Entertainment Industry Economics A Guide for Financial Analysis NINTH EDITION Harold L. Vogel 11 CAMBRIDGE UNIYERSITY PRESS
Contents Preface page xix Part I Introduction Chapter 1 Economic perspectives 3 1.1 Time concepts 3 Leisure and work 3 Recreation and Entertainment 4 Time 5 Expansion of leisure time 5 1.2 Supply and demand Factors 9 Productivity 9 Demand for leisure 11 Expected Utility comparisons 13 Demographics and debts 14 Barriers to entry 17 vii
viii Contents 1.3 Primary principles 18 Marginal matters 18 Price discrimination 21 Public-good characteristics 21 1.4 Personal-consumption expenditure relationships 23 1.5 Price effects 27 1.6 Industry structures and segments 28 Structures 28 Segments 29 1.7 Valuation variables 34 Discounted cash flows 34 Comparison methods 35 Options 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 48 Laws of the media 48 Network features 50 2.3 Legal layers and limitations 52 Layers 52 Limitations and concentration issues 53 2.4 The Internet 54 Agent of change 54 Long-tail effects 57 2.5 Advertising 59 Functionality 61 Economic and business aspects 62 2.6 Accounting and valuation 64 Accounting 64 Valuation 65 2.7 Concluding remarks 65 Notes 66 Selected additional reading 76
Contents Part II Media-dependent entertainment ix Chapter 3 Movie macroeconomics 83 3.1 Flickering images 84 3.2 May the forces be with you 86 Evolutionary Clements 86 Technology 86 Capital 89 Pecking orders 90 Exhibition 90 Production and distribution 91 3.3 Ups and downs 92 Admission cycles 92 Prices and elasticities 94 Production starts and capital 95 Releases and inventories 97 Market-share Factors 98 Collateral Factors 98 Exchange-rate effects 98 Trade effects 104 Financial aggregates 106 3.4 Markets - Primary and secondary 107 3.5 Assets 112 Film libraries 112 Technology 112 Utilization rates 112 Interest and Inflation rates 113 Collections and contracts 114 Library transfers 115 Real estate 115 3.6 Concluding remarks 117 Notes 117 Selected additional reading 124 Chapter 4 Making and marketing movies 126 4.1 Properties - Tangible and intangible 126 4.2 Financial Foundations 128 Common-stock offerings 129 Combination deals 129 Limited partnerships and tax shelters 130
x Contents Bank loans 133 Private equity and hedge funds 133 4.3 Production preliminaries 135 The big picture 135 Labor unions and guilds 138 4.4 Marketing matters 138 Distributors and exhibitors 138 Sequencing 138 Distributor-exhibitor contracts 140 Release strategies, bidding, and other related practices 144 Exhibition industry characteristics: 145 (a) Capacity and competition 145 (b) Rentals percentage 148 Video, Output deals, and merchandising 150 Video 150 Output deals 153 Merchandising 154 Marketing costs 154 4.5 Economic aspects 155 Profitability synopsis 155 Theoretical foundation 157 4.6 Concluding remarks 159 Notes 160 Selected additional reading 187 Chapter 5 Financial accounting in movies and television 194 5.1 Dollars and sense 194 Contract clout 194 Orchestrating the numbers 195 5.2 Corporate overview 196 Revenue-recognition factors 196 Inventories 197 Amortization of inventoiy 198 Unamortized residuals 199 Interest expense and other costs 201 Calculation controversies 201 Statement of Position 00-2 203 5.3 Big-picture accounting 205 Financial overview 205 Participation deals 211
Contents Pickups 211 Coproduction-distribution 211 Talent participations and breakeven 212 Producers' participations and cross-collateralizations 216 Video participations 216 Distributor-exhibitor computations 217 Distributor deals and expenses 219 Studio overhead and other production costs 221 Budgets high and low 222 5.4 Television-programming accounting 224 Feature licensing 228 Program production and distribution 229 Development and financing processes 229 Syndication agreements 231 Costs of production 233 Costs and problems of distribution 234 Timing troubles 236 5.5 Weakest links 238 Exhibitors: The beginning and the end 238 Distributor-producer problems 239 5.6 Concluding remarks 240 Notes 241 Selected additional reading 264 Chapter 6 Music 266 6.1 Feeling groovy 266 6.2 Size and structure 269 Economic interplay 269 The American scene 269 The global scene 274 Composing, Publishing, and managing 275 Royalty streams 276 Performances 276 Mechanical royalties 277 Synchronization fees 277 Copyright 278 Guilds and unions 278 Concerts and theaters 279 6.3 Making and marketing recordings 280 Deal-maker's delight 280 Production agreements 280 XI
xii Contents Talent deals 281 Production costs 282 Marketing costs 282 Distribution and pricing 283 Structure 283 Pricing 285 6.4 Financial accounting and valuation 285 Artists' perspective 285 Company perspective 290 Valuation aspects 292 6.5 Concluding remarks 293 Notes 293 Selected additional reading 308 Chapter 7 Broadcasting 312 7.1 Going on the air 312 Technology and history 312 Basic Operations 315 Regulation 319 Organizational patterns and priorities 321 Networks and affiliates 321 Ratings and audiences 322 Inventories 325 Independent and public broadcasting stations 326 7.2 Economic characteristics 327 Macroeconomic relationships 327 Microeconomic considerations 329 7.3 Financial-performance characteristics 330 Variable cost elements 330 Financial-accounting practices 332 7.4 Valuing broadcast properties 334 7.5 Concluding remarks 336 Notes 337 Selected additional reading 349 Chapter 8 Cable 354 8.1 From faint signals 354 Pay services evolve 355
Contents 8.2 Cable industry structure 356 Operational aspects 356 Franchising 361 Revenue relationships 362 8.3 Financial characteristics 365 Capital concerns 365 Accounting Conventions 367 8.4 Development directions 369 Pay-per-view 369 Cable's competition 370 DBS/DTH 370 MMDS/LMDS 371 SMATV 371 STV 371 Telephone companies 371 8.5 Valuing cable-system properties 372 8.6 Concluding remarks 374 Notes 375 Selected additional reading 383 xiii Chapter 9 Publishing 387 9.1 Gutenberg's gift 387 First words 387 Operating characteristics 388 9.2 Segment specifics 390 Books 390 Educational and professional 391 Trade 392 Multimedia 394 Periodicals 395 Newspapers 395 Magazines and other periodicals 398 9.3 Accounting and valuation 400 Accounting 400 Valuation 400 9.4 Concluding remarks 401 Notes 401 Selected additional reading 406
Chapter 10 Toys and games 10.1 Not just for kids Financial flavors Building Nocks 10.2 Chips ahoy! Pong: Pre and apres 10.3 Structural statements Video games Profit dynamics Coin-op 10.4 Concluding remarks Notes Selected additional reading Contents 410 410 411 414 416 416 418 418 419 420 421 422 430 Part III Live entertainment Chapter 11 Gaming and wagering 11.1 From ancient history At first Gaming in America Preliminaries The Nevada experience Enter New Jersey Horse racing Lotteries Other wagering segments Asia's jackpot 11.2 Money talks Macroeconomic matters Funding functions Regulation Financial Performance and valuation 11.3 Underlying profit principles and terminology Principles Terminology and Performance Standards 11.4 Casino management and accounting policies Marketing matters Cash and credit Procedura! paradigms 437 437 437 438 438 441 442 443 444 444 446 449 449 451 452 453 454 454 456 459 459 461 462
Contents 11.5 Gambling and economics 463 11.6 Concluding remarks 466 Notes 467 Selected additional reading 474 xv Chapter 12 Sports 480 12.1 Spiee isnice 480 Early Innings 480 Media connections 482 The wagering connection 484 12.2 Operating characteristics 485 Revenue sources and divisions 485 Labor issues 487 12.3 Tax accounting and valuation 489 Tax issues 489 Historical development 489 Current treatments 491 Asset valuation factors 491 12.4 Sports economics 492 12.5 Concluding remarks 495 Notes 496 Selected additional reading 506 Chapter 13 Performing arts and culture 514 13.1 Audiences and offerings 514 Commercial theater 515 On and off Broadway 515 Circus 520 Orchestras 521 Opera 521 Dance 522 13.2 Funding sources and the economic dilemma 522 13.3 The play's the thing 525 Production financing and participations 525 Operational characteristics 527 13.4 Art markets 528
xvi 13.5 Economist echoes Organizational features Elasticities Price discrimination Externalities About cultural economics 13.6 Concluding remarks Notes Selected additional reading Contents 530 530 531 531 532 532 533 534 543 Chapter 14 Amusement/theme parks 14.1 Flower power Gardens and groves Modern times 14.2 Financial operating characteristics 14.3 Economic sensitivities 14.4 Valuing theme park properties 14.5 Concluding remarks Notes Selected additional reading 548 548 548 549 550 555 557 557 558 559 Part IV Roundup Chapter 15 Performance and policy 15.1 Common elements 15.2 Public-policy issues 15.3 Guidelines for evaluation 15.4 Final remarks Appendix A. Sources of Information Appendix B. Major games of chance B.l Blackjack B.2 Craps B.3 Roulette 565 565 568 569 573 575 577 577 578 579
Contents xvii B.4 Baccarat 579 B.5 Slots 580 Notes 581 Appendix C. Supplementary data 583 Glossary 589 References 613 Index 669