Chapter 2
Film Cost and Revenue 2.1

Each year there are thousands of screenplays in prepared, however only 450 to 500 of these are produced into 35mm motion pictures in any given year.  Of these, less than half receive a theatrical release.  Thus a significant number of features are released directly to DVD and other media avoiding the risks associated with an unsuccessful theatrical release. 

The expansion in world film revenues since 1970 has grown from $1.2 billion to over $15 billion annually according to the Motion Picture Association of America (MPAA).  Other industry statistics show that in the past ten years there has been an overall increase of at least 30% in many “ancillary markets” listed below and, over 200% in home video market.  Despite this burgeoning market, motion pictures with high production and marketing costs often entail greater risks with less likelihood of return than lower-cost pictures released in the non-theatrical markets.

2.2 Film Finance
A study conducted by Monitor Co., found that the movie and television industries contributed over $16 billion to the State of California’s economy, directly employing 164,000 and indirectly employing another 184,000 people.  Financing of these projects is an elaborate network of investors, some specializing in financing specific stages of production which is drastically different from the traditional approach to building construction financing. 

The obvious difference being the lack of involvement of major schedule-A banks who are the traditional backers of major construction projects in North America.  This likely extends from the previous point in regards to the risks involved in making films with very little tangible value at the end of the process.  This table outlines some of the studios involved with producing the films viewed in this class. As you can see most of these are major studios making it difficult for smaller independent films to attract funding for release.Recently the financial environment of independent cinema has changed to help filmmakers finance their films by cutting out the middleman and matching filmmakers with investors, finishing funds, or distributors. 

Figure 1.1 details both the production costs (negative costs) and theatrical revenues for each of the films viewed in class.  For comparison purposes these costs have been escalated to 2006 rates which reveals the drastic variation in the production costs of these films.  Revenues also appear to be equally variable with little correlation to production costs.  It is difficult to compare film revenues from different periods of time and released in different countries as the popularity of cinema is constantly fluctuating, generally on an upward trend.  The following sections describe how revenue is generated in the film industry and what factors contribute to cost.

2.3 Film Revenue Sources
The current means of delivering feature motion pictures to the audience includes movie theatres, DVD, cable TV (monthly subscriptions and pay-per-view), direct broadcast satellite TV, free broadcast TV (Network and Syndication), and ancillaries (such as airlines and libraries). 

Many A-Pictures generate $30 million within 14 weeks of initial theatrical release.  When accounting for home video, foreign and ancillary revenues, these revenues can double.  The following outlines how each of these markets contribute to the total revenue of a film.

Theatrical Market
Each month there are about 16 new major features introduced to the theatrical marketplace, playing on an average of 1650 screens in the North America grossing $10 to $40 million over this period.  Typically first run is 8 weeks before moving to second-run theaters for the balance of its theatrical life which may last for another 6 months.  Beyond these revenues, theatrical exposure is often a major method of increasing the value of ancillary markets listed below, as they benefit from word of mouth advertising and ad campaigns created by the theatrical release.
According to the U.S. Bureau of Census, there are over 22,000 establishments in the United States dedicated to renting and selling DVDs.  The growth in the worldwide home video market, once considered an ancillary market has emerged as a primary source of revenue especially for films that were not released theatrically. 

Cable TV Markets
This market includes both “pay TV” and “pay-per-view” channels, which combined, have around 60.5 million subscribers in the United States.  This market competes vigorously with the home video market for a first run option to gain market share of post theatrical release viewers.  Network television is only a significant source of revenue for extremely successful pictures, or pictures are made-for-television releases.  In all revenues from cable sales total approximately 20% of theatrical revenues. 

Syndication
Syndication, the act of selling features to each of the thousands of local independent television stations (stations not affiliated with a network), is the final venue for revenue generation following theater and DVD releases.  Because these screenings often continue for 5 years or longer from initial release this market can continue to generate revenue from the film. 

Ancillary Markets
One of the first films to demonstrate how valuable ancillary markets, consisting of spin-offs such as toys, games, clothing, and other novelty items was Star Wars.  Over time these revenues can be as significant as revenues from the other markets. 

One rapidly growing ancillary market is in video and computer games.  At this time there are no clear figures on how large the revenues from this medium could grow or what products and services technology will offer in the future.  There is some speculation that the “bonus features” included on most DVDs have contributed to rising demand for both rented and purchased DVDs.  The high definition DVD or Blue Ray technology may also increase sales to a point where some predict that this segment will be equal to the theatrical release revenues for some films.

2.4 Negative Costs of Film Production
In broad terms feature films cost what the producer can’t obtain for free, in addition to all the costs they have deferred for payment at a later date from the revenue generated from the film.  These costs vary drastically, where low budget films range from $200,000 to $700,000 and high budget films usually are averaging $48 million with many of the blockbusters such as the recent James Bond film “Casino Royal” was produced for $150 million.

The following excerpt from an industry document provides an overview of factors contributing to these negative costs and reveals why in high-budget A-Pictures the risk associated with investing in these films can be significant. 

Typically the largest revenues are generated by high-budget A-Pictures, financed and/or released by the MPAA companies.  However because of the huge negative costs they incur these films do not necessarily generate the highest returns.  This is especially relevant to net profit participants who typically only see profit participation in 5% of the pictures that they are involved.  In the example of Casino Royal, between its release on November 17th to December 3rd box office ticket sales in North America were reported to be $115 million.