Simpler movie contracts can lead to higher movie revenue, according to research by Whitman professor and colleagues

Simpler movie contracts can lead to higher movie revenue, according to research by Whitman professor and colleagues April 07, 2008Amy Schmitzaemehrin@syr.edu

After “lights, camera, action,” movie distributors and movie theaters hash out how to split the box office revenues. This contract negotiation is often testy, especially for blockbuster films anticipated to bring in huge profits. For weaker movies, the contract terms will determine whether the movie will receive enough screen exposure at the theaters to have a chance to make money.

These contracts usually come in the form of a sliding scale: in the first week, when the movie is most in demand, the studios get a larger share of the revenue — sometimes as much as 80 percent. As time goes by and demand decreases, the shares even out or reverse, giving theaters a more favorable cut of the revenue. These weekly revenue shares are negotiated on a movie-by-movie basis and are typically augmented by exception clauses for unexpectedly strong box office performances.

Such contracting practices are notoriously complicated and require a significant investment in administrative efforts and costs. Moreover, they often result in conflict — the theaters feel cheated out of big money in the movie’s opening week, and studios complain that theaters are too quick to take underperforming movies off the screen and unwilling to play “smaller” movies at all, forcing the distributors to take all the risk.

New research by Eunkyu Lee, associate professor of marketing in the Whitman School of Management at Syracuse University, questions the necessity of the complicated and costly contracting practice in the industry. Using a combination of game theory and an optimization technique called genetic algorithm, Lee and his research partners analyzed different contract structures in simulated movie markets and compared their effectiveness and performance to the current sliding scale structure.

“The major finding of this analysis is that the contract between studios and theaters does not have to be as complicated as the current industry practice,” says Lee. “Much simpler contracts, such as a 50-50 split or a two-part tariff are just as effective or better than the sliding scale, and they are also not as costly to implement.”

A 50-50 split entails equal distribution of revenue for both studio and theater during the entire duration the film is playing. A two-part tariff involves a fixed fee payment from the studio to the theater and a split of weekly revenues at a constant proportion.

“Using simpler contracts has the added benefit of encouraging theaters to play a larger number of movies,” says Lee. “Because theaters would be more willing to play the `smaller’ movies, studios would be less reliant on a small number of blockbusters. This would increase the variety of movies for general audiences, which likely would draw in a wider range of movie-goers.”

Lee’s research paper, forthcoming in Marketing Science and co-authored with Sumit Raut of Tata Consulting Services (TCS), India; Sanjeev Swami of Dayalbagh Education Institutes (DEI), India; and Charles B. Weinberg of the University of British Columbia, notes that a small but growing group of managers in the movie industry have begun experimenting with these new types of contracts, suggesting the industry’s interest in simpler, yet effective, alternatives to the current contracting practice.

“Hopefully, our findings will accelerate this recent trend,” says Lee. “The managers in the industry should welcome the message of our study that it is not necessary to negotiate for sliding scale contract terms for every movie, on a case-by-case basis. Using a simpler contract can make the whole movie season more profitable.”

Lee sees potential extension of his research for other dynamic multi-product industries such as the book, music, fashion, video and digital game industries, where, like the movie industry, new products are frequently introduced and the market environment changes constantly.

For more information or to set up an interview, contact Amy Mehringer, Whitman School communications manager,at (315) 443-3834 or aemehrin@syr.edu.