129: How Do Movies Make Money?
[Podcast] How Do Movies Make Money?
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Subscribe: RSSIn this episode, we go down the rabbit hole of how movies make money and how it affects the independent filmmaker.
Movie money for you ...
Before we plunge into the depths of how movies make money, let's explore how the artists, craftsmen, and executives make their money.
The Stars ...
Hollywood movie stars make their money from big payouts and for a select few they'll get to share in the profits. And that's it! If the movie fails to perform at the box office, it doesn't impact the stars as they still get paid their fee and move onto the next project.
Out of curiosity, how much did the cast of Avengers: Age of Ultron make?
- Robert Downey Jr. - $40 million
- Scarlett Johansson - $20 million
- Chris Evans - $6.9 million
- Jeremy Renner - $6.1 million
- Chris Hemsworth - $5.4 million
- Mark Ruffalo - $2.8 million
For supporting roles, the fees drop dramatically. For instance, in the film "The Wolf of Wall Street", Leonardo DiCaprio earned a $25M fee, while his co-star, Jonah Hill only made $60,000.
For Iron Man 2, Mickey Rourke made $250,000.
The Directors, Writers and Producers ...
The movie industry operates on the star system, so only a handful of movie stars actually command multi-million deals.
As for the writers, directors, and producers their fees vary and are nowhere near the movie star level, Unless you're Christopher Nolan, who can command a $20M payout. For the mere mortals, here's a general breakdown:
- Writers earn fees between: $100,000 - $1M
- Directors earn fees between: $250,000 - $10M
- Producers earn fees between: $250,000 - $2M
Agents, Executives, and Below-the-Line ...
For everyone else, fees and salaries vary. Most Below-the-Line (BTL) craftsmen based their fee off of union rates.
To get a thorough breakdown of salaries and fees, take a look at the 2014 article from the Hollywood Reporter.
Source: Hollywood Reporter
Movie money for indie filmmakers ...
We've seen how the players in Hollywood make their money, but what about the independents?
When the budgets for über indie films are anywhere between $10,000 - $50,000, there isn't much in the way of fees left over for filmmakers.
So, why are so many indie filmmakers still making films when they can't pay themselves a reasonable fee?
- Experience. Many aspiring filmmakers need the experience.
- Credits. Many aspiring filmmakers are looking for IMDB credits.
- Profit Sharing. In some cases, the aspiring filmmakers really believe in the film they are making and hope to participate in any profits.
How do Hollywood movies make money ...
Currently there are 6 major movie studios.
- Warner Bros.
On a smaller level, Lionsgate might be considered a 7th studio, but you'll see why the Big 6 have the largest market share.
One of the important factors that all these Hollywood studios have in common is they are part of larger corporate conglomerates and are publicly traded companies.
CASH FLOW ...
The most important aspect that allows movie studios to fund such high budgeted films, is that they are publicly traded. This means cash flow.
When Steve Jobs purchased Pixar from George Lucas in 1986, he had to float cash for the company as they pivoted from selling software to producing commercials, to eventually making the first Computer Generated Animated feature film with, Toy Story.
Predicting that Toy Story would be a huge success, Steve Jobs made the move to turn Pixar from a production company into a publicly traded studio.
Why is this important?
In the book, "Creativity, Inc." written by Pixar's President, Ed Catmull, he explains the inherent business model of Pixar and how Steve Jobs changed that ...
In 1995, when Steve Jobs was trying to convince us that we should go public, one of his key arguments was that we would eventually make a film that failed at the box office, and we needed to be prepared, financially, for that day. Going public would give us the capital to fund our own projects and, thus, to have more say about where we were headed, but it would also give us a buffer that could sustain us through failure. Steve’s feeling was that Pixar’s survival could not depend solely on the performance of each and every movie.
The underlying logic of his reasoning shook me: We were going to screw up, it was inevitable.
Hollywood Accounting ...
The major studios leverage the value of their intellectual property (IP) library to raise capital. The studios have an incentive to please their shareholders.
Keep the price of the stock up and no one will care what type of films a studio makes.
What about the myth that no Hollywood movie makes money? How does this happen? Many refer to this as Hollywood Accounting.
We've explored how movie stars, writers, directors, producers, executives and all the artisans part of the BTL make their money—via the film's budget.
The movie studios approve and allocate the funds to make the film, but the creation of the film is only part of the equation for the studios.
Prints & Advertising (P&A) ...
Traditionally P&A referred to the cost of film prints that would be shipped out to all the theaters across the world. Now, these costs have been reduced since digital files have been sent to the theaters instead.
Of course, advertisement would refer to the marketing costs it takes to get the word out about the film coming out.
In an article with the screenwriter of "Logan", Scott Frank, shared this perspective with Business Insider:
The economics are different, so the process is different,” Frank said. “Movies now cost a huge amount of money to market … You may make a movie for $10 million, but if it’s a movie the studio cares about, they’re going to spend over $30 million to market it. So the marketing costs are huge. Marketing has become sort of the church for the business.
Source: Business Insider
How movies don't make money ...
In 2011, the Atlantic pulished an article entitled, "How Hollywood Accounting Can Make a $450 Million Movie 'Unprofitable'.
Here is an amazing glimpse into the dark side of the force that is Hollywood economics. The actor who played Darth Vader still has not received residuals from the 1983 film "Return of the Jedi" because the movie, which ranks 15th in U.S. box office history, still has no technical profits to distribute.
How can a movie that grossed $475 million on a $32 million budget not turn a profit? It comes down to Tinseltown accounting.
The article would go on to explain how all movies form their own corporation. You might have heard that every film needs to file itself as a Limited Liability Company (LLC). The costs that go into setting up production must funnel through this LLC.
In an interview with Edward Jay Epstein, author of "The Hollywood Economist" he clarifies what these LLC's do for the filmmakers and studios.
Each movie is set up as its own corporation. So what "lost money" on the picture is that corporation — Gone In 60 Seconds, Inc., or whatever it was called.
And Gone In 60 Seconds, Inc. pays all these fees to Disney and everyone else connected to the movie. And the fees, Epstein says, are really where the money's at.
Imagine you're running a lemonade stand with your buddy Steve. Your mom says you have to share half your profits with your sister. But you don't wanna! So you pretend your buddy Steve is actually a corporation -- call him Steve, Inc -- charging you rent for the stand, the spoon, etc. "Dang, mom, I don't have any profits, I had to pay it all to Steve, Inc!" you say when you come home. But the money isn't gone. It's as good as yours -- in your best friend's pocket.
The movie distribution deal ...
So far we've explored ...
- How executives and artists get paid through "fees" that are dictated by the deals they make and/or the budget of the film.
- How studios are able to finance such high priced films through large amounts of capital supplied by the publicly traded stocks
- And how the studios prevent paying out large profits to the people who made the film by paying themselves fees for prints & advertisements.
Most distribution deals are setup like this for the independent filmmaker as well. If you're lucky enough to even get a distribution deal for your film, the distributor may offer a minumum guarantee (MG) or an advance. This advance must be paid back with the profits the film makes when it's released to the market.
These kinds of deals are not unique to the film industry ... The music industry has their own set of problems that have an amazing semblance to the movie industry.
In the 2012 documentary, "Artifact" which follows the legal dispute between Jared Leto's rock band Thirty Seconds to Mars and record label EMI, which filed a $30 million breach of contract lawsuit against the band in 2008, after Thirty Seconds to Mars tried to exit its contract over royalty disputes.
Check out the video excerpt from "Artifact" below:
Movie Windowing ...
How do movies make money? They have to earn revenue somehow, correct?
For the studios, they will normally exploit the license of their movies through these distribution channels in the form of windowing.
• A studio will lease their movie to theater owners. This is the first stage of the window release.
• The lease could earn the theater owners 20%-25% for the first 4 weeks of the movie's release. This means the studios earn most of the revenue at the box office within the first few weeks of release.
• After a few weeks, the theater owners can start earning upwards to 80% revenue from the lease of the studio movie. Unfortunately, by this time most of the audience has stopped coming to the theater to see the movie. Unless, it's a phenomenon like "Titanic".
• The theater owners know very well what business they are in. In an article from The Movie Blog in 2007 about the economics of the movie theater, one theater owner stated, “We’re not in the movie business… we’re in the candy business”.
• Theater owners sell popcorn, that's how they make their money.
• Movie studios make a portion of their money back by releasing a film to theaters.
• After this window has closed, studios look to make money from the movie by leasing the film to both domestic and international TV markets.
• After the TV window has closed, a studio will release the film to the home video market via DVD's and Bluray discs.
• Right on the heels of the home video release, the studios will release the film onto Cable Video on Demand (VOD), Transactional VOD (iTunes), and Subscription VOD (Netflix, Amazon Prime).
• Each one of these window releases provides revenue opportunities for the studios to make their money back and any profits will be written off as marketing expenses.
The collapse of the windows ...
Unfortunately, not every film is getting a chance to benefit from the traditional windows like the studios do. For films on the independent side, producers are seeing these windowscollapsee.
In an article from Variety, famed indie movie producer, Jason Blum, stated:
“I think there are some movies that will stay in the traditional movies and most movies where the windowing will collapse,”
You may see this happening more and more through the release strategy like, Day and Date or premieres straight with VOD.
With a Day and Date release, a film will be in theaters at the same time being made available through VOD.
Roshan Dwivedi explained in an article for LinkedIn:
One of the benefits of a day and date release is that the publicity surrounding the theatrical release also benefits the VOD platforms.
What is the downside to this window collapse? When Radius-TWC released the 2014 sci-fi film, "Snowpiercer" via Day and Date, it was met with controversy.
The rule of thumb is that the major chains won’t play films with less than a three month window between theatrical and ancillary, but that many smaller circuits and independent theaters will play them.
Independent arthouse theater owners have a somewhat cynical view of the whole process:
"Basically, theatrical distribution (both Hollywood blockbusters and art house) are only vehicles to promote VOD/DVD sales and streaming. The blockbusters make back most of their budgets overseas and theatrical release is mandated in order to garner award nominations/wins, which again, serve mostly for DVD sales.
Here's the truth: Hollywood is not in the movie business — They are in the business of license exploitation.
When a studio owns the license to any IP, they can exploit it in a myriad of ways. George Lucas famously retained the rights to all ancillary and merchandising rights for Star Wars. Lucas built an empire off the sale of the toys.
Hollywood studios have caught on and find that they can make more money in the sale of merchandise.
What about the indie filmmaker?
In very rare cases, an independent filmmaker can earn millions from their work ... but not without help.
Case in point, listen in to my interview with Paranormal Activity creator, Oren Peli, as he shares with us a blow-by-blow account of what had to happen to make that film a global phenomenon.
Listen: Imagine Making $193M Off Your Micro-Budget Film
Many indie films still need the assistance from the studios to bring the film to a wider audience in order to earn greater revenue.
Indie Hollywood vs. Uber Indie Filmmakers
Any film made outside of the major studios is considered independent. As indie film executive and past podcast guest, Scott Kirkpatrick, has referred to this world as "Indie Hollywood".
Those producers and distribution companies that operate via the international film markets like Cannes and the American Film Market (AFM) have a different set of standards when it comes time to raising film funds and selling films.
These independent films don't have a publicly traded company behind them to finance the budget of the film. They must find the money through various outlets:
- Presales or pre-orders from foreign territories
- Producers will take a loan out against those presale promises to finance the budget
- Government tax rebate programs to get as much free money as possible
- Private equity (the rich dentist scenario)
These type of independent films make modest returns through a variation of distribution strategies that are based on the studio system. Some of these release strategies are:
- Pay a service company to release the film in New York and Los Angeles to qualify for the award season
- Use the limited theatrical release as a promotional tool for the DVD and VOD sales
- Since the film was presold to various foreign territories in order to take a loan out against the preorders, this will be part of the money earned
- Any additional TV, Cable VOD, and foreign territory deals that can be made after the film is made can be a source of additional revenue.
- Usually, these types of films are stepping stones for the producers and directors involved to get bigger budgets
- Bigger budgets mean higher fees that they can pay themselves
What about the über indie filmmaker? These are the new breed of filmmakers who aren't traveling to the film markets trying to make these larger deals. These are the filmmakers who have access to equipment to make a film right now. Where do these filmmakers make their money?
The neverending crowdfunding cycle ...
For most über independent filmmakers, they must utilize crowdfunding to raise the $2,000 - $15,000 to make their films.
If you look closely to these crowdfunding campaigns that reach these goals of $2,000 - $15,000 there are only about 25-65 backers.
This means, that if the film was sold online, only about 25-65 people would buy it.
The cycle works like this:
- The über indie filmmaker raises the $10,000 through crowdfunding to make their film
- There isn't enough room in the budget to pay anyone a living wage
- The film gets made and gets accepted to a handful of unknown film festivals
- No distribution offers are made
- The filmmakers send digital copies to their crowdfunding backers
- The filmmakers self-distribute the film on DVD and VOD platforms like VHX/Vimeo
- If the film is priced at $3/rental and $10/purchase price, then the average sale is $7
- In order to make the $10,000 back, the filmmakers need to make over 1,400 transactions
- But since the money was raised by crowdfunding, there isn't any obligation to pay anyone back as in the case like Indie Hollywood that have real investors they are beholden to
- When the film is unable to make over 1,400 transactions, the filmmakers return to the crowdfunding well to raise another $10,000 for the next project
- The cycle continues until there is a breakthrough
Another way to make money off your movie ...
The economics for the über indie filmmaker is different. New business models need to be explored in order to maximize the revenue for your films.
I encourage you to listen in on this podcast episode (scroll to the top), as well as, sign up for this FREE video series on "The New Adventures in Film Distribution".
- Part one of the video series explores the known world of film distribution
- Part two explores the realities of the VOD landscape
- Part three uncovers the true elixir for the über independent filmmaker
How does the über indie filmmaker sell their film for $100 instead of a $3/rental?
Click below to get the FREE video series!
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But now what?
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