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Hollywood Apologist?

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.

2 Comments, Comment or Ping

  1. Redneck

    Sorry to be late to the party, but you still made a big error. You took the 50 % of the US gross, but you added the 48% of the worldwide gross instead of the international gross, so you counted the us revenue twice. the calculation should have been, using you numbers (193M x 50%)+ ((M330-193M) x 48%) for a total closer to 96.5M+65.75M =162.27 million minus toms hefty 30% cut. That definitely chanres the profit outlook. That doesn’t even include toms 12% cut of dvd revenue and 22% cut of television revenue.

  2. Thanks for the catch! I have to be more careful with those late night posts! The International gross is approximately $263 (courtesy of the-numbers.com). At 48%, that adds $126.24 in studio revenue from international distribution. The US tally of $133 generates $66.5 ($133 x 50%), for a total worldwide theatrical takeof $193. That is $32M less than my error-prone initial calculation, but I don’t think it changes the basic point much. This film will still be nicely profitable for the studio. A loss in theatrical is the norm. It is expected (because the upfront marketing helps propel other distribution, such as DVD.)

    As an indicator, check out this story from Home Media Retailing:
    http://www.homemediaretailing.com/news/html/breaking_article.cfm?article_id=10072

    While HD DVD/Blu-Ray does not account for much now (maybe another $1M in profit?), there is clear library value in this title.

    The tentpole release business has some very negative implications for the business, very few would fail to recognize that. But, the studios have learned how to optimize those releases and profit from them. I contend that you don’t get tentpoles without major talent on the level of Tom Cruise.

    Welcome to the Film Funding Blog! Look forward to your continued posts.

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