The Basics: Movies & Money

Time for a refresher course on the basics of movies and money that will unlock certain mysteries like how a film can rake in millions at the box office, but still lose money.

It's a simple process that Hollywood makes needlessly complex because the people running Hollywood have their heads up their butts.

Let's start with the costs:

DEVELOPMENT COSTS: This is the costs entailed with bringing together a script, a crew, and a cast, then to see if the script is doable. 

In theory it's not supposed to be much money, but in theory communism works too.

One classic example of development done wrong is Jon Peters' attempts to make a Superman movie that resulted in 15 years and $50 million spent before a single frame of film was shot, and still all they got out of it was Superman Returns.

Once development is complete the script is ready to be made, then they start to spend the...

PRODUCTION BUDGET:  The production budget is the money spent on actually making the movie. That includes...

Staff Costs: This includes not just the up-front pay of the people making and appearing in the film, but also the expenses coming from their perks, like housing, entourages, and housing their entourages.

Pre-Production: Which includes production design, sets, costumes, props, etc..., getting locations, scheduling, final casting, rehearsals, and other preparatory work. Then...

Production: The actual shooting of the film. Nuff said.

Post-Production: Picture and sound editing, visual and audio effects, automated dialogue replacement, and all the other things that provide the spit and polish a movie needs to look slick and professional.

Once the Production Budget's been spent you then start paying out for...

PRINTS AND ADVERTISING:  P&A is the dirty little secret of Hollywood bookkeeping. They don't include it with the film's production budget, and generally don't discuss it in polite company.

Prints are the copies of the films that run through the projectors, and cost about $2000+ per copy if you have the sort of bulk discount deal with the developer for a wide release.

Now some theaters have gone digital, but not all, and even then the digital screen needs some way to get the film to the theater, either via a digital hard-drive (which costs money to make and deliver) or through some sort of on-line download (which costs money for bandwidth).

There's also advertising. Now the great chestnut the studios like to tout is that since they're all linked corporately to TV networks, radio stations, magazines, and newspapers through their parent companies that it will be easy and inexpensive.

And if you believe that I got a bridge in Brooklyn to sell you.

Very often these inter-connected media companies don't give any discounts or special treatment to films from their sister-studios. In fact, it's suspected that they charge their related movie studios more, to maintain the convoluted bookkeeping so central to big media's dysfunctional business model.

In 2006 the average estimated advertising costs for a wide release movie was around $34 million. I think that estimate was conservative, even for its time, and is probably just a fraction of what it costs today thanks to Hollywood having a rate of inflation similar to Weimar Germany.

STUDIO OVERHEAD:  This is an even deeper held secret than prints and advertising. This is supposed to cover the costs of running a movie studio. These costs are supposed to include the salaries of executives and support staffs, office rental and/or upkeep, and other expenses needed to run a business.

Of course this can also include ineffectual lobbyists in Washington, the Super-Sweet 16 party for the studio president's daughter,  the pink Mercedes she got as a gift, etc... etc.... 

All that adds up, but don't expect a decent accounting of these expenses.

Studio accounting makes as much sense as this photograph.

Now let's look at the revenues that come in when a movie is released and where that money goes:

BOX OFFICE: This is the money you pay when you buy a ticket to see a movie. But what's paid at the box office is not what the movie is going to make. The money you give the pimply teenager in the bow tie and polyester vest gets divided into the...

HOUSE NUT: The House Nut, or House Allowance if you don't like to use the word "nut," is a piece of the ticket price intended to help cover the cost of screening the film. This averages out to about half the ticket price.

RENTALS: This is the share of the box office that goes to the movie's distributor. Now there are variations of how much goes into the rentals. The opening weekend has a larger percentage of the rental than the rest of the theatrical run.

Foreign box office rentals vary on the country, but usually are a much lower percentage than North American rental shares. Usually the distributor gets an average of 25%-30% of the ticket price.

Another source of revenue comes from...

MERCHANDISE LICENSING: This is when the studio making a movie sells the rights to make merchandise based on that movie to other companies. This can range from toys to t-shirts and everything in between.

However, not every movie is conducive to making merchandise that sells. Kids movies are very merchandise friendly, as our superhero/sci-fi/fantasy movies. Domestic dramas... not so much.

Some arrangements are cash-up-front arrangements, but if the movie flops, the merchandise isn't going to move. So a lot of merchandise licensees make a deal with less or no money up front, in exchange for a cut of the profits.

And that's the money that comes in from a movie.

But's it's not all sweetness and light once the movie's released. The money that comes in has to be divided once again!

Sighting of the elusive "net profit."

DISTRIBUTOR'S SHARE: It's a little known fact that no movie studio actually distributes their own movies. They all have distribution companies that are separate from the studio in legal form if not in practice.  These supposedly independent distributors then take a cut of the rentals.

But there not the only ones, because there are also...

BACK END SHARES: If the movie's cast, or directors have any clout, or an agent/manager who has clout they get a piece of the action. If you're a big star you can get what they call a "dollar one" share. That means you get between five to ten cents for every dollar that comes in, sometimes it's from the rental, some times it's from the total gross box office.

Once all this is added up, divided, and subtracted, a movie usually need to make around 2.5 to 3+ times the movie's original production budget to just break even. 

But it's not the end of the movie's money-making life. Once in a studio's library and there they can make or lose even more money through...

HOME VIDEO:  This includes sales and rentals of DVDs, downloads, either online or in brick and mortar stores. They cost to produce, distribute, and a share has to go to the store. So it's not the guaranteed gravy train you might think it is.

TV LICENSING: This is the money generated by selling the rights to broadcast the movie to TV networks, local stations, and cable-channels.

Now this is where the studios love to play silly buggers with the numbers. Since most studios are part of big media conglomerates that own TV networks, local stations and cable channels you would think it would be easy and profitable.

It isn't.

It's increasingly rare for the major networks to air feature films in prime time unless the film is a massive family oriented blockbuster involving Harry Potter or the Pirates of the Caribbean. Meanwhile the outlets that do air movies, like local stations, and cable channels, but are more willing to constantly recycle a dwindling number of films which get cheaper with every airing, rather than pay for fresher movies, or dig up older classics.

Then there's the constant accusations of under-selling. This is where a media conglomerate that owns movie studios and TV channels will sell the license to movies at a "loss" for their movie studio, so their channel can make money from it.

And that's why you NEVER see "Net Profits" from a movie, EVER.

All of these complications, and manufactured losses create what I call a self-fulfilling idiocy. The studios think they're clever playing these games with the money. But these games are causing the costs of making, distributing, and advertising movies go up, and whittling away at real profits, and hurting the industry as a whole.

And those are the basics of money in Hollywood.