Let’s start with something simple: anyone who claims to have reliable knowledge about the profitability of a specific film, without having detailed access to its production budgets, financing documents and key talent agreements (virtually all confidential), misleads themselves and their readers.
The financing and accounting of films is probably more complicated now than it’s ever been, because the entities we call “studios” these days rarely finance their releases by themselves–they’re marketing and distribution organizations that are also in the business of renting out production space and equipment, often outsourcing at least some of their creative development (to independent producers) and financing (to banks and investment groups). Each project’s costs are the product of specifically negotiated project-by-project agreements, and often the numbers that are leaked or announced publicly are incomplete and/or deliberately inaccurate, either inflating figures to make a movie sound like more of an Event or reducing them to make the film seem like a wise investment. (Sometimes doing one and then the other for the same film.)
That having been disclaimed, it’s certainly possible to make educated guesses about profitability, and even if such guesses are (often) less educated than we think, they’re still fun. We here at SHOWBUZZDAILY are as prone to leaping into that deep water as anyone else, and may hazard some guesstimates in the next week or so, as what Hollywood considers its “summer,” a period that runs from the first weekend in May until mid-August, approaches its end. This year Hollywood Summer basically concludes on August 10, with the openings of The Bourne Legacy, Hope Springs and The Campaign (movies will continue to open through Labor Day, of course, most notably The Expendables 2, but they’re of a lower order of magnitude), and before we reach Hollywood Fall, when odd concepts like “quality,” “prestige” and “awards” come into play, it seems a good time to take a look at some of the factors that go into determining movie profitability.
Today we’ll look at what a “budget” is, and why adding up the costs of a movie’s salaries, props, costumes and equipment alone won’t provide the full answer. Tomorrow we’ll probe some of the extra behind-the-scenes expenses that stand between any movie and profitability.
How much does a movie cost? You’d think that would be the easy part of any analysis, but when it comes to the film business, nothing is straightforward. Here are some factors that make the expense of physically producing a film (often called the “negative cost”) complicated:
Overhead: Once upon a time, in the bygone days of Old Hollywood, movies were produced almost exclusively in the soundstages and on the backlots of the major studios. The movies that were shot there used all the studio’s facilities, from office space to costumes to phone and courier services. Rather than attempt an itemized charge for each service used, the studio tacked a flat “overhead” charge onto each budget. This was a racket in several ways: first, the amount charged didn’t necessarily have anything to do with the actual costs incurred by a specific production and instead became a profit center for the studio; and second, the charge was often calculated as a percentage of the movie’s base budget, when again, the fact that one particular movie cost more than another in total didn’t mean it was utilizing more studio resources and deserved to be charged additional overhead. But whatever. In the 21st century, many if not most films make limited use of soundstages and backlots, but most are still hit with an overhead charge.
Interest: Whatever the physical costs of production may be, whoever is putting up that budget treats the amount as a loan to the film, and before profits are even reached, that financier (these days, more often a multitude of them) charges interest on the initial investment, usually at prime + 1%.
Interest on Overhead, Overhead on Interest, and Interest on Interest: All of these concepts really exist, and all are specifically negotiated at the time a movie’s financing is being put together.
Tax Incentives: Put simply, quite a few countries and states want to encourage production in their locations (and the spending and employment that accompany a film shoot), so they provide studios and producers with financial goodies. This is why movies, and especially TV shows, are often shot in Canada, Eastern Europe, Australia, New Zealand, and states like Florida, Georgia and South Carolina–even if they’re set in places far from those locations. (A recent egregious example was the TV series version of The Firm, supposedly set in distinctive Washington DC, but filmed instead, except for a few scattered shots, in anonymous, unrecognizable locations.) The form, timing and requirements of incentives vary widely. Sometimes they’re tax rebates that can take months or longer to be processed, at other times they’re up-front reductions; sometimes they apply to all the spending done in the particular area, other times only to certain specific categories of expenditures; sometimes, but not always, they require a certain proportion of the production personnel or the key creative talent to be local. For big-budget movies, these incentives can save tens of millions of dollars, but the numbers that are thrown around to the press (“the budget was $150M, but really just $110M after incentives”) are often premature or flat-out wrong.
Marketing: By now, this is one of the better-known aspects of the profitability equation,but it bears repeating: for a typical big-studio wide release, the US marketing cost is around $50M, plus another $50M overseas. That means that while a fairly expensive $100M production has its cost doubled by marketing, for a “low-budget” $25M production, the “real” cost is quintupled. So truthfully, there isn’t any such thing as a “low-budget” big-studio wide release. Even a bargain basement production like Magic Mike, which was produced independently for around $7M and then sold to Warners, isn’t in profit yet with its current $108M theatrical gross (of which theater-owners keep 45%). And the marketing for big-ticket tentpole releases can easily rise to $150M+ worldwide.
Tomorrow: What–and who-else has to be paid before a movie can reach the promised land of “profit”?
About the Author
