One quick note this afternoon… a good article from Miller-McCune on the art of box office prediction…

I’ve been thinking a lot about the changing media landscape over recent weeks, and will try to put together a more comprehensive post soon. But, for this Monday morning, I wanted to a link about “The Wisdom of Crowds”.

The Dirty Little Secret About the “Wisdom of Crowds”- There is No Crowd, which talks about research from CMU that shows that “crowd” ratings on services like Amazon, IMDb and Digg are highly dependent on a few key community members.

This is one of a number of anecdotes that has convinced me that the “Long Tail” effect (the idea that broader choice helps niche products) is not really occurring online. Instead, what social media does is allow people to cluster more quickly around a few winners.

I think we’re seeing this phenomenon around the spectacular success of Paranormal Activity, which has used a smart online marketing campaign to generate buzz.  That then feeds upon itself to make the movie a must-see for teen and college-age audiences.  This kind of social clustering, I believe, occurs in every niche… with the net effect that the “tail” becomes shorter, not longer.  Studies of the real world are beginning to bear this out.

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There’s been more news this week on RedBox and online distribution, following the Disney/Marvel acquisition announcement on Monday.

Video Business summed up the latest on RedBox yesterday.  The brief version:

1. Indie rental stores are launching a campaign to persuade people to avoid RedBox because it’s “putting the entire entertainment industry at risk.”

2. SNL Kagan has released a report that says that the video-on-demand business model can’t compete against RedBox’s $1 rentals.  (The reason?  The studios get 70% of a $3.99 video-on-demand rental, leaving the provider about $1.20 on each transaction… if you cut the VoD price to $1, the provider gets just 30 cents. — too little to cover costs.)

Meanwhile, the Wall Street Journal (subscription required) reported that YouTube is in negotiations with some studios to start offering streamed movie rentals (aka video-on-demand).  The $3.99 rumored price suggests that this will follow the usual 70-30 split between the studio and the provider.

I think the lines are being drawn in the sand here.  On the one hand, we’re seeing some providers (e.g. YouTube) embrace the revenue-sharing model that exists in the traditional distribution channels.  On the other, RedBox is holding out for a new distribution model that’s less lucrative for the studios (and more profitable for them).

The company to watch right now, in my opinion, is NetFlix.  They’re also hoping to build a business that doesn’t involve revenue-sharing.  Their challenge, I think, is that the financial markets would reward them handsomely in the short term if they just cut a revenue-sharing deal with the studios.  The temptation to do so will be huge, but I suspect they’ll wait to see how the RedBox lawsuits pan out before they move one way or the other.

Disney’s acquisition of Marvel for $4 billion took the entertainment world by storm yesterday, with speculation centered around whether Disney had paid too much, and how they will integrate Marvel’s characters into the Disney brand.

From a purely financial perspective, I think the deal is risky, particularly because Marvel’s characters aren’t a good match for Disney’s core value as “the happiest place on Earth.”  But, even if the move proves to be bad from a cash-in-the-bank perspective, it might still make business sense… and here’s why…

The industry is entering a transition period, with online distribution starting to grow into a significant business and the rental market changing, thanks to the growth of Netflix and RedBox.

Netflix’ streaming service and Redbox rentals both operate without revenue-sharing agreements with the studios.  This contrasts with virtually all the major studios’ other revenue streams: when you buy a movie ticket, the studio gets about 50% of the ticket price; when you rent from Blockbuster, the studio gets about 40% of the rental (a share that also applies to Netflix’ traditional DVD rental business), and the studios, of course, get a healthy slice of the purchase price of a DVD.  Deals with network and cable TV also provide a healthy, and re-occurring, revenue stream.

But when you rent a movie from a RedBox kiosk, RedBox gets the whole dollar, because it bought the DVD outright.  Similarly, the movies Netflix streams are all fully licensed.  In both cases, the studios get an up front payment, but nothing for each view.

This presents a threat to the studios on the distribution side, which is why we’re seeing a seemingly endless succession of lawsuits around RedBox at the moment, and Netflix is finding it an uphill struggle to get good content onto their streaming service.

So the challenge for RedBox and Netflix is getting good content.  The studios own the rights to virtually all the really popular movies that people want to rent or view online, which gives them an in-built advantage in negotiations.  While RedBox might be able to get around this, because the so-called “First Sale Doctrine” allows them to buy DVDs from whoever they like and rent them to consumers, they would much rather have a simple process for acquiring thousands of DVDs and getting them to kiosks.  Netflix really has no choice but to negotiate direct with the studios for streaming rights, although it did find a way around that partially by striking a deal with Starz for some content.

But then… enter Marvel Studios.

After seeing Sony enjoying huge profits from the Spider-Man franchise, Marvel decided it wanted a bigger slice of the pie and started producing movies themselves.  They cut a deal with Paramount for “service deal” distribution of the movies to theaters (where Paramount doesn’t acquire the rights to the movie, but takes a fixed percentage for booking it in theaters, providing the advertising, and so on), and a similar deal for DVD distribution.  Marvel keeps the underlying rights to the movies, which puts them in a position to negotiate on their own behalf as new markets (e.g., online distribution and rental kiosks) open up.

So, as an independent company, Marvel would be in a good position to negotiate directly with Netflix and RedBox (and other new-era distributors like YouTube, say) and use the studios only for legacy theatrical and DVD distribution.  There’s really no incentive for Marvel to put a studio in the middle of such a deal, and the new-era distributors are hungry for content, and might offer very favorable terms to lock down a big franchise.

The studios’ big fear, I believe, is that once someone like Marvel started cutting them out of online distribution, other producers would look to do the same thing.  Steven Spielberg’s new DreamWorks would be an obvious candidate for utilizing service deals for theatrical distribution and direct deals for online distribution (Indiana Jones was already distributed via a service deal last year).  DreamWorks Animation could do the same thing, as could the new United Artists.  And once the floodgates open, the producers who currently operate within the studios would have established business models to follow if they wanted to go it alone.

So, from the studios’ perspective, Marvel could have been the tip of a very big, and very dangerous, iceberg.  Worse yet, Marvel has emerged as a serious player at a time when the studios are badly strapped for cash.  Well, all the studios, except one…

Disney was the only studio with the resources to put together an offer that Marvel couldn’t refuse.  In doing so, it might have taken a risk financially, but it might prove to be a very smart move if they keep the studio model intact.  Better to make a slightly bad deal for Marvel than hand over the industry’s biggest source of new revenue and profits to independent producers, Netflix, RedBox (and maybe Google, Yahoo and Microsoft) over the next five years.

The rest of the majors owe them one.

This is too good not to share.

One of the pleasures of running a data business is coming across people who use our data in interesting ways.  Over the years, I’ve worked with a number of educators from high school through post-grad who use our database in a variety of ways to teach statistics.

Here’s an article that gives a good overview of teaching using our data in a business school:

Movie Data Journal of Statistics Education Volume 17, Number 1 (2009)

Because time series forecasting is such a universal topic in business statistics classes, we have been intrigued with finding data sets that are both current and meaningful for our students. Although there is certainly a huge amount of financial time series data available, we have found that the movie box office data sets provide excellent examples of those forecasting features typically emphasized in business statistics textbooks: trend, seasonality, cycles, and randomness.

GM sent me a nice letter today, thanking me for buying a car from them (many years ago now).

Given that the letter was obviously prompted by their bankruptcy, they could hardly avoid the topic.  But their marketing department excelled themselves in finding a description of, well, their collapse:

 As you may know, GM is using an expedited, court-supervised process to accelerate the reinvention of our company.

Fantastic.

I got Barnes & Noble’s weekly member coupon today, which turns out to be a 40% discount on Barack Obama’s books.

Since the URL seemed fairly straightforward, I thought it would be interesting to see what happened if I added 1 or 2 to the document number.  Et voila, history is rewritten at the drop of a URL:

Click the image for the screenshot.

In case you were wondering, the fine print on the coupon does not say it is invalid if John McCain is not, in fact, the 44th President, although I suspect they might be discounting his book 40% for the next few weeks anyway.

Updated with correction – the model also predicted Indiana incorrectly.

I’m going to do a more thorough analysis in the next couple of days, but I think I can say that the model worked very well yesterday. It predicted the times that Pennsylvania and Virginia would be called accurately (it was 33 minutes late for PA and just 5 minutes or so early for Virginia), and also that Obama would be elected president with the calling of the Western states at 8pm Pacific.

The only two states it predicted incorrectly was were Florida and Indiana, which the model predicted was were going to go to McCain, based on George Bush’s over-performance there in 2004.  As far as predicting when states would be called, it correctly predicted that Missouri and North Carolina wouldn’t be called until today (although it thought John McCain would have been called as the winner in Missouri in the early hours of this morning).  Overall, I believe it predicted the call time correctly (or within a few minutes) in about 40 states, although I’m still trying to find the exact time CNN called all the states (if someone knows where to find the info, perhaps they could post it in the comments?  Their Political Ticker blog seems to have most, but not all of the call times).

The model’s one real miss was Ohio, which was projected to be still too close to call.  That, and Florida and Indiana, look to be the two states where Obama significantly out-performed compared to 2004.

Not bad, given that I constructed the projection a week before the election.

One other thing… USC has posted the video from last week’s panel here.  It seems to work for me on Windows, but not on my Mac.  Your mileage may vary.

Here’s my prediction for election night with audio commentary.
Note that all times are Pacific Time — add three hours to convert to Eastern!

The first six and half minutes are a quick rundown of the methodology behind the prediction. Feel free to skip that if you want to get to the fun part.

As I mentioned yesterday, USC will be posting video of yesterday’s panel discussion. I’ll update this post with a link to that as soon as I get it.

Update: I forgot to give them credit in the presentation, but poll closing times come from the wonderful web site The Green Papers. I’ve assumed that the networks will not call the results for any state until all polling has closed in that state. Some news articles (e.g. this morning’s Reuters article) suggest the we might start to get exit polls/vote counts earlier than my timeline in some states. The confusion comes from the states where polling closes at different times in the Eastern and Western parts of the state.