In this course we will cover the basic economic and financial analyses that are needed in the entertainment industries. By the end of the course, you should have accomplished two things. First, you should have some understanding of the basic economic theory governing exploitation of intellectual property in the main entertainment media (motion pictures and television) and some exposure to the related entertainment media of recorded music, live theatre and video games. Second, you should have some appreciation of the financial analysis that is common in the entertainment industries.

The only prerequisites for this course are the finance, accounting and economics courses that are included in the first year of the MBA curriculum. If you have not had these courses, please see me immediately.

The textbook for this course is Entertainment Industry Economics by Harold Vogel. Vogel is a financial analyst with a brokerage firm and this book provides the only outline of the entertainment industries that is specifically designed for an outside financial analyst. Along the way he provides a lot of useful overview of the size, scope and cash flows in the industry.

There is also a case packet and a reading packet. Note, however, that the readings packet is rather expensive. As an alternative I am putting the contents of the readings packet on electronic reserve at http://www.usc.edu/Classes/ER/fall98/fbe552/index.html. The files are on this site as PDF files and you can read them and decide which ones you want print. There are also a number of pdf files on the website for this course, which you can reach by going through my webite at http://marshallinside.usc.edu/mweinstein/teaching.html. This document contains hyperlinks to the readings.

You may want to check out Daily Variety and/or the Hollywood Reporter on a regular basis.

The class will be a mix of cases and lecture/discussion. I have arranged for a few guest speakers from the industry to discuss specific topics.

Your grade will be determined by a weighted average of the following: class participation (40%), your grade on the final exam (60%). As an alternative to taking the final exam, I offer the option of writing a term paper. The term paper should be an analysis of a major issue facing the entertainment industries. The term paper MUST include significant empirical analysis and must represent original research. While the topic is open, it must have my approval. I suggest that you start thinking about topics immediately. The paper will be graded on all aspects including organization and grammar.

In evaluating class participation I will be considering the contributions that you have made to furthering the discussion of the topic at hand. Mere opening your mouth is not good class participation. I am looking for comments that are thoughtful and lead the discussion forward, not astray.

My office is HOH702G (x06499). I try to maintain a fairly liberal policy regarding office hours. My formal hours are Th 4:00 – 5:00, but I try to be available at any time. I can also be reached by First-Class, or regular e-mail (mweinstein@marshall.usc.edu) I am an avid user of e-mail and try to respond quickly. Often e-mail is the easiest way to get to me. I have established a conference for this course. I would prefer that you post any question dealing with course material to the conference so that both the question and my answer are available to all. I encourage discussion and posting of messages on the class conference. In general, I will try to refrain from answering questions until the class has had time to mull it over and students have had time to answer the posted questions.

Note that class will not meet on Tuesday September 22 or Tuesday, September 29. There will a makeup class on Saturday, November 14.

Also, this syllabus, is, of necessity, incomplete. At this time I have not been able to finalize all the guest speakers.
 

Introduction to the course

The Movie Title Trivia contest: In his decision in U.S. v Syufy, Judge Alex Kozinski included the names of over 200 movies as part of the text. By the end of the semster the person who has found the most titles will get an extra .01 points on the final exam.

Some of what makes Entertainment interesting is that so much of the value creation is tied to ownership and development of intellectual property. See this article on the difficulty in determining who owns the movie rights to Spider Man for an (albeit extreme) example.

Discussion: The Macro View

Readings:

Examine the MPAA Economic Review. What inferences can you draw from this data? You might look at the relation between movie attendance and the number of screens, and the relation between box-office revenue and the cost of production, distribution and marketing. What has happened to the real (inflation adjusted) cost of making, distributing and attending a movie?

Discussion: Economic Foundations I: Skewed!

Readings:

Required:

Note on Interdependent Utilities

Recommended:

DeVany, Arthur and W. David Walls, Bose-Einstein Dynamics and Adaptive Contracting in the Motion Picture Industry, 106 Economic Journal 1493 (November, 1996).

DeVany, Arthur, Hollywood is an Uncertain Place: Kim Basinger’s Ordeal and Complexity in the Movies. Unpublished working paper, Department of Economics, University of California, Irvine (1997).

For a non-technical introduction to the economics of fads and cascades you may find Bikhchandani, Welch and Hirshleifer, Learning from the Behavior of Others: Conformity, Fads and Informational Cascades useful.

Discussion: Economic Foundations II: Why did G-d Make Superstars?

Reading:

Discussion: Economic Foundations III: Vertical Integration

Reading:

Discussion: The Motion Pictures Studio: History and Evolution

Readings:

Required:

Case: DeLaurentis Entertainment Group

Guest Speaker: Tom Doughty
Tom was formerly with the Bank of America and was the BofA lending officer on this case

Questions

1. Will the proposed $75 million line of credit satisfy DEG’s financial needs over the next two years? Evaluate the forecast of DEG’s cash receipts and disbursement.
2. What are the risks in DEG’s business and strategy? How might those risks affect the firm’s financial requirements?
3. Should Bank of America extend the line to $75 million and syndicate the loan? As the agent for the lending group, would you ask for or insist on any changes in Dino DeLaurentis’ strategy?

Discussion: Predicting Movie Success

Readings:

Readings:

Required:

Discussion: More on Profit Sharing Contracts

Discussion: Motion Picture Accounting

Readings:

Discussion: What is a TV Network?

Readings:

Case: Fox Broadcasting Company

Questions:

1. Why were the three television networks historically able to sustain high profits?
2. How has the structure of the broadcast television industry changed in the late 1970’s and early 1980s?
3. How to these structural changes affect the barriers to entry into network broadcasting?
4. Should Fox Broadcasting Company (FBC) be attempting to become the fourth television network?

Discussion: Windows of Distribution

Readings:

Required:

Case: Arundel Partners: The Sequel Project

Questions

1. Why do the principals of Arundel Partners think they can make money buying movie sequel rights? Do you expect any major film studios to be interested in the sort of arrangement described in the case? What are the substantive differences, if any, between buying a portfolio of sequel rights all at once and negotiating film-by-film to buy them?
2. Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes to buy. [There are several ways to approach this problem, all of which require some part of the dataset presented in Exhibit 6–9. You may find it helpful to study the Appendix, which explains how these figures were prepared.]
3. What are the primary advantages and disadvantages of different possible ways to estimate the value of the sequel rights? What further assistance or data would you require to refine your estimates of the rights’ value?
4. What problems or disagreements would you expect Arundel and a major studio to encounter in the course of a relationship like that described in the case? What contractual terms and provisions should Arundel insist on? What sort of due diligence should Arundel undertake?

Case: The MPAA and GATT

Questions:

1. Who was right in the debate over audiovisual services? Why did the GATT negotiations on audiovisual matters become so heated?
2. Why is the United Sates the world leader in the filmed entertainment industries?
3. Evaluate the strategy the MPAA used during the GATT negotiations. What would you have done similarly? What would you have done differently?
4. What approach should the MPAA take with respect to the EU in the aftermath of the GATT signing?

The Regulatory Environment of Broadcast and Cable Television

Guest Speaker: Prof. Matthew Spitzer
USC Law School

Readings:

Case: Paragould City Cable

Questions

1. Who are the winners and losers from public/private competition in Paragould’s cable TV market? What is the dollar value of gains or losses form competition to the relevant individuals or institutions?
2. Is the provision of cable television service in Paragould, Arkansas, a natural monopoly? What approaches other than direct municipal competition could the city of Paragould have employed to improve cable television service in the city?
3. What is your evaluation of City Cable’s performance through August, 1993? What is City Cable’s breakeven number of subscribers at current prices? What is the company’s breakeven price at its current subscriber level?
4. What changes, if any, would you recommend with respect to City Cable’s current strategy? What changes would you recommend to PCI regarding its current strategy?
5. Under what circumstances is competition between publicly and privately owned firms appropriate?

Discussion: Valuation of Entertainment Properties

Speaker: Dave Davis
Houlihan, Lokey, Howard & Zukin

Readings:

Salter, Ray, "Valuing Entertainment Properties"

Case: Crystal Dynamics (A)

Questions

1. What has been Crystal Dynamics’ strategy in the video game industry? Does the hiring of Zelnick complement their approach?
2. What has been Kleiner, Perkins’ strategy in investing in information technologies? What has been their role in Crystal Dynamics to date?
3. Why is Crystal Dynamics seeking to undertake a strategic alliance at this point?
4. Is Zelnick’s desire to have a strategic investor purchase a block of shares at a pre-money valuation of more than $15 Million reasonable? Are the concerns of the Kleiner, Perkins partner justified? What valuation for Crystal Dynamics is appropriate? An appropriate discount rate might be 17%.
5. If Zelnick is successful in interesting a corporate partner (or partners) in Crystal Dynamics, how should the arrangement be structured?

Discussion: Recorded Sound

Readings:

Required:

Case: Coming Soon, A Theatre Near You

Questions

1. Are the trading relationships between the studios and the exhibitors likely to be stable?
2. In the relationship between the studio and the exhibitor, when are are the prices set? Where does value creation occur? What leads to value creation?
3. Who has been capturing the value in the typical deal between the studio and the exhibitor?
4. How does the move from single screen to multiplex theatres affect the relations between studios and exhibitors?

Recommended:

Guest Lecture: An Independent Production from Acquisition to Home Video: Fried Green Tomatoes

The Summer Game (and Others)

Case: The Baseball Strike

Questions

1. Up to the time of the strike, was value creation in Major League Baseball increasing or decreasing?
2. Who has been capturing this value? Who has been creating this value?
3. Why did free agency change things so much?
4. Do any of the options on the table for resolving the dispute look promising?

Vogel, Ch. 11

Some other stuff that you may like:

You may find Selig v. U.S., 565 F. Supp. 524 interesting. When a new buyer purchases a professional sports team, one of the assets that is acquired is the set of then existing player contracts. In 1959 the well known baseball entrepreneur, Bill Veeck, got an IRS ruling that allowed him to depreciate the players' contracts with the Chicago White Sox when he purchased the team (the team won the American League championship that year, its first since 1919, and the Sox haven't won since). The Veeck ruling appears to have increased turnover of major league teams as the contracts are depreciated over five years and new contracts cannot be depreciated. However, upon sale of the club a new owner can depreciate the contracts. When the current commissioner of baseball, Bud Selig, purchased the Seattle Pilots and moved them Milwaukee as the Brewers, he allocated over 95% of the purchase price to the contracts, so he could depreciate them. The IRS disallowed and Selig sued. This is the district court decision that presents an analysis of the pre-free agency market for ballplayers. Selig won.

You may also note that there is a tendency among judges (usually male) to wax poetic when they get to write about baseball. Parts of these decisions can make for entertaining reading. The first example of this tendency is Judge Bauer's decision the appeal of the Selig case. He affirms the lower court ruling. Also, there is Justice Blackmun’s opinon (and related opinions) in Flood v. Kuhn. This was the last major case to uphold the reserve clause. What is Justice White is saying in his concurring opinion?

In December, 1975, an arbitrator declared that Andy Messermith and Dave McNally were free agents because they had played the 1975 season without signing their contracts. The arbitration provision had been added to the agreement between the owners and the players in 1973. The owners fired the arbitrator, Perter Seitz, and appealed his decision to the courts. Seitz’ ruling was upheld. I have posted the District and Circuit Court decisions upholding Seitz’ ruling. These are more arcane, but may be of interest.

Even more stuff you may like that is also optional:

Daly, George, The Baseball Player’s Labor Market Revisited, in Summers, P. ed., Diamonds are Forever (Washington, The Brookings Institution), 1992.

Quirk, James and Rodney Fort, "Competitive Balance in Sports Leagues," Chapter 7 from Paydirt, The Economics of Professional Team Sports, (Princeton, Princeton University Press) 1992.

Quirk, James and Rodney Fort, "Why Do Pro Athletes Make So Much Money," Chapter 6 from Paydirt, The Economics of Professional Team Sports, (Princeton, Princeton University Press) 1992.

Here are two articles on the role of sports at News Corporation. Murdoch's purchase of the Dodger's is discussed here, and this article shows that the combination of sports and media is not just an American pheonomenon.

The New York Times Magazine of October 18, 1998 was devoted to the business of sports. Here are a few items from that issue.
This is a rather playful diagram showing how media and sports are combining. Best viewed at school as it is a big, color, file.
Here is an article showing how the Florida Marlins understate their true profitability
And here is another, more comprehensive, piece on Murdoch and sports that examines some of the ways the entertainment conglomerate may affect the game.

Here is article on the selling of the NBA even without any games

Case: Time Inc.’s Entry Into the Entertainment Industry (A)

Questions

1. How attractive is the merger of Time and Warner?
1. What are the value enhancement opportunities?
2. Is the proposed exchange ratio of .465 per Warner share attractive?
2. What prompted Paramount’s interest in Time?
3. What legal, financial, and restructuring options does Time have to combat the Paramount bid? To ensure that it is not a target in the future?
4. What would you do as Mr. Munro? How would you explain a decision to reject the Paramount offer at the annual shareholder’s meeting?

Discussion: Live Theatre and Music

Readings:

Case: Viacom, Inc.

Questions

1. Compare Viacom’s pre-1993 operating strategy with its strategy after the Paramount acquisition.
2. Compare Viacom’s operating strategy with News Corp.’s?
3. How do the differences in operating strategies relate do differences in views on the ultimate source of value creation in these industries?
4. Which decision, the supply contract or the equity participation is more consistent with Viacom’s view of the world? Why? Which would you recommend?

McElvogue, Louise, US Cable Firms Find Tough Crowd Abroad, Los Angeles Times (August 27, 1998)
Economist Magazine Survey of Technology and Entertainment (November, 1998)
Carter, Bill, Shrinking Network TV Audiences Set Off Alarm and Reassessment, New York Times (November 22, 1998)