The Market Process at Work, Even in Hollywood

Forbes.com (and here) gives a ranking of the Hollywood stars that are overpaid. Yes, overpaid. The point Forbes tries to make is not a moral one. The problem is not that movie stars make thousands of times what the average worker makes in the US. Rather, the point is that some movie stars get paid way more than they should considering the income they generate with their movies. Why is that?

Russell Crowe for instance hasn’t had much success since Gladiator. His (last three) movies have generated an average of $5 in gross income for every dollar he has been paid. Nicole Kidman is another star who, in the last few years, has been in movies that haven’t attracted much crowd. She was recently paid around $15m for her role in Golden Compass. The movie cost $200 to make and so far has not delivered has much as one would hope for a movie in that category. Kidman has generated an average of $8 in gross income with her last three movies for every dollar she has been paid. The same is true of Jim Carey. In fact, Carey is the worst performers and has been earning $20m for movies that turned out to be complete stinkers like Fun with Dick and Jane. Will Ferrell, Jennifer Lopez, Adam Sandler, Cameron Diaz and others are also on the list. Other stars are much more profitable, Angelina Jolie has generated an average of $15 for every dollar she has been paid. She also gets paid less than Nicole Kidman, around $10m per movie. Jolie is 3 times more profitable than Crowe.

It is interesting to see how the market is adjusting. Clearly some stars get paid well after a huge blockbuster. Crowe got many offers and huge salaries after Gladiator (which cost $100m to make and earned $460m in box office sales alone). Sandler got many more offers after The Wedding Singer in 1998. He got paid $20m for Click, which earned $236m in box office sales. A name can have a lot of value and producers may be willing to pay for it. However, as the profitability of an actor goes down, so does the interest of producers. Carey is not being paid up front for his latest movie, Yes Man. Whether Crowe will be in the same boat depends on what an American Gangster does at the box office. Kidman and Lopez may also be confronted with the same problem very soon.

While there is perhaps a lag of a few movies before the returns on a name start to fall, it is clearly the case that appearing in profitable movies over and over again is not something easy to do. Having a name is not enough. One can rise to the summit of the profession and disappear from the headlights within a few years. No one can escape the diktat of the consumers has Mises used to say, not even movie stars. Movies have been made about this very theme. Sunset Boulevard is one that I remember.

Beyond reducing the stars’ salaries (which seems to be difficult for some reason), the market also reacted in another way. Judd Apatow, who has already made hundreds of millions (549 to be  exact) with Knocked Up and Superbad, makes movies on a shoe-string budget ($30m is not much in this industry). One way to cut costs is to employ no stars (not even former ones), and this is exactly what he is doing with his next movie, Walk Hard: The Dewey Cox Story. This is interesting because usually low-budget movies don’t generate much income because they are not widely distributed and don’t interest a vast amount of people. This is the case of “indie films” in the US. Judd Apatow has shown that one can combine the two: make low-budget movies that attract a huge crowd. He is a real entrepreneur. But will it last?

Comments

[chris]

They seem to hold the quality of the movie constant. Are they still being overpaid if the same movie performs worse with a different actor?

Seems like Judd's newest movie is a flop:
http://boxofficemojo.com/movies/?id=walkhard.htm
I wonder what Judd gets paid in relation to gross revenue.

[Will Luther]

Interesting.

"Forbes examined the salaries, budgets and returns for films headlined by some of the biggest stars in the industry." ( Forbes)

I am just not sure they are controlling for enough variables. Unlike the previous commenter, I am not sure movie quality is held constant. Sure budget plays a role. But what about the script? For example, that Dick and Jane script was horrible. And it never would have made as much without Carey. But Superbad and Knocked Up (which btw had Katherine Heigl from Grey's Anatomy, ABCs biggest show...) were gems; you did not need to add a lot of glitz to make them good. (Plus, Superbad followed Knocked Up which, again, carried Heigl's endorsement so that by the time Superbad came out, Judd and Seth Rogen, the actor carrying over, had already made names for themselves...thus not needing endorsements from big timers.)

Control for script quality and co-stars, and then tell me that Jim Carey is overpaid! (...no surprise there, though.)