Summer's here! Let the Hollywood games begin NewsLink (Beacon Hill Inst.) Spring 2002

For his brilliant portrayal of mathematician John Nash in A Beautiful Mind, Russell Crowe won critical acclaim. Based on the popular biography by Sylvia Nasar, A Beautiful Mind won the Oscar for Best Picture in March.

Nash’s is a classic story of the triumph of the human spirit over adversity.

Having pioneered work early in his career in the emerging field of game theory, Nash overcame schizophrenia and, in 1994, along with two colleagues, won the Nobel Prize for Economics.

The science of strategy, game theory, attempts to understand, in mathematical terms, the actions of players in a set of games. Game theory examines the options for cooperation and competition between two or more players. The applications of game theory are numerous. Economists are interested in game theory because it helps them understand how competitors behave when confronted with a set of choices on how to price their products. For example, consider the incentive for an individual member nation of the Oil Petroleum Exporting Countries (OPEC) to cheat on pricing and production agreements. If all OPEC members charge a high price, an individual member will be tempted to undercut prices a little and steal market share from fellow members. But if everyone follows the same strategy, the whole group will be worse off, as everyone’s profit margin shrinks.

Nash’s contribution to game theory — one that bears his name — finds that in a particular game, if each player’s choice of action is a best response to the actions taken by other players, then this set of strategic choices comprises an equilibrium.

In the OPEC game, if the member nations do not have a mechanism in place to guarantee cooperation, individual members will find it easy and tempting to charge low prices. If everyone is charging a high price, one player will benefit by charging a low price and securing more market share. If everybody is charging a low price, then it is hardly profitable for someone else to do differently. Thus the low pricing option for every player is the best response to everybody else’s incentive to charge a low price.Pricing low is the Nash equilibrium in such a non-cooperative setting.

And while the highly rarefied Nash equilibrium may not find its star affixed on Hollywood Boulevard any time soon, it is clear that the big-time studios know a little bit about game theory. An examination of how studios strategize in their choice of release dates illustrates the point. Game theory can explain why you did not see Spider-Man go head-to-head against the latest Star Wars prequel from 20th Century Fox, LucasFilm’s Attack of the Clones, on the same opening holiday weekend.

Which way do we go?

Each major studio releases approximately 15 films a year including one or two potential blockbusters. Until recently, each major studio preferred to release their anticipated blockbusters close to four major holidays: Memorial Day, the Fourth of July, Thanksgiving and Christmas. Why are these times critical? People like to go to movies on holiday weekends. Because during these times, moviegoers are less likely to think about which film they’ll take in; they flock to the megaplex or local theater with little regard for the latest movie reviews.

For a studio, holiday weekends mean a huge chunk of the revenue pie is up for grabs. Moreover, the first weekend for any movie can draw a significant portion of the film’s final revenues. Thus, no one studio wants to find its blockbuster going up against a competing studio’s blockbuster. So the game begins with movie producers asking themselves, “Do I want to be in the thick of competition and release my movie during a holiday weekend?” Or, “Do I really want to spend all that money advertising my movie?” Or, “Am I better off releasing the show on a non-holiday weekend?” It’s a game that starts several months and sometimes a year or more in advance of a release.

How much is at stake? Take Spider-Man for instance. The movie cost Sony about $150 million to make. Sony expects to spend about $50 million in marketing. The movie shattered first-weekend records in early May and was the fastest movie to reach the $200 million mark. But its release date was almost entirely based on the threat of having to compete against Attack of the Clones, the latest Star Wars prequel described early on as “the franchise of franchises.” As we went to press, the huge George Lucas PR machine was already in high pitch, with the creator appearing in televised one-on-one interviews and other promotions just before the May 16 release.

Hollywood studios go to great lengths to avoid such head-to-head holiday weekend release competition. Theoretically they could collude and stay out of each other's way. But the anti-trust laws negate that option. The studios can’t coordinate their schedules without getting into trouble.

This places the studios in a tight bind, since without coordination, the absolute worst scenario could happen: all the potential blockbusters could, in principle, be released at the same time! So what’s the alternative? They try to schedule their films by signaling.The thrill of the race

Let’s take a hypothetical example. When a major well-financed studio, let’s call it Dismal Science Cinema, enters the 2003 Fourth of July holiday-weekend sweepstakes, it possesses private information about its featured film, Rational Expectations, a sequel to an earlier blockbuster, Adaptive Expectations (no comparison to Dickens intended). Dismal Science Cinema is also thinking about how to place its remaining 14 films, some of which include romantic comedies and docudramas. Starting a year in advance, Dismal Science Cinema signals to other studios just how serious it is about launching a million-dollar advertising campaign for the blockbuster. Other studios will size up Rational Expectations’ status as a sequel, knowing that the earlier film had already captured an audience. They will also take note of Dismal Science Cinema’s ability to live up to its promise to spend heavily on advertising. Not known for its parsimony, Dismal Science makes what’s called a “credible commitment.” These two pieces of information are reliable indicators of whether Dismal Science will release Rational Expectations on the much-sought-after 2003 July 4th weekend. Once Dismal Science commits to this date, the studio’s remaining films will then be distributed optimally throughout the rest of the year. Meanwhile, other studios will plan accordingly. Knowing that the revenues will be limited by the presence of the 800-pound gorilla, Rational Expectations, the rest of the studios aim for an early June release. If a rival studio, 20th Century Keynes, finally realizes it can’t compete with its own blockbuster, To Demand is Divine, it pulls out of the holiday competition — opting for a greener pasture and the next-best alternative of receiving a larger portion of a smaller pie of revenues on a non-holiday weekend.

Meanwhile, Back in Hollywood …

Sometimes studios gamble by trying to position their release based on the genre. Even the hot and heavy thriller Rational Expectations may not have the field to itself. A rival studio, Liquidity Films, may gamble on the fact that its movie, Friedman in Love, will find a niche for filmgoers who don’t like action movies.

Recent trends suggest that year-round releases have eclipsed the holiday release game playing. Both Spider-Man and Attack of the Clones were released weeks before Memorial Day. But recent evidence indicates that the four major seasons are still pivotal.

The studios still play to win the big game around four major release seasons. One soon-to-be released film, Men in Black II, cleared the field for this July 4 weekend by the sheer drawing power of stars Will Smith and Tommy Lee Jones. Insiders didn’t even try to challenge Men in Black II’s “credible commitment.” Which goes to show that game theory is a concept that is hardly alien to Hollywood.