How do studios make money from movies? (Asking for a studio friend…). The movie business exists of course to make entertaining films (or at the very least tries to) but they really exist to make money. This week Kevin Costner took one of the biggest gambles ever seen when he invested an eye-watering $38 million of his own money into funding four period Westerns, the first of which is Horizon: An American Saga which was released on Friday. It is a risk because not only are westerns notoriously hard to fund, let alone sell to audiences these days, there are no guarantees in this business that he will make a sliver of that money back. Costner had to finance a bit himself, but he managed to talk two anonymous investors into putting up the rest of the money, while Warner Brothers seems to have taken on distribution as a favour to a once very lucrative Hollywood star. This really illuminates that it is not a film that makes or loses money at the box office, people and companies do.
So how do studios make money and in what order are people paid back?
Let’s take Barbie as an example. Say three investors put up all the money for the film, with Investor A putting up 10%, Investor B putting up 60% and Investor C putting up 10% (and the remaining 20% is covered by the post-production house who wants to do the editing after filming has wrapped). Once the (massive) budget of $145,000,000 is accumulated and filming is completed, we see how much of a dent the box office makes in order for this money to be paid back. Hint: it made a significant dent.
The beginning of the recoupment ‘waterfall’ starts at the box office, with the money from the box office flowing into different tributaries of companies and people who need their earnings. Once the box office figures emerged as making $1,485,000,000, the people that need to be paid back are as follows.
- Exhibitors – Also known as cinemas, exhibitors usually have a deal with the studio but the rule is thumb is that it is a 50:50 split. In Barbie‘s case, cinemas would have received approximately $742,500,000 – and they receive it first in the waterfall.
- Distributors – Distributors get about 25% of the box office, or 75% of what the exhibitors got which for Barbie would be around $556m.
- P&A Repayment – Finally, Print and Advertising (P&A), which is the marketing and promotion of the movie must be paid back from the box office revenue. The rule of thumb for big blockbusters is that P&A is usually 50% of the production budget.
After these initial payments have been made, we are into ‘Gross Receipts’ territory. The following people or companies are paid in this order:
- Collection agency
- Sales Commission
- Sales expenses
- Sales advance
- Investor A repayment
- Investor B repayment
- Investor C repayment
- Post house repayment
Following these payments, if Net Profits are reached (which they were in the case of Barbie), the following people will receive an additional percentage payment.
- Investor A
- Investor B
- Investor C
- Post House
- Producer
- Director
- Actor 1
- Actor 2
- Actor 3
- Writer
- IP Author
In the streaming era, the difference with the streaming waterfall is that it is compressed and there are less tributaries as technically there are less individuals to pay back as theatrical is removed. For example the streaming platform may be the producer and the sales agent so it is one payment.
It must be noted that the Barbie example is really an anomaly, and many films do not reach these heights but it does show that it is a lucrative business when it works out and difficult when it does not. The rule of thumb is that a film must make around two and a half times its production budget to be considered a success to pay everyone back and with a little extra left over. That’s why ‘breaking even’ is simply not enough in the film business and you have to aim much higher because nothing is guaranteed. Film finance specialist Mike Kelly says that the recoupment waterfall is more like a ‘dammed river,’‘If you stand under a waterfall then you will invariably get wet, whereas you can invest in a film and remain parched.’
FILM FOR THOUGHT 