[Podcast] How Do Movies Make Money?

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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.

Source: CinemaBlend

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.

• Disney
• Warner Bros.
• Fox
• Universal
• Sony
• Paramount

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.

Now ...

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.

Source: Wikipedia

Check out the video excerpt from "Artifact" below: