The Economics of Hollywood

by Tejvan Pettinger on June 18, 2014 in concepts

Readers question: Why does Hollywood make so many superheroes movies nowadays? What can be the economics behind it?

I’m not really a movie goer. I think the last Superhero move I watched was the original Superman back in the days when Coal miners were still a political force and people used to rent videos to watch in VHS tape players.

One reason I don’t like the usual Hollywood movies is that they are so predictable, and frankly you can get soon bored of the same formula – good guy goes down on his luck, but when things look really bleak – Superman comes back from the brink, defeats the bad guy and everyone lives happily ever after.

So, if they are so depressingly predictable, why do so many super-hero style movies get made by Hollywood?

Risk vs solid reward

Making movies is a risky business. But, ultimately studios are interested in making a profit – not in producing artistic films which may appeal to hard bitten film critics. You have to put a lot of money in, and you need to guarantee that you get a good return. With superhero style movies, they have a strong track record of getting decent revenues. If Superman 1,2,3, and 4 all made a profit. Then you could make an approximation that Superman 5 has a good chance of making profit too.

Suppose some new film director came along with a risky plot – something very independent, different, ‘artistic’ and challenging. – It could be a great success, but equally it could be a flop. You could make slightly higher than usual profits, but equally you could make a loss. Given the choice between a risky new style film and a guaranteed ‘banker’ – there is a strong economic incentive for you to choose the ‘safe’ option of another superman hero movie.

A good example, is the TV series ‘Breaking bad’ – It is critically acclaimed as one of the most innovative and well produced TV series of all times. But, when the creator approached TV networks, no one wanted to touch it. TV producers couldn’t see any track record for successful  / profitable TV based on a chemistry teacher cooking crystal meth. It was very successful in the end, but the success was unexpected. Generally, TV producers would rather commission something with a more certain audience (like minor celebrities eating worms in the jungle)

Advertising and brand loyalty

One difficulty with producing films is that you have to gain strong brand loyalty in a short space of time.  If nobody has heard about the subject of the film, it will be harder to attract interest. The advantage of producing a superhero movie is that there is an instant brand loyalty and awareness of the superhero like Spiderman / Superman. By using well known comic characters, you have effectively got a lot of free advertising – from the long period of customer awareness of the superhero.

The most successful film franchise – James Bond has a huge advantage because the brand of the film series is so well known. You know a James Bond film may be quite predictable, but at least you know you are going to see some good action shots, fast cars, beautiful women and spectacular backdrops.

It is one reason why books are often made into films. Awareness of the books, helps with the advertising for the film.

Famous actors

The difficulty of going to a film is that you don’t know whether it is worth the money, until after you have seen it. You can go on reviews, but apart from that you have to make an educated guess. I remember choosing videos (in the days of video rental shops). The only thing you had to go on was the title, cover shot and list of actors. You had to guess whether the film was going to be any good on this rather flimsy basis.

This is why famous actors can command such a high wage. If customers see a famous actor (who they like) in the movie, they are more likely to go. If the film is about an unusual subject, with unknown actors, it will be much hard to attract sufficient demand. The actor is at least a known quantity. The rest of the film is unknown. So people may base their choice of films based on the actors in it.

The ‘Starbucks effect’

Suppose you go to the cinema, and you have a choice between two films. One is Spiderman 2, and the other is the ‘Unknown adventures of an Oxford economics teacher’. Which film are you going to see?

Well, Spiderman 2 is going to be predictable, but at least you can guarantee a certain standard, a bit of shooting and some excitement. You would probably rank this a 7/10.

The adventures of an Oxford economics teacher could really go either way. It may be a dazzling, informative and challenging film, which surpasses all your expectations (10/10) or it could be a horrible flop – about as interesting as, well, revising economics.

Faced with this choice, customers would most likely choose the risk-averse option of Spiderman 2 – at least you know what you are getting.

The reason I call it the Starbucks effect  is that if you go to a foreign town, many customers prefer the certainty of a well established brand label like Starbucks – rather than risk an independent coffee shop (an independent, which could be better, but also could be worse)

This is why studio producers want to concentrated on well known film subjects, rather than take a punt on art house classics.

2nd APR Results

PUSAT TINGKATAN ENAM SENGKURONG					BLOCK				3
	Record for the 2nd APR in July 2014
No	Name	P1	40%	Data Response	30%	Essay	30%	Total marks P2 (60%)	Total marks (100%)	Grade	Attitude
		30		20		20
1	AK AHMAD AMIN HIDAYATULLAH BIN PG HJ ROSLI	20.00	26.67	9.00	13.50	5.00	7.50	21.00	48	E	GOOD
2	YAP ZHI SENG	15.00	20.00	9.00	13.50	5.00	7.50	21.00	41	E	GOOD
3	MD HARITH ASNAWI BIN HJ JOHAR	18.00	24.00	11.00	16.50	10.00	15.00	31.50	56	D	GOOD
4	YONG KE YING	21.00	28.00	6.00	9.00	9.00	13.50	22.50	51	D	GOOD
5	NUR HAZIIMAHRASYIDAH BTE HJ IBRAHIM	15.00	20.00	8.00	12.00	8.00	12.00	24.00	44	E	GOOD
6	NUR IZZATI BTE HJ MARZUKI ISKANDAR	16.00	21.33	6.00	9.00	4.00	6.00	15.00	36	U	GOOD
7	MD SHAHRIMAN BIN ASLAN	23.00	30.67	6.00	9.00	5.00	7.50	16.50	47	E	GOOD
8	LO SIONG WEI	22.00	29.33	13.00	19.50	12.00	18.00	37.50	67	C	GOOD
9	IHZAS	15.00	20.00	5.00	7.50	9.00	13.50	21.00	41	E	GOOD
10	SITI NADHIRAFIFAH BTE HJ ARIFIN	20.00	26.67	8.00	12.00	13.00	19.50	31.50	58	D	GOOD
11	THOW SIN HUI	24	32.00	9	13.50	6	9.00	22.50	55	D	GOOD
12	NADHIRAH IZZATI BTE HJ MATNOR	13	17.33	12	18.00	3	4.50	22.50	40	E	GOOD

Aggregate Demand Video

Measuring Unemployment

The unemployed are those individuals of working age who are capable of work, and are actively looking for work, but who are not employed. If labour is employed, but not effectively used, the situation is called underemployment.

Measuring unemployment

Measuring unemployment accurately is made difficult because of imperfect knowledge. Not all instances of unemployment are recorded, and some records of unemployment may not be accurate. Because the unemployed are eligible for benefits, some individuals may work, but not disclose it, and claim benefit. Conversely, many unemployed may not bother to inform the authorities, and this unemployment goes unrecorded.

The Claimant Count

The Claimant Count records those claiming unemployment benefit (Job Seekers Allowance, or JSA) and can prove they are actively looking for work. It excludes housewives and those on training schemes.

How useful is the Claimant Count?

The Claimant Count may not reflect the true level of unemployment in the UK economy, given that not all the unemployed will bother to claim, and some are deterred because they cannot prove they are looking for work. This is especially true of part-time employeeswho are much less likely to register as unemployed compared with full-time workers. While some individuals may fraudulently claim, it is generally recognised that the Claimant Count under-estimates actual unemployment levels.

UK Claimant Count

The International Labour Organisation (ILO)

The labour force survey is undertaken by the International Labour Organisation (ILO) and is a more direct assessment of unemployment, rather than those who claim benefit.  It is based on an interview of a sample of 60,000 households (approximately 120,000 people) and tries to measure ‘unemployment’ as a whole, rather than those simply claiming benefits. To be considered as being unemployed individuals must:

1. Have been out of work for 4 weeks.
2. Be able to start work in the next 2 weeks, so they must be readily available for work.
3. Workers only need to be available for work for one hour per week, so part-time unemployment is included in the measurement, though these workers are unlikely to claim unemployment benefit. This tends to make ILO unemployment much higher than the Claimant Count.

UK unemployment 

The ILO survey gives a higher figure than the Claimant Count. Sustained growth between 1994 and 2008 pushed UK unemployment to a record low. Largely as a consequence of the financial crisis in 2008, the UK, along with many other advanced economies, went into a deep recession, with unemployment peaking at just under 2.65 million in the first quarter of 2012.

Youth unemployment

EU unemployment

Long term youth unemployment

How useful is the ILO survey?

Since 2003, the Labour Force Survey has become the UK government’s official measure of unemployment. However, critics argue that it over-estimates true unemployment by including people only looking for a few hours of part-time work per week. In addition, like all samples, it can be subject to sampling error, which reduces its accuracy.

The costs of unemployment

Opportunity cost.

Unemployment represents an opportunity cost because there is a loss of output that workers could have produced had they been employed. The government also spends more on unemployment benefit; hence there is another opportunity cost. The money going on unemployment benefit could be spent on hospitals and schools.

Waste of resources.

Resources not employed are left idle, and this is a waste to an economy – education and training costs are wasted when individuals who have received these benefits do not work.

The Chancellor loses revenue.

The unemployed do not pay income tax, and pay less indirect tax as they spend less.

Erosion of human capital.

Many skills are acquired at work, and being unemployed means can mean fewer new skills are acquired, and existing skills are lost.

Lower incomes.

The unemployed have lower personal incomes and lower standards of living. In addition, the unemployed also experience relatively poor physical and mental health.

Externalities.

There are further external costs associated with unemployment, such as increased crime, alcoholism and vandalism.