American Cinema and the Global Market
Week 5 Readings and
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Reading 1: Motion Picture Negative Cost and Return on Investment
Abstract: A statistical study of the
relationships between the cost of producing a feature film, the cost of getting
it to market, the gross US box office revenue, total worldwide rentals returned
to the distributor, market share, and market efficiency.
by
Dr. Bruce R. Cook, Ph.D., CEO
New Millennium Films, Inc.
Note: This article was originally written in 1995. It has not been substantially updated because the all the conclusions still hold. At the time when more data are available for analysis, there will be a second version. BRC
Studios (which are all corporations) share profits with stockholders by paying dividends to shareholders. Simultaneously the studios will declare that a film that has earned $ $100 million at the box office (and that cost only $20 M to produce) has not yet broken even. This report is not about their hallucinatory bookkeeping practices. Instead it an investigation designed to help the independent producer understand probable income from an independent feature film.
The Motion Picture Investor newsletter from Paul Kagan Associates tracks data from all Motion Picture Associates of America (MPAA) releases and is privy to confidential information regarding each film put into theatrical distribution. They are apprised of the actual cost of production (Neg. Cost), the total spent on prints and advertising (P&A), the US box office totals (US BO), the total worldwide rental revenue (WW Rents) and total costs of world wide distribution (WW Costs). Note that rentals are not the same thing as box office receipts: rentals are the actual amounts returned to the studio after the exhibitors and sub-distributors have taken their fees. Similarly, worldwide costs include not only P&A, but foreign distribution fees, costs of subtitling, video mastering and so on. In issues 143 (November 14, 1994), 144 (December 16, 1994), and 145 (January 6, 1995), they summarize the results of tracking all MPAA productions from 1989-1993 and all films released by the studios from 1985-1993. This latter group obviously includes all the studio-produced films in the first group; other studio-produced films from earlier years; films not produced by the studios, but later acquired by them for release; and films not released by the studios but tracked by Kagan. There are 786 films in the 1989-1993 Studio Release study, and 2,252 films in the 1985-1993 All Releases study.
The results confirm less formal statistical studies which I conducted on those films released during 1989-1991 that earned more than $1,000,000 in rentals. I will state the conclusions first, then the data, the reasoning for interpreting the data, and finally recommendations for production choices.
The conclusions are that: 1) the most profitable return on investment comes from films costing less than $1 million; 2) that the studios will put ever more money into blockbuster films with budgets exceeding $60 million; 3) that the majority of a studios revenue derives from films in the 20 to 40 million range; and 4) that the overall market requires a constant flow of product at each negative cost level.
Return
On Investment (ROI) vs. Negative Cost
Studio
Releases 1989-1993 (SR)
and All Releases 1985-1993 (AR)
|
Negative |
Number of films |
Ave. |
Ave. |
Av. WW Rents $M |
Av. WW Costs $M |
Ave. Net Profits $M |
WW Rents / WW Cost |
|||||||
|
|
SR |
AR |
SR |
AR |
SR |
AR |
SR |
AR |
SR |
AR |
SR |
AR |
SR |
AR |
|
< 1$M |
2 |
36 |
1.7 |
0.7 |
1.1 |
1.3 |
4.2 |
3.9 |
2.5 |
1.7 |
1.7 |
2.2 |
1.68 |
2.28 |
|
1 to 5 |
42 |
646 |
1.6 |
1.4 |
2.1 |
2.4 |
6.7 |
6.2 |
5.9 |
5.3 |
0.8 |
0.9 |
1.14 |
1.18 |
|
5 to 10 |
138 |
602 |
5.3 |
3.7 |
10.0 |
7.6 |
21.4 |
16.0 |
14.7 |
12.1 |
6.7 |
3.9 |
1.46 |
1.32 |
|
10 to 15 |
183 |
N/A |
7.4 |
N/A |
16.1 |
N/A |
34.2 |
N/A |
23.0 |
N/A |
11.2 |
N/A |
1.49 |
N/A |
|
10 to 20 |
N/A |
651 |
N/A |
8.1 |
N/A |
20.8 |
N/A |
39.8 |
N/A |
25.6 |
N/A |
14.2 |
N/A |
1.56 |
|
15 to 20 |
170 |
N/A |
9.8 |
N/A |
21.6 |
N/A |
45.9 |
N/A |
31.4 |
N/A |
14.5 |
N/A |
1.46 |
N/A |
|
20 to 30 |
145 |
196 |
12.8 |
12.7 |
35.7 |
36.5 |
72.5 |
71.0 |
42.6 |
42.0 |
29.9 |
29.0 |
1.70 |
1.69 |
|
30 to 40 |
63 |
74 |
17.9 |
17.1 |
61.3 |
56.5 |
129.3 |
119.3 |
63.3 |
61.0 |
66.0 |
58.3 |
2.04 |
1.96 |
|
40 to 50 |
25 |
28 |
21.7 |
21.3 |
82.2 |
80.2 |
154.9 |
151.7 |
75.7 |
75.9 |
79.2 |
75.8 |
2.05 |
2.00 |
|
50 to 60 |
9 |
10 |
16.1 |
16.6 |
35.5 |
37.2 |
82.6 |
86.9 |
75.0 |
76.1 |
7.6 |
10.8 |
1.10 |
1.14 |
|
over 60 |
9 |
9 |
28.9 |
28.9 |
140.6 |
140.6 |
301.4 |
301.4 |
123.2 |
123.2 |
178.2 |
178.2 |
2.45 |
2.45 |
|
Total |
786 |
2252 |
7750 |
13207 |
20760 |
34906 |
43276 |
70261 |
25656 |
94139 |
17169 |
26123 |
N/A |
N/A |
|
Average |
N/A |
N/A |
9.9 |
5.8 |
26.4 |
15.5 |
55.1 |
31.2 |
32.6 |
19.6 |
22.4 |
11.6 |
1.69 |
1.59 |
The first item of interest is that the studios are not able to exploit films made for less than one million nearly as well as the independents are able to do. The studio worldwide revenue to worldwide cost ratio (hereafter referred to as R/C) is 1.68, whereas the indies obtained 2.28. Consequently the studios release far fewer of them. The more important item is that movies made for less than one million have the highest Revenue/Cost ratio of all categories of production, except movies costing more than sixty million.
Number of Films Released vs. Negative Cost
|
Neg.
Cost |
< 1 |
1--5 |
5--10 |
10--20 |
20--30 |
30--40 |
40--50 |
50--60 |
> 60 |
|
Studio Films |
2 |
42 |
138 |
353 |
145 |
63 |
25 |
9 |
9 |
|
All Films |
36 |
646 |
602 |
651 |
196 |
74 |
28 |
10 |
9 |
Even a quick glance at the data above shows that studios release most films
in the 10 to 20 million dollar category. When considering all films tracked,
there is a much broader peak (from 1 to 20 million), with the greatest
frequency being centered at the 5 to 10 million range. In other words, the independent
producers make less expensive films and they make more of them. While this
is not surprising news, most people are unaware that more films are produced by
the independents than by the studios. In the five-year span 1989-1993, the
studios released 786 films, an average of 157 per year. However, the total
number of films released per year has been holding about 400 for the past
decade. In other words, the studios only release about 40% of the theatrical
product in any given year.
Negative
vs. P&A Costs forAll Studio Releases 1985-1994
|
|
Ave. Neg. Cost |
Ave. P&A Cost |
Ave. Total Cost |
P&A as % of Neg. |
|
1985 |
10.8 |
6.6 |
17.4 |
61.1 |
|
1986 |
9.9 |
6.0 |
15.9 |
60.6 |
|
1987 |
12.2 |
7.3 |
19.5 |
59.8 |
|
1988 |
12.0 |
7.0 |
19.0 |
58.3 |
|
1989 |
14.2 |
7.9 |
22.1 |
55.6 |
|
1990 |
16.5 |
9.3 |
25.8 |
56.4 |
|
1991 |
18.2 |
9.8 |
28.0 |
53.8 |
|
1992 |
19.8 |
11.0 |
30.8 |
55.6 |
|
1993 |
20.2 |
11.3 |
31.5 |
55.9 |
|
1994 |
20.5 |
11.5 |
32.0 |
56.1 |
|
CAGR |
7.4% |
6.4% |
7.0% |
N/A |
|
Ave. |
N/A |
N/A |
N/A |
57.3 |
*
Kagan reports that the ratio of the P&A costs as a percentage of negative cost has been slowly declining since 1985, for domestic studio release slates, averaging 57.4% for the period from 1985 to 1993. The figures analyzed are for domestic P&A only; they do not reflect world costs.
Figures include some product made by independents and acquired by the studios for theatrical release. They do not include movies made for TV or that went straight to video, areas that traditionally are strongholds of the independent producer.
Using this as a rough guide to assist in finding the average in each range of negative cost, allows the compilation of the following table. CAGR is Compound Annual Growth Rate in per cent.
Total
Expenditures of All Films Tracked 1985-1993
|
Neg. Cost Range |
Ave. Neg. Cost |
Total Neg. Cost |
% Share Neg. Cost |
Total P&A Cost |
Total US |
Total WW Rentals |
Total Net Profits |
% Share Profits |
|
< 1 |
0.7 |
25.2 |
0.09 % |
25.2 |
46.8 |
140.4 |
79.2 |
0.30 % |
|
1--5 |
3.4 |
2196.4 |
7.8 % |
904.4 |
1550.4 |
4005.2 |
581.4 |
2.2 % |
|
5--10 |
7.7 |
4635.4 |
16.5 % |
2227.4 |
4575.2 |
9632.0 |
2347.8 |
9.0 % |
|
10--20 |
16.3 |
10611.3 |
37.7 % |
5273.1 |
13540.8 |
25909.8 |
9244.2 |
35.4 % |
|
20--30 |
26.7 |
5233.2 |
18.6 % |
2489.2 |
7154.0 |
13916.0 |
5684.0 |
21.8 % |
|
30--40 |
38.8 |
2871.2 |
10.2 % |
1265.4 |
4181.0 |
8828.2 |
4314.2 |
16.5 % |
|
40--50 |
48.3 |
1352.4 |
4.8 % |
596.4 |
2245.6 |
4247.6 |
2122.4 |
8.1 % |
|
50--60 |
53.9 |
539.0 |
1.9 % |
166.0 |
372.0 |
869.0 |
108.0 |
0.4 % |
|
> 60 |
78.4 |
705.6 |
2.5 % |
260.1 |
1265.4 |
2712.6 |
1603.8 |
6.1 % |
|
Total |
28169.7 |
28169.7 |
100 % |
13207.2 |
34931.2 |
70260.8 |
26085.0 |
100 % |
|
Ave. |
12.5 |
12.5 |
N/A |
5.9 |
15.5 |
31.2 |
11.6 |
N/A |
All figures in millions, unless specified
The first item to note is that the 10 to 20 million category represents the peak for spending on production, for P&A expenses, for US box office, for worldwide rentals and for net profits. The most unbalanced data shows that the films under 1 million return 0.3% of all profit, while the 50 to 60 million films return a slightly greater 0.4%--yet all 36 small films cost only a total of $25.2 million while the 9 large films cost $539 million!
A review of all this data might lead one to wonder why the film industry doesn't only make movies for more than 60 million, garnering nearly the highest return rate. Why is the bulk of the product made for much less? And why is the bulk of the income gathered around these lower budget shows?
The studios and the independents know that there are only so many stars capable of opening a $60+ million film and there are only a few weekends per year appropriate for releasing such a blockbuster. But the theaters need new films far more often than that. Further, the video rental stores, cable TV operators, broadcasters and so on also echo the sheer volume demanded by theatrical exhibitors. The movies made for less than 30 million account for 68.7% of all profits! They also account for 95% of the total number of films made. In other words, there are bigger payoffs possible at the higher budget range . . . but the price to play is very high per picture. Since no one can absolutely predict which film will be a blockbuster at the box office, most studio projects, and nearly all independent projects, are made for lesser amounts.
Low
Budget Examples of
Return on Investment
The following are several low budget films where I have personal knowledge of the cost of production and the eventual gross sales, because they were made by family members or close friends.
|
Title |
Production Cost |
Gross Revenue |
Rev./Cost Ratio |
|
Jurassic Women |
60,000 |
500,000 |
8.33 |
|
Phoenix |
230,000 |
2,100,000 |
9.13 |
|
Final Equinox |
225,000 |
600,000 |
2.67 |
|
The Prosecutor |
175,000 |
540,000 |
3.08 |
|
Nightwish |
650,000 |
1,300,000 |
2.00 |
|
Line of Fire |
140,000 |
395,000 |
2.82 |
|
Dragon Fury |
125,000 |
560,000 |
4.48 |
|
Playmaker |
850,000 |
1,000,000 |
1.18 |
|
Total |
2,455,000 |
6,955,000 |
2.84 |
If one now reduces revenue by a 20% distribution fee, then the average return on investment becomes 2.27, a number strikingly similar to that reported by the Kagan Newsletter.
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