Star Attraction The Box Office Power of Stars

How much do movie stars contribute to box office success? Harvard Business School professor Anita Elberse researched the notion of "star power" to better understand how A-list players contribute to Hollywood's bottom line.

We can all understand at some level that stars in the worlds of film, sports, and even business create results. If you want big box office for Pirates of the Caribbean, it probably pays to sign Johnny Depp to play the lead.

But Harvard Business School professor Anita Elberse wanted to learn more about the dynamics of star power. Can studios depend on a star's track record as a predictor of future success? Are two "A-list" stars better than one? Can stars improve a studio's overall profitability as well as kick up box office revenue on one movie? What stars attract the most ticket buyers?

And in an interesting plot twist, Elberse decided to design her research not around actual box office receipts, but rather around a Hollywood simulation game that has over half a million players.

The results were published in her working paper, "The Power of Stars: Creative Talent and the Success of Entertainment Products."

So what exactly is "star power" and how does it contribute to a film's success?

According to Anita Elberse, the concept "star power" captures the extent to which an artist's involvement with an entertainment product contributes to the success of that product. That can work in a variety of ways. For example, in the case of films, powerful actors and actresses can help guarantee financing and push a movie through the development process; they can aid in generating interest from theatres across the globe seeking to show the film; and they can help to attract audiences to the film. Their power may find its origins in superior acting skills, a loyal fan base, a knack for picking the most promising projects, a strong relationship with other creative talent, a solid box-office record, or even a combination of such factors.

Star power, of course, is only one of many factors that determine a film's market performance. Film characteristics such as story line, genre, and the use of special effects also affect demand. The role of directors and other creative talent could play a role. In addition, decisions regarding the release strategy for a film, such as whether to open a movie in a large number of theatres, whether to use television advertising to promote the film, and whether to avoid a competitive, high-season opening weekend may impact its market success as well.

However, most of these key factors are in some way linked to star power. For example, movie studios are probably more confident that a Tom Cruise movie will emerge as the winner of a competitive July 4 opening weekend than a movie with an unknown actor, and will adjust their release strategy accordingly.

Professor Elberse used a game as a research tool, so how exactly did she employ it and could a game accurately predict the profitability of a movie?

The Hollywood Stock Exchange is an online market simulation that revolves around movies and movie stars. It is a game—no real money is involved—with over half a million players. Anyone who is interested in playing can join the simulation. New HSX traders receive "Hollywood dollars" and can increase the value of their portfolio by, among other things, strategically trading "MovieStocks." The prices of those MovieStocks reflect expectations of box office revenues.

HSX, which is owned by Cantor Index Holdings, mimics a real supply-and-demand-based stock exchange like the New York Stock Exchange. HSX acts as the market maker—its technology is set up so that when there is high demand for a certain stock, prices will automatically go up, and when there is low demand, prices will go down. As such, from the perspective of the trader, the market works much like any other stock exchange. Movies have an initial public offering once the project first takes shape, and traders can buy, sell, cover, and short stocks just as they can do at the NYSE. What is different is the terminal nature of the trading process: MovieStocks are de-listed roughly four weeks after their corresponding movies are released in U.S. theaters.

Although the simulation does not revolve around real money (Hollywood dollars are worthless outside HSX), it is interesting that collectively, HSX traders usually produce relatively good forecasts of actual box office returns. In fact, the forecasting accuracy is what makes it such a valuable research setting.

Professor Elberse used HSX to measure how the involvement of a movie star affects likely theatrical movie revenues. She started by compiling a database with over 1,200 casting announcements such as "Tom Cruise dropped out of Cold Mountain" and "Angelina Jolie is attached to star alongside Brad Pitt in Mr. and Mrs. Smith," and she matched those to their corresponding MovieStocks on HSX. To understand the impact of movie stars on movie revenues, she then designed an event study to analyse HSX traders' response to those announcements. In an extension of the study, to examine the impact on movie companies' profitability, she also analysed whether those announcements affected the valuation of movie studios (or the media conglomerates to which they belong) listed on the NYSE.

It struck the professor that an event study focused on casting announcements would help her avoid many of the shortcomings that plague previous research on the power of stars. For example, most existing research does not account for the possibility that studios may employ bigger stars for movies that are expected to generate higher revenues, or that the most powerful stars may be able to choose the most promising movie projects. That has made it difficult to draw conclusions on the direction of causality. In addition, motion pictures are the result of the work of many actors and actresses, and previous research has not been able to assess the effect of one star in isolation.

In her study, Professor Elberse found that HSX prices respond significantly to casting announcements, which suggests that the involvement of stars affects revenues. The list of announcements with the biggest impact contains a number of established, often highly paid stars, including Tom Hanks, Mike Myers, Tom Cruise, and Mel Gibson. It also contains a few actors that are typically not included at the very top of most industry executives' rankings, such as Johnny Knoxville and Seann William Scott. It seems audiences value those stars more than Hollywood executives do.

The study shows that, as might be expected, an actor's past box-office performance is positively related to the magnitude of his or her impact on revenues. However, the number and, particularly, the average box-office record of other cast members also play a role. In fact, interestingly, the impact of a newly recruited star and the other cast members are linked—the more A-list a cast already is, the greater is the impact of a star with a track record of box office successes. In other words, recruiting Angelina Jolie leads to a bigger boost of expected revenues if a powerful actor such as Brad Pitt has already agreed to star.

Furthermore, although she finds strong evidence that stars drive revenues, she finds no support for the idea that stars drive the profitability of movie studios. That suggests that stars "capture their rent"—they capture the value they add.

So, can movies ever do well without casting from the A-list? - and what does that imply for the B-list?

The professor confirms that movies can do well without a stellar cast. There are many examples of blockbuster movies that did not have any stars that belonged to the A-list at the time it came out. In fact, some of the best-selling movies of all time did not have any A-list actors—Titanic, the highest-grossing movie of all time, is a classic example. (Of course, many of the cast members in those successful movies went on to become part of the A-list). However, on average, recruiting an A-list cast member appears to have a positive impact on revenues.

The industry often relies on a star's historical box office record to measure star power. When the professor looked closely at the data in her study, she found that rankings of stars based on their past box-office performance can change dramatically over the course of just a few years. Star power is a highly dynamic concept—stars can move from the B to the A list (or vice versa) based on just a few successes or failures. This underscores the limitations of relying solely on stars' historical box-office performance to forecast their future performance.

What are the implications of all this for managers in the motion picture industry?

According to Professor Elberse, movie executives highly reward their top talent, in the form of multimillion-dollar salaries, perks, and profit participation deals, and often give high-profile stars an influential role in the movie marketing process. As such, creative talent is an important marketing investment for managers in the film industry. She says her study provides relevant insights into the return on that investment.

Also, her findings suggest that the power that the motion picture industry attributes to stars stems from a focus on revenues rather than profits. If movie studio executives aim to be cost-effective, they may have to alter their talent recruitment and compensation schemes. Her conclusions on the determinants of stars' effectiveness provide important insights in that respect. For example, while a star's past box-office record provides some guidance about his or her future box-office performance, it is important for executives to not lose sight of the bigger picture. Rather than wasting resources on one "A-list" star, matching cast members with similar rankings might often be a more efficient strategy.