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Topic: Profitability of the film industry (and into the future)

Hey guys,

Long time listener, first time poster. I always enjoy hearing your opinions on films, especially the LA tidbits that you don't tend to get while working overseas.

I often discuss the topic subject with friends of mine who work in various facets of production, but since none of them are specifically on the money side of feature films we never seem to be able to get a clear answer. I was hoping that the combined experience at DIF could shed some light on it.

This is a very broad topic so I'll try to keep this as organised as possible. Here are some general assumptions I'm working from (feel free to dispute):

1) Individual studio films don't technically turn a profit, the studios operate on a 'fee' system and extract money in that way. "There is no net" etc.

2) The studios, while no longer owning theatres, still benefit from 'internalising costs' by owning their own distribution arms. Buena Vista with Disney etc.

3) The studios themselves have been absorbed into massive conglomerates.

4) The majority of studio revenues now come from non-theatrical sources. Domestic/worldwide TV, DVD, merchandise etc. Hence the increasing focus on proven brand names and garnering broad international appeal.

5) Most films (studio or otherwise) on an individual basis, lose money.

6) Independent films are financed by ordinary (wealthy) people, who don't enjoy the risk-hedging abilities of the studios (who produce slates of films), or the benefits of owning their own distribution chain.


I'll apologise halfway through for the long post but hopefully it takes the conversation somewhere interesting - here are my questions:

a) Do the film studios actually make any significant positive financial impact on their conglomerated owners? Or are they kept around just so those companies can maintain a foothold in the media/PR sphere?** I've been told that the actual end-of-the-day profits of the big studios are nothing to write home about.

b) If the vast majority of films lose money, why are there still so many privately invested independent films? Is it really just wealthy people splashing money for the glamour of the business and bragging rights?

c) When DVD/BluRay collapse, where do you see the future of film financing/distribution revenue? Netflix/iTunes?

While I imagine that Netflix/iTunes may be a nice bonus cheque for films which already exist, it seems too meagre to sustain even modest production budgets with it as the only revenue stream.

I also understand that creative works like music and books (which are relatively inexpensive to produce, financially speaking), may thrive on the Kindlestore/iTunes, unfortunately movies are orders of magnitude more expensive to make. And no, Canon 5Ds don't change that. It also appears that torrent piracy is becoming increasingly prevalent and (more disappointingly) socially acceptable.

It seems like a shame, because I feel like with the technology advancements in post-production especially, we could be seeing a bunch more smart and well produced films that sit under a million dollar budget. I don't know, however, that they'd be able to be marketed in a way that actually encouraged savvy viewers to pay for them.

In other words, are films ultimately now just aimed at those too stupid to know how to steal?

I hope some of you managed to get all the way through that post, and look forward to hearing what you guys have to say!

** I'm reminded of an interesting interview with the director of Hitch on the subject of product placement. He mentions that his "boss" (GE) doesn't really care about film or the film industry, they make fighter jets and power plants.

Last edited by alexishere (2012-01-08 08:43:10)

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  • paulou
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Re: Profitability of the film industry (and into the future)

Film money is really complicated, and those are awesome questions. There's a short book called The Hollywood Economist (with great iOS app version) that answers the basic historical and operational questions about film money. It falls on its face discussing more modern models (them newfangled playstationTunes!), but hopefully the second edition, coming out in 16 days will address a lot of the more recent developments.

Anything I tried to elaborate on would just be me potentially misunderstanding something I read in that book.

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Re: Profitability of the film industry (and into the future)

A) Hollywood has traditionally operated on the model of one box office hit paying for a stable of misses. Avatar not only pays for itself but ten other movies that don't make their money back. The number of productions used to be bigger and the amounts of money smaller, but over time, with corporate consolidation and more and more outside money financing Hollywood, the powers that be have put fewer eggs into fewer baskets. So you're dealing with profits and losses in the hundreds of millions and sometimes billions of dollars. Yes, that makes a dent even on the balance sheet of GE. The problem is that it has to be that big to make a dent, which means more of this way of things, which isn't terribly conducive to good movies, in my opinion.

B) Pretty much actually. It still amazes me that there are people who independently finance films with their own money. The odds are so terrible, the potential for return on investment so slim, from a financial perspective it's absolutely insane. I won't try and do a psychological census of every film investor out there, but for many it's the chance to walk the red carpet, hang out with a movie star, talk about your movie on the golf course, or whatever. But the potential payoff isn't negligible either. If a movie hits, it can payoff brilliantly. The general principle is the riskier the investment, the more it pays, if it pays. The less risky, the less it pays off. Film investment is risky enough that the odds are probably as good, if not worse, as playing the lottery. Which is positively stupid from a financial investment standpoint, but if the last four years of this economy have taught us anything, it's that even people very good at making money can be exceptionally stupid.

C) Eventually, most likely, all or most of any kind of hard disk media will disappear. But it will probably take longer than any of us think. Or, at least, economics and politics will keep it from being possible long after its technologically possible. Hopefully, online distribution will make it more feasible to make human amounts of money outside of the studio system. If you can make a movie for half a million and have a reasonable expectation to recoup that through iTunes, that may be the landscape of independent film in the coming years. You go to the theater to see Avatar 3, which is all spectacle and no story, and then you come home and rent Primer 3 on iTunes, which is the reverse. I could live with that.

But we're still a ways from finding an equilibrium. Right now the theaters are too expensive and online is too cheap. That's what Netflix's whole price raising/Qwickster debacle was about. They're in the midst of renegotiating the licenses for the content from all the studios and the studios are playing hardball. When Netflix negotiated the licenses the first time around, they got them for a song and a dance, because there was no money in online distribution, so the studios didn't care. But now there is and everybody knows it, so the studios are trying to hang onto that money and Netflix is caught between recalcitrant content owners and pissed off customers. Time will tell if they can thread the needle, but given how they handled everything with the price raising and Qwikster, my money would be on probably not.

Last edited by Brian (2012-01-08 16:53:29)

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Re: Profitability of the film industry (and into the future)

Paulou: Funny you mention it, I read that book recently and found it fascinating - looking forward to the updated version. If you haven't checked out Epstein's other books he covers some great stuff - how Debeers dominates the diamond trade, how the Rockefellers reinvented their shady past with a huge PR push and so forth.

Brian: Thanks for the detailed response, some great points there. I'm guessing you meant "more eggs in fewer baskets", ie. they're taking bigger gambles on individual projects. Makes sense in the context of big business wanting to play bigger hands.

I haven't done the research to see which of his are studio or independently funded, but I remember reading something where Cronenberg was discussing his process of finding "some rich guy to invest". I wonder if that approach can make sense for the 5-20million range when dealing with (somewhat) proven quantities like him. Woody Allen, Coen brothers etc seem to be able to make fairly cheap (relatively speaking) films that presumably do okay. Although 'A Serious Man' for 7million isn't really a bargain if it bombs.

I've been thinking a similar thing with regard to the Netflix debacle - seems pretty risky to set a fixed price-point for such a huge customer base, without really having any control over the cost of their inputs (content). Netflix instant isn't (technically) available where I am, although I was thinking that in a hypothetical world where every piece of media content on the planet was available through some kind of 'super netflix' and your 50USD/month subscription was just divided between all of the things you watched, could that actually work?

Assuming everyone played ball and watched everything through the portal, for reasons of social expectation or whatever, it would act as a sort of 'media content levy' across the whole internet.

Interesting stuff though guys, look forward to hearing other peoples' thoughts.

Last edited by alexishere (2012-01-08 17:46:46)

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Re: Profitability of the film industry (and into the future)

Damn, man, you bring the thunder with your first posts.

I have nothing smart to add to this conversation, I just wanted to high five ya.

Teague Chrystie

I have a tendency to fix your typos.

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  • paulou
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Re: Profitability of the film industry (and into the future)

Speaking strictly of profits, the importance of box office is overinflated because it's easy to report and rationalize.

For studios, box office receipts only stand for like 12% of the profit that will be made over the reasonable lifespan of a title. They're just good for publicity and bragging rights ("Number One Movie of Type This Season!").

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Re: Profitability of the film industry (and into the future)

And the winner for best newcomer is...

http://img818.imageshack.us/img818/153/screenshot20120108at180.png

...alexishere!

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Re: Profitability of the film industry (and into the future)

mur...  I think the big tent pole movies are much more likely to be the ones where only a small percentage of the profits come from the theatrical release, mainly due to the ridiculous amounts of merchandising that goes on for big blockbuster movies. You don't see McDonald's putting "The King's Speech" images on their plastic cups. They probably lose a lot of product placement money on period dramas as well.

I often wonder what would happen if the studios dumped one of their hundred-million dollar marketing campaigns on some little indie drama like "Take Shelter". They have a trailer that 99% of the population probably will never see and that's about it. Would people go to see "The Land Of Blood And Honey" if there were billboards and TV commercials hyping it up all over the place?

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Re: Profitability of the film industry (and into the future)

Thanks for the thoughts guys.

I realise that not every studio film lands on McDonalds cups, just that they have that breadth of cross promotion when they need it. That's a really interesting point about lack of product placement in period dramas, the thought had never occurred to me.

Would be interesting to hear Dorkman or Trey's thoughts on this, as I gather they have battled this terrain in the past, or are now. I'm in the process of working out a deal with a private investor for an approx. USD $100k Super16mm feature that I've written, and I'm trying to learn as much as I can about the distribution world before I construct the contracts etc.

I'm not writing Star Wars but I'd hate to leave out the modern day internet distribution equivalent of the "merchandise clause".

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Re: Profitability of the film industry (and into the future)

Excuse a gross oversimplification on my part.  But wouldn't the smartest thing for a filmmaker to do right now, in 2012, be to either:

A) strike up a relationship with Netflix/Hulu/Whatever as a newly formed distribution company to shell out a series of releases?  Which would be a good time to corral all those people you know who are making their own movies, you acting as an umbrella corp (I assume they have a minimum number of releases they'll expect from you in a year, so enjoy that paperwork),

or

B) buddy up with an existing low-rent distribution company that has an existing contract with Netflix that isn't expiring within the next 24 months?  And budget your film according to that?  YOU probably won't make any money, but it should recover costs, which, I assume, starting out, is what matters most.

I don't pretend to know anything.  But that's kind of my thumbnail business plan as I pulled it out of my ass.  It's subject to failure at the first sign of contrary fact.

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Re: Profitability of the film industry (and into the future)

I think you're right on target iJim. I don't think Hollywood will go away anytime soon, but there is much to bemoan about what they're producing nowadays.
A less consumerist, more merit-based system of financing for the kind of fillms that have become the realm of 'indies,' would do well and could change the game.

I'd love to hear thoughts or suggestions on how to get in with one of those.

Last edited by drewjmore (2012-01-11 03:24:17)

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Re: Profitability of the film industry (and into the future)

Good call iJim and those kind of options are definitely the sort of things I'm going to look into.

I think at this stage it really comes down to the sort of dollars that places like Netflix can afford to pay, and if it's viable for them. I'll report back with my research when I get somewhere with it, if people are interested.

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