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Entertainment Industry Economics: A Guide for Financial Analysis.

By Harold L. Vogel, Cambridge and New York, Cambridge University Press, fourth edition 1998, pp.490, $39.95.

Business economists working in the entertainment industry will recognize this new edition as an old friend. Since its first introduction in 1986, Volgel's Entertainment Industry Economics has been the first place professors sent students who wanted to begin serious study of the industry. While the book is serious in the sense of being a no-nonsense, fact-based treatment, complete with supply and demand curves and equations, it is far from humorless. Each chapter begins with a line like, "Break a leg" for the Performing Arts or "Happy trails to you ..." for Financial Accounting in Movies and Television. And then the line is connected to the subject in the introductory paragraph.

The book's subtitle is appropriate, because the focus of the book is the financial side of the industry. However, the book is much broader than accounting or financial analysis per se. In fact, these elements are mercifully minimized. The book is a collection of professionally researched industry studies, complete with bibliographic references and data. It covers the economic landscape of entertainment in its broadest sense, including cultural, social and political factors that influence the industry's economics. For example, in the first chapter when entertainment and recreation are differentiated, the value of time is discussed and contrasted with concepts spanning those of Aristotle and Veblin to modern economists such as Becker and DeSerpa. Financial aspects are explained as consequences of broad ranges of intervening variables and forces, from philosophical and social to political and historical. More than one-third of the book is devoted to citations, references, data and technical appendices.

The first chapters are about the cinema. A brief history of movies is recounted, beginning with Edison in the 1890s and the lower Broadway "Kinetoscope Parlor" to the century-later purchase by the Kirkorian group of MGM, MGM's buying the Orion library, and now the explosion of DVD titles. The inelastic market demand for tickets is discussed in the context of the seasonal fluctuations and changes in national income. I was surprised to learn that the real price of tickets has fallen since the 1970s.

Film is like construction in the sense that capital is a critical factor of production. It is interesting that apparently a statistically significant inverse correlation exists, with at least a one-quarter lag, between interest rates and the number of production starts. Also, with at least a six-quarter lag, an inverse relation probably exists between production starts and borrowed reserves (credit availability). The lag structure is consistent with the long lead-time needed to assemble all of the components for motion-picture productions.

Many other aspects of the industry are discussed, including international aspects. Because 30 to 45 percent of the gross rentals earned by the major studios are from outside the United States and Canada, swings in foreign-currency exchange rates substantially affect domestic U.S. firm profitability. Many other economic and financial aspects that would interest potential investors are introduced, as well. In the analysis of the film industry's assets, there is an illuminating discussion of the real-estate holdings of the major studios.

The chapter on the financial foundations of making and marketing movies as well as the one on the financial accounting in movies and television motivates the book's subtitle. They were at just the right level for me. They gave me just enough information to understand the issues and to remind me why I became an economist and not an accountant. However, I recommend the chapters to other business economists. We operate in the business world, and we deal with numbers from financial accounting systems. Because of this, we need to understand the source and assumptions under which those numbers are constructed. Vogel makes a good argument that accounting problems in the industry are more often due to differing views, assumptions and interpretations than intended deceits. Nevertheless, the book covers numerous arcane practices as well as a dozen simple tricks of the trade like pricing tickets below profit maximizing levels to maximize concession profit, called "downstream diversion." These conditions combine to reduce the transparency or reliability of financial information and reduce investment returns as well. The problem is only compounded because of the already risky nature of the business.

Other industries that are classified as media dependent include music, broadcasting, cable, publishing, and toys and games. Each chapter is a study of how markets and business works. They are fascinating and written in a clear style that concentrates on economic issues. Each study is presented at a level above popular accounts and yet several levels below the abstraction or technical virtuosity of purely academic inquiry.

The wisdom displayed in the book comes from the selection of material and its concise explanation. No chapter is more exemplary of this than the one on gambling in the section of the book on live entertainment. This section also contains chapters on sports, the performing arts, plus amusement and theme parks. In terms of the general public, the fundamental economics of the gaming and wagering industries are probably the least understood of any industry. As in most entertainment, the one thing you are left with is the memory. However, in gambling the memory might be loosing, so the value must not be that memory. And because consumers spend more on gambling than any other form of entertainment, it certainly has value, and it is not a new value. Vogel traces the history of gambling from biblical times, through the postwar Nevada Bugsy Segel era, to modern issues such as the Indian Gaming Regulatory Act and bets placed via the Internet.

The industry's economics are mysterious to many, although casino and gaming equipment stocks are market favorites. In this chapter, the mathematics of gaming, along with references to Journal of Political Economy and American Economic Review articles, are melded with the socioeconomic differences between patrons at Caesars World vs. Circus Circus, together with glimpses into the ideas associated with the St. Petersburg Paradox, Friedman-Savage, Bernoulli, Asch, Malkiel and Quandt. This analysis is far from only theoretical interest because, as the author notes, economic analysis can be readily applied to everything from game playing to the determination of optimal credit policy and casino comps. These are practical questions being faced today. How much to "comp" Las Vegas gamblers, meaning to give complementary rooms and other services, was the subject of a recent Wall Street Journal story. It was in the special section covering a popular recurring event, the Kentucky Derby. Vogal's gaming chapter also contains sections on horse racing, sports book and lotteries, with appendices listing the legal status of dozens of activities from charitable bingo to telephone betting, plus a section covering international gaming exotica such as Pai Go, Fan Tan, Sic Bo, Trente-et-quarante and more. The chapter demystifies the industry not only for the business economist, but also for the general reader or potential investor.

So, why do people gamble? According to the author, it's entertainment. According to this reviewer, so is the book.

Gerald L. Musgrave Economics America, Inc.
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Author:Musgrave, Gerald L.
Publication:Business Economics
Article Type:Book Review
Date:Jul 1, 1998
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