the unusual economics of the film industry part II

by on October 12, 2009 at 1:05 pm in Uncategorized | Permalink

Another aspect of the economics of the film business that I don't believe is common elsewhere is that you often find vast price difference for the same commodity.  In fact, if I'm not mistaken in most industries it's illegal to sell the same product at different prices to different buyers.  Yet actor salaries can vary drastically between productions, and I'm talking about prices for the same actor.  For example Jim Carrey routinely gets paid $20M to act in a big studio comedy, but will take a fraction of that amount for a edgy, thoughtful, smaller indie like "The Eternal Sunshine of the Spotless Mind".  I use Carrey as one example, but almost all of the major film stars routinely engage in the same practice.

What has always surprised me about this is not that motivation of the stars which I completely understand.  They want to stretch, do something more daring, take creative risks, put themselves in a film that could be an award winner, etc.  They don't need the money, so they are motivated by other factors.  What surprises me is that the studios accept the price differential so easily.  I have never heard of a studio executive saying, 'Wait a minute Mr Sandler, you say you want $20M for 'You Don't Mess with the Zohan' yet the entire budget of 'Spanglish' was less than that, how does that work?"  To be sure, there are constant negotiations between the studios and agents over star salaries, and this current recession has shown that even the top stars as are susceptible to the general economy as the rest of us.  However those negotiations are aways centered around how big the star's last picture 'opened', and previous pay scale precedents do not come into play.  A star taking a much reduced payday to appear in a smaller indie production doesn't seem to weaken their bargaining power.  There appears to be no risk to their next 8 figure pay check by very publicily taking a huge pay cut in the interim.  I think this is a good thing, especially for the indie filmmaker community, but it's curiosity to me nontheless.

Konstantin October 12, 2009 at 1:18 pm

” In fact, if I’m not mistaken in most industries it’s illegal to sell the same product at different prices to different buyers. ”

This only applies to goods, not services like Jim Carrey provides. It’s not the film industry which is exempt, it’s the service sector.

maharbbal October 12, 2009 at 1:35 pm

I’m not sure it is such a puzzle.

The execs from the studios have a vested interest in having their stars as edgy, interesting, talked-about and loved as possible. As the small inde film seldom represent any threat by themselves, there is no opportunity cost, so they can go at it.

It actually makes perfect sense, they get the rewards attached with non-main stream cinema without having to spend a single dollars. You can say that they have a stake or a shadow investment in the small-budget inde flix their stars participate in.

Actually if you think about it, it is quite a common feature. Why do companies or celebrities devote time and money to good causes? Because they care… well maybe but they wouldn’t do it if it hurt their future prospect. How comes you need to pay a million dollar to have say Angelina Joly at your birthday party but the little Sudanese kid doesn’t pay? Why do Russian billionaires accept that? Because having a bimbo is easy, but having a gorgeous woman, with a heart of gold and a brain (and who attracts a lot of media attention) is rare and expensive.

So to sum it up, the studios accept and endorse the system as if it was some sort of charity.

Not mentioning that it may also count as subcontracted research. Take Tarantino’s Reservoir Dog, I am sure the actors didn’t get the biggest checks of their lives but the studios earned some serious kudos in the process (what’s cool, who’s cool, who looks cool and how, etc.)

Coming to think about it we can also try out a theory that works for painting: a school starts as a marginal player (take the impressionists for instance), then grows until it becomes the new main stream (the Academie). At that point, productions are large, expensive and fairly common (bad business model), it suddenly offers the opportunity to a bunch of youngsters to produce cheaply new pieces marketed as “modern” (see Picasso, Braque and Co)which will gradually crowd out the old stuff and a new cycle can start.

The same happens in movies (see the Nouvelle Vague), it almost happened in the US in the 1970s, so paradoxically the big boys need to diversify away from main stream to keep on evolving and have chips in whatever new may arise. The de facto “lending” of their stars is a way to do just that. Remember the Leopard: We need to change everything…

Ryan October 12, 2009 at 1:42 pm

It’s about signalling. Actors signal their quality by appearing in high-quality movies. Since those movies are usually risky, they have to take a large pay cut to play a role in those movies. Movie studios are trying to signal that their movie is a high-quality movie, which they do by paying a lot of money to high-quality actors.

Actors don’t risk their $20m paydays by doing cheap work for good movies, because that’s how they earn their $20m paydays.

Abhi October 12, 2009 at 1:56 pm

My perspective is, Jim Carrey’s or Adam Sandler’s non-comedy performances are much more valuable to themselves than to the market.

Serious acting is outside their ‘niche’ no?

winstongator October 12, 2009 at 2:04 pm

You are also equating the acting in Zohan and Spanglish. While they’re done by the same person, and are similar, they are not identical – is the level of difficulty of each role the same? But you do have the cost v. difficulty curve going the wrong direction…

Mike October 12, 2009 at 2:21 pm

Different people pay vastly different sums for their college education. Why do rich people tolerate paying $40k to go to Harvard when they know children of families making less than $60k a year get to go for free? It’s because they have no choice. Same applies to your movie producers who want Jim Carrey.

Steve Sailer October 12, 2009 at 2:43 pm

The scary thing is that the movie industry’s output could be a lot more venal and mercenary than it already is if its members didn’t go around telling each other so often that they are artistic geniuses who are much too good for the drek they are in.

hibikir October 12, 2009 at 2:54 pm

But you do have the cost v. difficulty curve going the wrong direction…

Not really. Mainstream comedy is a lot harder than it seems. It might be easier to get a passable result, but extremely good results require a lot of hard work. Making a large percentage of people enjoy the same comedy is extremely difficult.

Still, difficulty is not the reason for pay: Artists are paid relatively to the value that they bring to a production. Eddie Murphy might not be the best comedian ever, but he attracts large audiences to otherwise cheap to make movies, so he can eat large percentages of production, and still be in demand. If he played in a movie that wouldn’t attract his main demographics, he’d either pass on the project, or have to take a pay cut.

And, as other have said, some movies are attractive enough to the actor that they’ll gladly do them for free, while they maintain their lifestyle with movies that sell a whole lot, but aren’t really what the actor himself would do if money was no object. For an example, look at Matt Damon’s movies in the last 10 years: He’s clearly using blockbusters to be able to finance the movies he wants to make.

blair October 12, 2009 at 3:14 pm

just FFT….established actors/risses realize what might happen on the back end of a low budget indie…so the low pay/rewards up-front might end up even greater?

bellisaurius October 12, 2009 at 3:35 pm

I thought people had two different economic calculators in their heads, one for strictly business related decisions, and another for friends/family/personal stuff. With the business one, a relationship where goods and services are traded at market rate is what’s expected and adhered to, with the exchange being a more or less material one.

For the other calculator, the transaction is performed more or less out of duty, or something not quite material, like feeling better about oneself, or some signalling purpose. I believe the example someone brought up to distinguish the two was along the lines of loosening up one’s belt after dinner and tossing your mom twenty bucks saying “thanks for dinner”. It would generally be insulting to presume directly that it was for the money (although fine to recompense after insisting so aside from the rest of the family).

John Dewey October 12, 2009 at 3:56 pm

Nicholas Tabarrok: “In fact, if I’m not mistaken in most industries it’s illegal to sell the same product at different prices to different buyers.”

As Konstantin already pointed out, the law regulating price discrimination, the Robinson Patman Act, applies only to goods, not to services. Even with the sale of goods, the law allows for variation in pricing. The Strategic Pricing Group (SPG) explains that five criteria must be considered before price discrimination can be illegal:

1. prices must be different
2. sales to 2 or more purchasers must be contemporaneous
3. product sold must be a good and not a service
4. products sold must be of like grade and quality
5. reasonable probability of competitive injury must exist

The last one is an especially tough hurdle to clear. Two customers may be charged different prices if they are in different industries or if do not compete in the same markets.

The most common defense offerred for price discrimination has been meeting competition, as SPG explains:

“Under this defense, discrimination is permissible if it is based on a good-faith belief that a discriminatory price is necessary to meet the price of a competitive supplier to the favored customer or to maintain a traditional price disparity.”

Strategic Pricing Group points out that for decades neither the FTC nor the Justice Department have actively pursued violations of Robinson Patman.

DaveP October 12, 2009 at 4:20 pm

I was always amazed that the film industry (and the music industry) could get by with having so many *profit-losing* products…it seems like 8 out of 10 movies lose money, 1 breaks even, and 1 is a blockbuster.

I can’t imagine many other businesses surviving for long with that business model…

Michael October 12, 2009 at 4:23 pm

Like many of the commenters, I don’t think that this is that puzzling:

There is one exogenous factor, and that is the star’s pursuit of credibility and legacy. This is basically a non-economic calculus.

After that, it all pretty much makes sense. Star power moves a movie, and increases revenue, so studios are willing to pay a lot for it. But they are competing against other studios. Because they are able to pay a lot, bids go up to a lot, and stars will usually choose whichever pays the most. Similarly, small producers and indy entrepreneurs too know that stars move movies, and are willing to pay as much as they can. Now, stars usually make choices of small movies based on idiosyncratic preferences, personal relationships, etc., but holding all things equal, even among the smaller films, they’ll choose whichever pays more.

The real question, in my opinion, is why there is no institutionalized attempt to economize star power’s ‘beneficent effect’ — the difference a star makes to the potential revenue of a small movie just by deciding to be in it. As of now, it seems, there’s no market in this power, it’s just bestowed ad hoc through the whims of stars.

Vic Sarjoo October 12, 2009 at 5:15 pm

An actor’s performance is not the same “product” from film to film. If you’re going to use that analogy, you should consider an actor’s performance to be more akin to raw material. That is to say, the raw material of gold is the same whether it is in designer jewelry, bullion or coating spark plugs, but the relative price to the end-user of the raw material varies widely depending on its application.

Another reason price varies is that film budgets are, when rationally done, priced based on demand. Hence, superstar Jim Carrey playing a villain in a superhero blockbuster that will sell to enormous summer US audiences and world audiences and which will large DVD and TV distribution and marketing revenue is worth more than Jim Carrey playing a quirky character in a small, but poignant film that will command only a small audience and limited World, DVD and TV distribution and almost no marketing revenue.

I run an intellectual property exchange for Television, Film and Music and thus possess expert knowledge on this subject.

Andrew October 12, 2009 at 6:31 pm

One thing that hasn’t been mentioned (that I saw) from all these armchair economists who are completely unsurprised is that movies are a gargantuan coordination project that starts over every two months. THAT is something pretty unique I think.

A star may not have a project available for a month or two and thus can do a little work at no cost to him and a bonus to reputation and portfolio.

J. Goard October 13, 2009 at 2:37 am

No initial article in Eternal Sunshine of the Spotless Mind.

It’s a line of iambic pentameter, dude.

Brett October 13, 2009 at 2:47 pm

Once a Hollywood mogul said to one of his stars: “Damn it, you earn far too much. However, you’re worth the money.”
Big actors are part of the deal which means they do have a share in the production. They are bringing box office attraction to the party and they get what they are worth. Indie-pictures don’t have much box attraction anyway. Economically it’s rather wise for actors to appear in “good” movies since it give their careers a cance to last longer with is especially true for female actors. They have to move from “the next sexy charming thing” to “beautifully acted character” in a “meaningful” movie otherwise they are down and out in just a couple of years.

buy r4i card January 30, 2010 at 12:03 am

Personally speaking I want to see the head explode, the naked female form and hear the filthy language in my movies. Not in every movie, but if the director feels that he wants to put it in, fine, I love it. Hey, sometimes even using such material gratuitously can be fun.

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