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Exploring the small movie profitability puzzle Dongling Huang & Dmitri G. Markovitch & Andrei Strijnev

# Springer Science+Business Media New York 2013

Abstract Movie industry sources and academics claim that film production is a risky business in which revenues and profits accrue to a few successful releases, most of which happen to be big-budget productions. At the same time, Hollywood produces hundreds of low-budget movies annually that seemingly have low chances of success from the outset. This is the paradox that the current research seeks to explore. We hypothesize how key elements of small films' business strategy serve to help low-budget film ventures to achieve profitability. We then draw on rich data assembled specifically for this research to explore the hypothesized cost-side and revenue-side inputs and also to compare the profitability of low-budget and big-budget film ventures. Contrary to the prevailing wisdom, we find that, on average, both big-budget and low-budget films generate a profit, when all major sources of revenue and cost are considered. Keywords Motion picture industry . Movie performance . Low-budget films

1 Introduction Hollywood sources and academics claim that film production is a risky, winner-take-all business in which revenues and profits accrue to a few successful releases (e.g., Decom 2004; De Vany and Walls 2004; Vogel 2007). Observationally, it appears that movies that Dongling Huang, Dmitri G. Markovitch, and Andrei Strijnev contributed equally to this research. The authors thank Jon O'Brien, Brian Ratchford, Joel Steckel, and Fang Wu for their helpful comments. D. Huang (*) : D. G. Markovitch Lally School of Management & Technology, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA e-mail: [email protected] D. G. Markovitch e-mail: [email protected] A. Strijnev University of Texas at Dallas, Richardson, TX 75080, USA A. Strijnev e-mail: [email protected]

Mark Lett

succeed commercially tend to be expensive productions. Given this received wisdom and observational evidence, it is perplexing to see hundreds of low-budget movies being produced in the USA each year. Assuming economic agent rationality, this contradiction likely implies that investment in small movies generates positive returns to at least some channel members, and there is simply limited understanding of profit distribution in the motion picture industry. The motion picture industry is a very important industry, both economically and socially, that has been a fertile ground for scholarly research (e.g., see Eliashberg et al. 2006 for an overview). However, many of the past studies have examined the film industry output by pooling large and small movies in aggregate analyses (e.g., Ainslie et al. 2005; Ravid 1999). Others have focused on the highest grossing films in a given year, i.e., mostly big-budget productions (e.g., Elberse and Eliashberg 2003; Neelamegham and Chintagunta 1999). To date, virtually no research has evaluated smaller movie performance or strategies specifically. Moreove