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Friday, December 31, 2004

The G-Movie Paradox 

There is an interesting article (subscribers only) in the January 10 issue of Fortune that discusses a discontinuity in the production of movies. It turns out that G-rated movies are, on average, vastly more profitable than movies with other ratings, yet account for a mere 3% of the movies that major studios produce.
No matter how you slice the movie business—by star vehicles, by budget levels, by sequels or franchises—by far the best return on investment comes from the not-so-glamorous world of G-rated films. The problem is, these movies represent only 3% of the total films made in a typical year.

Take 2003, the last year for which Motion Picture Association of America statistics are available. Of the 940 movies released that year, only 29 were G-rated. Yet the highest grossing movie of the year, Finding Nemo, was G-rated.

On the flip side are the R-rated films, which dominate the total releases and yet bring easily the worst return on investment. A whopping 646 R-rated films were released in 2003—69% of the total output—but only four of the top 20 grossing movies of the year were R-rated films.

This trend—G-rated movies are good for business but underproduced; R-rated movies are bad for business, and yet overdone—is something that has been driving economists batty for the past several years.

In other words, if the maximization of profits is the principle objective of Hollywood movie studios, they are acting irrationally. Hollywood is investing its capital without regard to its return.

Fortune suggests that the underinvestment in movies suitable for family viewing is a function of Hollywood's culture:
If Hollywood were run like a real business—instead of, say, like a clubby, insecure, award-crazy, star-groveling high school—where things like return on investment mattered, there would be one unchallenged, sacred principle that studio chieftains would never violate: Make lots of G-rated movies.

In a way, this should be reassuring to almost everybody. Leftists who are concerned that "corporations" will destroy the artistic merit of movies in the pursuit of profits can now rest assured that that has not happened. Conservatives who argue that Hollywood ignores families and produces corrupting R-rated movies to advance some nefarious social agenda can safely conclude that that has happened.

There are a couple of additional observations to make about this. First, the G-movie paradox surfaces interesting questions about the strange political beliefs of most movie stars, who are the most leftist rich people in the economy. Why is it that so many movie stars insist that "corporations" are motivated only by the pursuit of profit when it is so clearly the case that that does not reflect their own experience? Though it does explain why so many celebrities seem to believe that the economy has money to burn on wasteful social programs. What more wasteful a social program is there than a money-losing R-rated movie?

Second, it seems to me that there are other industries that attract irrational amounts of capital, presumably because of the glamor or other inherent satisfaction in the business. Airlines come to mind, as do restaurants, both of which industries seem to attract an enormous amount of money to losing ventures. Perhaps the production of R-rated movies is just fun.

5 Comments:

By Anonymous Anonymous, at Sat Jan 01, 03:13:00 PM:

I do not know that the returns are baffling. Because there are fewer G-rated movies, their returns will be better for two reasons. First, consumer demand is channeled into fewer movies. If supply is increased, the average return will be lower. Second, by producing fewer g-rated movies, the studios produce only the best and put more effort into them. If they were to attempt to produce more, they would have to produce lower quality scripts and divert their resources. Producing more g-rated movies will not produce more Finding Nemos.
But, the numbers suggest that there is room for more g's, that the business other g's make will be greater than the business they take. This might not be so. First, successful g's are very costly to make. Nemo cost $94 million and the Shreks cost $60 and $74 million, respectively. (I am not sure whether these costs include advertising, which would increase the cost by tens of millions.) The studios cannot afford to produce a lot of films because a lot will not be profitable. Also, successful g's are massively hyped. There is a limited amount of time and media for g's to advertise themselves. Producing more g's will cut into the possible advertising for other g's.
Second, there is demand for movies every week to bring out the young people who fill the movie theaters. These movies tend to be r- or pg13-rated Kids and their parents will not fill movie theaters on a weekly basis. G's have to be special for parents to take their two or three kids to the megaplex.
Finally, if they were included in the study, independent movies (which are predominantly r-rated) will drag down the returns of r-rated movies.  

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