Revenue Sharing and Channel Structure in the Motion Picture Industry

Abstract

One of the most striking features of movie business is the apparent difference in the contract design over new product introduction. Due to shelf capacity constraints retailers typically receive a higher slotting fee during the initial product introduction phase. In the movie industry, however, theaters offer studios higher proportion of revenues early on in the movie life cycle, even though theaters are also subject to capacity constraints. We argue that the unusual sharing contracts prevalent in the movie industry align the interests of movie studios and exhibitors by inducing studios to choose release dates strategically.

We consider a model with multiple risk-neutral studios and one risk-neutral exhibitor. The demand for movies comes from a continuum of homogeneous consumers with a logit demand, which allows for the outside option, whose quality varies over time (seasonality). Because consumers rarely watch the same movie more than ones, we assume that consumers never consider movies they have previously seen. We show that if movie closing date is unaffected by the release, a studio facing a flat sharing rule wishes to release its movie as soon as the movie production is over. For a movie theater, however, the optimal release date is a solution to a complex problem of allocating multiple movies to a limited number of screens in rooms with fixed capacity. Moreover, theaters may care more about concession stand revenue than box office revenue. Our numerical simulations illustrate that sliding-scale sharing rules are a natural candidate for inducing studios to choose their release date in a manner that is more beneficial for the exhibitor. This result is intuitive: for studios, sliding-scale rules stress the revenues of the first week. Thus, the objective becomes to have a strong opening week, postpone their release dates may become beneficial.

Our model also offers an insight into why theaters charge the same price for all movies in all seasons. When concession stand revenues are important, the exhibitor wishes to charge a low ticket price in order to increase the overall traffic. Studios, however, prefer a higher price that maximizes the box office revenue. This conflict can be resolved if the exhibitor commits to a fixed ticket price.

Keywords: movie, contract design, revenue sharing, incentives, price

JEL Classification: L82, L22, D21