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Entertainment Industry Economics
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  • 103 tables
  • Page extent: 646 pages
  • Size: 228 x 152 mm
  • Weight: 0.988 kg

Library of Congress

  • Dewey number: 338.4/7791
  • Dewey version: 22
  • LC Classification: PN1590.F55 V6 2007
  • LC Subject headings:
    • Performing arts--Finance

Library of Congress Record


 (ISBN-13: 9780521874854)

Replaced by 9781107003095


Entertainment Industry Economics

A Guide for Financial Analysis, Seventh Edition

The entertainment industry is one of the largest sectors of the U.S. economy and is in fact becoming one of the most prominent globally as well. In this newly revised book, Harold L. Vogel examines the business economics of the major entertainment enterprises: movies, music, television programming, advertising, broadcasting, cable, casino gambling and wagering, publishing, performing arts, sports, theme parks, and toys and games. The seventh edition has been further revised and broadened and differs from its predecessors by restructuring and repositioning the previous Internet chapter, including new material on the economics of networks and advertising, adding a new section on policy implications, and further expanding the section on recent theoretical work pertaining to box-office behavior. The result is a comprehensive, up-to-date reference guide on the economics, financing, production, and marketing of entertainment in the United States and overseas. Investors, business executives, accountants, lawyers, arts administrators, and general readers will find that the book offers an invaluable guide to how entertainment industries operate.

Harold L. Vogel is the author of Travel Industry Economics: A Guide for Financial Analysis (Cambridge University Press, 2001), a companion volume to this textbook. He was senior entertainment industry analyst at Merrill Lynch & Co. for 17 years and was ranked as top entertainment industry analyst for 10 years by Institutional Investor magazine. Mr. Vogel frequently writes and speaks on investment topics related to entertainment and media, leisure, and travel and currently heads an independent investment and consulting firm in New York City.

Entertainment Industry Economics

A Guide for Financial Analysis

Harold L. Vogel

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press
32 Avenue of the Americas, New York, NY 10013-2473, USA
Information on this title:

© Harold L. Vogel 2007

This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

First edition 1986
Second edition 1990
Third edition 1994
Fourth edition 1998
Fifth edition 2001
Sixth edition 2004
Reprinted 2006
Seventh edition 2007

Printed in the United States of America

A catalog record for this publication is available from the British Library.

Library of Congress Cataloging in Publication Data

Vogel, Harold L., 1946–
Entertainment industry economics : a guide for financial analysis / Harold L. Vogel. – 7th ed.
   p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-521-87485-4 (hbk.)
ISBN-10: 0-521-87485-8 (hbk.)
1. Performing arts – Finance. I. Title.
PN1590.F55V6 2007
338.4′7791–dc22      2006028089

ISBN 978-0-521-87485-4 hardback

Cambridge University Press has no responsibility for
the persistence or accuracy of URLs for external or
third-party Internet Web sites referred to in this publication
and does not guarantee that any content on such
Web sites is, or will remain, accurate or appropriate.



  Preface page xix
Part I   Introduction
Chapter 1   Economic perspective 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 10
  Expected utility comparisons 12
  Demographics and debts 13
  Barriers to entry 14
1.3   Primary principles 16
  Marginal matters 16
  Price discrimination 19
  Public good characteristics 19
1.4   Personal-consumption expenditure relationships 19
1.5   Industry structures and segments 23
  Structures 23
  Segments 24
1.6   Valuation variables 29
  Discounted cash flows 29
  Comparison methods 30
  Options 31
1.7   Concluding remarks 31
  Notes 33
  Selected additional reading 37
Chapter 2   Basic elements 39
2.1   Rules of the road 39
  Laws of the media 39
  Network features 41
2.2   Internet 42
  Agent of change 44
  Accounting and valuation 45
    Accounting 45
    Valuation 45
2.3   Advertising 46
  Functionality 47
  Economic aspects 48
2.4   Concluding remarks 50
  Notes 51
  Selected additional reading 58
Part II   Media-dependent entertainment 63
Chapter 3   Movie macroeconomics 65
3.1   Flickering images 66
3.2   May the forces be with you 68
  Evolutionary elements 68
    Technology 68
    Capital 71
  Pecking orders 72
    Exhibition 72
    Production and distribution 73
3.3   Ups and downs 74
  Admission cycles 74
  Prices and elasticities 76
  Production starts and capital 77
  Releases and inventories 79
  Market-share factors 81
  Collateral factors 81
    Exchange-rate effects 81
    Trade effects 86
  Financial aggregates 88
3.4   Markets – primary and secondary 88
3.5   Assets 92
  Film libraries 92
    Technology 94
    Utilization rates 94
    Interest and inflation rates 95
    Collections and contracts 98
    Library transfers 98
  Real estate 99
3.6   Concluding remarks 99
  Notes 100
  Selected additional reading 105
Chapter 4   Making and marketing movies 106
4.1   Properties – physical and mental 106
4.2   Financial foundations 108
  Common-stock offerings 109
  Combination deals 109
  Limited partnerships and tax shelters 110
  Bank loans 112
  Private equity and hedge funds 113
4.3   Production preliminaries 114
  The big picture 114
  Labor unions 117
4.4   Marketing matters 117
  Distributors and exhibitors 117
    Sequencing 117
  Distributor–exhibitor contracts 119
  Release strategies, bidding, and other related practices 123
  Exhibition industry characteristics: 124
    (a) Capacity and competition 124
    (b) Rentals percentages 126
  Home video and merchandising 127
    Home video 127
    Merchandising 132
  Marketing costs 132
4.5   Economic aspects 133
  Profitability synopsis 133
  Theoretical foundation 135
4.6   Concluding remarks 137
  Notes 138
  Selected additional reading 158
Chapter 5   Financial accounting in movies and television 164
5.1   Dollars and sense 164
  Contract clout 164
  Orchestrating the numbers 165
5.2   Corporate overview 166
  Revenue-recognition factors 166
  Inventories 167
  Amortization of inventory 168
  Unamortized residuals 170
  Interest expense and other costs 170
  Calculation controversies 171
  Statement of Position 00–2 172
5.3   Big-picture accounting 175
  Financial overview 175
  Participation deals 178
    Pickups 181
    Coproduction-distribution 181
    Talent participations and breakeven 181
    Producers’ participations and cross-collateralizations 185
    Home video participations 185
  Distributor–exhibitor computations 186
  Distributor deals and expenses 187
  Studio overhead and other production costs 190
  Truth and consequences 191
5.4   Television-programming accounting 194
  Feature licensing 194
  Program production and distribution 196
    Development and financing processes 196
    Syndication agreements 198
    Costs of production 200
    Costs and problems of distribution 203
    Timing troubles 203
5.5   Weakest links 205
  Exhibitors: the beginning and the end 205
  Distributor–producer problems 207
5.6   Concluding remarks 208
  Notes 209
  Selected additional reading 225
Chapter 6   Music 228
6.1   Feeling groovy 228
6.2   Size and structure 232
  Economic interplay 232
    The American scene 232
    The global scene 235
  Composing, publishing, and managing 237
  Royalty streams 238
    Performances 238
    Mechanical royalties 239
    Synchronization fees 239
    Copyright 239
  Guilds and unions 240
  Concerts and theaters 241
6.3   Making and marketing records 241
  Deal maker’s delight 241
    Production agreements 241
    Talent deals 243
  Production costs 243
  Marketing costs 244
  Distribution and pricing 245
    Distribution 245
    Pricing 246
    Internet effects 247
6.4   Financial accounting and valuation 247
    Artists’ perspective 247
    Company perspective 251
    Valuation aspects 253
6.5   Concluding remarks 254
  Notes 254
  Selected additional reading 264
Chapter 7   Broadcasting 267
7.1   Going on the air 267
  Technology and history 267
  Basic operations 270
  Regulation 273
  Organizational patterns and priorities 274
    Networks and affiliates 274
    Ratings and audiences 276
    Inventories 279
    Independent and public broadcasting stations 280
7.2   Economic characteristics 281
  Macroeconomic relationships 281
  Microeconomic considerations 281
7.3   Financial-performance characteristics 283
  Variable cost elements 283
  Financial-accounting practices 284
7.4   Valuing broadcast properties 287
7.5   Concluding remarks 289
  Notes 290
  Selected additional reading 299
Chapter 8   Cable 304
8.1   From faint signals 304
  Pay services evolve 305
8.2   Cable industry structure 309
  Operational aspects 309
  Franchising 310
  Revenue relationships 312
8.3   Financial characteristics 315
  Capital concerns 315
  Accounting conventions 318
8.4   Development directions 320
  Pay-per-view 320
  Cable’s competition 320
    DBS/DTH 321
    MMDS/LMDS 321
    SMATV 321
    STV 321
  Telephone companies 321
8.5   Valuing cable-system properties 322
8.6   Concluding remarks 324
  Notes 325
  Selected additional reading 331
Chapter 9   Publishing 335
9.1   Gutenberg’s gift 335
  First words 335
  Operating characteristics 336
9.2   Segment specifics 339
  Books 339
    Educational and professional 339
    Trade 340
  Periodicals 341
    Newspapers 341
    Magazines and other periodicals 345
  Multimedia 346
9.3   Accounting and valuation 339
  Accounting 347
  Valuation 347
9.4   Concluding remarks 348
  Notes 348
  Selected additional reading 351
Chapter 10   Toys and games 355
10.1   Not just for kids 355
  Financial flavors 356
  Building blocks 360
10.2   Chips ahoy! 361
  Slots and pins 362
  Pong: pre and après 362
10.3   Structural statements 364
  Home video games 364
  Coin-op 365
  Profit dynamics 366
10.4   Concluding remarks 367
  Notes 368
  Selected additional reading 373
Part III   Live entertainment 00
Chapter 11   Gaming and wagering 379
11.1   From ancient history 379
  At first 379
  Gaming in America 380
    Preliminaries 380
    The Nevada experience 381
    Enter New Jersey 383
    Horse racing 385
    Lotteries 388
    Indian reservations, riverboats, and other wagering areas 388
11.2   Money talks 390
  Macroeconomic matters 390
  Funding functions 393
  Regulation 394
  Financial performance and valuation 396
11.3   Underlying profit principles and terminology 397
  Principles 397
  Terminology and performance standards 399
11.4   Casino management and accounting policies 402
  Marketing matters 402
  Cash and credit 404
  Procedural paradigms 405
11.5   Gambling and economics 406
11.6   Concluding remarks 409
  Notes 409
  Selected additional reading 415
Chapter 12   Sports 420
12.1   Spice is nice 420
  Early innings 420
  Media connections 422
  The wagering connection 424
12.2   Operating characteristics 425
  Revenue sources and divisions 425
  Labor issues 427
12.3   Tax accounting and valuation 428
  Tax issues 428
    Historical development 428
    Current treatments 430
  Asset valuation factors 430
12.4   Sports economics 431
12.5   Concluding remarks 433
  Notes 434
  Selected additional reading 442
Chapter 13   Performing arts and culture 449
13.1   Audiences and offerings 449
  Commercial theater 450
    On and off Broadway 450
    Circus 456
  Orchestras 456
  Opera 456
  Dance 457
13.2   Funding sources and the economic dilemma 457
13.3   The play’s the thing 459
  Production financing and participations 459
  Operational characteristics 461
13.4   Economist echoes 463
  Organizational features 463
  Elasticities 464
  Price discrimination 464
  Externalities 465
13.5   Concluding remarks 465
  Notes 466
  Selected additional reading 472
Chapter 14   Amusement/theme parks 477
14.1   Flower power 477
  Gardens and groves 477
  Modern times 478
14.2   Financial operating characteristics 479
14.3   Economic sensitivities 484
14.4   Valuing theme park properties 486
14.5   Concluding remarks 487
  Notes 487
  Selected additional reading 489
Part IV   Roundup 00
Chapter 15   Performance and policy 493
15.1   Common elements 493
15.2   Public policy issues 496
15.3   Guidelines for evaluating entertainment securities 497
  Cash flows and private market values 497
  Debt/equity ratios 499
  Price/earnings ratios 499
  Price/sales ratios 500
  Enterprise values 500
  Book value 500
15.4   Final remarks 501
Appendix A:   Sources of information 503
Appendix B:   Major games of chance 505
  Blackjack 505
  Craps 506
  Roulette 508
  Baccarat 508
  Slots 509
  Other casino games 510
    Poker 510
    Keno 511
    Big Six Wheel 511
    Bingo 511
    Pai Gow, Fan Tan, and Sic Bo 511
    Pan 512
    Trente-et-quarante (Rouge et Noir) 512
  Lotteries 513
  Tracks 514
  Sports book 514
  Notes 516
Appendix C:   Supplementary data 517
  Glossary 533
  References 557
  Index 587


en·ter·tain·ment – the act of diverting, amusing, or causing someone's time to pass agreeably; something that diverts, amuses, or occupies the attention agreeably.

in·dus·try – a department or branch of a craft, art, business, or manufacture: a division of productive or profit-making labor; especially one that employs a large personnel and capital; a group of productive or profit-making enterprises or organizations that have a similar technological structure of production and that produce or supply technically substitutable goods, services, or sources of income.

ec·o·nom·ics – a social science that studies the production, distribution, and consumption of commodities; considerations of cost and return.

Webster's Third New Unabridged International Dictionary, G. & C. Merriam Company, Springfield, Massachusetts, 1967.

Each year Americans cumulatively spend at least 140 billion hours and more than $280 billion a year on legal forms of entertainment. And globally, total annual spending is approaching $1 trillion. So we might begin by asking: What is entertainment, why is there so much interest in it, and what do its many forms have in common?

   At the most fundamental level, anything that stimulates, encourages, or otherwise generates a condition of pleasurable diversion could be called entertainment. The French word divertissement perhaps best captures this essence.

   But entertainment can be much more than mere diversion. It is something that is so universally interesting and appealing because, when it does what it is intended to do, it moves you emotionally. As the Latin root verb tenare suggests, it grabs you: It touches your soul.

   Although life is full of constraints and disciplines, responsibilities and chores, and a host of things disagreeable, entertainment, in contrast, encompasses activities that people enjoy and look forward to doing, hearing, or seeing. This is the basis of the demand for – or the consumption of – entertainment products and services; this is the primary attribute shared by the many distinct topics – from cinema to sports, from theme parks to theater – that are discussed in the pages that follow.

   Entertainment – the cause – is thus obversely defined through its effect: a satisfied and happy psychological state. Yet, somehow, it matters not whether the effect is achieved through active or passive means. Playing the piano can be just as pleasurable as playing the stereo.

   Entertainment indeed means so many different things to so many people that a manageable analysis requires sharper boundaries to be drawn. Such boundaries are here established by classifying entertainment activities into industry segments, that is, enterprises or organizations of significant size that have similar technological structures of production and that produce or supply goods, services, or sources of income that are substitutable.

   Classification along those lines facilitates contiguous discussion of entertainment software, as we might more generically label films, records, and video games, and of hardware – the physical appurtenances and equipment on which or in which the software’s instruction sets are executed. Such classification also allows us to more easily trace the effects of technological developments in this field.

   So accustomed are we now to continuous improvements in the performance of entertainment hardware and software that we have trouble remembering that, early in the twentieth century, moving pictures and music recordings were novelties, radio was regarded as a modern-day miracle, and television was a laboratory curiosity. Simple transistors and lasers had yet to be invented, and electronic computers and earth-orbiting communications satellites were still in the realm of science fiction.

   These fruits of applied technology have nevertheless spawned new art forms and vistas of human expression and have brought to millions of people around the world, at virtually the flick of a switch, a much more varied and higher-quality mix of entertainment than has ever before been imagined feasible.

   Little or none of this, however, has happened because of ars gratia artis (art for art’s sake) – in itself a noble but ineffectual stimulus for technological development. Rather, it is economic forces – profit motives, if you will – that are always behind the scenes, regulating the flows and rates of implementation. Those are the forces that shape the relative popularity and growth patterns of competing, usually interdependent, entertainment activities and products. And those are the forces that ultimately make available to the masses what was previously affordable only by upper-income classes.

   It is therefore surprising to find that most serious examinations of the economics of entertainment are desultory and scattered among various pamphlets, trade publications and journals, stockbrokers’ reports, and incidental chapters in books on other topics. The widely available popular magazines and newspapers, biographies, histories, and technical manuals do not generally provide in-depth treatments of the subject.

   This book, then, is a direct outgrowth of my search for a single comprehensive source. It attempts to present information in a style accessible and interesting to general readers. And, as such, it should prove to be a handy reference for executives, financial analysts and investors, agents and legal advisors, accountants, economists, and journalists. To that end, some supplementary data appear in Appendix C.

   Yet Entertainment Industry Economics will most likely be used as a text for graduate or advanced undergraduate students in applied media economics and management/administration courses in film, music, communications, publishing, sports, performing arts, and hotel-casino operations. Instructors should find it easy to design one-semester courses focused on one or two areas. A minimum grasp of what entertainment and media economics is all about would require that most students read at least the first halves of Chap-ters 1 and 2 and, at the end of the course, the first section of Chapter 15. But many different modules can be readily assembled and tailored. Among the most popular would be concentrations on film, television, and music (Chapters 2 through 8); gaming and sports (Chapters 7, 8, 11, and 12); arts and popular culture (Chapters 6, 7, 9, 10, and 13); or entertainment merchandi- sing and marketing (Chapters 2, 7, 9, 10, and 14).

   The topics covered in the book have been chosen on the basis of industry size measured in terms of consumer spending and employment, length of time in existence as a distinct subset, and availability of reliable data. In a larger sense, however, topics have been selected with the aim of providing no more and no less than would be required by a “compleat” entertainment and media industry investor. The perspectives are thus inevitably those of an investment analyst, portfolio manager, and economist. Whereas this decision-oriented background leads naturally to an approach that is more practical and factual than highly theoretical, it nevertheless assumes some familiarity, supported by the appended glossary, with the language of economics and finance.

   This seventh edition has been further revised and broadened and differs from its predecessors by restructuring and repositioning of the previous Internet chapter, inclusion of new material on the economics of networks and of advertising, a new section on policy implications, and further expansion of the section on recent theoretical work pertaining to box-office behavior.

   I am especially grateful to Elizabeth Maguire, former editor at Cambridge University Press, for her early interest and confidence in this project. Thanks are also owed to Cambridge’s Rhona Johnson and production editor Michael Gnat, who worked on the first edition, to Matthew N. Hendryx, who worked on the second, and to Scott Parris for the third through seventh.

   I am further indebted to those writers who earlier cut a path through the statistical forests and made the task of exposition easier than it would have otherwise been. Particularly noteworthy are the books of John Owen on demand for leisure, Paul Baumgarten and Donald Farber on the contractual aspects of filmmaking (first edition; and second with Mark Fleischer), David Leedy on movie industry accounting, David Baskerville and Sidney Shemel/M. William Krasilovsky and Donald Passman on the music business, John Scarne and Bill Friedman on the gaming field, Gerald W. Scully and Andrew Zimbalist on sports, and William Baumol/William Bowen on the performing arts. Extensive film industry commentaries and data collections by A. D. Murphy of Variety (and later, The Hollywood Reporter and the University of Southern California) were important additional sources.

   My thanks also extend to the following present and former senior industry executives who generously took time from their busy schedules to review and to advise on sections of the first edition draft. They and their company affiliations, as of that time, were Michael L. Bagnall (The Walt Disney Company), Jeffrey Barbakow (Merrill Lynch), J. Garrett Blowers (CBS Inc.), Erroll M. Cook (Arthur Young & Co.), Michael E. Garstin (Orion Pictures Corp.), Kenneth F. Gorman (Viacom), Harold M. Haas (MCA Inc.), Howard J. Klein (Caesars New Jersey), Donald B. Romans (Bally Mfg.), and James R. Wolford (The Walt Disney Company). Greatly appreciated, too, was the comprehensive critique provided by my sister, Gloria. Acknowledgments for data in the second edition are also owed to Arnold W. Messer (Columbia Pictures Entertainment) and Angela B. Gerken (Viacom).

   Although every possible precaution against error has been taken, for any mistakes that may inadvertently remain the responsibility is mine alone.

   I’ve been most gratified by the success of the previous editions and, as before, my hopes and expectations are that this work will provide valuable insights and a thoroughly enjoyable adventure.

   Now, on with the show.

Harold L. Vogel

New York City

Entertainment Industry Economics

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