Entertainment Industry

views updated May 23 2018

Entertainment Industry






Entertainment as an industryin the United States aloneis responsible each year for $150 billion in expenditures and some 120 billion hours of consumed time (Vogel 1998, p. xvii). Entertainment as an economic sector consists of diverse products and services including motion pictures, television, music, broadcasting, print media, toys, gaming, gambling, sports, and fine arts.


Leisure time has been a determining factor in the development of recreation and entertainment as an industry. Entertainment has grown as an industry in step with increased income and time available for leisure and recreation. Economic development, often quantified in terms of productivity or output per person-hour, has enabled goods and services to be produced with fewer labor inputs. The growth of the entertainment industries has been directly related to the development of a modern economy and rising economic productivity, though precise estimation of the demand for leisure is a thorny task (Owen 1971). An important issue in the development of entertainment as an industry is the rising productivity of workers, and in particular the ways in which technical progress has increased worker productivity. Progress in technology, in addition to creating the demand for entertainment products and services, has also led to the creation of much of the dominant forms of contemporary entertainment.


Substantial production in the creative industries takes place within the U.S. economy and creative products are a major U.S. export. Motion pictures, home video and television programming, music and sound recordings, books, video games, and software are collectively one of the largest and fastest-growing economic sectors, responsible for about 6 percent of total U.S. gross domestic product per annum (Motion Picture Association of America 2006a). Multinational entertainment/media conglomerates such as Vivendi, Sony, and AOL/Time Warner are increasingly becoming dominant in this sector, with operations that permit substantial economies across the line of entertainment products. The process often begins with a literary work of fiction, which is then made into a movie exhibited in cinemas and later on syndicated and network television domestically and abroad, and finally released on home video. Characters and other elements from the movie can be developed into a line of toys cross-promoted with fast food, and further developed into a video game or board game, and perhaps even featured in a line of clothing.

In the motion-picture industry, the sector of entertainment with the highest profile, domestic (U.S. and Canadian) box-office receipts accounted for about $9 billion, while worldwide box-office revenue was over $23 billion for 2005 (Motion Picture Association of America 2006b). The international market now yields more revenue than the North American market and it is also the source of revenue growth for the motion-picture industry, though success in the international market is largely conditional on success in the North American market. The dominance of Hollywood films in worldwide box-office revenue gives rise to claims of cultural imperialism, though major Hollywood studios in fact design films for distribution in the worldwide market even though the films are screened in North America first. While international box-office revenues have been rising, the major sources of new revenues for the motion-picture industry have been from home video and digital versatile disc (DVD) sales, and from merchandising arrangements such as toys, video games, clothing lines, and other products that are tied to successful motion pictures.

While Hollywood films dominate worldwide box-office revenue, the American film industry does not dominate worldwide production. The Mumbai-based Indian film industrycommonly known as Bollywood because it is the Hollywood of Bombay (the former name of present-day Mumbai)produces more motion pictures each year than any other country. Throughout the 1980s about 250 individual film production companies completed an annual average of about 700 feature films per year with the encouragement of official government policy requiring commercial movie theaters to screen at least one Indian film per show (Gomery 1996). In 2003 the Indian film industry produced 877 feature-length films and 1,177 short films (Central Board of Film Certification 2006); this contrasts with the 459 new films released in the United States during 2003 (Motion Picture Association of America 2006b).

The music industry consists primarily of the sales of prerecorded musicalbums distributed on compact disc and audiocassettes, and singles distributed on compact disc. Music videos are also sold as product in traditional formats. Music is also available in alternate digital formatsincluding MP3, OGG, and WAVthrough Internet retailers. The authorized digital distribution of music content has been overshadowed by unauthorized distribution, both free and for profit, though academic research on this issue is much less clear than one would glean from journalistic reports (as is discussed in more detail below).

Gambling in the United States is popularly associated with the cities of Atlantic City, New Jersey, and Las Vegas, Nevada, which are responsible for 9 and 21 percent, respectively, of the 2005 U.S. annual gambling revenues of about $53 billion (PricewaterhouseCoopers 2005). Native American casino-operators account for over 40 percent of gambling revenues. While the United States is a large gambling market, accounting for over 60 percent of worldwide gambling revenues, substantial new growth in gambling revenues is occurring in international markets, especially in the former Portuguese colony of Macao, which began granting licenses to new casinos a few years after being returned to Chinese sovereignty in 1999. While gambling revenues in aggregate make the United States the largest market, the character of North American gambling is quite different from Asian gambling markets. For example, in horse track gambling the average total amount bet on a race day at a North American track is on the order of $100,000, whereas at Hong Kong tracks and Japanese tracks a days bets are on the order of $200 million to $300 million, respectively (Busche and Walls 2000).

Expansion of casino gambling opportunities in Asia, with new casinos in Macao and proposed casinos in Japan, Thailand, Singapore, and Taiwan, together with recent changes in British gambling taxation and online gambling opportunities, make prospects favorable for the expansion of international gambling markets (Paton et al. 2002).


The entertainment industries differ in important ways from traditional manufacturing and service industries. Richard Caves (2000) enumerates seven ways in which the creative industriesincluding fine arts, music, and motion picturesdiffer distinctly from what he terms the humdrum industries:

  1. Neither producers nor consumers know the demand for product until after it is revealed. Creative products and services are experience goods and there is symmetric ignorance of information, not an informational asymmetry.
  2. The creative talents producing the product care about the creative output explicitly, in addition to their pecuniary compensation in production.
  3. The creators engage in joint multiplicative production with an array of diverse inputs in which all inputs are essential, because there is less substitutability than in other production processes.
  4. Entertainment products are horizontally differentiated products. Each product is unique and must be experienced before demand is known.
  5. Products are vertically differentiated by the quality of the inputs used in production. Furthermore, inputs of different quality levels may be combinedfor example, a B-list screenplay and an A-list actor.
  6. Profitability depends on temporal coordination and prompt realization of revenues once assets are sunk. Delays may occur once assets have been committed to production.
  7. Creative products are durable and this leads to issues regarding rents, collection and monitoring of royalties, warehousing, and retrieval.

The seven features identified by Richard Caves are essential in understanding the markets for entertainment products both qualitatively and quantitatively (Walls 2005). Additionally, the demand for entertainment has two properties that are deserving of our particular attention. The first is that consumption of entertainment requires the time of the consumer. The second is that the demand for entertainment is not fixed in advance of the product being produced; instead, it is discovered by the consumers after the product has been consumed. We will discuss these properties of entertainment demand briefly.

The time-cost element is important in understanding the demand for entertainment, because consumption of entertainment necessarily implies customer-supplied inputs; recognizing this explicitly is essential if we are to understand the functioning of demand and supply in this market. Perhaps the best illustration of this point, in a more general context, is the seminal paper by Arthur De Vany and Thomas Saving (1983). De Vany and Saving demonstrate that when all else is equal, consumption cost is lower for a product that requires less time to consume. Of course, price can be adjusted and this implies a tradeoff between time-cost and the monetary price. In the entertainment industry, this may also involve substitution across alternative media for a similar product. For example, reading an 800-page book may involve a substantial element of time, but a consumer may substitute a videocassette or DVD film version of the book to be viewed on a computer or television monitor, or a compact disc or audiocassette version of the book to be listened to while at home, at work, or while commuting. All of these alternative means of consumption involve tradeoffs in which the time-cost of consumption varies greatly and may be of primary importance in consumption decisions.

The demand for entertainment products is not fixed in advance, but is discovered by consumers as they consume many entertainment products. Understanding this aspect of demand is essential if one is to make sense of many of the entertainment industrys unique business practices. When movie audiences see a movie they like, they make a discovery and tell their friends about it. This and other information is transmitted to other consumers and demand develops dynamically as the audience sequentially discovers which movies it likes. Supply adapts to revealed demand through flexible exhibition contracts and other business practices that permit the increasing returns in film demand to be realized. For example, early viewers of a motion picture may substantially affect the choices of other potential viewers. This type of behavior is known in the social sciences as, variously, herding, contagion, network effects, bandwagons, path-dependence, momentum, and information cascades (Arthur 1994; Banerjee 1992; Bikhchandani et al. 1992). The particular algebraic models of this behavior differ in the mathematical details, but they are all dynamical processes: Demand depends on revealed demand. As a result of this sequential demand process, initial advantages in movie attendance can lead to extreme differences in outcomes when demand has recursive feedback. De Vany and Walls (1996) showed that box-office revenues have a contagion-like property where the week-to-week change in demand is stochastically dependent on previous demand. A big opening of a bad movie can cause consumption to evaporate. But a big opening of a good movie can lead to an avalanche of attendance. Demand for movies, music, fashion, and other entertainment products and services are characterized by extreme uncertainty due to the nature of dynamical demand.


The most substantial challenge facing the entertainment industry is intellectual property piracy, largely due to the easily copyable digital format of many entertainment products. Infringement of copyrights and other forms of intellectual property is a large and growing problem around the world and it is of particular importance for the entertainment industry. The Motion Picture Association of America estimates that losses due to piracy exceed $3 billion annually in potential worldwide revenue (Motion Picture Association of America 2005). The intellectual capital of the S&P 500 companies is worth 3.4 trillion U.S. dollars (Bowers 2001), so it follows that even a small percentage infringement on such a large base generates enormous absolute losses to property rights holders. Peggy E. Chaudhry and Michael G. Walsh (1996) provide an overview of trends in counterfeiting in the international marketplace, including a consideration of the legal framework that governs the protection against piracy and a review of different anticounterfeiting strategies.

Piracy of entertainment products can take many forms. These range from illegal copying and distribution of videocassettes and optical media (CD-ROM, VCD, and DVD) to Internet piracy, which can involve commerce and the sharing of digital content. Unauthorized signal transmission and theatrical performances are other types of movie and music piracy. Music and movie piracy are either commercial sale of physical media or the sharing of videocassettes, optical media, and digital content over the Internet.

For most entertainment products the pirate good is identical to the authentic article, except for the packaging and after-sale support. For example, music CDs will be an exact digital copy of the authentic product, but liner notes and lyrics will either be missing or will contain numerous, and often humorous, typographical errors. Many entertainment companies use copy-protection technologies, including the Content Scrambling System for DVDs, dedicated DSL set-top boxes, digital encryption encoding of satellite signals, and Macrovision for videocassettes. The use of antipiracy technologies raises the cost of engaging in piracy, as Sougata Poddar (2003) had modeled analytically. Despite efforts to increase the cost of piracy, however, in practice it is not too difficult even for a computer hobbyist to work around the latest antipiracy technologies (Perry 2005). Even the copy-protection technologies employed in computer softwareincluding online authenticationare quickly rendered obsolete by digital pirates (Harvey and Walls 2006).

Copy-protection technologies, whether effective or not, are aimed primarily at preventing retail products from becoming a source of pirate supply. But the source of pirate movies is often not a retail copy but instead is an insider copy, such as the advance copies used for screening and marketing purposes (Byers et al. 2003). Other copies are made from handheld video camera recordings of motion picture films off of a theater screen. While the quality may be low, the latest movies are also readily available over internet-based file-sharing networks, such as BitTorrent (Kwok 2004). This contrasts with music piracy, in which high-quality copies of songs and entire albums are available either freely through file-sharing networks, such as those available with the Kazaa program, or available for purchase through for-profit retailers such as allofmp3.com.

Many factors are associated with piracy (Limayem et al. 1999), and according to Seung Kyoon Shin et al. (2004) sociological factors may in fact be more important than some economic factors. Most studies suggest that the level of piracy is systematically related to the level of income. Income reflects a persons average cost of time and the demand for quality. Patrick J. Harvey and W. David Walls (2003) examined the demand for pirate software in a laboratory study and found that the demand for counterfeit goods decreased as the expected penalty for consuming the illicit goods increased. Income may be correlated with other infrastructure that provides alternative means of consuming the product. All of these factors would be expected to decrease the demand for pirate products as income rises. As average income rises, the supply of pirate products would also be expected to decrease due to the availability of more attractive opportunities for employment than pirating. There is, however, no unambiguous prediction of the equilibrium effect of income changes on piracy.

In a forthcoming article, the present author empirically examines the rate of motion-picture piracy across a sample of twenty-six countries and finds that the level of piracy is explained by the level of income, the cost of enforcing property rights, the level of collectivism present in a countrys social institutions, and the level of Internet usage. Conclusions about the behavioral aspects of piracy are more certain than piracys actual impact on the entertainment industry revenues, however: Felix Oberholzer-Gee and Koleman Strumpf (2004) found that Internet music piracy had no negative effect on legitimate music sales; on the contrary, their study found that piracy may even boost sales of some types of music, contradicting the music industrys assertion that the illegal downloading of music online is causing revenues to fall. In contrast, Rafael Rob and Joel Waldfogel (2006) found that the U.S. music industry lost one fifth of a sale for each album downloaded from the Internet. There is no definitive answer to the question of whether or not piracy has a net negative effect on consumer demand in the entertainment industry.

SEE ALSO Film Industry; Gambling; Industry; Music; Recording Industry; Sports Industry; Television


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Banerjee, Abhijit V. 1992. A Simple Model of Herd Behavior. Quarterly Journal of Economics 107 (3): 797817.

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W. D. Walls

Entertainment Industry

views updated May 17 2018


The entertainment industry in the United States is a multi-faceted combination of a wide variety of disciplines. Radio, insurance, publishing, merchandising, television, film, music, and the computer industries are only a few of the elements that make up this immense industry. Any attempt to cover every aspect of this topic in less than five hundred pages would be foolhardy to say the least. However, it is possible to highlight specific elements of this industry and show how they have influenced U.S. economic history, particularly marketing and advertising.

Live entertainment became popular in the United States during the late nineteenth century. Two types of theater developed: the "variety" theater, offering comedy, musical performances, stage magic, and other spectacles at low prices; and the "legitimate" theater, which presented serious literary works for what were considered more "sophisticated." The "variety" theater crossed ethnic and economic boundaries, emphasizing topics such as action and comedy. This form of theater was the model for vaudeville, a popular form of entertainment that existed in various forms from the early 1900s until the mid-1940s. Radio, and then television, pulled audiences away from the theater. This was due partially to the convenience of entertainment being provided in the home. Ironically, many of the performers from vaudeville successfully made the transition to these new media, thus regaining their audience. But this was far from the end of theater. Though vaudeville found an audience via mass communication, the "legitimate" theater thrived through the likes of Broadway, and through smaller venues across the country.

The film industry was born in 1889, when William Kennedy Laurie Dickson, working out of Thomas Edison's laboratory, developed a motion picture camera and a primitive projection device known as a kinetoscope. 1896 saw the arrival of the first commercial film projector, designed by C. Francis Jenkins and Thomas Armat. As there were no movie theaters in existence, films were shown in vaudeville houses and in a variety of other locations. The mass production of films did not begin until the early 1900s. The subsequent boom that followed would have a massive impact on the U.S. economy. From the 1920s to the 1940s, Hollywood, California was the capital of the global movie producing market. One key to this industry's success was the manner in which it adapted when faced with economic and technological changes. Antitrust and patent infringement suits, the Great Depression, World War II, and other factors managed to damage the industry's financial status, but it always recovered quickly. Instead of bowing down, the film industry simply expanded. Initially the cameraman wore many hats, acting as director, producer, editor, distributor, and in other capacities. Mass production changed that; as more films were produced, it became necessary to delegate responsibility to several individuals.

This diversification led to the creation of many jobs, and opened up a new market for numerous existing jobs as well. By the 1990s, literally hundreds of people worked on each film produced. These artisans ranged from directors, cinematographers, and marketing specialists to insurance representatives, carpenters, and caterers. Production companies themselves had branched out into three different types: the majors, the minimajors, and the independents. The majors are built up of large companies such as Disney or Sony, and usually handle not only film production but also distribution and marketing. Minimajors such as Orion Pictures Corporation, tend to specialize in specific film genres and have limited distribution ability. Lastly, the independents generally have no distribution power. In the mid1990s, independent films were becoming more and more popular, as directors were able to apply more creative control to these pictures with very little corporate intervention. Regardless of the production company type, the film industry continued to prosper. Feature films produced in the United States earned approximately $4.6 billion worldwide in 1991.

Radio started as a hobby in the early 1900s and grew to become the world's first "instant" mass medium. As early as 1921, radio stations were being constructed and broadcasting such programming as religious services, news, and sporting events. With the inception of the National Broadcasting Company (NBC) in 1926 and the Columbia Broadcasting System (CBS) in 1927, national broadcasting networks came into being. In 1927, the Federal Radio Commission (FRC) began regulating the content of the airwaves. However, these regulations did not hinder the marketing of commercial products to mass culture. Indeed, commercial radio broadcasting became the number one way to advertise products of all types, including filmsKing Kong was the first motion picture to be promoted via the radio, in 1933.

However, this national mass media dominance came to an end in the late 1940s with the advent of television. However, the Federal Communications Commission (FCC) continued licensing new radio stationsso much so that between 1945 and 1960 the number of stations had increased from 973 to 4,306. Throughout the 1940s and 1950s radio stations developed a new marketing strategy; instead of targeting a national market, each station approached specific niche markets based on audience age, location, and other elements. A variety of musical forms such as country, jazz, and rock n' roll could now be represented over the airwaves, catering to specific target audiences. Advertisers were able to promote their products based on the station's audience type. This type of marketing remained the radio standard through the 1990s.

Many parallels can be drawn between radio and its successor television. As with radio, television began its reign under the control of large national networks (NBC, CBS, and ABC). By 1955 over half of the homes in the United States had a television. Both radio and the stage lost a sizable share of audience, while radio suffered the added burden of losing some of its advertising to the visual mass medium.

In the 1950s, ABC found itself in a ratings slump. The network began experimenting with more risky programming designed to capture a specific audiencemuch in the same way that radio had begun to broadcast to specific niches of the market. Maverick, starring James Garner, was the first of these edgy shows. The gamble paid off and soon ABC was running programming that was heavy with sex and violence, such as The Untouchables and 77 Sunset Strip. This would set a standard for the television industry that would continue through the 1990s. During the 1960s and 1970s, the other two networks (CBS and NBC) also began to angle their programming at target audiences as well.

The mid-1970s gave rise to a new threat to the networks: cable television. Home Box Office (HBO) and what would eventually become the Turner Broadcasting System offered a wider variety of programming. The Fox network was started by Rupert Murdoch in the mid-1980s with a goal of presenting programming that would push the barriers of good taste. Much like the "variety" theater of the past, the Fox network broadcast mostly lowbrow comedies and action dramas.

The success of the Fox network spurred tremendous growth of the cable industry in the late-1980s through the 1990s. The major networks began to lose ground as numerous cable stations were launched. The Golf Channel, the Family Channel, the Arts & Entertainment Network, and Comedy Central offer just a few examples of the choices viewers had in 1999. This type of specific marketing approach became known as narrowcasting. As with radio, television found itself catering to specific markets in order to increase advertising sales.

The television medium also provided additional outlets for the film industry: television programming and video tape sales. Major movie studios provided approximately half of all prime-time network programming in the early 1980s. By the 1990s, major film production companies were buying up television stations throughout the United States. Paramount Pictures Corporation, Disney Studios, joined Twentieth Century Fox as major players in the television industry.

Amusement parks offer many elements of the entertainment industry in one central location. The origin of the amusement park is rooted in medieval history, when European cities would host "pleasure gardens" alive with fireworks, games, dancing, rides, and other diversions. The 1800s saw America as the primary developer of amusement parks. This was due in part to the development of the trolley. In order to boost business trolley companies would construct amusement parks at the end of their line. This industry continued to grow and by 1919 over 1,500 amusement parks existed in the United States.

Unfortunately, World War II disrupted the industry's success, causing many parks to close. This trend continued into the early 1950s, as television and other factors began to draw people away. However, with the opening of Disneyland in 1955, the theme park had arrived. Upon its success, theme parks began to spring up across the country. In the 1990s many amusement parks were associated with film and television companiesso much so that several offered attractions based on motion pictures. The two most prominent parks of this type were Disney/MGM Studios and Universal Studios. Both produced film and television material and also offered extensive entertainment facilities such as rides, restaurants, shows, and more.

By the late 1990s, the rapid advance of technology found many aspects of the entertainment industry receiving a facelift. Digital technology was changing the nature of film; from special effects to editing to projection, this hightech approach opened a new realm of visual freedom to filmmakers and improved image quality in theaters as well. High Definition Television (HDTV) was in the works, offering drastic improvements in picture quality. Small satellite dishes that offered a wide variety of programming for less cost to the user were rapidly replacing cable. Cable companies, in turn, were hedging their bets on the Internetthe cable modem, allowing for faster access speeds and greater reliability. The World Wide Web became a global hub of home entertainment, allowing for global broadcasts of talk radio programs, theater and movie ticket purchases, television listings, and much more. Who can say where technology will take the entertainment industry in the future?

See also: Amusement Parks, Vaudeville, Jack L. Warner


"The Amusement Park Industry: A Very Brief History," [cited April 20, 1999] available from the World Wide Web @ www.carousel.org/amusement.html.

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