A report by the BFI into the British film industry (2003-2010) came up with a startling discovery: only 7 per cent of British films in this period made a profit. You could say that nobody’s perfect, but how can an industry that consumes so much money still continue to receive financing if the vast majority of films are commercial failures? Will the long-term climb in stock price for big studios like Time Warner Inc. (TWX) continue? Or are the studios writing cheques that the theatres can’t cash?
The difficulty in answering these questions is down to the complexity of film financing and the rapidly changing sources of film profits. Traditionally films lived and died by their box office returns – you had to sell the tickets first, then when you sell the tickets, you get the money and when you get the money you get a hit.
Box office returns still dominate movie statistics and numbers like Avatar’s $1.8bn revenue for a $500m film cost grab headlines. However, this is no longer a guarantee of actual profit. A box office loss is still a loss, but a box office profit does not take into account a host of distribution costs from film prints to advertising. Advertising, in particular, can run into the hundreds of millions of dollars, cancelling out most, if not all, profits. This is partly down to the reduction in vertical integration whereby a production company can no longer rely on returns generated purely from its own studios, distributors and theatres. It is also due to a fall in domestic US box office receipts compared to costs. As a result, studios have realised that they’re going to need a bigger market.
Step up China. While the US box office is still the largest in the world, the Chinese film market is growing fast, overtaking Japan in 2013. The Lunar New Year is traditionally a strong month in China with February 2015 being the first month that the Chinese box office took more than the US. The US should be afraid, very afraid.
2014 box office
However, China is a difficult market to penetrate. Until 2011, the Chinese government imposed a quota of 20 foreign films per year, which severely curtailed Hollywood’s access to the market. While the removal of the quota by the World Trade Organisation was seen as a coup, it has benefitted China significantly as it coincided with party policy to wield a softer power influence internationally (as shown by the Beijing Olympics in 2008). Instead of a quota, China now has a system whereby all film distribution is controlled by the Chinese Film Group (CFG). Within China, CFG has the power to pre-screen film scripts and decide the direction of film financing.
Whilst CFG is seen as a profit-making organisation, its decisions tend to align with the stated aims of the State Administration of Press Publication Radio Film & Television, which has traditionally censored films for any content critical of the party. Now international filmmakers have realised that a studio’s best friend is the CFG. Some of the results are very visible, with increased use of Chinese locations in films like The Dark Knight and Skyfall. It also has a less visible impact, with film scripts edited in advance of shooting to conform to Chinese requirements and additional scenes being shot for Chinese distribution including an additional 4 minute segment in Iron Man 3 to showcase several famous Chinese actors. Studios are happy to compromise because China has made them an offer they can’t refuse.
In addition to reaching for the international box office, film companies have always been closing sales in the post-theatre market. The vast majority of profits for a film now come from DVD, Video On Demand (VOD) and TV releases where the costs are much lower and the market much larger. The complications in these releases come from piracy and a lack of real understanding of how audiences are using these different formats.
The US film industry was last thrown into major confusion in the 1970s when a series of non-traditional films like Easy Rider and the Godfather started making serious money compared to the more generic fare that the studios were used to producing. This led to screenwriter William Goldman’s famous quote “nobody knows anything”.
Once again we are back in a situation where “nobody knows anything”, leading to all sorts of release schedule confusion. Firstly there was the reduction in the ‘piracy window’ whereby films came out on DVD much closer to the theatrical release. This has since been followed with experiments such as multi-format releasing, where films are made available online, in cinemas and on DVD at the same time, and ‘windowing’, where a film is released onto, and then pulled from, different formats in sequence so as to maximise revenue. Straight–to–video is no longer the derogatory term it once was, with companies believing its better to get busy releasing than get busy failing.
In addition to accessing as many audiences as possible through international markets and format experiments, production companies are looking to reduce their market risk. For the last five years, film critics have complained that the number of remakes and comic book movies has made them mad as hell and they’re not going to take it any more. Production companies have ignored this, deciding simply that greed is good and ignoring the criticism. By turning comic books into films or remaking classics they are accessing a ‘built-in’ audience of fans who will watch the movie independent of its actual quality. The downside is a reduction in funding for original stories that could have been a contender.
Another popular technique is to share risk across production companies. Up until the 1990s most films were made by a single company that shouldered all the risk and benefitted from all the profits. Recent movie-goers will have noticed that the opening sequence of most films now involves sitting through several animated logos as the roster of film financers is called. This distribution of risk is an attempt to improve the predictability of returns in an industry that is like a box of chocolates, you never know what you’re going to get.
From this we can see a trend towards an increase in revenue sources but a decrease in income per source. So why are so many film companies profitable if so few films are returning a profit?
There is talk about the increase in costs due to union fees, but there have always been inventive ways to get around these restrictions (for example, the varied architecture of Toronto allows it to stand in for any American city with the added bonus of a 16 per cent tax break on Canadian labour costs for film shoots). The real answer probably lies in Kevin Smith’s interview with Scott Derrickson to discuss his film The Exorcism of Emily Rose, where Derrickson stated:
“I had 5% of the net of that movie. That was in my contract. And it cost $19 million. And it made $150 million worldwide. There’s no net. That’s how movie math works.”
If you can handle the truth, then there it is: nobody knows anything except the accountants.
Apologies to Some Like It Hot, Top Gun, Scarface, Jaws, The Fly, Psycho, The Godfather, Glengarry Glenn Ross, Shawshank Redemption, Network, Wall Street, On The Waterfront, Forrest Gump and A Few Good Men for mangling their quotes.