How Exactly Do Movies
Make Money?
By Dina Zipin | Updated May 22, 2017 — 1:36
PM EDT
From afar, the movie business might look pretty
glamorous. Celebrities and producers glide down red carpets, clutch their
Oscars and vacation in St. Bart’s… just because they can. While there's a lot
of money to be made in the film industry, the economics of movie making are far
from simple.
Something you’ll
likely hear if you walk through the halls of any movie studio is, “nobody knows
anything.” And it’s true. The public can be fickle, the industry is in flux,
and any movie is an extremely risky investment, even a film starring big names.
According to the Motion Picture Association of America’s (MPAA) Theatrical Market Statistics for
2016, U.S. and Canadian box office was $11.4 billion a 2%
improvement from 2015. Globally the box office for films hit $38.6 billion in
2016.
It’s nowhere as
straightforward as the early days of cinema when a movie would come out in
theaters, make the vast majority of its revenues via ticket sales, and then
essentially disappear. Major studios and indie filmmakers alike now spend much
of their days looking for new sources of revenue,
because ticket sales are no longer the be-all and end-all for films.
First, the Budgets
In general, major
studios don’t disclose the full budgets for their films (production,
development, and marketing/advertising). This is in part because it costs far
more to make and market a film than it seems. For example, the production
budget for Marvel’s "The Avengers" is recorded as $220 million, but
if you factor in marketing and advertising costs, that number spikes. (For
more, read: What Drives
Summer Blockbuster Movie Profits?)
Indeed, for many
films, the Print & Advertising (P&A) costs alone can be extremely high.
A $15 million film (which, funnily enough, is considered a small budget film in
Hollywood) might have a promotional budget that's higher than its
production budget. This is because films that don’t have a built-in audience
(like those based on bestselling books like “The Hunger Games” or even “50 Shades of Grey”)
need to get people into the theater. Romantic comedies or some children's films
need to promote themselves via billboards, TV commercials and subway ads, and
those costs add up quickly. For a film budgeted between $40 and $75 million,
its P&A budget might be $20 million.
For any type of film,
whether a blockbuster or an indie production, things like tax incentives and
revenues from product placements can help pay down the
budget. If they're given an incentive to shoot a film in Canada or Louisiana or
Georgia, producers will usually hustle to do so.
Going back to the
“nobody knows anything” mantra, occasionally there are surprise hits like the
indie “Little Miss Sunshine,” which is a Cinderella story when it comes
to film finance. Its budget was around $8
million, it sold to distributor Fox Searchlight for $10.5 million at the
Sundance Film Festival, and it made $59.89 million in U.S. theaters, which is
almost unheard-of for an indie. By contrast, you have the Walt Disney Co. (DIS
) movie "John
Carter," which had an estimated budget of $250 million, but only made $73
million at the U.S. box office.
So there's no sure
path for a film to turn a profit since factors like brand awareness,
P&A budgets and the desires of a fickle public come into play. Still, there
are a few tried and true ways that films can attempt to make money.
Ticket Prices
Theater attendance has
been falling, which makes it even harder for studios and distributors to profit
from films. Usually, a portion of theater ticket sales goes to theater owners, with
the studio and/or distributor getting the remaining percentage. Traditionally,
during the opening weekend of a film, the larger chunk went to the studio,
while as the weeks went on, the exhibitor's percentage rose. So a studio might
make 50% of a film's ticket sales in the U.S. and even less than that on
overseas ticket sales.
The percentage of
revenues an exhibitor gets depends on the contract for each film. Many
contracts are intended to help a theater hedge against
films that flop at the box office by giving theaters a larger cut of ticket
sales for such films, so a deal may have the studio getting a smaller
percentage of a poorly-performing film and a larger percentage of a hit film's
take. (You can see the securities filings for large theater chains to see how
much of their ticket revenue goes back to the studios.) Studios and
distributors generally make more from domestic revenue than from overseas sales
because they get a larger percentage. Still, overseas ticket sales are
incredibly important, especially today. It's why you’re seeing more sci-fi,
action, and fantasy films, and why superhero movies are such a phenomenon:
They’re easy to understand, whether you’re in Malaysia or Montana. It’s much
harder for an indie comedy to translate.
Merchandising
It all started with “Star Wars.” Since the first George
Lucas-helmed movie premiered back in 1977, the franchise has made over $12 billion in
revenue from toy licensing alone (for more, read: How Netflix Pays for Movie and TV Show Licensing).
In 2015, "Star Wars: The Force Awakens" brought in $700 million in
retail sales. And global merchandising sales rose by 4.2% to $251.7 billion in
2015 according to a 2016 study by the International Licensing Industry
Merchandisers' Association.
This strategy
obviously doesn't work for every film (action figures for a comedy like Amy
Schumer’s “Trainwreck” probably wouldn’t bring in billions), but for big-budget
films that appeal to kids and Comic-Con junkies alike, merchandising is a cash
cow. See Disney’s “Toy Story” franchise, which has brought in about
$2.4 billion in retail sales.
Foreign Sales
When a producer
cobbles together the budget for an independent film modestly budgeted at,
say, $25 million, selling the distribution rights in foreign territories is
crucial to cover the film’s budget and, hopefully, bring in revenue.
Independent filmmakers can actually make money if they have a great foreign
sales agent who can sell their film in key overseas markets.
Oftentimes, producers
will make their “wish list” when casting their film, and the list will
typically be full of well-known names that “travel” overseas. If you have Tom
Cruise or Jennifer Lawrence as your star, you’re much more likely to sell the
rights to China and France. This isn’t a guarantee that your film will make
millions (or billions) but it's about as safe a bet as you can get in this
business.
DVD/TV/Streaming Rights/VOD
Once upon a time, it
was all about DVD sales. Now, it’s far more about Video On Demand (VOD),
television rights and streaming rights. (For more, read: The Future of the Television Industry.)
For some producers,
selling pay-TV and international rights is a big
source of profit because the producer doesn’t have to pay for marketing and
P&A costs. Films have to leave the theater at some point, but they can
remain evergreen on TV. How many times have you
flipped through channels and come across “The Notebook” or “The Devil Wears
Prada” yet again? There's also money to be made 32,000 feet in the air: airlines pay hefty sums for in-flight
entertainment.
As for VOD, revenue
from these deals should add hundreds of millions to a studio's bottom line. For indie films, there are
several VOD release strategies: day-and-date (movies released simultaneously in
theaters and VOD), day-before-date (VOD before theatrical) and VOD-only. So
movies that don’t have the special effects and big-name stars to lure people to
the theater often profit from this model.
And while the DVD
market may have slowed dramatically, it’s not a lost cause—at least, for some
films. “The Hunger Games” sold 3.8 million copies in its first weekend on
DVD/Blu-Ray, so if a property is branded or has a huge built-in audience,
DVD/Blu-Ray sales still could be robust.
The Bottom Line
As the saying goes,
nobody knows anything in Hollywood. The film industry is in flux, and ticket
sales alone don't drive revenue. There’s merchandising, VOD sales, foreign
sales and a plethora of other distribution channels that can help
filmmakers, producers, and studios turn a profit. So who knows, the little
indie that you invest in could just be the next “Little Miss Sunshine.” Or not.
In Hollywood, there are no guarantees.
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