“The trouble with this business is the dearth of bad pictures,” Sam
Goldwyn once said. In this contradictory maxim lies the mystery of
Tinseltown’s finances. The way Hollywood makes money has always been
baffling. There is much ringing of bells and jingling of coins, but
it’s the ringing and jingling of slot machines, not cash registers.

And few things are more baffling than its love affair with R-rated
films; it just doesn’t make sense or (sorry about that) cents. An
analysis of the profitability of nearly 3000 films over the last 15
years was released earlier this month.(1 ) It shows that G-rated films
are 11 times more profitable than their R-rated counterparts.
Nevertheless, Hollywood has churned out 12 times more R-rated films
than G-rated films.

The figures from this study commissioned by the Dove Foundation, an
American group which lobbies for family-friendly entertainment, are
striking. While the average G-rated film earned a profit of US$79
million, the average R-rated film earned only $6.9 million. The trend
is even noticeable in the PG and PG-13 categories: the more suitable
films are for family viewing, the higher their return is. The average
PG film earned $28.3 million and the average PG-13 film earned $23.5
million.

(For readers unfamiliar with the American ratings system, G–rated films
are for all ages; PG films contain some material which may not be
suitable for children; PG-13 films contain material inappropriate for
children under 13; and children under 17 can attend R films only with a
parent.)

Even on return on investment (ROI), not just bottom line profit,
family-friendly films are also investor-friendly. According to the
analysts commissioned by Dove, Kagan Research, a California media
business research firm, the ROI on G-rated films produced between 2000
and 2003 was a staggering 94.5 per cent, while the ROI on R-rated films
was only 28.7 per cent.

R-rated films were last in the home entertainment stakes as well.
Nowadays, Hollywood studios earn more from marketing their productions
for the home market on DVDs and videos than through the box office.
G-rated films have easily outstripped PG, PG-13 and R-rated films over
the past 15 years.

There’s nothing new about this situation. Five years ago Dove conducted
a similar study with nearly the same results. Dick Rolfe, its founder
and chairman, says proudly that the maths shows that the vaunted
profitability of R-rated films is a myth. “If film makers will turn
around and begin catering to the family audience with high quality,
wholesome movies, they will reap their reward in increased profits,” he
says.

Does the bottom line make sense?

To campaigners for a family friendly Hollywood, the bottom line sounds
like a powerful argument. Michael Medved, the author of the 1992
best-seller Hollywood vs. America, pioneered financial analysis as a cudgel for changing the dominant culture. His comment about the Dove study is:

“For several decades, Hollywood has tried to ignore the
increasingly overwhelming evidence that edgy, adult-themed
entertainment usually constitutes a bad investment and a sucker bet at
the box office... [This] latest study provides such an avalanche of
proof for the advisability of creating more general audience
alternatives that even the most stubborn studio chief will ignore it
only at his (or her) peril.” (2 )

So here’s the mystery: why aren’t the movie moguls jumping through
family-friendly hoops if G-rated films are really so profitable? They
appear to have completely ignored the Dove Foundation’s report, by the
way. G-rated films are still a tiny fraction of all films. Between 1989
and 2003, of the 2,982 films in survey, only 123, or 4 per cent, were
G-rated. But there were 1,533 R-rated films, or 52 per cent. Why is
this? Don’t movie moguls care about the bottom line? Are they dumb? Or,
as Sam Goldwyn might have said, are they just stupid?

Does the Dove explanation hold water?

There seem to be three explanations floating about. The first is the
Dove Foundation’s — that “today’s movie-goers are voting with their
feet, and walking away from R-rated movies at the box office. There are
too few movies of good taste to keep them coming back.”(3 )

But there are problems with this argument. For one thing, the reason
that young people are walking out of the movie theatres could be that
they are getting stuck into R-rated video games, surfing the internet
and downloading MP3 files — not because they are disgusted by
Hollywood’s vulgarity.(4 )

True, the number of R-rated films does seem to be declining. In 1989,
Hollywood produced 111 of them, but by 2003 this figure had dropped to
87. Maybe the studios are beginning to shift towards less raunchy and
violent fare. But maybe not. The number of G-rated films basically
stayed steady, moving from 7 to 10. At the same time, the PG-rated
films fell, from 41 in 1989 to 23 in 2003. What increased markedly was
the number of PG-13 films, from 41 to 80.

Overall, what seems to be happening is that adult content is spilling
into PG-13 films as Hollywood tries to chase the teen market. In fact,
a recent study by the Harvard School of Public Health argued that more
violence, sex and profanity has been seeping down into the lower
ratings over the past decade.(5 ) So a decrease in the number of
R-rated films may not necessarily signal greater family-friendliness.
Instead of increasing the number of G-rated films, it could be
corrupting the PG and PG-13 films.

Furthermore, not all G-rated films make money. Some, like The
Incredibles or Finding Nemo, make pots of money. But G-rated
blockbusters are mostly animations which require a huge investment.
Marketing them requires a highly developed distribution system with
tie-ins to toy manufacturers and fast-food outlets. Many studios do not
have these. Live action G-rated films can flop, and often do. Only on
the average are G-rated films gold mines for the studios.

Cultural bias?

The second explanation for the predominance of R-rated films is
cultural bias. This is the one favoured by the Dove Foundation and
Michael Medved. They think that problem is not movie-goers, but
movie-makers. As Medved said a few years ago:

Commercial success may mean money, but big stars and top
producers already have more than enough money to satisfy their wants
and needs. On the other hand, victory at the Academy Awards — the
annual Oscar ceremony is this Sunday signifies the respect of peers and
recognition of their seriousness as cinematic artists. It also helps to
provide more creative freedom and independence for future projects
while, as a lucky bonus, giving them the chance to charge higher fees.
For the great majority of creative people, the delicious combination of
esteem and enrichment beats pure cash every time. (6)

There is something in this theory. A couple of years ago, two
economists, Arthur De Vany and W. David Walls, decided to test Medved’s
claims.(7) First of all they did a statistical analysis of the kind of
films that “stars” appear in. Stars seldom appear even in G-rated
big-budget films but they appear reasonably often in R-rated films,
even low-budget productions. “It is notable that R-rated films -—
portrayed by critics as attacks on conventional social values and
morals -— attract a disproportionately large share of Hollywood’s
on-screen and behind-the-camera stars, and this is even more true of
high-budget R-rated movies,” De Vany and Walls wrote. This seems to
confirm that indigenous Tinseltowners are biased towards R-rated films.

And then De Vany and Walls concluded that R-rated films simply don’t
make as much money. “An executive seeking to trim the ‘down-side’ risk
and increase the ‘upside’ possibilities in a studio’s film portfolio
could do so by shifting production dollars out of R-rated movies into
G, PG, and PG-13-rated movies,” they contended. Only a deeply
entrenched bias can explain this economically irrational behaviour.

Is it just too hard to know what works?

But a third explanation has to be added to these considerations: that
making movies is one of the toughest ways imaginable to make money and
the studios simply aren’t very good at it. Each Hollywood movie is a
completely different product with highly unpredictable revenues and
costs. To quote Sam Goldwyn again: “If I were in this business only for
the business, I wouldn’t be in this business.”

The authors of a recent survey of the economics of the American film
industry (8 ) ask how it is possible for so many smart people to end up
making ten-ton turkeys. Take the 2002 film The Adventures of Pluto Nash,
which featured mega-star Eddie Murphy. This cost over $100 million to
produce but earned less than $5 million in American theatres. It was
“the on-flight movie on the plane to hell,” as one reviewer quipped. Or
take Mel Gibson’s film The Passion of the Christ, the
highest-grossing independent film ever made; it was turned down by
several studios. “It is staggering to discover how little ‘science’
usually goes into the process” of producing films, they comment.

So sadly, while the statistics show that G-rated family-friendly films
are a good bet, there is little chance that the big shots in Hollywood
will convert to family-friendliness any time soon after studying the
Dove Foundation’s statistics. They know that making G-rated films is
risky, too; they like making R-rated films which win Oscars; and most
significant of all, they don’t seem to know what the hell they’re doing
anyway.

Michael Cook is editor of MercatorNet.

Notes
 (1) “Profitability of MPAA-rated movies”. Dove Foundation. May 2005.
( 2) “Profitability of MPAA-rated movies”. Dove Foundation. May 2005.
 (3) Dick Rolfe. “Hollywood profits climb sharply by shifting to family films.” Dove Foundation website. June 2005.
 (4) Kaiser Family Foundation. “Generation M: Media in the Lives of 8-18 Year-olds”. March 9, 2005.
( 5) Kimberly M Thompson and Fumie Yokota. “Violence, Sex, and
Profanity in Films: Correlation of Movie Ratings With Content”. Medscape General Medicine. July 13, 2004.
 (6) Michael Medved. “Want an Oscar? An ‘R’ revs up your chances.” USA Today, March 18, 1999.
 (7) Arthur De Vany and W. David Walls. “Does Hollywood Make Too
Many R-Rated Movies? Risk, Stochastic Dominance, and the Illusion of
Expectation.” Journal of Business. Vol 75, no. 3, 2000.
 (8) Jehoshua Eliashberg, Anita Elberse and Mark Leenders. “The
Motion Picture Industry: Critical Issues in Practice, Current Research
& New Research Directions.” 2005.