Examining Success in the Motion Picture Industry PAT TOPFI. Introduction We have all heard the old adage “You’ ve got to spend money to make money”, but will spending a lot of money lead to making a lot of money? Some movie companies have created their own interpretation of the proverb and figure that if one can make money by spending it, then one must be able to make more by spending more. Spending money in the movie industry can be done fairly easily. Companies can hire well-known actors and actresses, employ a popular director, beef up the action sequences with better computer graphics, or advertise the film in mass media outlets. The eight most expensive films ever produced were made in the last three years, with “Pirates of the Caribbean: At World’s End” topping them all with a production budget of $300 million and an advertising budget of nearly $40 million in 2007 (showbizdata.com). While the film did generate $300 million in domestic box-office revenue and continued to generate revenue in DVD sales and rentals, that box-office revenue number is far worse than what the production companies must have estimated for the third installment in the popular pirate series. But the question remains, why would a motion picture production company spend the most ever spent on a single movie and run the risk of losing much of it? Some believe if they spend enough on a film, people will automatically go see it, but then there are movies like “Poseidon” which spent $160 million in production budget and collected only $60 million in domestic box-office receipts in 2006. One has to believe that there is something more appealing to consumers in the motion picture industry than an expensive film. Do the reviews of professional movie critics impact consumers’ thoughts? Or does a certain genre put more people in the seats of theaters? Is box-office success guaranteed by using an established actor or actress in the lead or do people simply not care about any other factors and see movies for seemingly no reason at all? This paper focuses on the effects of several variables on the domestic box-office demand for the 189 widely-released movies of 2007. I will examine if there are factors that ultimately lead to movie success at the box-office or if there are factors that are believed to be important, but in all actuality have very little impact on revenues. Box-office receipts, however, are not the ultimate determinant of success in the industry. Some companies may use theaters as extended advertising medias and capitalize on the relatively cheap cost of producing DVDs and digital copies of films, but success typically has to occur in the theaters in order for other forms of the film to sell. Nevertheless, examining box-office revenue is the best way to determine the success of a film at this time because the information is readily available and movie theaters are still accepted as the major source of revenue for a particular movie. II. Literature Review The blockbuster theory has not been discussed much in the motion picture industry research, but it is the ultimate goal of every company. The theory is that movie production companies should spend vast amounts of money in the creation of a particular film because if it happens to become a blockbuster, a film which generates a large profit, it can cover the costs of several failed projects by the same production company (Garvin, 1981). The Star Wars franchise resurrected a struggling 20th Century Fox company that went out on a limb to spend $11 million on a science fiction movie and other companies have been trying to replicate the success of the surprising smash hit ever since. While some studies focus on how expenditures increase the chances of producing a blockbuster movie, others have looked at the influence of advertising on box-office revenues. Elberse and Anand (2007) looked at a simulated market of motion pictures and determined the effectiveness of pre-release advertising in the movie industry. They found that when a high quality movie is produced, increases in television advertising will generallyincrease box-office revenue because people are being exposed to a well-done movie and will want to go see this “good” movie. When a low quality movie is produced, revenues will fall with an increase in advertising because audiences are being exposed to a poorly done movie and will not want to go see this “bad” movie. If the “bad” movie was never advertised, potential customers will not see the bad previews for the film and they have a greater chance of spending money at the box-office than if they had seen the bad preview and declare the film as a must-miss. Quality and advertising budget, therefore, must be taken into consideration when trying to predict box-office revenues. This study also suggests the possibility of an interaction between advertising costs and professional review scores. When review scores are high, production companies should be spending more on advertising and be spending less when review scores are low. A look at this interaction will determine if those production companies are spending their dollars in the right place. Holbrook and Addis (2007) look solely into the quality of movies and the impact of expert judgment on box office revenues. They find similar results to Elberse and Anand (2007) in that people go see quality movies, but does it take a vast amount of money to produce these quality movies? A quality picture generally has better acting, better camera shots, and better special effects; all factors that lead to a more expensive production budget, so quality and production costs may be highly correlated, but both are important nonetheless. III. Theory When looking at the supply and demand market for motion pictures, one has to realize that it is unlike most markets. Price is fixed for each movie in a theater for those of the same age and for those wanting to see a movie during the same time of day. Changes in price do not have to be considered because there will simply not be any. Supply can be considered fixed as well. There are only so many movie theater seats in the United States and more will not be built with the excitement of a new movie coming out. Since price and supply are generally fixed, the only variation one can witness is in the location of the demand curve. A visual representation of this unique supply and demand model can