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The Economics of the Blockbuster

Tom White

13th August 2014

Why do we get summer holiday blockbusters? They seem to matter more and more to Hollywood studios.

According to one professor "the entertainment industry is moving more towards a winner-take-all-market". Yet it wasn't supposed to be like this. A best-selling 2008 book, The Long Tail, argued that the mainstream was going to be "shattered into a zillion different cultural shards," as fickle consumers "scattered to the winds" using the internet to find the books, films and songs that met their unique taste. So what might be going on?

According to The Guardian, in the UK too, a studio's biggest hit will account for a quarter of its total box-office takings. The blockbuster remains the monster in the multiplex, despite a surge in the number of films coming to screen. While 20 years ago a film could become a hit through word of mouth, it could now lose its screen space after one bad weekend. The phenomenon is not restricted to the silver screen. The average high street bookshop may stock thousands of titles, but the profitable inventory is just 10 or 20 books. And Spotify reported in January that one in five of the four million songs on its music-streaming service had never been listened to. One study from 2008 found that just 52,000 tracks or 0.4% of the catalogue of online music stores accounted for eight out of 10 downloads.

This is the opposite of the prediction made in The Long Tail. The book predicted that the internet would transform buying habits, giving consumers access to an unlimited choice of songs, films and books. The blockbuster was not going to become extinct, but far less important. Instead, "a mass of niches" would be the new cultural and economic force. According to sources in the article, it's because popularity is infectious: "Choices in music are not determined by availability; choices in music are determined by social forces. People listen to the things that [other] people listen to."

Paul Ormerod gets a mention: people change their behaviour when faced with a stupendous number of choices.

"They are more likely to copy and emulate people whose judgements they trust. In this model something starts to become popular not because of its objective qualities, but because it is already popular".

Any YouTube visitor knows this. The same is true with Twitter trends and "most-read" lists on newspaper websites.

And there's still more economic factors at work according to another professor.

When executives think they have the next James Bond or Harry Potter on their hands, all kinds of signals are sent around the organisation. In contrast, a quirky, low-budget film with unknown actors is less likely to be funded.

So blockbusters succeed because they are blockbusters.

But here's the problem: The blockbuster formula is based on ingredients that are supposed to deliver super-high profits. So they bid up the price of those inputs. The studios are at risk of paying more and more to get less and less. And they have to invest more and more because everyone else is investing more and more. Some studios are setting themselves up for colossal failures...

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