Thursday, December 29, 2005

Where the Money Comes From

What if I were to ask you what brings in the most revenue for a film? The average person may think that the theatrical release is the biggest moneymaker. However, you guys are in the film industry and know that DVDs and the home video release is the biggest moneymaker. Right? Wrong! The biggest moneymaker for a film is TV licensing. ...continued...

The first time I looked through the numbers, it was somewhat of a surprise to me too. After all, it isn’t something the studios openly share with the public and we have been told for years that home video is the money buffet. Studio accountants like to merge box office, home video, and TV licensing into a single number for their Wall Street reports. They purposefully blur things so that it is hard to get a firm grip on where the money comes from. There are several reasons for this, but is probably left for another story. Lucky for us, the real internal figures are confidentially furnished to the Motion Picture Association and if you know the secret MPA handshake, you can follow the money trail.

Last year, the six major studios had total revenues of $7 billion from world box office sales, $21 billion from world video sales, and $18 billion from world television sales. Even a 3rd grader can tell you 21 is more than 18. However, these numbers are slightly misleading because they reflect gross revenue. Simply put, there is more costs associated with box office and DVD sales than television licensing. However, you can see how easy it is to think that home video brings in the most cash.

During a theatrical release, there is a lot of money spent on P&A (prints and advertising). A rough estimate is that studios spend at least half of the production budget for marketing. If Chicken Little cost $80 million to make, they have probably spent at least $40 million to market it. However, a lot of times that marketing cost is much higher and can sometimes approach the cost of the production itself. When you price in prints and the cost of shipping them to theatres, it can add another $15-$20 million for a major release. You can start to see that P&A can easily match or exceed the actual production costs for a movie. When an $80 million dollar movie makes $200 million in the box office, the studio is still losing money by the time theatres take their cut of ticket sales and pay off those P&A costs.

When a film is ready for home video sales, it hopefully has broken even or gotten close to that in its theatrical release. Home video is the point where the studio see the money tip in their favor. Wholesale DVD prices have dropped to $5 in some cases. Even though the profit margins have decreased and sales have leveled off, it still is a huge income source and can bring in excellent revenue. However, marketing costs and advertising are still high and offset a good portion of those returns. Until Iger gets his way and eliminates the delay in release windows, these costs will continue to be significant.

The real moneymaker is in television licensing. What makes it so profitable is that unlike home video, the licensee pays for the cost of marketing and advertising. The studio no longer has to pay for these things. It is pure profit outside of a couple of minor costs. Roughly $4 billion in revenue comes from the major networks, another $4 billion from pay-per-view, and close to $10 billion from cable networks. With this flow of cash and practically no expenses, TV licensing easily out gains both theatrical and home video sales.

The whole purpose of theatrical release is to get as close to break-even as possible. Home video sales should send you into profit. By the time you get through television licensing, you should be sitting on a pile of cash if you have played your cards right.

2 comments:

klahd said...

Staloren, I feel kind of silly asking this question in the comment field, but I don't know how else to get in touch with you. I was wondering if you could give me the html coding that allows you to divide your posts with the "read the entire story" line? I'm not having any luck figuring out how to do that on blogger myself. Any help would be much appreciated. My email is klahd222@yahoo.com. (Please delete this comment after you've read it.)

Staloren said...

Klahd, I don't actually remember how I did it. If I'm not mistaken I had to modify the template. And for each post I have to add a special /span.

I learned how to do it from the FAQ pages somewhere on blogger.com. If you hunt around you will probably find it.