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Blockbuster economics: So you want to make a movie?

Category: Business

Published: 8th May 2012 00:00:36

If a Hollywood studio has spent a lot of money on a movie, say $200m, then you will probably find out about it.

Talk of vast budgets is good for business.

From the audience's point of view, it might be worth the price of the ticket just to see what justified that expense.

But finding out exactly how the money is spent is more difficult.

On rare occasions production budgets have leaked out, but up-to-date information is hard to come by.

And that's hardly surprising, as there is a lot at stake. Exposing a movie's financial details could upset a lot of powerful people.

A film's director, actors and producers will be some of the most significant costs in the budget, and they will not be happy to have their pay open to public scrutiny.

But it is possible to get an idea of where the money goes.

So, if you have always wanted to direct a blockbuster movie, here's a rough-and-ready guide to how much it is going to cost you.

And, lower down, find out how you might get some of that money back.

So what qualifies these days at a big budget? According to Nikki Finke, founder and editor-in-chief at the respected Hollywood news website Deadline.com, $200m is the starting price. "$200m is when they (studio executives) really start thinking hard about it."

Approving (or green-lighting) a project of that size might be beyond the remit of even a studio chairman. It might have to go to top executives at the parent company.

You are going to need a story for your movie. More often than not that will come from a book, a play, or in some cases a video game. The rights to a best-selling book can cost anything between $500,000 and $2m.

So you have permission to use the story, now it needs to be converted into a script. Top scriptwriters will command hefty fees and you could spend as much as $2m. That's the elite end of the market; most Hollywood writers toil away for much, much less.

This varies wildly form director to director. Some like Steven Spielberg may take a producer role, which means extra payment.

The most successful directors will ask for as much as $10m for a movie, and may also want a cut of the film's profits.

The title "producer" can mean a lot of different things in Hollywood. Typically it is the person who will shepherd the movie from the script page to the premiere.

A producer can be thought of as the chief executive of the film. They are the financial controllers and will make hiring-and-firing decisions.

They will also bring investors into the project and negotiate deals with distributors.

At the high end of the industry they will receive millions of dollars. While rarely getting paid more than the lead actor, they can make up to $5m for a film.

A big name actor can expect an up-front payment, $10-$20m would not be unusual. The biggest names can demand a percentage of a movie's box office return.

While studios are generally reluctant to offer such deals it can be a way of managing financial risk.

If the film is more successful than expected, everyone is happy. But if it fails, at least the payments to actors will be limited.

For the Hollywood elite, vast sums can be made. It is reported that Johnny Depp has made hundreds of millions of dollars out of the Pirates of the Caribbean movies.

Again, this can vary wildly.

If you want to film in Manhattan, you will have to pay for filming permits, insurance, security - the list goes on. And if you want to film at night, elaborate lighting will be needed.

You can save money by filming in cheaper locations. Many countries will offer tax breaks. The Lord of the Rings trilogy received substantial tax breaks from New Zealand.

Producers will have day-by-day breakdowns of how much filming will cost. Something relatively straightforward like a courtroom drama could cost $500,000 a day. For a 40-day shoot, that is $20m.

But if you want car chases or pyrotechnics, then you can expect to pay a lot more.

Keep plenty of money in reserve for this. Computer generated imagery (CGI) is expensive, and big-name directors like long movies.

For some films that rely on visual effects, it will almost double the cost of the movie. You could end up spending $100m.

A relative bargain. For an original song, a well-known pop star may charge up to $1m.

So you have made the movie, the director is happy and you have kept to the budget. Surely the worst is over. Wrong.

"Actual filming, unless the director goes off the rails, that is often the easiest part of it all. These days it is extremely rare that a production will be a month or two late. In this business, one or two days is a big deal," says Nikki Finke at Deadline.com.

You are now entering the world of marketing, which is very expensive. Big films will need a global advertising campaign. This can often amount to 50% or more of the original budget. Reports say that Disney's flop movie, John Carter, cost $250m to make and another $100m to market.

So the film has been made and the advertising campaign has been rolling for months, now it is time to make some money.

The rule of thumb is that a movie studio can expect to receive about half of the box office sales.

But in reality, the deals struck will be complicated. Studios often negotiate a high percentage for the opening week, which will then tail off, so the cinema chain gets a greater share as the film gets older.

In the US, home entertainment spending, which includes DVDs and film rentals, has been falling since hitting a peak in 2004. Nevertheless it remains an important part of a film's revenue.

Bruce Nash, the founder and president of Nash information services, which provides movie industry research and support, says: "The death of that market is somewhat overblown.

"The DVD market peaked much earlier than studios would have liked, but the overall viewing of video at home continues at the same rate as ever. It's a much more mixed market between DVD, Blu-ray, video streaming and rental services like Red Box."

A studio will typically take 40% of DVD and rental sales, and that can generate some healthy sums.

DVD sales of the movie Avatar totalled $600m in the US alone. Another $57m was spent on renting the movie.

In the business this is known as ancillary revenue. It includes licensing for toys, games, posters and other items. This area is particularly important for animated family films like Pixar's Toy Story series.

In-flight entertainment is also included in this bracket.

Ancillary revenue can amount to about 10% of box office take.

Generally a film will be offered on some kind of video-on-demand service first, then a premium cable package, and finally it will make its way on to regular television.

The fees will be based on the film's box office performance. A studio can expect to make about 11% of its box office total from TV releases.

Source:
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Harvard Citation

BBC News, 2012. Blockbuster economics: So you want to make a movie? [Online] (Updated 8th May 2012)
Available at: http://www.ukwirednews.com/news/1427032/Blockbuster-economics-So-you-want-to-make-a-movie [Accessed 25th Apr 2014]

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