The Movie Industry Today

parts II and III abridged

The Players

• Production

– Studios contract with known producers

– Studios finance indie producers

• Distribution

– studios

• Exhibition

– Theaters

– Ancillary markets

Demand for Flickers

• Prices and elasticity

– Demand for hit movies is inelastic

– Demand for complementary goods is not • Babysitter

• Dinner

• Parking/transportation

• That really good buttered popcorn

– Demand for “regular” movies is elastic • Rush hour specials

• Student/senior discounts

Markets for Movies

• Historically theaters were the only market

for movies

• Technology → ancillary markets

• Culture + technology =

– Piracy

– Impatience – I don’t want to wait six months to

rent/stream anymore

Marketing

– Distributing

• Sequential patterns (decreasing order of

MR/time)

– Theater

– Streaming/video on demand

– DVD/Blu-ray

– Pay TV

– Network TV

• Decreasing theater release window over time

Release Patterns

Markets for Movies

• Ancillary markets

– Decreased average cost of distributing

• A DVD is cheaper to produce than a film print

• Electronic version is even cheaper

– Increased revenue streams

– Profits are not necessarily increased

• Costs have risen faster than revenues

• Who are customers in ancillary markets?

– Marginal viewers who would not go to theater anyway

– Viewers who substitute streaming/rental for trip to theater

Markets for Movies • Ancillary markets

– Change in source of revenue over time

1980 1990 2000 2014

Theatrical box office 52.4% 25.0 29.4 16

Domestic 29.6 15.9 15.2 5.6

Foreign 22.8 9.1 14.2 10.4

Home video 7.0 38.6 38.2 27

Pay cable 6.0 8.3 7.8 8

Network TV 10.8 0.8 1.5 46

(merch

and

digital

3%)

Syndication 3.8 4.6 3.9

Foreign TV 2.5 7.6 6.9

Made for TV films 17.5 15.2 12.3

Financing a film – Major Studio

• Bank loan on distribution contract

• Invest own capital

– Independent producer • Presales

• Deal with major studio

– Funding requires that movie be cast (function of agent) • Storyline

• Actors

• Directors

• Estimated budget

The Box Office Dollar

Gross

participants, 8.0%

Negative costs

and profits, 23.0%

Distribution fee,

24.0%

Theater take, 9.0%

Distribution

expenses, 6.0%

Publicity, 20.0%

Nut, 10.0%

This is what’s available to

finance the cost of the film

Distributor-exhibitor contracts

• exhibitor covers “nut” before splitting box

office

– rent, utilities, insurance

• sliding % of box office gross

• territorial exclusivity for theater

• advances and floors

– Advance: non-refundable down payment

– floor required by distributor to protect against

bomb.

Distributor-Exhibitor Relations

Example of distributor rental calculations

Week 1 Week 2

Box office gross (one week) $16,000 $6000

Less “nut” - 1500 -1500

Theater “net” revenue 14,500 4500

Min rental (70% box office gross) (11,200) - 4200

Max rental (90% of “net”) -13,050 (4050)

Theater operating revenue 1450 300

Distributor Costs

• distributor fee is cost to access distribution pipeline

• ≈ 1/2 of fee pays for distributor costs – overhead

– annual operating expenses

– other publicity and promotional expenses

• remaining 1/2 of fee is “profit”

– provides cash flow to finance other films

– compensates for risk of financing movie

– covers losses of box office bombs – only at box office can a film generate negative return, because box office

attendance determines revenue

– ancillary market distribution contracts are written to guarantee TR > TC

Marketing • Advertising

– Often as much as 50% of total cost

– Advertising = f(competition)

• Competition = f(release date)

• release strategy

– wide release requires lots of ads

– slow build-up can rely more on word-of-mouth ads

Supply and Demand

• Seasonal admission cycles

Normalized Domestic Movie Ticket Sales: 2006

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

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7-Jan

28-Ja

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11-M

ar

1-Apr

22-A

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ay

3-Jun

24-Ju

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5-Aug

26-A

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16-S

ep

7-Oct

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ct

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ov

9-Dec

30-D

ec

Week Ending Date

Percen

tag

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f W

eek E

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ly 8

th

Profit and the Box Office

• Profit = Total revenue – total costs

• TR = box office + ancillary

• TC = production + distribution + publicity

Top Six Studios 2016 • 84.9% of domestic box office

• Averaged 17.6 releases

• Average production cost $118 million

• 17.6 x $118 = $2.08 billion

• On average 25% of cost recovered at domestic box office, 75% from ancillary sources

• Average box office take for distributor = 42%

• for studio to recover $521 million in costs from box office, its box office gross must be $521/.42 = $1.24 billion

• Total 2016 box office $10.6 billion

• Each studio needed 11.7% (1.24 bil/10.6 bil) share of market to break even

2016 Studio Share Domestic Box Office

Studio

Mkt

Share

Box Office

Gross (mils)

Number of

films

Buena Vista (Disney) 26.3% $3000.9 13

Warner Brothers 16.7% $1902.2 23

20th Century Fox 12.9% $1468.9 16

Universal 12.4% $1408.0 17

Sony/Columbia 8.0% $911.5 22

Paramount 7.7% $876.8 15

Lionsgate 5.8% $655.0 24

Focus Features 1.7% $196.5 10

STX Entertainment 1.7% $195.6 6

Open Road Films 0.9% $107.0 7

Roadside Attractions 0.7% $75.7 10

A24 0.6% $65.8 18

The 2016 Box Office

Total

films

released

$281

million or

more

$200-$280

million

$100-$200

million

% of all

films that

earned

$100

million or

more

732 9 4 16 4.0%

The average film cost approximately $118 million to make last year. At 42%

distributor box office take the break even box office was $281 million. In 2016

there were nine films that had a domestic gross in excess of $281 million.

2016 Domestic Box Office Leaders

Film

World

Box

office

(mils)

% from

domestic

box

office

Opening

wknd Wks

Prod

Cost

(mil)

Break

even

(est)#

Rogue One $1053 50.3% $155 11.4* $200 $714

Finding Dory $1028 47.3% $135 25 $200 $714

Captain America:

Civil War $1153 35.4% $179 20 $250 $892

The Secret Life of

Pets $875 42.1% $104 25 $75 $268

The Jungle Book $967 37.6% $103 24 $175 $625

Deadpool $783 46.4% $132 18 $58 $207

* Still in release as of March 7, 2017 # includes marketing costs equal to 50% of production costs

Hollywood Economics

Arthur DeVany

London: Routledge, 2004

Arthur DeVany

Survival of the fittest

• How long does a movie last?

Likelihood of remaining in Top 50

Who produces the movies?

• The movie Lorenz curve

• The studio Lorenz curve

• A top-heavy industry

Equitable distribution

2016 Studio Share Domestic Box Office

Studio

Mkt

Share

Box Office

Gross (mils)

Number of

films

Buena Vista 26.3% $3000.9 16

Warner Brothers 16.7% $1902.2 35

20th Century Fox 13.3% $1520.2 29

Universal 12.4% $1408.0 20

Sony/Columbia 8.3% %943.5 48

Paramount 7.7% $876.8 18

TOTALS 84.7%

% of INDUSTRY TOTAL 3.7%* 84.9% 19.2%

* Percentage of US based studios

What did Buena Vista do right?

What did Buena Vista do right?

2016 top domestic box office Film Studio Gross

(mils)

Rogue One Buena Vista $530

Finding Dory Buena Vista $486

Captain America: Civil War Buena Vista $408

The Secret Life of Pets Universal $368

The Jungle Book Buena Vista $664

Deadpool Fox $363

Zootopia Buena Vista $341

Release strategies

• Wide release

versus slow

build up

• Performance by

release strategy

• Good movies

have legs

• Dogs slink away

Performance over time

• Two-thirds of movies earn their max box-

office revenue in first week

• Slow releases are the exception

• Second week is usually the week of widest

release for most movies

A bomb And a hit

Star power

• Why stars are paid so

much

• How valuable is a

star?

• Can a big name save

a big bomb?

The expectation of a

movie’s performance is

dominated by unlikely

events

That is, nobody

really knows what to

expect

What makes a hit?

• Rating, Genre or Star?

• Predicting performance

Since film

rentals

are

approx

one half

of box-

office

revenues,

a gross

return of

2 would

be the

break

even

point

same

mean

but diff

std dev

The current philosophy

• Minimize risk by offering something

familiar

– Sequels, stars, franchises

• Diversify

– Major studios are parts of conglomerates

• Brand your product

– Think toys, video games, etc

Summary

• The movie industry is built on the

blockbuster model

– Stars are the safest bet among a selection of

risky bets

– Because movies are experience goods,

subject to the ever changing whims of the

audience, copycat producing is a safe bet

– Tension between artist and financier

Summary

• The importance of ancillary markets

• Studios finance and distribute

• Marketing costs depend on competition

and release strategy

• The bulk of the box office dollar goes to

the distributor

Questions?