The Power Law, Explained by a K-Pop Girl Group and a Bad Deal

What a Netflix megahit reveals about outliers, compounding, and the math behind billion-dollar outcomes.

Picture this: You’re running a movie studio in 2021. The pandemic has shuttered theaters worldwide. Your competitors are hemorrhaging cash. Netflix approaches with an offer: $120 million guaranteed for your animated K-pop film, no questions asked. You take the deal. Smart move, right?

Fast forward to 2025. That film, K-Pop Demon Hunters, has become Netflix’s most-watched movie ever with 236 million views, spawning a franchise potentially worth billions. Your take? A flat $20 million.

Welcome to the most expensive safety play in Hollywood history and a masterclass in misunderstanding power law economics.

The Orphan Studio’s Dilemma

Sony’s predicament was unique among Hollywood majors. While competitors like Disney, Warner Bros, and NBCUniversal poured billions into their own streaming platforms, Sony decided nearly two years ago that investing in premium studio content for theaters was the best path forward. They had no Disney+, no HBO Max, no Peacock. They were, essentially, the arms dealer in the streaming wars—selling bullets to everyone else’s army.

This “picks and shovels” strategy seemed brilliant. Sony brokered licensing deals bringing close to $3 billion in revenue, securing lucrative arrangements without launching another competitor in a crowded OTT market. They avoided the massive infrastructure costs and subscriber acquisition battles that were bleeding their competitors dry. Sony positioned itself as a content supplier rather than wading into the streaming platform wars, maintaining theatrical priorities while collecting checks from everyone else.

But here’s the catch with being an arms dealer: you never capture the territory.

We’ve Seen This Movie Before

Sony’s K-Pop Demon Hunters wasn’t even their first pandemic-era fumble. In January 2021, Netflix bought worldwide distribution rights to The Mitchells vs. the Machines for about $110 million. That film? It became Netflix’s most-viewed animated work with 53 million households watching in the first 28 days.

Two massive hits. Two capped upsides. Two lessons unlearned.

The tragedy isn’t that these sales were wrong; rather it’s that Sony fundamentally misunderstood the game they were playing. In heavy-tailed distributions, certainty is the most expensive insurance you’ll ever buy.

The Babe Ruth Effect: Why Swinging for the Fences Beats Playing It Safe

Here’s where the math gets delicious. De Vany and Walls studied over 2,000 motion pictures and discovered box-office revenues are asymptotically Pareto-distributed with infinite variance and the mean is dominated by rare blockbuster movies located in the far right tail. Translation? There is no typical movie because box-office revenue outcomes do not converge to an average: revenues diverge over all scales.

The venture world tells the same story, just with different actors. Horsley Bridge data spanning 7,000 investments from 1985-2014 showed that roughly 6% of investments representing 4.5% of dollars invested generated 60% of total returns. Meanwhile, Correlation Ventures’ analysis of 21,640 financings found that 65% failed to return 1x capital, while only 4% produced returns of 10x or more.

Both industries obey what statisticians call the “Babe Ruth effect” – you strike out more often, but when you connect, you send it to the moon.

How Stars Keep Their Upside

Here’s where Hollywood offers a masterclass that Silicon Valley should study. Watch how Keanu Reeves played the John Wick franchise: He earned just $1-2 million for the first John Wick film in 2014, but by Chapter 4, he commanded $15 million upfront. More importantly, Reeves got an ownership stake in John Wick: Chapter 2, meaning he was a profit participant in the film.

This escalating participation model is how Robert Downey Jr. reportedly earned $75 million from Avengers: Endgame alone through his roughly 8% backend deal. Tom Cruise? He’s been riding backend participation since the 1990s, turning Mission: Impossible into his personal ATM machine.

The genius? Studios tolerate this because continuity has value. They need the same star for the sequel. The franchise depends on it.

But venture? Once you sell, you’re out. There’s no “sequel participation” when WhatsApp becomes a $100 billion business inside Meta. No backend points when your acquirer uses your technology to build their next billion-dollar product line. Founders get one shot at the upside while stars get to renegotiate every sequel. You could pull off an Elon and renegotiate your compensation, but this is still limited to outliers!

Even worse for Sony: despite having the contractual right to produce any sequels or spinoffs, they’ll seemingly still only make $20 million per movie under Netflix’s deal structure. They became the only player in Hollywood who can’t renegotiate their own success.

The NVIDIA Lesson: Why Diamond Hands Win

Want to see what holding through uncertainty looks like? NVIDIA’s 10-year total return is 29,666.91%, while the 5-year return is 1,493.71%. Even more mind-bending: NVIDIA returned 36,708.1% between 2015 and 2025.

But here’s the kicker… remember 2018? NVIDIA’s stock peaked at $7.32 in October 2018 but closed the year at $3.38 after the crypto mining crash. How many “smart” investors took their profits at $7? How many more panic-sold at $3?

Those who held? They’re ordering yachts with yacht garages.

This reality has fundamentally reshaped venture strategy. The smartest funds now explicitly plan to hold winners for far more than 10 years, even as companies stay private longer. They’ve internalized what Sony learned painfully: eliminating all risk means eliminating all upside, paying hundreds of millions in opportunity cost for guaranteed returns.

The Mathematics of Regret

Let’s talk about why power laws are so counterintuitive and so cruel to those who misunderstand them.

In normal distributions, playing it safe works. If you’re managing a portfolio of municipal bonds, avoiding the bottom 20% of performers and capturing the middle 60% is a winning strategy. The average is your friend.

But in power law distributions? The top 10% of venture investments generate 60-80% of all returns globally. Miss the tail, miss everything. There is no middle to capture because a third of investments might fail entirely, another third might break even, and only the final third includes those one or two breakout successes driving all profits.

Sony’s dual disasters -- K-Pop Demon Hunters and The Mitchells vs. the Machines weren’t just bad deals. They were a fundamental misreading of the game’s rules. When Sony sold K-Pop Demon Hunters to Netflix to secure guaranteed revenue and protect itself from potential box office losses, they thought they were being prudent. They were actually lighting money on fire.

The Billion-Dollar Punchline

The cruelest irony? Sony knew the power law existed—they just thought they could opt out of it. The studio’s new licensing deals were meant to help find visibility in the streaming landscape while broadcasting to the creative community that they’re fighting for theatrical cinema. They wanted to have their cake (guaranteed profits) and eat it too (maintain theatrical credibility).

Instead, they got neither. K-Pop Demon Hunters proved streaming could create cultural phenomena. And their “guaranteed” profits? A rounding error compared to what they left on the table.

The lesson screams from every data point: In power law businesses, the gravest mistake isn’t taking losses on failures—it’s capping your upside on winners. When one investment can deliver 100x, 1,000x, or even 10,000x returns, nine companies returning 5x won’t hold a candle to that single massive winner.

Whether you’re a studio executive watching Netflix count your billions, a founder considering that “safe” acquisition offer, or an investor thinking about taking profits: remember Sony’s $20 million lesson. In heavy-tailed distributions, playing it safe isn’t safe at all. It’s the most dangerous game you can play.

Sometimes the biggest risk is not taking enough risk. And sometimes, a guaranteed $20 million is the most expensive money you’ll ever make.