Entertainment Industry Economics -...

Entertainment Industry EconomicsA Guide for Financial Analysis, Ninth Edition

The entertainment and media industries, already important sectors of the U.S.economy, continue to grow rapidly in other countries around the world. Thisninth edition of Entertainment Industry Economics, like previous editions, isthe definitive source on the economics of film, music, television, advertising,broadcasting, cable, casinos, publishing, performing arts and culture, toysand games, sports, and theme parks. It synthesizes a vast amount of data toprovide a clear, comprehensive, and up-to-date reference guide on the eco-nomics, financing, accounting, production, and marketing of entertainmentin the United States and overseas. Completely updated, it includes new sec-tions on price effects, art markets, and Asian gaming. Financial analysts andinvestors, economists, industry executives, accountants, lawyers, regulatorsand legislators, and journalists, as well as students preparing to join theseprofessions, will benefit from this invaluable guide on how the entertainmentand media industries operate.

Harold L. Vogel was senior entertainment industry analyst at Merrill Lynch &Co., Inc., for seventeen years and was ranked the top entertainment industryanalyst for ten years by Institutional Investor magazine. Holder of a PhD infinancial economics and also a chartered financial analyst (CFA), he writesand speaks frequently on investment topics related to entertainment andmedia, leisure and travel, and extreme market events while heading an inde-pendent investment and consulting firm in New York City. His books includeFinancial Market Bubbles and Crashes (Cambridge University Press, 2010)and Travel Industry Economics: A Guide for Financial Analysis, secondedition (Cambridge University Press, 2012), a companion to this volume.

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Cambridge University Press978-1-107-07529-0 - Entertainment: Industry Economics: A Guide for Financial Analysis: Ninth EditionHarold L. VogelFrontmatterMore information

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EntertainmentIndustryEconomicsA Guide for Financial AnalysisNINTH EDITION

Harold L. Vogel






32 Avenue of the Americas, New York, NY 10013-2473, USA

Cambridge University Press is part of the University of Cambridge.

It furthers the University’s mission by disseminating knowledge in the pursuit ofeducation, learning, and research at the highest international levels of excellence.

www.cambridge.orgInformation on this title: www.cambridge.org/9781107075290

C© Harold L. Vogel 1986, 1990, 1994, 1998, 2001, 2004, 2007, 2011, 2015

This publication is in copyright. Subject to statutory exceptionand to the provisions of relevant collective licensing agreements,no reproduction of any part may take place without the writtenpermission of Cambridge University Press.

First published 1986Second edition 1990Third edition 1994Fourth edition 1998Fifth edition 2001Sixth edition 2004Seventh edition 2007Eighth edition 2011Ninth edition 2015

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication DataVogel, Harold L., 1946–Entertainment industry economics : a guide for financial analysis / Harold L. Vogel.

pages cmIncludes bibliographical references and index.ISBN 978-1-107-07529-0 (hardback : alk. paper)1. Performing arts – Finance. I. Title.PN1590.F55V6 2014338.4ʹ7791–dc23 2014021771

ISBN 978-1-107-07529-0 Hardback

Cambridge University Press has no responsibility for the persistence or accuracy of URLs forexternal or third-party Internet Web sites referred to in this publication and does not guarantee thatany content on such Web sites is, or will remain, accurate or appropriate.






TO MY DEAR FATHER– WHO WOULD HAVE BEEN SO PROUD











Contents

Preface page xix

Part I Introduction

Chapter 1 Economic perspectives 3

1.1 Time concepts 3Leisure and work 3Recreation and entertainment 4Time 5Expansion of leisure time 5

1.2 Supply and demand factors 9Productivity 9Demand for leisure 11Expected utility comparisons 13Demographics and debts 14Barriers to entry 17

vii






viii Contents

1.3 Primary principles 18Marginal matters 18Price discrimination 21Public-good characteristics 21

1.4 Personal-consumption expenditure relationships 23

1.5 Price effects 27

1.6 Industry structures and segments 28Structures 28Segments 29

1.7 Valuation variables 34Discounted cash flows 34Comparison methods 35Options 36

1.8 Concluding remarks 36

Notes 38

Selected additional reading 44

Chapter 2 Basic elements 47

2.1 Psychological roots 47

2.2 Rules of the road 48Laws of the media 48Network features 50

2.3 Legal layers and limitations 52Layers 52Limitations and concentration issues 53

2.4 The Internet 54Agent of change 54Long-tail effects 57

2.5 Advertising 59Functionality 61Economic and business aspects 62

2.6 Accounting and valuation 64Accounting 64Valuation 65


Notes 66







Contents ix

Part II Media-dependent entertainment

Chapter 3 Movie macroeconomics 83

3.1 Flickering images 84

3.2 May the forces be with you 86Evolutionary elements 86

Technology 86Capital 89

Pecking orders 90Exhibition 90Production and distribution 91

3.3 Ups and downs 92Admission cycles 92Prices and elasticities 94Production starts and capital 95Releases and inventories 97Market-share factors 98Collateral factors 98

Exchange-rate effects 98Trade effects 104

Financial aggregates 106

3.4 Markets – Primary and secondary 107

3.5 Assets 112Film libraries 112

Technology 112Utilization rates 112Interest and inflation rates 113Collections and contracts 114Library transfers 115

Real estate 115


Notes 117


Chapter 4 Making and marketing movies 126

4.1 Properties – Tangible and intangible 126

4.2 Financial foundations 128Common-stock offerings 129Combination deals 129Limited partnerships and tax shelters 130






x Contents

Bank loans 133Private equity and hedge funds 133

4.3 Production preliminaries 135The big picture 135Labor unions and guilds 138

4.4 Marketing matters 138Distributors and exhibitors 138

Sequencing 138Distributor–exhibitor contracts 140Release strategies, bidding, and other related practices 144Exhibition industry characteristics: 145(a) Capacity and competition 145(b) Rentals percentage 148

Video, output deals, and merchandising 150Video 150Output deals 153Merchandising 154

Marketing costs 154

4.5 Economic aspects 155Profitability synopsis 155Theoretical foundation 157


Notes 160


Chapter 5 Financial accounting in movies and television 194

5.1 Dollars and sense 194Contract clout 194Orchestrating the numbers 195

5.2 Corporate overview 196Revenue-recognition factors 196Inventories 197Amortization of inventory 198Unamortized residuals 199Interest expense and other costs 201Calculation controversies 201Statement of Position 00–2 203

5.3 Big-picture accounting 205Financial overview 205Participation deals 211






Contents xi

Pickups 211Coproduction-distribution 211Talent participations and breakeven 212Producers’ participations and cross-collateralizations 216Video participations 216

Distributor–exhibitor computations 217Distributor deals and expenses 219Studio overhead and other production costs 221Budgets high and low 222

5.4 Television-programming accounting 224Feature licensing 228Program production and distribution 229

Development and financing processes 229Syndication agreements 231Costs of production 233Costs and problems of distribution 234Timing troubles 236

5.5 Weakest links 238Exhibitors: The beginning and the end 238Distributor–producer problems 239


Notes 241


Chapter 6 Music 266

6.1 Feeling groovy 266

6.2 Size and structure 269Economic interplay 269

The American scene 269The global scene 274

Composing, publishing, and managing 275Royalty streams 276

Performances 276Mechanical royalties 277Synchronization fees 277Copyright 278

Guilds and unions 278Concerts and theaters 279

6.3 Making and marketing recordings 280Deal-maker’s delight 280

Production agreements 280






xii Contents

Talent deals 281Production costs 282Marketing costs 282Distribution and pricing 283

Structure 283Pricing 285

6.4 Financial accounting and valuation 285Artists’ perspective 285Company perspective 290Valuation aspects 292


Notes 293


Chapter 7 Broadcasting 312

7.1 Going on the air 312Technology and history 312Basic operations 315Regulation 319Organizational patterns and priorities 321

Networks and affiliates 321Ratings and audiences 322Inventories 325Independent and public broadcasting stations 326

7.2 Economic characteristics 327Macroeconomic relationships 327Microeconomic considerations 329

7.3 Financial-performance characteristics 330Variable cost elements 330Financial-accounting practices 332

7.4 Valuing broadcast properties 334


Notes 337


Chapter 8 Cable 354

8.1 From faint signals 354Pay services evolve 355






Contents xiii

8.2 Cable industry structure 356Operational aspects 356Franchising 361Revenue relationships 362

8.3 Financial characteristics 365Capital concerns 365Accounting conventions 367

8.4 Development directions 369Pay-per-view 369Cable’s competition 370

DBS/DTH 370MMDS/LMDS 371SMATV 371STV 371

Telephone companies 371

8.5 Valuing cable-system properties 372


Notes 375


Chapter 9 Publishing 387

9.1 Gutenberg’s gift 387First words 387Operating characteristics 388

9.2 Segment specifics 390Books 390

Educational and professional 391Trade 392Multimedia 394

Periodicals 395Newspapers 395Magazines and other periodicals 398

9.3 Accounting and valuation 400Accounting 400Valuation 400


Notes 401







xiv Contents

Chapter 10 Toys and games 410

10.1 Not just for kids 410Financial flavors 411Building blocks 414

10.2 Chips ahoy! 416Pong: Pre and apres 416

10.3 Structural statements 418Video games 418Profit dynamics 419Coin-op 420


Notes 422


Part III Live entertainment

Chapter 11 Gaming and wagering 437

11.1 From ancient history 437At first 437Gaming in America 438

Preliminaries 438The Nevada experience 441Enter New Jersey 442Horse racing 443Lotteries 444Other wagering segments 444

Asia’s jackpot 446

11.2 Money talks 449Macroeconomic matters 449Funding functions 451Regulation 452Financial performance and valuation 453

11.3 Underlying profit principles and terminology 454Principles 454Terminology and performance standards 456

11.4 Casino management and accounting policies 459Marketing matters 459Cash and credit 461Procedural paradigms 462






Contents xv

11.5 Gambling and economics 463


Notes 467


Chapter 12 Sports 480

12.1 Spice is nice 480Early innings 480Media connections 482The wagering connection 484

12.2 Operating characteristics 485Revenue sources and divisions 485Labor issues 487

12.3 Tax accounting and valuation 489Tax issues 489

Historical development 489Current treatments 491

Asset valuation factors 491

12.4 Sports economics 492


Notes 496


Chapter 13 Performing arts and culture 514

13.1 Audiences and offerings 514Commercial theater 515

On and off Broadway 515Circus 520

Orchestras 521Opera 521Dance 522

13.2 Funding sources and the economic dilemma 522

13.3 The play’s the thing 525Production financing and participations 525Operational characteristics 527

13.4 Art markets 528






xvi Contents

13.5 Economist echoes 530Organizational features 530Elasticities 531Price discrimination 531Externalities 532About cultural economics 532


Notes 534


Chapter 14 Amusement/theme parks 548

14.1 Flower power 548Gardens and groves 548Modern times 549

14.2 Financial operating characteristics 550

14.3 Economic sensitivities 555

14.4 Valuing theme park properties 557


Notes 558


Part IV Roundup

Chapter 15 Performance and policy 565

15.1 Common elements 565

15.2 Public-policy issues 568

15.3 Guidelines for evaluation 569

15.4 Final remarks 573

Appendix A. Sources of information 575

Appendix B. Major games of chance 577

B.1 Blackjack 577

B.2 Craps 578

B.3 Roulette 579






Contents xvii

B.4 Baccarat 579

B.5 Slots 580

Notes 581

Appendix C. Supplementary data 583

Glossary 589

References 613

Index 669











Preface

en·ter·tain·ment – an activity that is diverting, amusing, or pleasing and thatagreeably occupies the viewer’s time and attention;

in·dus·try – a specific branch of a craft, art, business, or trade that involves adivision of labor and that requires significant investment capital and employsmany people in organizations with similar technological and organizationalstructures used to provide goods and services that are largely substitutable;

ec·o·nom·ics – a social science that studies how wealth is created, distributed,used, and consumed and that considers costs and returns.

Each year, Americans cumulatively spend at least 160 billion hours and morethan $320 billion on legal forms of entertainment. And globally, total annualspending is approaching one trillion dollars. So we might begin by asking:What is entertainment, why is there so much interest in it, and what do itsmany forms have in common?

At the most fundamental level, anything that stimulates, encourages, orotherwise generates a condition of pleasurable diversion could be calledentertainment. The French word divertissement perhaps best captures thisessence.

But entertainment can be much more than mere diversion. It is somethingthat is universally interesting and appealing because, when it does what itis intended to do, it moves you emotionally. As the Latin root verb tenaresuggests, it grabs you: It touches your soul.

Although life is full of constraints and disciplines, responsibilities andchores, and a host of things disagreeable, entertainment, in contrast, encom-passes activities that people enjoy and look forward to doing, hearing,or seeing. This is the basis of the demand for – or the consumption

xix






xx Preface

of – entertainment products and services; this is the primary attribute sharedby the many distinct topics – from cinema to sports, from theme parks totheater – that are discussed in the pages that follow.

Entertainment – the cause – is thus obversely defined through its effect: asatisfied and happy psychological state. Yet, somehow, it matters not whetherthe effect is achieved through active or passive means. Playing the piano canbe just as pleasurable as playing the stereo.

Entertainment indeed means so many different things to so many peo-ple that a manageable analysis requires that sharper boundaries be drawn.Such boundaries are here established by classifying entertainment activi-ties into industry segments; that is, enterprises or organizations of signifi-cant size that have similar technological structures of production and thatproduce or supply goods, services, or sources of income that are largelysubstitutable.

Classification along those lines facilitates contiguous discussion of enter-tainment software, as we might more generically label films, recordings, andvideo games, and of hardware – the physical appurtenances and equipmenton which or in which the software’s instruction sets are executed. Such clas-sification also allows us to trace more easily the effects of technologicaldevelopments in this field.

So accustomed are we now to continuous improvements in the perfor-mance of entertainment hardware and software that we have trouble remem-bering that, early in the twentieth century, moving pictures and music record-ings were novelties, radio was regarded as a modern-day miracle, and tele-vision was a laboratory curiosity. Simple transistors and lasers had yet tobe invented and electronic computers and earth-orbiting communicationssatellites were still in the realm of science fiction.

These fruits of applied technology have nevertheless spawned new artforms and vistas of human expression and have brought to millions of peoplearound the world, virtually at the flick of a switch, a much more varied andhigher-quality mix of entertainment than had ever before been imaginedfeasible.

Little or none of this, however, has happened because of ars gratia artis(art for art’s sake) – in itself a noble but ineffectual stimulus for techno-logical development. Rather, it is economic forces – profit motives, if youwill – that are always behind the scenes, regulating the flows and ratesof implementation. Those are the forces that shape the relative popularityand growth patterns of competing, usually interdependent, entertainmentactivities and products. And those are the forces that ultimately make avail-able to the masses what was previously affordable only to upper incomeclasses.

It is therefore surprising to find that most serious examinations of theeconomics of entertainment are desultory and scattered among various pam-phlets, trade publications and journals, stockbrokers’ reports, and incidentalchapters in books on other topics. The widely available popular magazines






Preface xxi

and newspapers, biographies, histories, and technical manuals do not gener-ally provide in-depth treatments of the subject.

This book, then, is a direct outgrowth of my search for a single com-prehensive source. It attempts to present information in a style accessibleand interesting to general readers. As such, it should prove to be a handyreference for executives, financial analysts and investors, agents and legaladvisors, accountants, economists, and journalists. The approach is holistic;executives and analysts in any one sector increasingly need to also under-stand how related and adjacent sectors operate.

Entertainment Industry Economics will, however, most likely be used asa text for graduate or advanced undergraduate students in applied mediaeconomics and management/administration courses in film and television,music, communications, publishing, sports, performing arts, and hotel–casino operations. Instructors should find it easy to design one-semestercourses focused on one or two areas. A minimal grasp of what entertainmentand media economics is all about would require that most students read atleast the first sections of Chapters 1 and 2 and, at the end of the course, thefirst section of Chapter 15.

But many different modules can readily be assembled and tailored. Amongthe most popular would be concentrations on film, television, and music(Chapters 2 through 8); gaming and sports (Chapters 7, 8, 11, and 12);arts and popular culture (Chapters 6, 7, 9, 10, and 13); or entertainmentmerchandising and marketing (Chapters 2, 7, 9, 10, and 14).

The topics covered in the book have been chosen on the basis of industrysize measured in terms of consumer spending and employment, length oftime in existence as a distinct subset, and availability of reliable data. In alarger sense, however, topics have been selected with the aim of providingno more and no less than would be required by a “compleat” entertain-ment and media industry investor. The perspectives are thus inevitably thoseof an investment analyst, portfolio manager, and economist. Although thisdecision-oriented background leads naturally to an approach that is morepractical and factual than highly theoretical, it nevertheless assumes somefamiliarity, supported by the appended glossary, with the language of eco-nomics and finance.

This ninth edition has been further revised and updated and differs fromits predecessors through inclusion of new sections relating to price effects,Asian gaming, and art markets, and through expanded coverage of oil pro-duction and consumption. (A companion text, Travel Industry Economics,2nd edition, uses a similar approach in reviewing the airline, hotel, andtourism industries.)

I am especially grateful to Elizabeth Maguire, former editor at CambridgeUniversity Press, for her early interest and confidence in this project. Thanksare also owed to Cambridge’s Rhona Johnson, who worked on the firstedition, to Scott Parris, former longtime Cambridge economics editor, forthe third through eighth, and to Karen Maloney for the ninth.






xxii Preface

I am further indebted to those writers who earlier cut a path through thestatistical forests and made the task of exposition easier than it otherwisewould have been. Particularly noteworthy are the books of John Owen ondemand for leisure; Paul Baumgarten and Donald Farber on the contractualaspects of filmmaking (first edition; and second with Mark Fleischer); DavidLeedy on movie industry accounting; David Baskerville and Sidney Shemel,and M. William Krasilovsky and Donald Passman, on the music business;John Scarne and Bill Friedman on the gaming field; Gerald W. Scully andAndrew Zimbalist on sports; and William Baumol and William Bowen on theperforming arts. Extensive film industry commentaries and data collectionsby A. D. Murphy of Variety (and later, The Hollywood Reporter and theUniversity of Southern California) were important additional sources.

My thanks also extend to the following present and former senior industryexecutives who generously took time from their busy schedules to reviewand to advise on sections of the first edition draft. They and their com-pany affiliations at that time were Michael L. Bagnall (The Walt DisneyCompany), Jeffrey Barbakow (Merrill Lynch), J. Garrett Blowers (CBS Inc.),Erroll M. Cook (Arthur Young & Co.), Michael E. Garstin (Orion PicturesCorp.), Kenneth F. Gorman (Viacom), Harold M. Haas (MCA Inc.), HowardJ. Klein (Caesars New Jersey), Donald B. Romans (Bally Mfg.), and JamesR. Wolford (The Walt Disney Company). Greatly appreciated, too, was thecomprehensive critique provided by my sister, Gloria. Acknowledgmentsfor data in the second edition are also owed to Arnold W. Messer (ColumbiaPictures Entertainment) and Angela B. Gerken (Viacom). Many thanks forimprovements and updates of ninth edition music figures are also owed toJonathan Handel and for advertising estimates to Brian Wieser.

Although every possible precaution against error has been taken, for anymistakes that may inadvertently remain the responsibility is mine alone.

I’ve been most gratified by the success of the previous editions and, asbefore, my hopes and expectations are that this work will provide valuableinsights and a thoroughly enjoyable adventure.

Now . . . on with the show.

Harold L. VogelNew York CitySeptember 2014






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