From a distance, the movie industry may appear to be quite glamorous. Simply because they can, celebrities and producers stroll down red carpets, clutch their Oscars, and take vacations in St. Barts. The economics of producing movies are rather complex, despite the fact that there is a lot of money to be made in the film industry.
Anyone who enters a movie studio will probably hear someone say, “Nobody knows anything.” It is accurate. Both the public and the industry are undergoing change. Any movie, even one with well-known actors and actresses, is a very dangerous venture. The U.S. and Canadian box office totaled $2.2 billion in 2020, an 80% decrease from the prior year, according to the Motion Picture Association of America’s (MPAA) Theatrical Market Data Report. Due to the COVID-19 epidemic, the global box office for movies fell to a record low of $12 billion in 2020, a 72% decrease from 2019.
It’s far more complicated now than it used to be, when a movie would be released in theaters, earn the majority of its revenue from ticket sales, and then vanish. Because ticket sales are no longer the only source of income for movies, both major studios and independent filmmakers spend a large portion of their days seeking for new ones. Regrettably, the closure of the majority of cinemas in early 2020 makes finding alternative sources of revenue more crucial than ever.
KEY LESSONS
- The film industry offers many opportunities for financial gain, yet the economics of making movies are anything but straightforward.
- There is no guarantee that a movie will make money because of variables like brand awareness, P&A spending, and the whims of an unreliable audience.
- Because to the recent decline in theater attendance in the United States, it is now more crucial than ever to make money at overseas theaters.
- With the release of Star Wars, merchandise has been a significant source of income for family-friendly movies.
- Movie studios are relying more and more on television rights, video on demand, and streaming platforms for revenue.
Costs and Budgets for Film
Major studios typically don’t reveal the full budgets for their films (production, development, marketing, and advertising). This mystery exists in part because producing and marketing a movie is much more expensive than most people think. For instance, it is predicted that a summer blockbuster like Marvel’s “The Avengers” will cost $220 million to produce. The budget increases as marketing and advertising expenses are taken into account.
Print and advertising (P&A) expenses alone can be very expensive for many movies. A Hollywood small-budget movie with a $15 million budget might have a promotion budget that is more than its production budget. Many movies need a technique to draw audiences because they don’t already have one (like those based on popular books like “The Hunger Games” or even “50 Shades of Grey”). Romantic comedies and some children’s movies must promote themselves through TV and print advertisements, and those expenses soon mount. A movie with a $40–$75 million budget might have a P&A spend of more than $20 million.
Tax benefits and money from product placements can help pay the bills for any kind of movie, whether it’s a blockbuster or an independent effort. Producers would typically work hard to shoot a movie in Louisiana or Canada if they are offered a financial incentive to do so. So, there is no guarantee that a movie will make money because of variables like brand awareness, P&A spending, and the preferences of an unpredictable audience. There are, however, a few tried-and-true methods for making money from movies.
Ticket Sales Income
The recent decline in theater attendance has made it more difficult for studios and distributors to turn a profit on their movies. The studio and distributor often receive the remainder of the proceeds from the sale of theater tickets, with a percentage going to the theater owners. The opening weekend of a movie was traditionally when the company received more funding. The percentage for the theater operator increased as the weeks passed. A studio may earn roughly 60% of a movie’s ticket sales in the US and 20% to 40% of that from sales of tickets elsewhere.
The contract for each film determines what portion of sales an exhibitor receives. Numerous contracts are made to help a theater protect itself from movies that perform poorly at the box office. In exchange, the studio may receive a smaller percentage of the profits from a film that does poorly than a bigger percentage of the profits from a successful film. This is accomplished by providing theaters a larger cut of ticket sales for such movies. To find out how much of a large theater chain’s ticket sales are returned to the studios, check out their securities filings.
Because they receive a bigger percentage, studios and distributors typically make more money from local sales than from those made abroad. Foreign ticket sales increased in importance in the early 21st century notwithstanding this arrangement. This contributes to the rise of superhero, fantasy, adventure, and science fiction films. Translations are not necessary for action or special effects. Whether you’re in Malaysia or Montana, they’re simple to comprehend. Building a foreign audience for an independent comedy is substantially more difficult.
Marketing Dollars
With Star Wars, everything began. Since the start of the George Lucas science fiction story in 1977, the series has generated billions of dollars in sales just from toys, not to include license fees from other businesses. Retail sales for “Star Wars: The Force Awakens” totaled $700 million in 2015.
It is clear that not every movie will benefit from this tactic. Action figurines for romantic comedies are uncommon. But for big-budget movies that appeal to both children and Comic-Con fans, merchandise is a moneymaker. Disney’s “Toy Story” brand, for instance, has generated billions of dollars in retail sales. Yet, other analysts advise continuing to watch out for movie fatigue. YouTube and video games are two contemporary forms of entertainment that kids are becoming more interested in.
Overseas sales
Selling the distribution rights in international markets is essential when a producer scrapes together the funding for an independent film. It assists in meeting the film’s financial needs and, ideally, generates income. If they have a fantastic foreign sales agent who can promote their films in important foreign markets, independent filmmakers can really turn a profit.
Producers frequently compile a “wish list” of famous actors and actresses who “travel” overseas while casting a film. Finding a partner ready to purchase the rights in China and France is considerably more likely if your star is Tom Cruise or Jennifer Lawrence. This is about as safe a bet as you can make in this business, but it doesn’t guarantee that the movie will gross millions (or billions).
VOD, streaming, and television rights
It used to be solely about DVD sales. Video-on-demand (VOD), streaming, and broadcast rights are now much more important.
Because the producer avoids paying for marketing and P&A expenses, selling TV and overseas rights can be a significant source of income for some producers. Movies eventually have to leave the theater, while TV shows can go on forever. How many times have you changed the station just to see “The Shawshank Redemption” or “The Notebook” again?
Regarding VOD, the money made through these agreements ought to boost a studio’s bottom line by hundreds of millions. There are many VOD distribution tactics for independent films, including day-and-date (movies released simultaneously in theaters and on demand), day-and-date (VOD released before theatrical release), and VOD-only. This technique is frequently profitable for movies that lack the fancy effects and well-known actors needed to draw audiences to the theater.
Hollywood movies now make money from streaming video. After a few years, VOD revenues usually stop, but movie companies can continue to profit from older movies by licensing them to Netflix or Amazon Prime. The popularity of original content on streaming sites, however, also entices viewers away from classic films.
The conclusion
Nobody knows anything in Hollywood, as the adage goes. The movie business is under transition, and revenue isn’t just based on ticket sales. Filmmakers, producers, and studios can make money through merchandising, VOD, streaming video, overseas sales, and a variety of additional distribution channels. Who knows, the independent film you back might end up being the next “Little Miss Sunshine.” Or not. There are no guarantees in Hollywood.
