The determinants of opening weekend box office revenue for movies.

Author:Terry, Neil
Position:Report
 
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  1. INTRODUCTION

    The average budget of a motion picture for release in the United States has risen to over fifty million dollars per movie. A single movie can be the difference between millions of dollars of profits or losses for a studio in a given year (Simonoff and Sparrow, 2000). The tone for profits or losses of a major movie release is set by the opening weekend box office revenue, which averages approximately 34 percent of the total domestic box office revenue for movies released in recent years. The opening weekend box office performance serves as a strong predictor of overall financial performance at the domestic box office, foreign box office, video sales, and video rental revenue. In addition, the importance of the opening weekend box office as a source of total box office revenue has been accentuated by the observation that the average time from box office to video release is a relatively short 4.5 weeks (Terry and De'Armond, 2008). The purpose of this research is to analyze the motion picture industry with a focus on the determinants of opening weekend box office revenue.

    This manuscript is divided into four sections. First, a survey of the related literature is discussed. The second section provides the model specification. The third section puts forth an empirical evaluation and discussion of the determinants of opening weekend box office revenues for 398 films released during the years 2006-2008. The final section offers concluding remarks.

  2. SURVEY OF THE LITERATURE

    Many researchers have developed models that explore the potential determinants of motion picture box office performance. Litman (1983) was the first to develop a multiple regression model in an attempt to predict the financial success of films. The original independent variables in the landmark work include movie genre (science fiction, drama, action-adventure, comedy, and musical), Motion Picture Association of America rating (G, PG, R and X), superstar in the cast, production costs, release company (major or independent), Academy Awards (nominations and winning in a major category), and release date (Christmas, Memorial Day, summer). Litman's model provides evidence that the independent variables of production costs, critics' ratings, science fiction genre, major distributor, Christmas release, Academy Award nomination, and winning an Academy Award are all significant determinants of the success of a theatrical movie. Litman and Kohl (1989), Litman and Ahn (1998), and Terry, Butler, and De'Armond (2004) have replicated and expanded the initial work of Litman. None of the extensions of Litman's work has focused on the determinants of opening weekend box office revenue.

    One strong area of interest in the movies literature has been the role of the critic (Weiman, 1991). The majority of studies find that critics play a significant role on the success or failure of a film. Eliashberg and Shugan (1997) divide the critic into two roles, the influencer and the predictor. The influencer is a role where the critic will influence the box office results of a movie based on his or her review of the movie. Eliashberg and Shugan's results suggest that critics do have the ability to manipulate box office revenues based on their review of a movie. The predictor is a role where the critic, based on the review, predicts the success of a movie but the review will not necessarily have an impact on how well the movie performs at the box office. Eliashberg and Shugan show that the predictor role is possible but does not have the same level of statistical evidence as the influencer role.

    King (2007) explores the theoretical power and weakness of critics on the box office performance of movies. The substantial market power of critics is derived from the following: (1) Film reviews are widely available in newspapers, magazines, and websites. The ubiquitous availability of critical reviews in advance of a movie release creates positive or negative energy in the critical opening weeks; (2) Film critics regard themselves as advisors to their readers. They are often as explicit in their recommendations as Consumer Reports is about other consumer purchases; and (3) Film critics are likely to be considered objective. There are too many critics and too many films for serious critical bias to develop. Those who are skeptical about the influence of film critics point to the following counter arguments: (1) It is possible that the effects of aggressive marketing at the time of a film's release might dominate critical evaluations in determining opening attendance; (2) Critics may raise issues that do not concern most audiences. They are more likely to notice and comment on technical issues, like cinematographic technique, than the average member of the audience; and (3) Critics may write for a readership that has different tastes from the average cinemagoer. The most obvious potential reason for this is demographic. Cinema audiences are younger than the general population and less likely to pay attention to print reviews. Critics might therefore, be expected to aim their reviews at the older demographic audience and give relatively negative reviews to certain film genres. The empirical results put forth by King (2007) are mixed with respect to the impact of critics on box office earnings for the U.S. box office in 2003. He finds zero correlation between critical ratings for films and gross box office earnings when all releases are considered because of the affinity critics have for foreign movies and documentaries relative to the general public. For movies released on more than 1,000 screens, critical ratings have a positive impact on gross earnings.

    Reinstein and Snyder (2000) focus on the critics Siskel and Ebert and how their reviews impact box office success. The authors report that the correlation between good movie reviews and high demand might be false due to unknown quality measurements. In order to circumvent the proposed false correlation Reinstein and Snyder apply a "differences in differences" approach that yields a conclusion that positive reviews have a surprisingly large and positive impact on box office revenue. Reinstein and Snyder also report that their results show that the power to influence consumer demand does not necessarily lie in the entire critic population, but may lie in the hands of a few critics.

    Wallace, Seigerman, and Holbrook (1993) employ a sample of 1,687 movies released from 1956 through 1988 to investigate the relationships between movies box office success and critic ratings. They find a poorly rated movie will actually lose money for every positive review it receives while a highly rated movie will continue to gain money for every positive review it receives. Wallace, Seigerman, and Holbrook (1993, p. 11) interpret these findings by saying that "it appears that a bad movie has something to gain by being as trashy as possible.... [For] a good movie, it apparently pays to strive for even greater excellence." Ravid (1999) has also looked at movie reviews as a source of projecting higher revenues. He concludes that the more reviews a film receive, positive or negative, the higher revenues it will obtain.

    Although much research has supported the critic as a positive indicator of box office success, others have shown that the critic plays a much less important role. Levene (1992) surveyed students at the University of Pennsylvania and concludes from her 208 useable surveys that positive critic reviews ranked tenth, behind plot, subject, and word-of-mouth on a list of factors that influence the decision to watch a film. Levene's study reveals that theatre trailers and television advertising were the two most important determinants. Faber and O'Guinn (1984) conclude that film advertising, word-of-mouth and critics' reviews are not important compared to the effect that movie previews and movie excerpts have on the movie going public. Wyatt and Badger (1984) find that negative or positive reviews have little effect on the interest of an individual to see a movie over a mixed review or seeing no...

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