Wellywood is in an expensive global subsidy market

The $300 million in film subsidies in the coming budget is riding off the back of Sir Peter Jackson’s phenomenal success. Our politicians will not consider pulling out of this global subsidy market until they have backed a few box office bombs.

The first law of Hollywood economics illustrates how fickle moviemaking is: “Nobody knows anything … Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one (Goldwin 1989).”

Big budgets, star power and large marketing budgets do not reduce ‘the terror of the box office’. Industry profits depend on the rare blockbuster; 78 percent of films are unprofitable (Walls 2005). Taxpayers cannot afford to pick winners in an industry of flops and the occasional blockbuster.

You do not have to be much of a film buff to remember box office flops with big names in them. Every Robert De Niro fan has been asking for a fair time now why did he agree to his latest film? Bruce Willis spent the middle part of his career recovering from a few box office bombs.

Many famous films and TV shows succeeded because the producers made something that audiences did not know they wanted to see until they saw it. Their success surprised everyone, including their producers. Star Wars, Rocky, The Rocky Horror Picture Show, One Flew over the Cuckoo’s Nest, My Big Fat Greek Wedding, The Godfather, Fawlty Towers and Seinfeld are all examples.

We watched the Seinfeld pilot last week. How did it ever get picked up (and initially only for four episodes)? George Clooney appeared in 23 failed pilots before hitting it big. These are the freaky odds taxpayers are playing when selecting which films to subsidise.

The most profitable movies of all time such as National Lampoon’s Animal House often had tiny budgets. Donald Sutherland is still kicking himself for insisting on a $50,000 cash rather than $35,000 plus 15% of the eventual $500 million gross (in present-day dollars). He thought he had made a nifty deal for one day’s work in a $2.5 million film, signing on only as a favour to his old baby sitter John Landis. You just never know when the biggest break in your life is passing you by in show business.

Sir Alec Guinness hated every day on the Star Wars set but made most of the money he ever made in his life from his 2 ¼%. It was supposed to be 2 ½% but did not think it important to get the increase from 2% in writing before the film’s first release in a mere 32 theatres.

George Lucas planned to be out of town to escape some of the backwash of failure at the box office. He was in LA through a mix-up in dates and only realised he was rich when he went out for a hamburger to be caught up in massive traffic jams around a theatre playing Star Wars.

Think of any successful film in the first half of the 1970s, Steve McQueen turn down it down; any successful film in the second half of the 70s including Star Wars, James Caan turned it down. Sean Connery turned down Lord of the Rings.

On Academy Awards night, the audience is full of stars showing surprising grace under pressure in an emotional profession. They show their true acting chops by jumping up, applauding and faking genuine smiles despite their having turned down the Oscar-winning role.

Many classics have modest initial reviews or weak box offices such as Blade Runner and Get Carter. Radical uncertainty about whether you will like what you see is part of the experience sought when going to the movies. My favourite movie is Casablanca the second time I saw it at Uni for $1.

Studios and investors cope with this extreme uncertainty through a portfolio approach. They invest in many films and in both established and new talent and hope to get lucky.

New Zealand taxpayers cannot diversify the risk of frequent flops with a global portfolio approach. We have only enough cash to spare to subsidise a few films. Many of these are now sequels or franchises that sooner or later will tire with their inherently fickle audiences.

Any industry which survives on the grace and favour of the subsidy granter is inherently vulnerable; doubly so when consumer tastes are so unpredictable. With 6000 or so employed in the NZ film industry, the danger is politicians will never turn the subsidy tap off because of job losses.

New Zealand is a bit player in a global subsidy market where national, state and city governments are all pitching big to attract a bit of glamour their way.

The poor returns on film subsidies are well-known. The Treasury estimated taxpayers spent $472 billion in seven years for net economic benefits of just $13.6 million from 2004 to 2011; an annual rate of return of less than one percent. Treasury found only limited evidence of spill-overs to tourism.

The infant industry argument for subsidies does not stand up if only because they never grow up. Perpetually subsidising the film industry as the basic business model makes no sense at all.

Looking past the tinsel town glamour, film subsidies are a race to the bottom for the taxpayer. That does not count for much when there are photo opportunities for politicians with movie stars.

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Market-based assurance of quality and performance alert

Why does an industry need regulation when incidents of malfeasance are front page news that closes the offending business for good? Social media is another market discipline of quality.

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Source: Dog owners devastated after pet believed mauled to death at doggy daycare – National – NZ Herald News.

Sociologist documents what Gary Becker knew in 1957

Sociologist documents what Gary Becker knew in 1957

Source: Pager, Devah. 2016. “Are Firms that Discriminate More Likely to Go Out of Business?” Sociological Science (September):849-859. PDF

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.@TheEconomist thinks US domestic airlines are a successful oligopoly!?

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ON THE PERSISTENT FINANCIAL LOSSES OF U.S. AIRLINES: A PRELIMINARY EXPLORATION Severin Borenstein Working Paper 16744 January 2011.

Failing firm defence for legacy media mergers

There is a large literature on the failing firm defence to merger law. I wrote an Australian Law Journal article about that defence many years ago.

The essence of the argument is that when a firm is to fail, the choice is between a high cost single plant monopoly and a lower cost multi-plant monopoly that absorbs the asset failed firm. For today’s purposes, that would be newspapers that would otherwise close but for the now blocked Fairfax/NZME media merger

Some think allowing mergers of market leaders with failing firms is good for competition.

To get a merger clearance on the basis of the failing firm defence, the merging companies must provide sufficient, compelling evidence that the failing firm will inevitably leave the market without the merger and there is no less anti-competitive alternative.

The basic rationale behind the doctrine is that since the failing firm would have left the market anyway due to its financial collapse, any harm to competition caused by the loss of an independent market player would arise regardless of the merger. Allowing the merger saves scrapping the assets of the failed firm.

Posner and Easterbrook described the failing firm defence as one of the most pernicious doctrines to ever arise in antitrust law. They did not elaborate much.

#livingwage movement just can’t handle the truth @LWEmployerNZ

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Looks like the living wage movement will not be taking up my challenge for a public debate anytime soon.

The Dutch disease for the benefit of #GarethMorgan @stevenljoyce

I am putting in a Official Information Act request to see if anyone advise ministers that a export promotion target results in a matching increase in imports along with a large appreciation in the New Zealand dollar. Did New Zealand dodge the Dutch disease from this foolhardy export promotion policy? The Dutch Disease story is one of sectoral shifts.

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In the 1960s, with fixed exchange rates under the Bretton Woods system, the Netherlands discovered off-shore natural gas. As natural gas was extracted, it increased domestic income and spending. Investment was redirected toward the natural gas sector. Dutch wages and prices began to rise gradually. The Dutch guilder became overvalued in real terms, their industrial products became uncompetitive, and the manufacturing sector shrunk. This phenomenon of de-industrialization in the presence of rich natural resources was called the Dutch disease. They got natural gas but lost manufacturing.

In the late 1970s and early 80s, the UK experienced similar de-industrialization under a floating exchange rate regime. They discovered and exploited the North Sea oil fields. Since the global oil price was rising, the UK was expected to earn a great amount of foreign exchange in the future. But even before these earnings were realized, the British pound appreciated suddenly in both nominal and real terms. This damaged the British manufacturing sector.

Source: MF model – float

If there is an increasing demand for New Zealand exports if the Business Growth Agenda target of increasing New Zealand exports was successful, there is an increase in demand for New Zealand dollars to pay for these exports. This will result in an appreciation of the New Zealand dollar making imports cheaper. This will switch demand for New Zealand competing industries to these imports.

This process of currency appreciation and expenditure switching will continue until export match exports again. There is nothing wrong with an export boom as long as it is based on comparative advantage rather than subsidies.