Film Fund-amentals: Analyzing Hollywood

Nobody can pick a winner. That is the age-old wisdom of Hollywood, which is odd coming from a bunch of folks who also insist that they are the only people who can successfully do the one thing they claim can’t be done. The sheer absurdity of this point may help to explain the current dismal state of the summer’s box office. Heck, you can’t expect them to do the impossible. That’s why they get paid large sums of money for failure. Gee whiz, the studios couldn’t afford them if they were successful, right?

Uncertainty is the only certain thing in the film business. If you don’t believe me, just read the Arthur De Vany book Hollywood Economics: How Extreme Uncertainty Shapes the Film Industry. De Vany’s study is a must-read that I highly recommend and which is peppered across the Web in various free e-book versions like some sort of intellectual soup kitchen run by the Salvation Army. So just click on the above link and read away. De Vany makes some very good and extremely significant points.

But I’m also going to suggest ignoring much of what he says (just read it first and then ignore it). The reasons are simple. First, since his original study was done (much of the research period was conducted from 1985 to 1996), the dynamics have started to change and will continue to change quite radically. The core of his study was specifically designed for the state of the industry in the 1990s. The rapid development of new technological venues is about to completely alter the structure of the film market, and what now exists will eventually (within the next five or so years) give way to marketing venues that are currently being viewed as ancillary markets. In many respects, the system is going topsy-turvy as the ancillary markets are about to become the primary source of income (actually, this is already happening).

Secondly, predicting success (especially in the traditional Hollywood manner) is not the point. Traditionally, Hollywood producers have operated on the idea that they will put together the type of project that will score big and that the sole objective of financial assessment is figuring out what elements will bring in the greatest returns. They then stumble their way through various assumptions about “star casting,” “hot subjects” and “current trends” in the vain hope of producing the next Avatar or Dark Knight. Mostly, they end up with the next Hot Tub Time Machine. Often, they think that this approach is a form of risk assessment and management (because they are taking a risk and by gum, they can manage it). It is nothing of the sort.

Real economic management is based upon mapping out your base average figures (and this is just the start of the process). With virtually any Hollywood film, you can actually create a model that will give you the low end of what you can actually expect to make with any given type of movie. Notice I said the low end. This is your realistic assessment figure. If the movie succeeds beyond that estimate, great. If not, well at least you’ll know what you’re getting into. It is not an attempt to predict success. It is designed to prevent failure (Yes, I’m using the F-word – another part of the problem is Hollywood’s strong emotional aversion to the word).

In many businesses, this approach is standard practice. But in Hollywood, you might as well be speaking Venusian. I know because I’ve had some of these conversations with people in the business. By in large, they’re perfectly sane and intelligent folks. They are very good at discussing deals, profit points, splits and percentages. But the very minute the conversation turns to the grim issue of realistic financial modeling, their minds just go… well, somewhere else. Sometimes, I can snap them back to attention if I jack up the figures to bogus levels that I know are not advisable (which is actually a common practice in Hollywood). They like big numbers. More importantly, they want and expect something akin to alchemy as you take a leaden script and turn it into box office gold. Nothing works that way, but that’s what they want.

This is one of the major reasons why the film industry is unpredictable. Aside from all of the unpredictable variables inherent to the business, the industry is structured in an irrational manner. Nothing can be done about the unpredictable variables. They are what we Catholics call a Mystery. However, there are ways to manage and handle the rest of the business. The simple fact is that nobody in Hollywood wants to do that because… well, it just isn’t fun. I admit, it is a lot more exciting to chatter about how you can save the picture by having Angelina Jolie buck naked on the Titanic in IMAX 3D while blasting away with an RPG at invading aliens who are shooting death rays overhead, but this isn’t exactly a business model. What it does model is a system of behavior that is clinically defined as Narcissistic Personality Disorder. This is also why it really pays to be a psychiatrist in Los Angeles.

In a nutshell, this is the real problem. The economic structure of the film industry is completely irrational, based on a set of impulses and desires that defy any approach to analytical study and then packaged up under the pretense that it is simply some form of mysterious, magical act that will lead the lucky producer to a profitable yellow-brick road. Of course, this mind set is pure bunk. Likewise, the standard Hollywood defiance toward any attempt to find a more rational basis to the business is the typical response of a mentally disturbed personality when confronted by a direct acknowledgment of their mental disorder.

Now let me be quite clear. I’m not saying that everybody in Hollywood is nuts. There are many sane people in the business. Or at least that’s what they tell me. But the system is extremely dysfunctional and is currently built upon multiple layers of denial, irrational behavior patterns and pervasive impulsiveness in the decision-making processes. In that sense, the film industry is completely insane.