What was the most profitable film release of 2006? It all depends on how you measure profit.

As the blog BizofShowbiz reports:

In the category of the most widely released movies for 2006, the most profitable movie of the year was surprisingly “Ice Age: The Meltdown,” which beat out what most thought would be the leader “Pirates of the Caribbean: Dead Man’s Chest.”

http://www.bizofshowbiz.com/2007/01/ice_age_most_profitable_film_of_2006.html

This is based on the 2006 Kagan Profitability Report that the Holllywood Reporter’s Paul Bond discusses in his recent article. http://news.yahoo.com/s/nm/20070119/media_nm/profits_dc_1

While Kagan does a great job with their profitability index, they exclude several key elements of production cost (because they are extremely difficult to estimate.) Distribution fees, profit participations (points), overhead allocations, and the cost of financing (interest charges) do not make it into Kagan’s calculations.

Based on the gross profit percentage, it is likely that Little Miss Sunshine would take the crown. However, if we look at total profit in dollar terms, I have no doubt that Pirates of the Caribbean: Dead Man’s Chest would be ranked first. With 15.1 million units of DVD sold and box office of over $400 million in the U.S. alone, the revenues were tremendous. While the participations and residuals were no doubt costly, the profitability of DVD would propel this title ahead of the others.

The truly interesting question is to look at the profitability of a film like this from different perspectives. The profit picture for the studio (Walt Disney Company: DIS), is very different from that of the other profit participants (such as the key talent or the film’s producers.) One difference is that Disney earns a distribution fee and receives the overhead allocations, adding revenues to its coffers. On the other side of the ledger, these items are costs to the profit participants.

Just out of beta, an interesting twist on financing your next film:

FilmTies.com is the world’s first Membership based, Social Network Interactive Film Financing Community. We provide the complete interactive tools to our members who visit the site to socialize, meet friends, classmates, and interact with the film and music industry. FilmTies.com is part of the AdFilmTies Film Finance Model it empowers screenwriters, musicians, actors, directors, producers, sponsors and most importantly the movie watching public.

http://www.filmties.com

Hedge fund money continues to flow to Hollywood. This deal is interesting in that the funding may go to support independent films, as opposed to the mega tentpole releases.

Lionsgate is wrapping up a $210 million slate financing pact led by Goldman Sachs — a sign that hedge funds remain attracted to Hollywood, or at least to particular deals, despite mixed results in 2006.

Lionsgate agreement covers 23 films, excluding the “Saw” movie franchise and pics from Tyler Perry of “Diary of a Mad Black Woman” and “Madea’s Family Reunion” fame. Perry’s next is “Daddy’s Little Girl,” due out in February.

Lionsgate will receive a distribution fee of 15% — on the high side for slate deals — showing just how the mini-studio has impressed Wall Street with its track record and its model of modestly priced pics.

http://www.variety.com/article/VR1117957559.html?categoryid=13&cs=1

Latest data from Hitwise, as presented by CNET:

http://news.com.com/YouTube+rivals+look+for+answers/2100-1025_3-6149004.html?tag=html.alert

Want to create media for the small screen?

A national Call for Entries for the Institute will be announced at the 2007 Sundance Film Festival. Through the Institute, eight production teams of up to 3 people each will be selected to come to BAVC’s San Francisco facility for ten days. Producers will participate in high-level industry roundtables, intense one-on-one project development with technical mentors, new media storytelling workshops, and hands-on prototyping of their ideas. The participants will be adapting and developing award-winning film and video content for delivery using interactive formats, including video game applications, interactive, web-based experiences, mobile streaming, multi-user communities, and new educational software. They may choose a range of delivery strategies, including cell phones, other hand-held devices, set-tops, Internet, portable software and more.

“The Producer’s Institute intends to provide a first-of-its kind incubator for independent filmmakers in new media technologies, and a unique opportunity for industry to greenlight innovative content for these new distribution models,” says Wendy Levy, BAVC’s Director of Media Arts and Education, who will oversee the Institute. The Institute will take place June 1 – 10, 2007 at BAVC in San Francisco. Applications will be available online beginning January 15th, with a February 15th deadline to apply. Institute participants will be notified by March 1st.

More info available at BAVC:
http://www.bavc.org/meet/news/e_news/010107/events/index.htm

Image from BAVC eNews January 2007, bavc.org

“Notwithstanding last year’s disparaging headlines regarding declining box office and DVD sales, 2006 ticket sales and DVD purchases proved that the public actively enjoys movie-going and the in-home DVD experience, despite the proliferation of other entertainment alternatives,” Genius Products CEO Trevor Drinkwater said.

Much of the cheery-eyed optimism floating around the studio DVD divisions stems from the fact that the industry has just come off an exceptionally strong fourth quarter. Things got off to a good start when 20th Century Fox’s X-Men: The Last Stand and Buena Vista’s The Little Mermaid Platinum Edition generated $80 million in consumer spending in a single day. Further triumphs came as the quarter progressed, culminating this month when Buena Vista’sPirates of the Caribbean: Dead Man’s Chest sold 10.5 million DVDs its first week in stores, putting it on track to become the top-selling live-action DVD ever.

“A couple of interesting things happened in the fourth quarter,” Warner Home Video president Ron Sanders said. “You had some very strong theatricals that performed very well across the board, and you also had the additional benefit of TV-DVD continuing to have a huge upside, year-over-year. All of this pointed to a very healthy category.”

Visit BrandWeek for more information:

http://www.brandweek.com/bw/news/sportsent/article_display.jsp?vnu_content_id=1003525962

Pay Television licensing is a key element in studio “greenlight” models. (Greenlight models are the financial calculations that the studios develop and analyze in deciding which pictures to produce or acquire. Sharp Angle also utilizes this methodology in the film business plan work we do for clients.)

As this article from Variety indicates, deal terms in this area may be changing:

Some of the major studios’ deals at HBO, Showtime and Starz expire in 2008 and ‘09, and the three networks are seriously weighing whether they want to renew.

If they decide to tear up their current theatrical contracts, which ensure a multimillion-dollar payday for each movie, Hollywood would be forced to rethink some of its economics.

The pay cablers’ money makes the difference between profit and loss for many theatricals. And, just as crucially, any potential loss of pay TV money would affect studios’ decisions on what future films get made.

The 2008-09 expiration dates may seem a long way off, but as studios develop movie scripts years in advance, they automatically build in the anticipated pay TV revenues. But some of those far-off projects could be scrapped if there’s any prospect the pay TV dollars will go away or be drastically reduced.

“You’re effectively planning to greenlight movies based on deals that are expiring,” says a studio exec.

Especially at risk are low to midrange films. A loss of a few million bucks could mean these films won’t get made.

“If you have a big hit, a movie makes money everywhere, but if you have average box office on a movie, your profit is going to be in the pay deal,” says one studio chief.

For years, virtually every studio release was included in lucrative long-term output deals with HBO, Showtime and Starz.

Daily Variety, December 31, 2006. Daily Variety

The latest news from one of Australia’s critical financing sources:

THREE of Australia’s best known filmmakers, Phillip Noyce, Scott Hicks and Adam Elliot, are set to make new films at home next year. The Film Finance Corporation has approved funding support for Hicks’ The Boys are Back in Town and Oscar-winner Elliot’s first full length animation, Mary & Max.

The FFC also issued Noyce with a letter of intent, indicating finance will be given for his version of Tim Winton’s love story Dirt Music subject to the film’s producers’ meeting certain conditions.

Rachel Weisz, Oscar winner as Best Supporting Actress this year for The Constant Gardener, is expected to be one of the international cast in Dirt Music.

…

New television projects include The Falls, directed by Peter Andrikidis, the 13-hour mini-series Underbelly (an expose of the Melbourne gangland wars), and a six-part ABC series East of Everything co-written and co-produced by Deb Cox, of SeaChange.

Read the full story at the Courier Mail’s website www.news.com.au
This link takes you there http://tinyurl.com/yybssf

Adam Elliot

Check out Dov Simen’s 10 steps to raising money for your film:

1. GET THE SCRIPT
2. PREPARE PAPERWORK
3. WRITE A BUSINESS PLAN
4. DO YOUR LEGAL WORK
5. SELECT A CINEMATOGRAPHER
6. GET READY TO SELL
7. PHONE THE INVESTOR(S)
8. SEND PAPERWORK
9. SELL THE SIZZLE
10. ASK THE CLOSING STATEMENT

Get more info from his blog.

http://webfilmschool.blogspot.com/2006/12/chapter-14-financing-12192006.html

I was flamed in the pages of Going Private, a memoir blog chronicling the insights of a private equity professional. Nothing better to do? Read the latest musings here. Short on time? This sort of sums it up:

But, then again, they don’t seem to know the difference between revenue and net income (in my not entirely limited experience a very common problem in Hollywood).

And then there is:

I’m not sure they understand the structure of film production financing, or the nature and purpose of the many preferences that plague such financings. Clearly, the ramifications of changes in these structures in the Cruise case and way they give Cruise a major pay and status cut are lost on the authors. This is a pity, since they purport to be experts on the subject.

Ouch!

Making my job as a hard working Film Funding Blog author rather easy, Going Private provides the data to refute their own argument:

Budget estimates on the film vary, but range between $150 - $220 million in production, marketing and development costs.

I actually think the total costs are much higher than this, but let’s use that range for discussion. The share of box office flowing to the studio from domestic theatrical distribution on a film like MI3 is likely to be approximately 50%.

As an aside, initial exhibition terms probably started out more favorable to the studio, but the contract was likely revised downward. I agree that expectations for MI3 were not met (but maintain that the film will likely still turn a profit.)

Distributor share of box office on international distribution will probably come in closer to 48%, a little lower than U.S. share due to greater “off the top” deductions for box office taxes and theater checking (ticket audits).

Based purely on worldwide theatrical, studio revenue (their share of the box office) would be approximately $225M ($133.5 x 50% plus $330 x .48%). Pretty good for a “flop!” It is rare that a tentpole release breaks even on theatrical distribution. While I think costs are more than $225, coming this close, prior to ancillary releases, is actually a very positive indicator. That means the film will carry over a negative balance, but there are ample opportunities to recoup this shortfall in home video, television, and all other ancillaries.

Low and behold, MI3 is racking up huge sales with its DVD release. The Hollywood Reporter, well, reports:

Studio sources peg first-week sales at 3.7 million units, more than either of the two previous releases in the franchise. And that’s not counting an additional 20,000 units sold on the two next-generation formats, HD DVD and Blu-ray Disc — making “M:I 3″ the biggest-selling next-gen title since HD DVD’s April launch.

http://tinyurl.com/ymbqhr

My revenue estimate for DVD is $144M to $180M with a net of $116M to $145M. In an arcane twist, the studios can capture up to 75% of these DVD revenues without sharing the proceeds with talent, the film’s producers, or other net profit participants.

Even so, with only 25% of the DVD revenues (referred to as a royalty, the base used for revenue calculations in participation agreements) MI3 will still start to cross over into positive territory. DVD sales, TV, and other downstream distribution will trigger contractual residual payments to the writers, actors, and the director. However, I’m fairly confident that DVD revenues and income from the super-secret television output deals will easily cover those costs.

The bottom line? The studio will be fully reimbursed for all costs and stands to earn a distribution fee of 12-15% of total revenues, plus the 75% of DVD (minus replication and marketing). This is very conservatively north of $100M in profit to the studio. Final figures could easily be double this when all distribution channels are considered.

For profit participants, they may see somewhere over $50M depending on distribution, marketing, and overhead costs allocated to the picture. For Tom, he’ll make more money from his points on the film than from his $20M salary.

On a closing note, the latest rounds of hedge fund deals in Hollywood have done away with the stacked deck. Fund investors participate on equal footing with the studios, the portfolio of films include (many of) the crown jewels, and the revenue and cost estimates are fully vetted. (For example, fund investors share in the full pot of DVD revenues.) Come on Going Private, cut us a break! We may not be the sharpest tools in the drawer, but give us credit for at least being able to add and subtract (with an occasional ability to multiply and divide.) Could it be that maybe this time, you’re just wrong? Perish the thought.