Accounting , Finance & Investing , Leadership & Management

Neil Malhotra: What Does a Hollywood Blockbuster Look Like?

A study of the film industry examines discrepancies between estimated and actual box office performance.

February 16, 2012

| by Marguerite Rigoglioso

As the eyes of the world focused on the entertainment industry during the February 26 Academy Awards, few realized that every Sunday studios estimate and report their weekend box office results with numbers that are sometimes overly generous. When Fathom Studios produced one of the greatest movie flops ever, the animated Delgo in 2008, for example, they reported a Sunday estimate of $568,240 in receipts. On Monday, like all studios, they revealed the actual box office take: $164,160. Fathom’s estimate proved to be a 246% inflation that most likely lured far more people to the theaters the following weekend than would otherwise have been the case.

A new study from Stanford GSB drawing on data from Box Office Mojo and The-Numbers.com finds that for the 1,064 movies that opened between 2003 and 2010 in at least 1,000 theaters, this was hardly an unusual occurrence. Studio Sunday estimates for weekend revenues over the past decade were higher than the actuals by an average of 6.38% in the opening weekend, with some firms, like Sony, Rogue, and Summit, regularly inflating reports by more than 7.9%.

“The models studios use tend to be optimistic, which leads to inflation,” says Neil Malhotra, associate professor of political economy at Stanford GSB, who coauthored the study with Edmund Helmer, a graduate student in the Department of Statistics. “We also argue that there may be some strategy behind the inflation,” because “inflation is substantially higher in the first weekend of release, when the incentives are greatest to generate positive word-of-mouth,” Malhotra explains. “Buzz for the film can be generated by a good first-weekend performance and drive viewers to the theater in subsequent weeks,” Malhotra said.

As the researchers explain, what a film pulls in at the box office its first weekend is considered a significant marker of the movie’s success. Between the Sunday estimate and the Monday report, thousands of newspapers, trade magazines, and online posts are written about the weekend’s box office winners and losers. Movie studios care deeply about this press coverage because many people presumably follow the ‘wisdom of crowds.’ “In other words,” says Malhotra, “people may hear a film is popular and choose to watch it in its second week of release. So these studios often use opening weekend box office results in their advertising for the following week.”

Malhotra’s interest in the topic grew out of his personal love for following box office trends. “In reading Box Office Mojo reports on Sunday and Monday, I noticed that the Monday actuals tended to be lower than the Sunday estimates. I decided to develop a study about businesses that use these data.”

In 2010, the investigators discovered, CBS Films gave a Sunday estimate of $2.14 million for the first weekend of its film Extraordinary Measures. Box office receipts actually totaled only $1.15 million, inflating the estimate by 86%. “And there are many more such incidents,” notes Malhotra.

Such inflation is particularly striking when there is competition between the two films vying for first place. “Being in first place is extremely important to films since media coverage of the box office race generally highlights the film that won the previous week,” says Malhotra. “That means studios have particular incentive to inflate box office receipts when they believe they have the possibility to capture the number one ranking or are afraid of losing it.” Indeed, the study shows that the positive bias in Sunday box office receipt increases by about 0.1% for every million dollars the gap narrows between the top two films.

Although many studies have examined the predictors of box office success, the Stanford paper is the first to examine discrepancies between estimated and actual box office performance. The transparency and comprehensiveness of box office receipts, and the consistency around their reporting, provide a good test case for research onto the broader questions of financial misreporting. As to whether the study reveals any kind of “fraud” by studios, Malhotra comments, “Not at all. We are simply reporting an empirical regularity. Although our results are consistent with strategic behavior on the part of studios, the main purpose of the study is to stimulate additional discussion and inquiry by the media and the film industry.”

Moviegoers can find out for themselves how estimates stack up against actuals by visiting The-Numbers.com or boxofficemojo.com on Mondays around 1pm Pacific Time.

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