Friday, June 3, 2011

Deflation at the Box Office

One of the areas of the economy where "The Great Deflation" is getting the upper hand is the movie industry. A robust movie industry depends on robust economic growth. Domestically, annual revenue has grown from $2.5 billion in 1980 to $10.5 billion in 2010. During that time, we were mostly in a bull market as Cycle wave V unfolded starting in 1974 and ending in 2000. Even after the bull market ended in 2000, optimism continued to dominate, allowing revenue to rise for a while longer in nominal terms.

From 1975, when the first blockbuster movie, Jaws, was released in theaters, opening weekend records would regularly fall every couple of years. This trend continued all the way to 2008 when The Dark Knight claimed the opening weekend record with $158 million.

Here is a chart showing the highest opening weekend by year from 1975, plus a forecast all the way to 2022.

As we can see, there was a relentless uptrend in opening weekends from 1975 all the way to the top in 2008. The uptrend appears to exhibit a wave structure as well with Primary wave [4] down corresponding with a Primary degree bear market in the S&P 500 and the Value Line Index, which also unfolded during that time. From the low point in 1990, the advance unfolded in five waves all the way to the top in 2008. Within the final advance, Primary wave [5] up, the peak of Intermediate wave (1) corresponds to the opening weekend record of $72 million set by The Lost World:Jurassic Park in 1997, the peak of Intermediate wave (3) corresponds to the opening weekend record of $114 million set by Spider-Man in 2002, and the peak of Intermediate wave (5) correspond to the opening weekend record of $158 million set by The Dark Knight in 2008.

Notice that the trend channels associated with Primary wave [5] up broke down in 2010, which indicates a trend change at Grand Supercycle degree as far as opening weekends for movies is concerned.

Another indication of "The Great Deflation" getting the upper hand in the movie industry is inflation adjusted revenue over time. Here is a chart showing inflation adjusted revenue from 1980 to 2010.

Notice that inflation adjusted revenue peaked in 2002, with a steady decline after the peak. Another interesting observation is that the peak in inflation adjusted revenue occurred at the same time that Spider-Man claimed the opening weekend record, marking the peak of Intermediate wave (3).

The correlation is not coincidental. This is where "wave personality" comes into play. Third waves are characterized with strong breadth and strong momentum. Fifth waves are less dynamic than third waves and are characterized with decreasing breadth and momentum over time. Inflation adjusted revenue is the "breadth indicator" in the movie industry.

This may be related to the strength of the economy. In 1998 - 2000, the economy was still growing, which allowed for a robust movie industry to thrive. In 2000 - 2002, "The Great Deflation" already started to unfold, but economic conditions were still favorable, allowing inflation adjusted revenue to continue a bit longer until reaching a peak in 2002. That would be the first tipping point in which wage deflation started to have an effect on the ability of "average Joe and Jane" to go to the movies.

As wage deflation continued to unfold, more and more people were faced with having to make choices about which movies to see in the theater. When faced with such limitations, the tendency to gravitate towards the event movies such as Inception, Transformers 2, and Toy Story 3 in 2010. The effect is quite observable as event movies continue to make money, but smaller scale movies do worse than expected, which results in decreasing breadth. As wage deflation continued to unfold, people went to theaters less, which resulted in fewer movies making money. This created a divergence where inflation adjusted revenue steadily declined while opening weekend records continue to fall. This divergence culminated with The Dark Knight in 2008.

The period from 2003 - 2008 really does exhibit the characteristics of a wave 5 with a divergence between opening weekends and inflation adjusted revenue. This is not much different from the case where the stock market rises as the advance-decline line falls.

After 2008, the next phase started with "The Great Deflation" getting the upper hand on the movie industry. Even with the advent of 3D, the relentless influence of "The Great Deflation" proves too much to overcome. In late 2009, with Avatar having a legendary run for the record books, a 3D bubble was ignited as movie studios started to convert all of their movies into 3D. If there is an obvious example of herding, this would be it. The 3D bubble would last for several months, allowing Alice in Wonderland, How to Train Your Dragon, Clash of the Titans, and Shrek Forever After to make money. In June 2010, during Toy Story 3's run in theaters, the 3D bubble burst. In the months that followed, movies with 3D started to bomb with increasing frequency, with Mars Needs Moms being the most dramatic case. As of now, it seems that we are approaching a "point of recognition" as movie pundits are starting to realize that 3D is falling out of favor.

The movie industry has been sliding down the "Slope of Hope" since 2008. In 2010, there was speculation that Iron Man 2 would break the opening weekend record.  This year, expect a lot of speculation over the possibility of Harry Potter and the Deathly Hallows Part 2 possibly breaking the opening weekend record. Expect a lot of speculation in 2012 over the possibility of The Dark Knight Rises breaking the opening weekend record. Expect a lot of speculation in late 2013 over the possibility of The Hobbit: There and Back Again breaking the opening weekend record if the "point of recognition" isn't reached by then. This phase of the decline will continue until 2013 or 2014, when the center of Primary wave [3] down in the DJIA is reached. Until the "point of recognition" is reached, people will continue to speculate about the possibility of new opening weekend records.

With "The Great Deflation" having the upper hand in the movie industry, The Dark Knight represents the top of a Grand Supercycle degree bull market in the movie industry. No movie in the next 25 years will break the opening weekend record. With rising unemployment and wage deflation unfolding, fewer and fewer people will be able to go to the movies as "The Great Deflation" progresses. By 2022, opening weekends for event movies will fall to $4 million to $6 million.

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