Michael Lewis’s Moneyball has been the buzz subject in baseball since its release just over a year ago. The book, which tracked the Oakland Athletics and their maverick general manager Billy Beane over the course of the 2002 season, analyzed the inner workings of big-money baseball. Lewis showed how, with the mathematical nature of the game and the financial constraints of increasing player salaries, a modest organization succeeded and excelled in Major League Baseball even though they didn't have the vast financial resources of George Steinbrenner and the New York Yankees. The fallout from Lewis's effort is that other industries are re-evaluating their business practices by better understanding financial efficiency and correct investment and talent evaluation. This dovetails nicely into our work here at Box Office Prophets, as we are frequently asked detailed questions about movie receipts that are not so easily answered in a couple of sentences.
Part I: The Mystery of Feature Film Financing
By Walid Habboub
May 24, 2004
With interest in the financial performances of films growing, many questions arise with respect to how profitable a movie truly is. Sometimes it is easy to tell whether a production is financially successful; films such as The Passion of the Christ, My Big Fat Greek Wedding and the Star Wars and Harry Potter franchises are no-brain moneymakers. The key to profitability, though, is comparing the costs of making a movie with how much money it brings in. We here at BOP have often used a film’s production budget versus its domestic box office total as a measure of its relative success. Consequently, we have received a lot of questions specifically about streams of revenue outside of the domestic box office and how they translate into a film being a bigger success than we make it out to be. While it is true that other streams of revenue exist, and in the examples of the Potter and Jedi franchises they absolutely cannot be denied, there are still some very good reasons for us to use the sample point that we do. Simply stated, very few people will really know how much money a film makes or does not make; our best resource for understanding the relative success of a movie, where any compelling evidence as to its profitably is lacking, is to look at how well it did with respect to its production budget.
Chapter 1 -- The Costs of Making a Film
The first step in understanding the profitability of a film is understanding how much money goes into bringing that movie to your local theater. More importantly, we have to have an understanding of how much money is put into putting butts in the seats of that theater. The difference between the two points is that the latter is much more accurate to real life than the former. The fact is, movies are not just filmed and edited together and then left to release themselves. There is a lot of hard work and a lot of money put into selling the product and these are costs that are normally never discussed. Ultimately, these costs greatly affect the bottom line and are a huge part of any discussion on profitability and ROI (Return on Investment).
So where does the financing for a film come from? Simply put, the same people whose names and logos you see run before a movie begins are the people that finance the production. Well, almost all of them. Big Hollywood projects are financed by a studio that fronts the money that goes into producing the film. Often, more than one studio will take on the task of financing a movie, especially in situations where a production has an extraordinarily large budget. Sometimes studios will split the risk of financing a project with an agreement to split the revenues generated by the film. The rights on what region a movie will be distributed - domestic vs. international - are often a large part of how studios split revenues. Ultimately, it is these studios that put up the money to make a film and it is to them that a lot of the rewards, as well as the pitfalls, go.
Before a movie is even given a greenlight - a greenlight being the go-ahead to begin production - a studio will invest considerable amounts of money to secure a project to make into a feature film. A studio will pay for original scripts or original ideas; in the absence of original material, a studio has to invest large amounts of money in securing rights to a story, whether it is originally in the form of a book, a real-life story or a comic book character. Often, studios will even invest in potential books when they buy the rights for a yet-to-be published book by a well-known author. Including what could be an ungodly amount of script re-writes, a studio can spend as much as $10 million to bring a story to the point where it is ready to become a feature-length film. From there, the real work begins.
By the time a film is greenlighted by a studio, the studio will likely have worked with the production company in charge of making the movie and set out a production budget. This budget is how much the studio will be spending to make the film. The budget includes actors' salaries, crew salaries, shooting permits, set building, costumes, filming equipment, special effects, stunts, catering…basically anything you can think of that actually goes into putting together a film. It is this production budget that will often leak out and become pseudo-public knowledge. It is this number, a small part of a much larger number, that we use to get an understanding of how well a film does.
One Hollywood exec gives us an explanation of what a production budget looks like: “Production budgets are divided into two parts,” he reveals. “The above-the-line is all of the people who can get participations, i.e. producer, writer, rights, director and stars.” He adds, “The below-the-line is the wood for sets, crew, transportation, costumes, locations, travel, film, etc.” Finally, the exec reveals that “..overhead, the amount the studio charges for development, production and the assignment of studios' talent deals (i.e. Sony has an overall first-look deal with Sam Raimi and they charge the movie for this cost) are not included in production budgets. The overhead is included in P&Ls.” P&Ls stand for Profits and Loss, a traditional business breakdown of weighing overall costs and overall expenses. So essentially, the overhead costs, the start-up costs if you wish, are not seen in the production budget but are weighed against a film’s overall cost by the studios. So a studio spends a lot more money to make a film than what its production budget is. Not only is money spent to actually produce the specific project, but the cost of maintaining and developing talent to potentially associate with your film goes against a movie’s bottom line and affects its overall cost.
Beyond what a studio has to spend to actually make a movie, a studio will have to invest a considerable amount of money, and effort, to try and promote its film; after all, selling your movie is second only to making it. It is common to have movie trailers, an essential part of selling any film, contracted out to third-party companies who specialize in producing trailers at a considerable cost. Television ads also play a huge part in advertising a film and command big dollars, depending on when they air. For example, Sony paid over $2 million for a 60-second spot during the series finale of Friends to advertise Spider-Man 2. Throw in the costs of Internet marketing, print ad marketing, and other creative ways of marketing your film (see Sony’s MLB advertising fiasco that originally cost them more than $1.5 million) and you are looking at huge costs.
When we suggested to our exec that marketing budgets have reportedly climbed as high as $60 million, a number we thought was high, he corrected us by saying “…I'd (say) the number (is) more like $120 million. Sixty million is pretty average for a tentpole movie these days.” So, many of the large blockbuster films can see an average marketing budget of $60 million with the number being smaller and smaller for more limited releases.
Now that a studio has made the movie and convinced fans to see it, the costs of the film are completely gone, right? Wrong. Printing a film costs money. Producing a print costs over $4,000 per print. Of course, this is a print count and is very different from the screen count that is currently used to gauge how widely a film is distributed. Films with a 3,500 screen count will likely have print counts north of 4,500. Knowing that, we can see that a studio that wants to print 4,500 copies of its film will pay over $18 million to distribute it. A movie looking for a more conservative release of, say, 2,000 prints, still needs to spend at least $8 million just to make it available to its potential audience. Here, too, our exec gives us a hint that the costs can get even steeper still. “On Van Helsing, Universal spent $3 million extra just (to) rush prints…they had to print the movie at the last minute to widen the release.”
So these are simply the up-front and tangible costs of making a film. Clearly, they go far beyond the production budget, which becomes less and less important the bigger and bigger a film gets. The marketability of a film is always taken into account before it is approved for production, but our exec cautioned us to not be so cynical when we suggested that the selling of a movie is more important than the production itself. “I'd say that the marketing is never more important than the film. Ever. If everyone (at the studio) sees the movie and it's a stinker, then the focus shifts to marketing to save it, but that's way later.” So while it is not the number one priority for studios, marketing is still a critical piece of the puzzle and only becomes a priority when a film falls really low on the quality index. This is why Tom Cruise is paid $20 million per picture, because the studio can guarantee built-in marketability to their film without having to sacrifice quality. So it is not surprising that since marketability is high on the studios’ priority list, marketing costs will be a large part of the actual cost of making a film.
Ultimately, a film’s true cost is reflected in what needs to be spent on developing it, producing it, marketing it and distributing it. Only the cost of production, what we have been calling the production budget, factors into our everyday analysis of whether a film is doing well or not. With this in mind, in our next chapter we will look at the true total revenue brought in by a film. This will eventually lead us to a more accurate understanding of why production budget vs. domestic revenue is a good measurement of success.
--Jerry Simpson, Reagen Sulewski, David Mumpower and Matt Kinney contributed to this piece.
Read Movieball Part II: Selling a Film
Read Movieball Part III: Costs and Benefits - Is the Film a Winner?