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Reviews of Arthur De Vany's Hollywood Economics

Orley Ashenfelter reviewed Hollywood Economics in Barron's (December 4, 2004).

"This is a remarkable assembly of two decades of Arthur De Vany's efforts to study the movie industry using the tools of modern economics. Okay, movie lover, if that sounds dry, what about a hard-headed, dollars-and-cents answer to film critic Michael Medved's question: "Does Hollywood make too many R-rated movies?" De Vany's answer: a resounding "yes."

His answer isn't based on a red state versus blue state discussion, but on careful analysis showing that, at the production rates in the period he examined, G-rated movies had lower risk at each rate of return than did R-rated movies. From 1985 to 1996, De Vany found, Hollywood churned out more than 1,000 R-rated movies. If it had made more than a mere 60 (you read that number right) G-rated movies in that stretch, De Vany asserts, the industry would have been far better off economically.

Hollywood Economics brings to the movies what some call the New Economics of Art and Culture. A key ingredient in his approach is what he considers the industry's key characteristic, what screenwriter William Goldman (Butch Cassidy and the Sundance Kid, A Bridge Too Far) calls the "Nobody Knows Anything" principle. The basic idea: In Hollywood, a movie's revenues, costs-and thus returns-are extremely uncertain.

It appears that De Vany came to appreciate both the evidence supporting this proposition and the power of its implications only late in his academic career. (Earlier this year, I met him over dinner to discuss his work. A retired economics professor from the University of California at Irvine, De Vany, who's in the same age bracket as Clint Eastwood, looks a bit like that actor-and every bit as fit!)

The kind of risk De Vany describes is associated with the Stable Paretian hypothesis, in that once you know that revenue, costs or returns have reached level X, the expected value of future levels increases in level X.

Basically, it's about exponentials: The downside is called the "angel's nightmare." De Vany estimates, for example, that if you have spent $20 million on a film and are already over budget, you shouldn't expect to spend less than $32 million before you finish! The upside: Once you reach a certain level of revenue, you can expect even more, which leads to the virtually unimaginable financial success of movies like Titanic.

One of the most fascinating parts of Hollywood Economics is De Vany's analysis of superstar actors and directors. Due to the nature of the blockbuster phenomenon, a director like James Cameron (Titanic was his biggest hit) has made films with total gross revenues that equal those of movies by Ron Howard, who's made twice as many films.

On the other hand, De Vany shows that it's far more likely for a blockbuster movie to produce a superstar than for the presence of a superstar to produce a blockbuster movie.

He also argues that paying superstars a sum equal to the increase in revenues they're expected to generate usually means a movie won't be profitable. Indeed, in one chapter, he shows that not all superstars are worth such payments. Though Tom Hanks, Tom Cruise and Clint Eastwood may be; Jack Nicholson, Robert DeNiro or Bruce Willis may not be.

As venture capitalist Kip Hagopian (a/k/a B. Kipling Hagopian, producer of the blockbuster Ron Howard-Mel Gibson hit Ransom) told me last summer, the most difficult part of the Hollywood process is "to get the movie made."

My advice: Read this book before you try."

ORLEY ASHENFELTER is Joseph Douglas Green 1895 Professor of Economics at Princeton University.

Other, brief reviews from the book jacket.

"A heretical and wise perspective on the economics and consumer patterns of Hollywood. Provocative and eye opening for its depth and intelligent analysis." Thom Mount, Producer and former Universal Studios President.

"This book provides dramatic evidence that, in comparison with the film industry, normally uncertain markets are virtually sure things. Not even popular stars or large first-week audiences are valid predictors of a film's future success. The volume demonstrates what sophisticated analysis can and cannot reveal about an industry in which "no one knows anything." It will be extremely valuable to anyone with an intellectual, financial or other interest in the market for popular films and for anyone concerned with analysis of subjects characterized by extreme uncertainty. Nonspecialists should not be daunted by the demanding technical analysis for there is plenty that will readily be understandable and fascinating to any intelligent reader." William J. Baumol, Professor of Economics, New York University & Senior Research Economist at Princeton University, USA.

"With this book, the agnostic mantra of the motion picture industry "nobody knows anything" finally loses its legs. Somebody does know something, and it's Art De Vany. When the history of motion picture industry thought is written, this author and this book will have its unique place and special recognition in that story. The DeSantis Center for Motion Picture Industry Studies, my wife Carol and I are proud to have awarded this cutting-edge scholar the 2001 "Carol and Bruce Mallen Prize for Published Scholarly Contributions to Motion Picture Industry Studies." Bruce Mallen, Ph.D., Director, The DeSantis Center, Dean, College of Business, Florida Atlantic University

"If you want an applied exposition of the "wild" type of uncertainty, this is the book. I know of no better text to understand kurtosis, the contribution of the very small to the very large, and the dynamics of rare events. The value of this book lies way beyond the film industry. In addition it is written with great clarity and does not use anything beyond intuitive mathematics." Nassim Nicholas Taleb, PhD, Empirica LLC. Bestselling author of Fooled by Randomness, (Texere, 2001).

"The breakthrough work of De Vany that is represented in this book is both thoughtful and thorough, providing a theoretical foundation for understanding the statistical dynamics and economic structure of the movie business in a way that has never been done before. Hollywood's business practices and contractual relationships, often characterized as being bizarre and chaotic, are placed in a theoretical framework that makes them all appear quite rational and workable in the context of an economically-driven system. Even if readers do not fully grasp all of the mathematical details, industry executives, analysts, and students are likely to benefit greatly from this book and cannot claim to know the business of Hollywood and its economics until they've been exposed to this material." Harold L. Vogel, author of Entertainment Industry Economics, (CUP, 2001).

"Arthur De Vany has revolutionized the way in which Hollywood can be thought about. He has brought a rigour to the study of film that simply cannot be ignored, even where the reader does not always agree with his conclusions. These articles are essential reading for anyone wanting to understand the manner in which Hollywood works." John Sedgwick, Principal Research Fellow in Economics, London Metropolitan University, UK.

"Screenwriter William Goldman is famous for having said that "nobody knows anything" about the economics of the entertainment industries. His claim is now proved wrong for the movie industry. Arthur De Vany book makes it transparent. Even those who are not very familiar with the sophisticated statistical and econometric tools that he uses will understand the arguments, which are explained with great clarity and lucidity. De Vany's book will soon be among the very few classics on the entertainment industries." Victor Ginsburgh, Professor of Economics at Université libre de Bruxelles, Belgium.