2007 Headlines
Cornell Professor Finds Co-financing Movies Not a Good Deal, Questions Effectiveness of Word-of-Mouth Promotion
October 26, 2007 | Ithaca, NY - The business of financing movies is risky. To combat this risk, the motion pictures industry often co-finances movies. New research by S. Abraham (Avri) Ravid, a professor at the Johnson School at Cornell University, puts co-financed ventures in a rather grim light. This paper is forthcoming in the Review of Financial Studies, one of the top journals in finance.
In the movie industry, an alliance forms when one company collaborates with another to develop and finance a movie jointly. The alliance allows partners to share production and distribution costs and agree to split future revenues. Ravid's research demonstrates that whether co-financed or internally financed, the projects themselves perform similarly on average. However, studios tend to co-finance projects that they perceive to be riskier, while keeping the safer projects in their portfolio to themselves. The research (co-authored with D. Palia and N. Reisel) also considers the proposition commonly heard in Hollywood, that studios tend to share the costs of high budget movies. There is only partial statistical support for this proposition.
"Our results show that project risk matters in the decision to form an alliance," says Ravid. "We also find that projects developed internally do not perform significantly different from projects developed through alliances, suggesting that firms should optimally choose their organizational structure for project development."
On November 3, Ravid will be presenting new research at the Ninth Annual Business and Economics Scholars Workshop Summit in Motion Picture Industry Studies that will be held during the American Film Market in Santa Monica, CA from October 31st- Nov. 7th, 2007.
This new research puts into question the role of word of mouth promotion in predicting movie revenues. Some recent studies argue that postings on various internet sites such as Yahoo or IMDB drive revenues higher. The new paper shows that it may be the other way round, that is, if many people see the movie there are more postings, and that postings themselves are not a significant predictor of revenues.
Critical reviews are important, however, and to some extent the views expressed in the postings matter to the financial success of the movie.
