Movieball

Part III: Costs and Benefits
Is the Film a Winner?

By Walid Habboub

May 29, 2004

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To have a true understanding of a film’s profitability, we must examine every detail involved in how much money it makes and how much money was spent to make it. These details will never be released to the public and any individual movie’s true financial performance will only be known by a select few people who make it their job to know this information. What we can do for our part is use what we know to form a general understanding of where the money floats and thereby assess what is the quickest and most efficient way of analyzing success.

It is difficult to generalize all films’ performances by setting a specific formula to gauge when a movie becomes profitable, never mind gauging if it’s successful. Normal business standards tell us that you have to have a 40% return on investment to be considered truly successful. With Hollywood movies, we cannot make a determination if this level of success has been achieved simply because the true cost of a film is never known. In its place, what we have to do is assign a standard that gives us an understanding of the relative success of a film. We here at BOP have used the domestic box office versus production budget formula to make such assessments for quite a while now. We do so on the understanding that this is a reflection of success relative to performances of other films as well as the understanding that it is not merely enough for a film to make its production budget back; it has to bring quite a bit more than that.

We know that a movie generally receives less than 80% of every dollar it makes at the box office. A film can actually make as little as 65% depending on the agreement with the exhibitors and the box office pattern of the film. In the end, our perception of how much money a movie brings in is almost always too high. There are other factors that go into the overall bottom line of a film, factors that greatly impact a film’s profitability.

When a major movie star signs on to a project, they often receive “backend” deals that guarantee them a percentage of film’s box office take. The agreements can range from being negligible to being incredibly high, as much as 20% of domestic box office, which was the reported cut Keanu Reeves received for filming The Matrix sequels. What compounds the value of these deals is that these types of payouts are not only made to actors but are also made to producers, directors or even writers who are involved with the film. Even in situations where a studio buys the feature-length film rights to a property, they will sometimes share revenues with the holders of the property. All in all, this is revenue based on a film’s box office performance specifically, so if a film has a 20% commitment off the backend to pay off, we can essentially reduce its box office tally by 20%.

The backend deals are significant enough that they can affect how movies are cast and how budgets are decided. Our insider tells us “…some stars and directors will forgo the upfront salary for a bigger piece of the profits. Hanks, Willis and Cruise will work for next to nothing to keep budgets low. The strategic planners also will help the studio heads with casting as it relates to profitability…(meaning) if a big cheese has the choice between a $150 million movie with Will Smith and 20% of the gross 'out' and a $110 million movie with 10% and a lesser star, the accountants help figure out if it is worth it...” Gross “out” refers to the cut that certain talents receive on the backend. As the term suggests, the payment is virtually seen as a removal from the gross revenue a film makes. Clearly, these numbers are significant to the studio's bottom line but are almost never considered when we generally talk about a film’s box office take.

The reason these facts - and most of the points discussed in chapter one - become important is because these are the things that have not been commonly known and used in box office analysis. The fact is that the most common way box office has been measured is by comparing a film’s total box office, rental revenue and DVD sales against a film’s production budget. Factors such as backend deals, marketing costs, printing costs, exhibitor costs and every other point covered in chapter one are almost never considered, which is a huge mistake if one needs to make a detailed and accurate assessment of how well a film is doing. Because of all these factors, and due to the diversity of financial profiles across Hollywood films, there really is no surefire way to say that a film was profitable or not. So in absence of concrete evidence, we turn to logical and educated assertions.

Accurately assessing a film’s profitability is literally a full-time job; every studio employs strategic planners who forecast the cost of making a film and help insure that the studio does not lose money on the various projects that it has. Knowing that, the casual observer can choose to make certain assumptions about the unknown factors and try to emulate the professionals, or we can take a step back and understand what truly matters in how well a movie performs.

Domestic box office remains the most important aspect of a film’s revenue generation. A studio’s strategic planners forecast the total revenue of a film through its domestic take. Our insider reveals that “…the studio strategic planners who do the P&Ls on each feature produced assume that each movie's total revenue will be 1.5 times the domestic BO. That's the number they use themselves to forecast lifetime revenue.” So domestic revenue is still the critical factor in a film’s overall performance and should be the number one consideration into how well it’s doing. It is the benchmark that is consistent across all films that Hollywood makes. Not every film can rely on foreign box office and not every film lends itself well to DVD; however, every film’s performance is forecasted with domestic box office in mind. Similarly, not every film has a huge marketing campaign and not every film has big backend deals that weigh down its overall profitability, but every film has a production budget that is known - though not well communicated - and tangible.

It is this commonality between production budget and domestic box office that makes them a perfect fit for measuring the relative success of a film’s performance. There is a certain consistency with both and both are always reflective of how much effort a studio has put into a film - also how much faith it has in it – and how receptive the biggest moviegoing market is to it. A production budget is an upfront cost that is carefully decided upon and gives us a hint of the expectations surrounding a film. When the budget is set, the studio already knows how much intends to spend on selling the film, so while we might never know what the value of those expenditures will be, we can have an idea of what they are relative to other similar films. At the same time, domestic box office is a reflection of how a film will do in its entire lifespan across all revenue streams. Comparing the two against each other is only natural.

This leads us to conclude that comparing a film’s production budget versus its domestic take is an accurate way of measuring a film’s relative success. If a film does not at the very least recoup its production budget, it almost is certainly a disappointment to the studio releasing it. With all the costs associated in developing, selling and distributing a film, it is critical for films to exceed their production budget with the domestic gross alone. This can be said with the caveat that very few films actually lose money. It’s an old Hollywood adage that every film, given enough time, breaks even. Ultimately, making movies is still a business, and if a business is only turning a small profit on an investment, and a long-term investment at that, then the investment can be considered detrimental to the overall goal of the business.

The lesson here is to keep it simple. Remember that it is important for all studios, just like all businesses, to put out a positive message about earnings. There are a lot of positive messages out there with regards to how well films perform but there is very little reported on how much they truly cost. In the end, we know that a film costs more than what we’re told it does and makes less than what we usually think it has. What we should do when trying to understand how big the gap is between revenue and cost is look at the information that is the foundation of what we’re looking for and make a determination from there.