The Economics of Hollywood Part I: Why People Don’t Complain About Actors’ Salaries

Posted on October 24, 2011

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By Geoff Ratliff

It always amuses me when I hear athletes complain that people don’t care about actors making millions of dollars, so why do they complain about athletes making so much money. Well it probably has something to do with the fact that you don’t see actors involved in very public stand offs with studio heads about fair labor practices, but that’s oversimplifying the issue, especially since, as in the case of the recent NFL and NBA lockouts, the players did not choose to go on strike, they were locked out by the owners. There are both social and economic issues connected to the disparity between the way the general public views the salaries of athletes and entertainers, and it’s hard to say which plays a larger role, but I have a few ideas.

I’ve thought about this issue a lot over the years, but I was most recently inspired by a tweet from Deion Sanders – yes Primetime himself – calling out the public’s tendency to judge athletes differently than actors when it pertains to money. Now as a man who was one of the greatest athletes of all time, but is also quite the entertainer, Sanders should know better. His comments were made in the context of the NBA lockout, so it’s best that we first look at the differences in the economic structures of the NBA versus Hollywood They can be summarized with two, simple, three-word phrases: “Return on Investment” (ROI) and “Fully Guaranteed Contracts”. Allow me to explain, using a couple of real life examples.

Ryan Reynolds, one of Hollywood’s current go to guys, just got paid a substantial amount of money to play the Green Lantern, and the movie had a combined production and marketing budget of roughly $300 million. The film was not very good, and did not do well in the U.S. Box office. The truth is that neither of those things really matter because through additional revenue streams, i.e. foreign box office, licensing, DVD purchases, pay-per-view, etc., Green Lantern will make that $300 million back. They won’t get the ROI that they hoped for, but they certainly won’t lose money on the film; and there will be a sequel.

From an economic standpoint, neither the fans nor the studio are going to look at Reynolds as a grossly overpaid Hollywood star because the movie failed commercially. Fans don’t care because they only invested $12 and two-hours of their time. The studio doesn’t care because Oscar nominations and positive reviews from Rotten Tomatoes are not the true currency of Hollywood, money is. The movie did well enough via all revenue streams to recoup it’s exorbitant costs and justify green-lighting the sequel, so everybody’s happy. Warner Bros. received an appropriate ROI on Reynolds.

In contrast, let’s look at the Knicks’ signing of Eddy Curry. After a disappointing start to his NBA career, Curry managed to put together a solid 2004-2005 campaign, after which the Knicks traded away a combination of players and draft picks to the Bulls for Curry’s rights. The Knicks then promptly signed Curry to a $60 million contract extension, which turned out to be one of the worst contracts in the NBA that season; essentially because Curry could not stay healthy enough to contribute anything on the court for the next six years! Not only did the Knicks not receive the proper ROI for Curry’s services, but the fully guaranteed nature of the contract, combined with Curry’s health and performance issues made him absolutely untradeable, thus handcuffing the team for more than half a decade.

Imagine for a second what would happen if the economics of Hollywood were such that overpaying an actor for one promising performance, and betting wrong on that actor’s future, hamstrung your entire studio for six years. That’s an atrocious business model, but this doesn’t happen on the silver screen, precisely because only stars actually get paid like stars, and they only get paid like stars when they perform like them from an economic perspective. Ryan Reynolds may get $5 – $10 million per for the Green Lantern franchise, but not for Adventureland, which is arguably his best performance. Why? Because Adventureland was not a commercially viable movie. Maybe it seems counterintuitive from a common sense perspective that the best performances are more often than not undervalued, but the economics work.

All of that is well and good, but perhaps the biggest reason that fans have a greater sense of outrage over athlete’s salaries is the emotional attachment that we have to sports. There are other social implications – like the fact that the average fan can not relate to the lives of the players that they are cheering for because of racial and socio-economic differences – but let’s focus on the pure emotional nature of sports.

Unlike with Hollywood, where there is no true sense of outrage if you go see Green Lantern and it sucks, fans get rightfully pissed off if the bad contract of a player like Eddy Curry plays a significant role in preventing their favorite team from being successful for six seasons. For a majority of fans, our teams are an extension of ourselves and our lives. When they suck, we literally are worse off because of it; we become depressed and less productive human beings. The problem is that the NBA is full of bad contracts like this, and it doesn’t make sense from an economic or competitive standpoint for the league to continue to operate in a way that continues to allow the Eddy Currys to get paid like the Kobe Bryants.

The NFL is the most popular and most financially successful of any of the four major North American sports. Much of this has to do with the nature of the sport, but by and large it is due to the game’s economic structure, which ensures competitive balance and allows teams to cut bad contracts with limited financial risk. In other words, because there are no fully guaranteed contracts, teams are allowed to get rid of players that no longer provide the necessary ROI with their on the field performance. This makes ownership happy because it saves money, and it makes fans happy because we don’t have to watch an out of shape and unmotivated cry baby continue to collect checks while holding our team back from greatness. We also get the best on field product possible because players are always highly motivated to perform, even after signing huge contract extensions or free agent deals, because they know that, in the NFL, just like in Hollywood, tomorrow is far from a guarantee.

Follow Geoff on Twitter @snglemarriedguy

 

 

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