Forecasting Hollywood movie box office revenue with HSX trading history

Want to know what movies are going to make it or flank it at the box office? Is it going to be a hit, a fast decaying, or a sleeper movie – that is in terms of its box office revenue trend? Natasha Foutz, Wolfgang Jank and Gareth James have attempted to predict the revenue trend of Hollywood movies with 3 principle components (average/longetivty, fast decay, and sleeper effect) in conjunction with Hollywood Stock Exchange (HSX) trading histories. HSX is a virtual stock market of music, TV shows, and movies. The authors claim a high degree of forecasting accuracy using functional shape analysis and regression on the 3 principle components and early HSX trading histories for the individual 10 weeks box office opening revenue of Hollywood movies. If you are really good at this game, you may end up selling your billion-dollar HSX portfolio on ebay, who knows?

Hollywood movies have widely varying box office revenues, some much more profitable than others. Therefore, it is crucial to forecast movie demand decay patterns for movie financing, contracting, general planning purposes, etc. The forecast needs to be made long before the movie release, since planning happens much more in advance, sometimes years earlier. Most movies gain the majority of its revenue in the first 10 weeks of opening, so the model looks at the forecasting of demand decay patterns of the first 10 weeks of Hollywood movies. The use of HSX data is proven to provide more information for the revenue forecasting purposes. Virtual stock markets (VSM), the show of wisdom of crowds, are of no stranger to forecasting complicated issues ranging from election results, NBA championship winnings, to Al Gore’s 2007 Noble Prize winning. The results produced by VSM are very impressive and accurate. For example, the political VSM was said to be 75% more accurate than political polls.

Foutz, Jank and James identified 3 principle components to be used alongside the trading history of HSX: average/longevity, fast decay, and sleeper. Longevity captures the average box revenue over the lifetime of the movie where the trend is relatively smooth (a linear decreasing trend of a log transformation of the revenue figures), such as Batman Begins. Fast decay captures the movies that have great openings but quickly die out, such as Anchorman. Sleeper describes the movies that have a slow start, but with word of mouth (for example), it would pick up momentum in later weeks of the opening, such as Monster or My Big Fat Greek Wedding.

The authors tested out 5 different models of weekly revenue regression over a period of 10 weeks. Each model uses a combination (or the lack of) the three principle components and the trading histories from HSX. The results indicate that movies with higher level of trading activities on HSX at the very early stage (weeks in advance) would more likely have a higher weekend box office opening revenue. How could this finding be used for more meaningful purposes than betting with your friends? For example, theatre owners could better allocate screens and profit sharing, while movie producers could design different contracts for the slow burners than the fast ones. If you are a movie buff, maybe it’s time to get on the HSX for some trading fun instead of crying over the financial stock markets.

Credits: The talk was given at the INFORMS (Institute For Operations Research and Management Science) 2008 conference in Washington DC, in session SA68, by Natasha Z Foutz, Assistant Professor of Marketing, from the McIntire School of Commerce, University of Virginia. The title of the talk was "Forecasting Movie Demand Decay Via Functional Models of Prediction Markets".