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Research by David Waguespack
In recent years, academic research has emphasized the
benefits of embedded exchange, that web of friendships and
prior relationships that drives business transactions in
many different fields. The entertainment industry is
particularly notorious in this respect; it is common wisdom
that to be successful in Hollywood, “it’s not what you know,
it’s who you know.” But this may be keeping the film
industry from maximizing its own profit potential.
“Social Structure and Exchange: Self-Confirming Dynamics
in Hollywood,” by David Waguespack, assistant professor of
management and organization, with co-author Olav Sorenson,
University of Toronto, examines the relationships between
film distributors and production companies as a means of
understanding the effects of self-confirming dynamics in
embedded exchange. Film distributors receive a percentage of
all domestic and foreign revenue from the films they
distribute, so they have a strong incentive to maximize the
revenue of the projects they support. But their own biased
expectations may keep them from choosing the best and most
profitable film projects.
The authors used data archived in the online Internet
Movie Database (imdb.com) to follow the career paths of key
figures in film-making, including producers, writers, lead
actors and directors. Imdb, a volunteer- run site, tracks
thousands of films and more than 2 million individuals in
the motion picture industry throughout the course of their
careers. The authors had access to a vast amount of data,
including information about budgets, promotion and release
timing for each film.
Waguespack used information from the industry daily
Variety to track the films’ weekly box office performance.
He also interviewed three film producers and five current or
former senior distribution company executives and used a
variety of secondary sources to describe the ways the
industry works.
Examining more than 5,200 movies made between 1982 and
2004, Waguespack found that film distributors tend to work
repeatedly with the same team of principals at a level much
higher than could be expected due to chance alone. Films in
which the production teams had prior interactions with the
distributors stayed in theaters longer and earned more than
four times as much as other projects in average ticket
sales.
On the surface, this seems to indicate that distributors
benefit from working with production teams they know. But
Waguespack argues that this is actually a self-confirming
dynamic—an effect that occurs because the distributors,
believing that the films produced by their friends have
greater commercial potential, create the circumstances for
the film’s success.
This occurs because distributors have control of three
key factors to a film’s success: budget, promotion and
release date. Films with larger budgets, intensive promotion
and favorable release dates are predisposed to be
successful. After accounting for the factors that represent
distributor effort, Waguespack found that films in which the
principals have prior relations with the distributor
actually performed worse at the box office.
What accounts for this negative effect? Marketing dollars
and favorable release dates benefit higher quality films
more than lower quality films, and it may be that
distributors overallocate these scarce resources to
production teams they know because they overestimate the
quality of the work being produced. People tend to
overestimate the quality of work offered by prior exchange
partners. As they continue to work with the same partners,
confirmation bias prevents them from changing their initial
opinion of their partner’s work quality. Their beliefs
become even more biased as they interpret ambiguous evidence
in their partner’s favor.
Because distributors give preferential treatment to those
with whom they have prior relationships, they may be
forgoing a more beneficial relationship that would result in
greater success and thus greater profits. In the end, the
problem is not that the films of prior partners don’t do
well—it is that another project might do even better. So
relying on the web of prior relationships prevents the film
industry from maximizing profits for both distributors and
production teams.
Waguespack believes that the ways expectations produce
self-confirming effects may be felt in a wide variety of
markets that exhibit embedded exchange. Film-making is an
entrepreneurial enterprise, with each film being a new
project requiring the industry equivalent of venture
capital. Perhaps venture capitalists are also creating or
limiting the successes of businesses presented to them based
on their own expectations. “What is really driving
performance?” says Waguespack. “Is it that venture
capitalists are really good at picking the best new
businesses? Or is that success based on the effort that the
investor puts into the company afterward?”
“Social Structure and Exchange: Self-Confirming Dynamics
in Hollywood” was published in Administrative Science
Quarterly. For more information about this research,
please contact
dwaguesp@rhsmith.umd.edu.
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