Updated October 12, 2015
When Does a Movie Break Even at the BoxOffice?
The business of movies has gotten tricky when it comes to declaring a box office bomb or success and 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. The days of the sliding scale are long over, 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. Major theater chains are not fiscally friendly to independent distributors and it’s not easy being an independent distributor these days, with major chains like Regal Cinemas paying out just 34% of the ticket price, these companies go bust quite often. Here’s a quick read from the LA Times about Icon and Newmarket suing Regal Cinemas over the profits for The Passion of the Christ, because Regal demanded to keep 66% of the ticket price. 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, which local distributors keep 45% of the gross and 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 decade long 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 Insidious ($1.5 million), would not yield profits if it crapped out of theaters with $3 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 the box office bomb Winter’s Tale had $42.8 million in domestic TV ads and then there’s millions more in print ads, online ads, posters, billboards, Virtual Print Fees, etc.
Financial exposure and risk. Lets look at the 2014 box office dud Pompeii. German based Constantin Films financed the film for $100m and hired Summit Entertainment to pre-sell the film at Cannes. 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 $23m in the US and a weak $94m overseas. Pompeii did post small losses for most distributors and Constantin posted a $6m 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 of the world of movie flops, Legendary financed the Michael Mann fiasco Blackhat for $70m and paid for the worldwide marketing costs themselves and posted a $90m loss on the $70m 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 and the average release barely rings up $10 million in sales — and about 1/3 of that is going to the resellers, plus there is the cost of manufacturing. 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.