Business Issues: Tom Hanks (National Post article)

Diane Francis, Financial Post. Published Saturday, November 26, 2005

Making a movie with Tom Cruise usually leads to a box-office bonanza, but matching the appeal of more than one cast member makes even more business sense, says Anita Elberse who teaches at the Harvard Business School and researches Hollywood's marketing, along with other creative industries.

She examined the financial results of 500 movies since 2001 involving 600 stars to determine whether there was a payoff for the enormous amounts that movie stars earn.

"There is," she said. "On average, a major star is worth US$3-million revenues."

For part of her research, she consulted a virtual stock market called the Hollywood Stock Exchange (www.hsx.com), which anyone can play. Participants get US$2-million of play money and buy and sell movie "stocks." Roughly 500,000 players are in this game at any given time.

"The exchange is a good predictor of movie success," she said. "So the fact that the announcement that Tom Hanks will star in the movie version of The Da Vinci Code sent the movie's virtual stock up probably is a reliable indicator of his worth -- US$40-million in this case."

Casting announcements involving Mike Myers, Tom Cruise, Johnny Depp or Johnny Knoxville can send these virtual stocks soaring. Conversely, an announcement that Leonardo DiCaprio or Jim Carrey have turned down films drives down prices.

"My research also showed that matching the strength of cast members leads to better results than simply investing a lot in one star," Ms. Elberse said, citing as an example the successful film Mr. and Mrs. Smith starring Brad Pitt and Angelina Jolie.

Hollywood includes production, distribution and exhibition industries. Exhibitors are increasingly under pressure, thanks to the growth in consumers buying or renting DVDs.

Revenue from domestic theatrical screenings typically represent 20% of overall proceeds for a film, with another 20% for foreign theatrical, 40% for worldwide video sales and rentals and the rest from television rights or merchandising deals.

Movies typically hang around in theatres for weeks rather than months, and movie producers are increasingly making films specifically intended for the DVD market -- especially those aimed at children. "In some respects, theatres have become a loss leader for the DVD market," she said. "It is hard to be in cinemas these days."

The biggest-grossing movie to date is Titanic (correcting for inflation, it would be Gone With The Wind). Box-office blockbusters typically are big-budget productions with huge marketing efforts. But there is no single formula for success.

For instance, Mel Gibson's hugely successful The Passion of the Christ, which has earned more than US$400-million in revenue in North America, was initially intended to be marketed as a "sleeper", Ms. Elberse said.

"Newmarket Films, which distributed the movie, did a tremendous job marketing this movie," she said. "They cleverly used prescreenings to build buzz and used that to advertise the movie with a relatively modest budget."

But such enormous hits are few and far between.

"Many insiders say that only one in 10 bets pays off in movies," she said. "If you are looking for a sure return to your investment, you should not invest in movies."

Even so, the movie industry as a whole seems healthier than the music industry, which is plagued with piracy issues. She doesn't see that as a crippling problem for Hollywood. But there are challenges coming. "It's quicker to download a three-minute song than to download a 90-minute film," she said. "But as broadband expands it will become easier to download movies."

Hollywood is also wrestling with the switch to digital filmmaking, which creates significant benefits for studios -- it is cheaper and provides better picture quality -- but will require more attention to the risk of piracy.

Most attention has been paid to music, in which litigation has shut down file-sharing operations and in which Apple's iPods and iTunes now are quickly gaining share in the marketplace.

"This has changed how and what consumers are buying," she said. "Record companies may eventually move away from producing full albums because people just want to buy specific songs. Or they may switch to other bundling solutions, release more and more live recordings of concerts, or make more, but smaller, bets on new performers."

Other areas of interest for Ms. Elberse are television and video games. The recent decision by ABC Television to sell its two top shows (Lost and Desperate Housewives) on Apple's video iPod will be worth watching, she said. If this experiment takes off, selling individual shows may become a new source of revenue.

Video games, which can easily cost US$50 apiece, involve complex layers of plot and brain twisters in a graphically rich context. In the United States, total revenue from video games is higher than theatrical revenue from Hollywood movies.

"There are challenges facing all these industries," she said. "And it's hard to predict where it will all be in 10 years."

© National Post 2005