The opening of the 1998 feature film Beloved, produced by and starring Oprah Winfrey, spurred media anticipation. Based on the 1987 Pulitzer Prize-winning novel by Toni Morrison, the three-hour saga of a runaway slave's trials was the most expensive film ever made about the black experience. The Walt Disney Company, which spent an estimated $80 million to produce and promote Beloved, hoped it would capture film audiences the way Roots had once drawn television viewers. Yet Beloved bombed abysmally; three weeks after its release, box office receipts were a paltry $21.2 million. The New York Times quoted Disney Studios chairman Joe Roth's mournful reaction: "All there is," he said, "is pain."
Flops, bombs, and "stiffs" are a persistent fact of life in the entertainment industries. "Hollywood has been a bounteous poultry lot for ten-ton turkeys," writes Ropes professor of political economy Richard E. Caves, Ph.D. '58, in his new book Creative Industries: Contracts between Art and Commerce (Harvard University Press). Flopwise, things never seem to get better. A monumental Hollywood disaster like Heaven's Gate (1980) did not inoculate against the 1990 Bonfire of the Vanities debacle, nor prevent the crash and burn of Primary Colors in 1998. Book publishing tells similar tales: Bill Clinton's Between Hope and History tanked badly at bookstores, which returned 70 percent of their copies unsold. O.J. Simpson's lawyer Johnnie Cochran got a $3.5 million advance for his Journey to Justice, but the publisher sold less than half of the 650,000 copies shipped.
There may be no remedies for such fiascos, but Caves's economic analysis at least provides a context for understanding them. One chapter analyzes flops as illustrative cases that serve Caves's overall mission: an exploration of the special economic factors that shape films, theater, music, and book publishing. Drawing on his background in industrial organization and using the contract as the main unit of analysis, Caves focuses on deals. "In the last 10 or 12 years," he explains, "economic theory has gotten involved with the logic of contracts."
The contracts that eventuate in flops, like those that produce blockbusters, rest fitfully on the central uncertainty of creative industries: the unknown consumer demand for a given movie, CD, or book. Caves calls this the nobody knows principle after screenwriter William Goldman's oft-quoted line about movies: "Nobody knows anything." Unhappily for executives, knowledge of what has succeeded in the past offers almost no guidance in predicting future hits. In such risky waters, where the final product emerges from creative inputs assembled in sequence, film studios and investors attempt to limit their exposure with option contracts: investors sink money into the project by stages and always hold the right to cancel. But suppose the early creative results fall short of expectations? Then "the size of the disappointment is crucial," writes Caves. If expected revenues are written down steeply enough to fall below the remaining costs of the film's production, investors will kill the project. But if the "disappointment" simply shrinks the anticipated profit, they may sensibly fund the next stage. In this way, "when costs are sunk progressively and information on the product's quality [is] revealed gradually, rational decision-makers can carry projects to completion that realize enormous ex post losses."
Because they care personally about their product, creative workers like writers, musicians, and actors defy an assumption economists typically make about employees. This atypical attitude gives rise to what Caves calls the art for art's sake property. In the case of Hollywood bombs, "Deficient budgetary control systems interact treacherously with art for art's sake," he explains. "In the nature of their task, directors constantly seek ways to improve their product, ways that usually increase its cost while having only surmised effects on expected revenue." In director Brian De Palma's Bonfire of the Vanities, for example, "The plan called for the construction and furnishing of a luxurious Park Avenue duplex on a Los Angeles sound stage; with cost-cutting missives flying, the production designer responsible for it 'ignored the memos and kept working on his masterpiece.'"
Despite the special properties of creative industries, "there are other activities that share quite a lot with entertainment," Caves notes. "Professional sports are the clearest case. And the way scholars do research is another. When I start a project, I don't know how it's going to turn out. In any research and development arena, there's that same uncertainty."
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