Superstar Economics Preview

Superstar Economics Visionary Leadership Briefings

Keywords: Superstar economics> superstar branding> star power> success of a film> box office> Tom Cruise> David Beckham> LA Galaxy>

blockbuster> star driven revenue> project choice> project budget> studios> superstar executives> superstar footballers

2 GOLD MERCURY INTERNATIONAL Visionary Leadership Briefings. Superstar Economics

“A big star may not a profitable movie make” The economics of superstars by Nicolas De Santis Using as a “hook” the dismissal of Tom Cruise from Paramount Pictures

by Sumner Redstone, and David Beckham’s sensational career move to the Los Angeles Galaxy team, we review the power of superstar branding and the study of income distributions to the stars in sport, business and entertainment often referred to as “Superstar Economics.”

The script was so finely tuned, they must have asked the writing department to polish it a bit.

Wacky movie star. Losing what few marbles he had in the first place. Lousy movies. Flagging box-office appeal. What else could the suits do but fire the loser?

Sumner Redstone, chairman of Viacom Inc., the parent company of Paramount Pictures, has expertly spun the studio’s decision to end its 14-year relationship with actor Tom Cruise.

Movie industry executives may be forgiven for thinking that the Viacom chairman was mad to let Tom Cruise go after a 14-year relationship simply because Mr. Cruise seemed a little off balance. After all, the movies made by Viacom’s Paramount Pictures studio and the actor’s production company earned more than $2.5 billion at the box office.

Tom Cruise’s production company, has now signed a two-year financing deal with an investment partnership headed by Washington Redskins owner Daniel Snyder. The deal between Cruise/Wagner Productions and First & Goal LLC covers overhead and development, which will allow Cruise and producing partner Paula Wagner to run their company and make deals to produce films, some conceivably starring Cruise. Tom Cruise also sparked intrigue among New York financiers when he announced — after his unceremonious dismissal by Sumner Redstone, the head of Viacom — that he had secured $100 million of hedge fund

backing for his new production company. The fact that Tom Cruise is talking about hedge funds is an indication of how much business they are doing in Hollywood.

There are plenty of smaller hedge fund investors nosing around the big studios for a one-off deal, but there are a few players who have gone to Tinseltown with big pools of capital. Relativity Media has raised $1.3 billion in film finance this year through its two Gun Hill hedge funds, which are underwritten by Deutsche Bank. So why was Tom fired?

But one can’t discard that the reason is that it doesn’t make economic sense to pay Cruise all this money.

3 GOLD MERCURY INTERNATIONAL Visionary Leadership Briefings. Superstar Economics

There is a growing group of academics and companies studying how movies are made, financed and distributed.

Most are finding that the studios’ assumption that big stars will increase a movie’s bottom line is simply wrong.

“There is no statistical correlation between stars and success”, S. Abraham Ravid, a professor of economics and finance at Rutgers University, who, in a 1999 study of almost 200 films released between 1991 and 1993, found that once one considered other factors influencing the success of a film, a star had no impact on its rate of return. Employing a star had virtually no discernible impact on the box office itself.

Mr. Cruise would no doubt object to that assertion. And to be fair, there is some theoretical pedigree to the idea that he may be worth every penny. In fact, there is a whole branch of economics that aims to explain how talented people generate so much more money than competitors who are only slightly less good. It’s called superstar economics, which has been used to explain the astonishing fees of top lawyers and the skyrocketing pay of star chief executives, dates back to the insight in the late 19th century of the British economist Alfred Marshall, who observed that “the relative fall in the incomes to be earned by moderate ability (....) is accentuated by the rise in those that are obtained by many men of extraordinary ability.”

David Beckham and LA Galaxy Only very recently the truth of this statement was played out across the world’s newspapers with the revelation that David Beckham, the most famous footballer on the planet, had signed with Major League Soccer side the LA Galaxy in a five-year deal potentially worth the extraordinary sum of $250 million dollars. During the press conference at which the deal was announced, Beckham told reporters, “I’m going there not to be a superstar. I’m going there to be part of the team, to work hard and to hopefully win things.”

“Now the fun really begins. Now we’ll find out if all the effort and all the money are worth it.”

Tim Leiweke, the president and CEO of the Anschutz Entertainment Group, which owns the Galaxy.

And yet a superstar is assuredly what the team owners will expect for their money: as talented a player as Beckham is, few would assert that his on-field skills alone could command a quarter of a billion dollars. Real Madrid paid a fraction of that amount for the midfielder in mid-2003, and since that time the club has failed to win a single major trophy. Beckham, indeed, is now not considered worthy enough to play for his national side. The obvious truth is that American soccer, and the LA Galaxy in particular, have purchased a branding and marketing tool of enormous potency. Modern media technologies have placed individuals who possess “extraordinary ability” in a position of enormous privilege and power – at the top of the tree, the superstar who can prove himself superior by even the tiniest fraction will see that fraction translated into exponentially enormous rewards.