Do declining Hollywood revenues mean fewer movies or smaller mansions?

February 16, 2012 at 1:18 pm 10 comments

| Gabriel |

Matt Yglesias has a characteristically smart reply to my post on the effects of piracy in Hollywood vs music. Specifically, he notes that movie stars make a lot of money and we can expect losses to piracy to mostly affect them. That is, much as I argued that music piracy is not that big a deal because it mostly affects rent dissipation in the form of payola, Yglesias makes a parallel argument about elite labor compensation in film. I agree with this argument in part (in fact I anticipated it in my penultimate paragraph) but I think he goes a bit far in expecting that the cost will  primarily be felt in the form of reduced star compensation with little impact on the filmgoing experience.

Before quibbling, I should say that I totally agree that reducing the rewards to elite Hollywood workers will not greatly reduce the quality of our stars. If you think, as I do, that fame is endogenous and only very loosely coupled to native talent, then we might have some retirements in the short-run but in the long-run we can expect very little decline in movie star or screenwriter quality if the top movie stars and screenwriters take a pay cut. The real issue is not that cutting above-the-line costs will hurt quality but that above-the-line costs are a minority of all costs.

Since Yglesias brought up Tom Cruise, let’s use the example of Mission Impossible: Ghost Protocol. IMDb estimates the production budget at $145 million. For the sake of argument, let’s assume that Tom Cruise got paid $20 million, and maybe another $20 million spread between the other above-the-line talent like Brad Bird and Jeremy Renner.  (These are probably overestimates, but I’m trying to make a conservative argument). This still leaves at least $100 million for below-the-line costs. If the expected value of green-lightening MI4 were cut in half by piracy there’s no way this could fall entirely upon Tom Cruise and other elite labor, even if we assume they would work for free, because their total compensation was probably less than a third of the budget.

Making big tent-pole films is really expensive and not just because the director, screenwriters, and starring actors can bid up their compensation. In Hollywood accounting these people are known as “above-the-line” and their wages are, to a first approximation, equal to the expected value of their marginal contribution to the film’s revenues. Although the guilds set minimums, anyone you’ve heard of gets paid much more than union scale and in practice above-the-line wages are negotiated for each elite worker on each film. (This is why people need agents).

In addition to the marquee collaborators, there are lots of craft workers who contribute to films. To a first approximation their wages are set by unions and their cost is a multiple of the number of days on the shooting schedule. Spectacular shots take skilled labor and time. For instance the shooting for MI4‘s amazing hotel climbing sequence alone took eight days, all of them overseas where you have to fly in and put up the expensive union crew. Yes, they could do this more cheaply with digital but I think we’ve all learned that over-reliance on digital matte painting leads to terrible acting performances and a generally creepy uncanny valley feeling.

In much the same way that we can imagine cramming down the compensation of red carpet celebrities we can similarly imagine cutting the wages of below-the-line workers. However this is a much more difficult proposition, even if we put aside the “Hollywood craft workers are the salt of the Earth” talking point that Chris Dodd likes to use to pitch SOPA to left-wing audiences. Key grips are in some sense “overpaid,” but not by nearly so much as are movie stars. The fact is that if you want a master craftsman you need to pay a solid middle class living or that person will defect to another industry. We can imagine cutting celebrity wages by maybe 90% without much hurting labor quality but there’s not nearly as much fat to cut on the below-the-line side, maybe 30% or so. If you want to get below that it’s not going to come out of pay cuts but reduced labor utilization, and by extension lower production values. Contrast the flat lighting in Dawn of the Dead with the rich depths in Land of the Dead  and you’ll get a sense of why the latter film had a budget that was eight times higher in real dollars.

That’s in the long-run. There’s also an issue of what the transition would look like. As I mentioned above, movie star compensation is negotiated ad hoc for every film. If revenues drop appreciably the quote price for above-the-line workers will follow almost immediately. In contrast, getting a 20% or 30% clawback from both craft workers and non-name creative workers is a different procedural ball of wax. These wages are set by union contracts and would have to be renegotiated with SAG, WGA, and IATSE. Paring back the cost structure of an industry under threat is really hard and creates lots of resentment. Moreover the studios are notorious for their sketchy accounting which means that workers will understandably find it difficult to believe “we can’t afford it.” As such an attempt to clawback from union contracts would almost certainly provoke a series of strikes, which not only disrupts shooting during the strike itself but for any film that can’t be completed before a possible strike date.

So I agree that a lot of reduced revenues will be felt in lower star compensation, but a lot of it will cash out in terms of lower compensation for below-the-line workers and lower production values. And that’s after we suffer through a series of strikes to renegotiate the union contracts.

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Sympathy for the IP Industry Bleg on Failure

10 Comments

  • 1. Yoram Gat  |  February 16, 2012 at 7:21 pm

    But, again, if we take seriously the argument that lower profits would result in fewer and less lavishly produced movies and that this is a problem, then why limit ourselves to preventing movie-sharing/piracy? There must be other ways to increase studio profits and so increase the number and the extravagance of productions. One could simply go for direct subsidy by one giving the movie industry various tax breaks or allowing movie goers to deduct movie tickets from their income.

    And, of course, one could divert resources in one way or another to other industries, which presumably would increase the output and quality of the products of those industries.

    So, the question is: why the movie industry, and why in this roundabout way?

    • 2. gabrielrossman  |  February 16, 2012 at 7:54 pm

      Are you asking me or are you asking someone else who goes beyond merely extrapolating the effects of piracy to actually supporting a political agenda of more aggressive copyright enforcement?

      To play devil’s advocate, there actually are countries that engage in subsidies along the lines you’re describing, usually for reasons of cultural protectionism. What you see in these countries is a lot of rent-seeking as to who gets access to the subsidies.

      Of course there’s also a lot of rent-seeking over an intellectual property regime, as seen most egregiously with CTEA. The difference is that in the French model you have micro rent-seeking over particular grants whereas in the American model you have macro rent-seeking over the rules of the road. Subsidies in indirect form are less distortionary as they apply fairly automatically to whatever private actors do within the scope of the law. In practice there’s a big difference between enforcing rule of law (even if the law itself has been written by the MPAA) and doling out grants ad hoc. This is a major theme in Paul Starr’s Creation of the Media which argues that the American government has always subsidized the press but it has mostly done so indirectly and the indirect nature of subsidies inhibits censorship. For instance if the government directly subsidizes newspapers it can choose to do so only for papers aligned with the ruling party but if the government indirectly subsidizes newspapers through mass literacy or the postal system these indirect subsidies will benefit even the opposition press.

      That’s all 19th century stuff but in our own time consider the issues of obscenity and blasphemy. When the NEA or other public bodies subsidizes obscene or blasphemous art through grants they get dragged in front of Congress to explain themselves. In contrast, nobody would consider it objectionable for the FBI and courts to enforce the copyrights of hardcore pornography.

      To put it simply, if you indirectly subsidize media through copyright enforcement you get stuff the public likes, including stuff that is lowbrow and/or politically incorrect. If you directly subsidize media through grants you get stuff that politicians and artist peer review juries like.

      • 3. Yoram Gat  |  February 16, 2012 at 8:18 pm

        > Are you asking me or are you asking someone else who goes beyond merely extrapolating the effects of piracy to actually supporting a political agenda of more aggressive copyright enforcement?

        Fair enough, but my point is that focusing on the effects of piracy tends to limit the discussion to a small and rather arbitrary subset of the policy options.

        > If you directly subsidize media through grants you get stuff that politicians and artist peer review juries like.

        It seems that politicians tend to channel the public’s prejudices on such matters. Be that as it may, I was considering the possibility of subsidizing the industry as a whole via various tax breaks, not doling out grants for individual projects.

      • 4. gabrielrossman  |  February 16, 2012 at 8:30 pm

        I agree that it’s possible to design a subsidy scheme that works automatically, without rent-seeking. Probably the most promising of these would be an internet tax that was automatically doled out proportionately to a monitoring service’s estimate of how often a particular work was pirated. This would closely parallel the way music broadcasting royalties worked in the mid 20th century (see my comment in this old TAS post).

  • 5. Andrew Burday  |  February 22, 2012 at 7:06 pm

    Interesting post. I think another example of an automatic subsidy scheme would be the recording industry’s private tax on cassette tapes that was passed circa 1990+/-. Right? I don’t know what the law was called.

    Question: what do you mean by “their wages are, to a first approximation, equal to the expected value of their marginal contribution to the film’s revenues.”? I understand generally what you’re getting at, but literally — “expected value of their marginal contribution”? I don’t know what that means. If you were just trying to convey the general idea that the star’s fee is based on his/her ability to put butts in seats, fine. If there is something more specific, though, I’d be curious to know what it is.

    • 6. gabrielrossman  |  February 22, 2012 at 7:13 pm

      I’m referring to Art DeVany’s work. It gets pretty technical, but yes, it basically means that the more butts you can put in seats, the more you’ll get paid.

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  • 8. Maynard Handley  |  April 10, 2012 at 3:26 pm

    Gabriel, it seems that you are assuming the “essentiality” of an awful lot of contingent issues.

    The me take just one issue: For most movies, along with the above-the-line costs, the second huge expense is advertising the movie, a cost you completely neglected. A substantial reason for the huge cost of advertising is getting your movie known amongst the clutter of competing movies. But this clutter of competing movies doesn’t exist if things turn out as dire as you predict.
    In other words, the natural trajectory is not a complete collapse of the blockbuster, it is a dialing back from, what, twenty(?) huge-budget movies a year to fifteen to ten. At each step along this path there is both slack in star expenses and slack in the advertising budget that can be taken up, not to mention that fewer huge-budget movies means a larger pool of movie-goer money available for each such movie.

    The conditions that led to the blockbuster in the first place, the desire to appeal primarily to fifteen year old boys, still pertain, which means that such movies will still be made — and if they are made in half the current numbers and so at the same level of profitability (assuming piracy, declining audiences, etc), what’s the tragedy?

    To me a much more interesting issue is the larger one implied by the cost of advertising. The problem the movies have is that every production is a one-off which has to be sold as a one-off. Thus the various (ever more inane) attempts to reduce this uniqueness penalty with movies based on video-games, well-known (to kids) books, TV series, sequels and prequels, etc.
    The TV industry has a vastly superior model here, where they only have to generate advertising for the pilot of a show, then they can, for the most part, let things run on auto-pilot. In finance terms, creating a pilot is very much like buying an option, whereas creating a movie is like building a full factory — the one is so much more flexible than the other, and allows you to bail out at any point without much money spent if it looks like your guesses were wrong.

    One suspects there is a space between these two for the “ongoing-ness” of TV, but the better production values of movies, which just has not yet been found. Sequel after sequel is an attempt to do this for movies, but it’s a sad and pathetic attempt done completely wrong, with every “episode” restarted from scratch, with each writer or director trying to impose their own particular stamp on the material, and the results generally unsatisfactory to everyone.

    [And as high-end TV shows keep improving — Game of Thrones as the obvious current example — perhaps this is how the disruption plays itself out, not as movies learning from TV, but as TV approaching movies. No-one over fifteen cares about the quality of the explosions in Mission Impossible 8 because they’re at home watching high-end TV, with high-end production values, on their 60″ flat screens?]

    • 9. gabrielrossman  |  April 10, 2012 at 3:52 pm

      It’s an interesting question to ask how much promotion factors into it. It’s probably the case that promotion costs are what killed the indie bubble. (Long story short, indie movies were cheaper to make but comparably expensive to promote). In my previous post I mentioned how radio promotion is a specialized market so losses will accrue to factor input owners. This isn’t as true for film, which relies more on general explicit advertising markets (eg, tv ads) rather than specialized implicit advertising markets (ie, payola).
      Anyway, let’s say promotion expenditures get cut. Because the studios are competing for ads w other marketers this will mostly be a quantity issue not a price drop. To the extent that film-going is a zero-sum game then it won’t matter but I think film marketing actually does drive aggregate attendance. So bottom-line, I’m thinking that promotion as part of budget doesn’t solve the problem.
      I do agree w you though that “pre-sold” properties are a way to address promotional issues. We had the interesting case recently that Andrew Stanton insisted on treating John Carter as a pre-sold property when most people had never heard of this character.

  • 10. Abby Babble  |  June 7, 2012 at 1:54 pm

    Many of the most talented behind-the-scenes workers in Hollywood are underpaid. I’m an animator, and I know many people who work at FX studios or TV animation studios. Directors and art supervisors get paid decently, but the artists who *actually do the work* rarely get paid more than $50k/year, which doesn’t go far in Los Angeles.

    There is also a huge invisible market of outsourcing to cheaper states and other countries. For instance, Sony Pictures might pay Rhythm & Hues to do some special FX work. Rhythm & Hues signs a contract, but since they’re busy on their own projects, they fork the work over to Studio X. Studio X then forks it over to a studio in Canada or Texas, or maybe India. There are a ton of middlemen. The trail of money is hard to follow.

    I suspect that if Hollywood loses revenue, the demand for cheap outsourcing will rise … and quality will go down as a result. Executives and actors will continue to pull in the same salaries that they’re accustomed to. But special FX, sets, music, and costumes might start looking a lot cheesier / lower budget.


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