Whenever I write about media companies such as Disney (NYSE: DIS) and News Corp. (NYSE: NWS), there is a theme that I constantly go back to in regard to the profitability potential of these businesses. It centers on compensation of celebrity talent. I just don't get why so much money is thrown toward stars in the form of cash up-front and back-end participation. As far as I am concerned, content is always a gamble; one never knows what's going to be a hit and what's going to flop around like a dying fish on the boardwalk. And stars just don't seem to guarantee that anything will be a hit; likewise, a project devoid of stars can do gangbuster business.

That's why I utterly loved an article I read from The Hollywood Reporter. It's a lengthy expose on the correlation between box-office success and star power. This is truly one of the best pieces I've perused on the subject, and I just have to highlight it to those interested in the economics of Hollywood. Boiling it down to the essentials, it basically states that the youthful audiences of today care more about concepts than they do about stars, and authors Steven Zeitchik and Borys Kit collect some statistics to back their thesis up. Further, they point out simple existential observations that CEO's of media companies must take to heart; for instance, Tom Hanks might bring in the crowds for Cast Away, but he did nothing for The Ladykillers. Then again, was Hanks the reason Cast Away was such a hit? Was it the screenplay? Was it the premise? Could you have put the guy who plays Jigsaw from the Saw series in the starring role and have had as much success with him as you did with Tom?

There's no way to answer this question, unless you can invent a device to see what an alternate reality would look like. However, it seems reasonable to me that CEOs of Sony (NYSE: SNE), Viacom (NYSE: VIA), and General Electric (NYSE: GE) -- remember, GE owns Universal -- must finally relate star power to shareholder value. If they can get their studio heads off the cracklike addiction of chasing big stars with large deals, then profits at the studio divisions will surely increase. Budgets and marketing expenses are going through the roof, and something has to give.

Continue reading Media companies need to rethink compensation of talent

Media companies need to rethink compensation of talent originally appeared on BloggingStocks on Sat, 17 May 2008 14:10:00 EST. Please see our terms for use of feeds.