The following post by Edward Jay Epstein, author of the forthcoming The Hollywood Economist: The Hidden Financial Reality Behind the Movies (available from Melville House on February 23rd), is the third in a series leading up to publication of the book. You can read more of Epstein’s writings about Hollywood’s hidden economy at his website, here.You can also see Epstein in Oliver Stone’s forthcoming Wall Street 2: Money Never Sleeps wherein Epstein plays the head of the Fed …. Click here to read all posts in the series.

Up until 2008, the six major studios supplied their revenue numbers to their trade association, the MPAA. They included a detailed breakdown of the money they received from all sources—-movie theaters, DVDs, television licensing, and pay television, and from every market in the world. The MPAA aggregated the data and then published it its privately-circulated “All Media Revenue Reports.” Although secret from the public, these reports were provided to the top executives at the six major studios, who used them to gauge how their studio was performing vis-a-vis the other studios. Unlike retail sales reports, which at best are measures how much consumers spent buying tickets and DVDs, the MPAA numbers report much the studios actually received in revenue.

The story these numbers tell is how Hollywood’s business moved from movie theaters to homes. As this table shows, ticket sales from theaters provided 100 percent of the studios’ revenues in 1948. In 2007, the last full year reported by the studios, theaters accounted for less than 21 percent of the studios’ revenue and home entertainment—-a category that did not exist in 1948—-accounted for 79 percent of their revenues. What made home entertainment even more important to their earnings is the profits margins are much higher on DVDs and television licensing than theaters. The couch potato is now king.

Edward Jay Epstein studied government at Cornell and Harvard, and received his Ph.D from Harvard in 1973. His master’s thesis on the search for political truth (Inquest: The Warren Commission and the Establishment of Truth) and his doctoral dissertation (News From Nowhere) were both published as books. He is also the author of The Big Picture: Money and Power in Hollywood.