Why are all the visual special effects studios going bust?

Why Google can't help making money

However, we can go further than this. Money sticks to whoever it is that controls the rare resource in any production chain. Thus Google again: there's plenty of people willing to see ads, plenty willing to sell them, only a few who can intermediate between the two. Guess who gets all the money?

Or football (soccer to those across the pond). There's thousands of football clubs with the right to play in the Premier League if they can only fight their way there. The talent necessary to be able to play well in the Premier League is the rare thing, as we can see from some of the clodhoppers that currently do.

Thus the money flows to the players – who are hugely rewarded – and not to the clubs, almost all of which lose money. The effect of the latest Sky/BT rights auction is going to be to raise Wayne Rooney's wages and little else.

American sports are a cartel for the same reason. Talent is just as scarce, but there's no promotion up and down, so a place in that top league (MLB, NFL, NBA) is also a scarce and limited good and thus the teams can indeed make money.

Which brings us back to the movie business, of which William Goldman once said “nobody knows anything” (this may well be one of those quotes which has been edited over the years to sparkle, but the essence is there). No-one really does know where the really scarce item in the movie production chain is.

There are only so many who can carry a movie with star power. There are only so many who can organise the production chain (the studios). There are only so many who can actually launch on 3,000 screens at the same time, or launch globally and so on.

But the fact that we repeatedly have hits coming out of left field and repeatedly have hotly awaited debuts that tank, shows that no-one really does know nuttin'. Enough to move the odds a little, perhaps, but not enough for there to be sure-fire things either way, either hits or misses.

What we do know is that the ability to do those VFX bits, like animation, just isn't that scarce thing to which the profits will flow. An interesting example of which is Pixar, for when they were providing tools and animations, they really weren't going anywhere at all.

It was only by integrating everything into the production of the full movie that they prospered. Somewhere in that combination of everything is that scarce resource that gains the profits, not in the being able to animate an anglepoise lamp (however well).

At a deeper level, this also explains why competitive markets work so well. If all the stages in the production chain are in good supply, with no-one having a lock on any rare part of it, then the only rarity left is in our consumer desire to have that thing, good or service. Which means that the gains accrue to us, in what economists call the consumer surplus. ®