Updated September 21, 2017
When Does a Movie Break Even at the BoxOffice?
The old adage of ‘double your budget = break even‘ is just not the case for most films in release. So lets go through everything you need to know about how the box office works — well, not quite everything, but here are a few examples that are a good microcosm when it comes to the world of movie finance and hopefully through these different examples we can clear up the misconceptions of box office success and failure.
Movie theaters don’t play films for free. Theaters are not glorified snack, soda and popcorn dispensaries who receive pennies per ticket sold, they command on average 45% of the ticket price from the major studios and far more from independent distributors. When Icon and Newmarket were negotiating with theater chains over the exhibition fees for The Passion of the Christ, they were able to secure “studio terms” (about 55%). Once the picture pulled in mountains of cash, Regal Cinemas demanded to keep 66% of the ticket price, as per their corporate policy of allotting only 34% to small distributors. The result was a lawsuit that settled in Icon and Newmarket’s favor. Keep the basic 55% calculation in mind when you see box office numbers.
The days of the sliding scale are long over, where studios could demand most of the ticket price for an expected blockbuster. In fact, Disney tried to strong arm theaters into a 65% share of the ticket price for Iron Man 3, but every theater chain called bullshit and cut off advanced sales until Disney folded.
There is also a misconception that the US domestic market is the center of the box office universe and that could not be further from the truth. While it does differ in some territories, for the most part the ticket price is evenly split between the distributor and the cinema — with the major exception being China, where foreign distributors keep just 25%.
It is not cheaper to distribute films digitally than on film. This is not a debate over the merits of film vs. digital, but simply about the costs of distributing a film digitally. Since almost every theater has converted to digital projection, thousands of 35mm release prints no longer need to be processed, so you might expect that delivering a digital file for exhibition would be inexpensive and save millions of dollars per film — but that’s where the Virtual Print Fee comes in. The major studios formed a pact with theaters where they would pay a Virtual Print Fee to help offset the cost of theaters switching to digital projection and this fee can be more than the price of striking a film print. You can read more on the VPF over at Variety.
Doubling the budget does not always = break even. Marketing is very damn expensive. Marketing costs in some cases cost a hell of a lot more than the budget of the films themselves and again, doubling the budget on a film like Get Out ($4.5 million), would not yield profits if it crapped out of theaters with $9 million. Marketing costs on average are well over $30 million for a domestic wide release and here’s a perfect example from The Hollywood Reporter of a cheap Blumhouse film called Stretch, which cost less than $5 million, but Universal ended up dumping it online instead of spending $20 million – $40 million to market it. Prints and advertising costs have reached such exorbitant heights that studios are sometimes spending over $150 million to market high profile films worldwide.
DreamWorks Animation’s Penguins of Madagascar pulled in $373.4 million at the worldwide box office on a $132 million budget, but took a $57 million write-down on the film because of marketing costs of about $130 million. More importantly, the financiers of a film will not see back any of the film’s theatrical gross until marketing expenses are covered. The simplest example being that WWE financed the film The Condemned for $18 million and Lionsgate distributed it in the US and paid for the P&A. The film tanked with $7.3 million at the box office and from WWE’s investor relations financial report, issued the statement: “Currently, we have $18.0 million in capitalized feature film production assets related to The Condemned. WWE does not participate in any revenues associated with these film projects until the print and advertising costs incurred by our distributors have been recouped. Accordingly, no revenues have been recorded in the current quarter.”
Marketing costs may not be visible like the estimated budgets that get posted, but they are not discounted in determining if a film posted a loss. Almost every studio is publicly traded and releases their quarterly financial reports and the rising costs of marketing is a constant reason for posting a loss. Variety has a weekly column from iSpot.tv that shows the top 5 TV ad spends for the week and for example Paramount’s box office disaster Monster Trucks had $49.66 million worth of domestic TV ads — plus there’s millions more in print ads, online ads, posters, billboards, Virtual Print Fees, etc.
Financial exposure and risk. Lets look at the box office dud Pompeii and ‘pre-sales’. German based Constantin Films financed the film for $100 million and hired Summit Entertainment to pre-sell the film at Cannes to dozens of international distributors. The film was a very hot title and sold out every territory in Cannes and Constantin received most of their investment back from the pre-sales even before the cameras were rolling. With the risk now mitigated throughout dozens of distributors, Pompeii grossed a terrible $23 million in the US and a soft $94 million overseas. Pompeii did post small losses for most distributors and Constantin posted a $6 million loss on the film, but despite the dire worldwide total in relation to its huge budget, no one entity was on the line for very much. On the opposite spectrum in the world of movie flops, Warner Bros financed the Ben Affleck box office fiasco Live By Night for $65 million and paid for the worldwide marketing costs themselves and posted a $75 million loss on the $65 million film.
The home video market has collapsed and TV sales have reduced. When a studio takes a write down on a picture, the costs are usually estimated over what the movie will pull in from ancillary markets over a 10 year period. While most theatrical releases have the advantage of increased exposure for the home video market and TV sales over a film that bypassed theaters, both markets have been hit hard. Since about 2006, home video sales have been on a rapid decline. The home market peaked in 2004, where $21.8 billion in DVD and VHS sales accounted for the majority of the home entertainment market. In 2016 Blu-Ray and DVD sales were overshadowed by downloads and streaming and the entire home market saw $18.3 billion in spending. The problem with that deceitful number is that streaming yields the lowest returns for studios and physical media returns the highest. So while services like Hulu and Netflix have increased subscriber growth that added to that $18 billion tally, that does not accurately represent money that was returned to the financiers of movies.
TV sales used to be about 10%-12% of the theatrical gross in each market, but those payouts have dipped to about 8%. VOD sales and online downloads also have cable companies and sites like Amazon and itunes command a large percentage of the rental or purchase. Showing signs of panic and no innovation (and ignoring the inevitable expansion of piracy), studios have been toying with the idea of simultaneously releasing movies in theaters and at premium costs at home in the vicinity of $35 – $50 per title.
Ok, lets just wrap things up here. Here are a few resources to keep tabs on the parts of movies that have nothing to do with entertainment — basic arithmetic, data and (usually unfettered) capitalism. Check comScore for the top worldwide grosses. Every Sunday afternoon the worldwide numbers are posted and comScore is the service that almost every website that reports box office data purchases their info from. Universal also updates the overseas box office for their movies that they handle globally through Universal Pictures International. Here is the Universal site. As mentioned earlier, you can see the obscene amount of money spent on TV ads from the iSpot.tv page on variety. You can check the quarterly financial reports on the studios and their parent company if the performance of certain movies offset profit projections for better or worse: Sony, Paramount (Viacom), Lionsgate, FOX, Universal (Comcast), Warner Bros, Disney. Of course there is boxofficemojo.com (which is not always up to date on overseas numbers or accurate with budgets — but a fantastic data resource), the-numbers.com (also unreliable with overseas numbers, but a quality archive) and of course, there’s the narcissistic, but always data driven nonsense here on bombreport.com