Maintaining content innovation in an industry with unpredictable returns: a portfolio approach to movie production

ABSTRACT

The movie industry is typically characterized by high production risk and unpredictable returns. Innovating in this kind of environment is very risky and calls for smart strategies of risk diversification. Hollywood is a recognized content innovation leader in the global movie industry, but the recent tendency for major production companies in the industry is to reduce risk by imitating previously successful productions rather than maintaining an innovation drive. We analyse here an alternative possible strategy based on risk diversification, and show how such strategy is viable for the Hollywood system whereas it is less viable for alternative, less market oriented movie production systems. We study cost/return data for 909 films from the US movie market 1988–99 by the five major US studios, and 118 films from the Italian market 1995–2003 by the three major Italian producers. Three different strategies of portfolio composition are tested, in a comparative perspective, in the US and Italy production and market environments. We find that portfolio diversification strategies are always successful in reducing operating risk in the US, but only partially so in Italy due to major differences in market size and players’ characteristics, and ultimately to differences in entrepreneurial culture.

KEYWORDS:

• Movie industry
• finance
• content innovation
• risk diversification
• production portfolios
• return predictability

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The case of the movie Titanic, produced by Paramount in 1997, is striking. This movie cost $139 million, and generated at the US box office only more than $413 million, resulting in a profit of $274 million. The other 13 movies distributed by Paramount the same year produced a profit of $12.1 million altogether, equal to a mean profit per movie of $0.9 million – that is, 300 hundred times less than Titanic’s.