A Note on Revenue Versus Profitability as Indicators of Motion Picture Performance

We examine systematic differences between motion picture performance results based on revenue and profitability, using a measure of ROI based on box office revenue relative to the combined production and advertising budget. Special attention is given to the endogeneity of revenue, budget, and the number of screens. In addition, the modeling approach explicitly addresses self-selection associated with sequel decisions. We show that the coefficients of the non-budget variables are the same for both revenue and profit when budget is one of the regressors, and produce only small differences in them when the budget variable is omitted. Substantively, we find major producers and distributors are associated with lower revenue and profits once budgets and screens are controlled. They tend to utilize higher budgets but do not produce more successful movies with them. Sequels are associated with advantages in terms of both ROI and revenue. Contrary to common speculation, they cost less to produce than similar original films. Relative to past research, we find that genres matter more and MPAA ratings matter less than previously suggested. We also highlight the high elasticity between movie buzz and profitability. Similar to previous studies, we find that budgets are positively related to revenue and negatively to profits, which indicates that studios generally overspend. However, we further show that while most films are unprofitable (even when rental sales are considered), ones that resonate with audiences can profitably utilize much larger budgets.