $30 million within 14 weeks of release into theaters (Jaeger, 2003).

Purpose

The purpose of the current investigation is to examine relationships between opening weekend box office revenue and total box office revenue for 10 feature films. Each film under examination will be analyzed with regard to factors that may have influenced opening revenue and total revenue, as well as the dynamic between the two. It is hypothesized that variables such as star power, budget, and rating may have played roles in the box office revenue earned by the films.

Method

Ten feature films were selected for inclusion in the study. All of the films used demonstrated remarkable opening weekend performance in terms of box office revenue. Data including opening box office revenue, total box office revenue, and the proportion of total revenue represented by the opening revenue was obtained from Boxofficmojo.com.

FILMS

OPENING REVENUE

OF TOTAL REVENUE

TOTAL GROSS REVENUE

The Matrix Reloaded

Harry Potter and the Sorcerer's Stone

Harry Potter and the Chamber of Secrets

Spider-Man 2

X2: X-Men United

The Passion of the Christ

Star Wars: Episode II - Attack of the Clones

The Da Vinci Code

Austin Powers in Gold Member

The Lord of the Rings: The Return of the King

Information in the chart was obtained from Box Office Mojo, at http:www.boxofficemojo.com/alltime/weekends/)

Analysis

All of the movies examined varied in regards to their release date, opening weekend box office revenue, and subsequent total revenue. Several variables could have played roles in why certain films performed in certain ways. Each of the films will be examined according to their performance in terms of box office revenue.

The Matrix Reloaded - This movie was a science fiction sequel that was release outside any time frame that has been deemed influential. The opening weekend for this film was almost $92 million, which accounted for 32.6% of the total revenue earned for the film. Factors that may have affected the strong opening weekend and subsequent total box office revenue for the film are genre, star power, and the fact that it is a sequel to a successful movie. In terms of genre, films that fall into the category of science fiction perform relatively well in terms of revenue. This, however, is often offset by high production costs. Star power was a factor in the success of this film, considering the starring role was played by Keanu Reeves.

Harry Potter and the Sorcerer's Stone - This film is targeted towards children, and is based on a highly popular book series. This film earned $90 million in box office revenue on its opening weekend, which accounted for 28.4% of its total box office revenue, which was $317 million. The fact that it is a children's movie, had a huge budget, and has a built-in audience due to the success of the book series all contributed to the successful performance of this film, despite its lack of star power.

Harry Potter and the Chamber of Secrets - This film was released as a sequel to Harry Potter and the Sorcerer's Stone one year after the release of the first movie. This film earned $88 million in its opening weekend, which accounted for 33.7% of its total box office revenue, which was $261 million. Once again, this is a children's film based on a popular book series, which contributes to its success. Even though its total box office revenue was smaller than the first film in the series, the opening weekend revenue accounted for a higher proportion of total box office revenue than the first movie, which is most likely due to the fact that this film was a sequel.