Yeah, we’re going to have to talk about money. Again.
I’m pretty sure I’ve said before that when it comes to movies, money—the numbers—means nothing. Right? Yes. I’ve said that. It’s one of my truisms. Movie studio accounting is so creative—like, SUPER CREATIVE—that you can take the same set of figures and interpret it six different ways and make it mean something different every time. So I hate it when fans start using a movie’s revenue to bludgeon each other with why Movie X and Actor Y is/isn’t a success/failure and their career is over/skyrocketing because Movie X made/lost so much/little money. It’s annoying because 1) it propagates a lot of stereotypes about filmmaking that don’t really exist anymore, and 2) I end up getting a lot of email from either the fans trying to convince me of whatever it is they want validated or my friends and acquaintances who work for movie studios and accounting firms who are totally baffled as to where some numbers come from, and then expect me to explain it when I can barely add myself.
So, I sat down with some folks over the last few days and reviewed what’s going on with film accounting in the post-economic collapse environment—because we’re in a major paradigm shift for how movies are made and financed—and we’re going to have a talk about this, so that if you must engage in this type of talk, you at least have a better idea of why it’s all bullshit anyway.
The first rule is—fans are not welcome. You can’t approach any conversation about the numbers from a fan’s perspective. Movie math can be fascinating, but as long as you’re trying to prove/disprove something relating to the talent, your position is compromised from the get. You’ve got to nix the vendetta and just look at the numbers as raw data without the personal slant. It’s a lot easier to interpret what you’re looking at once you’ve stopped trying to justify your fan belief of the week. The second rule is that if you have to talk about the numbers, keep in mind that everything is an estimate, and no one really knows for sure what a movie’s profit and loss statement looks like, except for people responsible for the bendy math that either makes something look more successful than it was to encourage more investment, or makes it less profitable so they don’t have to pay back-end deals. Because yes, studios will straight up lie about a movie’s profitability in order to punk out on back-end deals.
Now. Let’s talk numbers.*
For the purpose of this being somewhat coherent, I’ve invented a movie studio, Polydore Pictures. In 2012, Polydore is slated to release two dozen films. Used to be, a studio would negotiate with the theater chains to get each movie into the cineplex, with the theater keeping a percentage of ticket sales. Usually, that relationship broke down to roughly 55% of domestic ticket sales going back to the studio, and the theaters keeping the rest. But then the theater chains all went broke in the early 2000s, and the financing model changed. So now, Polydore has a contract with the theaters that packages their releases together into a flat-rate deal, with the exception of a few select properties that are projected to make the big money. Those will be negotiated separately, in percentage packages.
For 2012, Polydore sells fifteen of their titles to the theaters in a flat-rate deal. That deal amortizes the payouts to the theaters over the year, say, $525 million is earmarked for theater payouts over 12 months. That money is paid from an account that is wholly separate from the accounts taking in the revenue of the movies currently in release. It’s not an A=B=A deal, so it’s not entirely apropos to judge a movie’s profitability on an assumed percentage deal because 1) the theaters probably aren’t being a paid a percentage for that ONE movie, but are getting paid for releasing ALL the movies, and 2) the movie’s actual revenue is going into an account where it will be parsed later to pay investors, talent, fund potential sequels, and internal bonuses if the property performs really well, etc. The money going to the theaters is mostly coming from revenues earned in the previous fiscal year. So assuming a movie is losing 45% of its revenue to the theaters isn’t really accurate, because that $525 million is amortized over fifteen titles—no one movie is bearing the brunt You basically shouldn’t account for that at all when you’re trying to judge success and failure with the numbers. Theater payouts are a separate set of books.
What about the nine movies they didn’t package? Six of them are specialty division releases—foreign language/arthouse films—that get deals done separately from the mainstream package. In the case of AMC, who has bought up a lot of independent theaters and maintained them as arthouses, Polydore’s flat-rate deal extends to those six pictures. So the AMC deal is for twenty one movies, not fifteen (which further decreases the burden on the mainstream releases). For indie theaters, the flat-rate deal is a way better proposition than a percentage deal, because these movies don’t usually make a ton of money, and 45% of no money is still no money, so the flat-rate guarantees revenue regardless of how the movies perform. But where there isn’t a chain-sponsored arthouse, Polydore will make whatever kind of deal the theater can handle. If they can screen all six films, great! Flat-rate deal. If not, they’ll go into percentages and in these cases, the theaters will require more of the take because they know going in they’re not talking about the bonanzas the mainstream theaters will see, thanks to tent pole titles. It’s actually easier to lose money on these small films, which are made for peanuts, because the studio is way less protected against that loss than they are with a blockbuster, where they’ve shunted as much of the debt burden onto third parties as possible.
Now, the remaining three films are the tent poles, the major blockbuster releases. Each movie is negotiated separately, and the theater deals are almost always percentage based, because with these movies, the potential for a bonanza is highest. Polydore, being a major studio with a lot of clout, is going to get the sweetest end of these deals. They’ll get AT LEAST 55% of the domestic revenue, with the reality being they’ll likely get 60%+. These movies are expected to make a lot of money, and 1/3rd of a lot is still a lot, so the theaters will take lesser percentages than they will from a mid-range studio releasing mid-range movies, where the grosses often don’t top $100 million. But even still, the grosses going back to the studio are not being flipped directly back to the theaters. They’ll enter the labyrinth of funky movie math and then the theaters will get paid at the end of the quarter with entirely different money, which probably came from the parent company, not the movie studio. The studio is always trying to keep as much money as possible. That’s the goal.
Now let’s talk about the part where movie studios are lying liars who lie out their lying holes. Better known as, how Prints and Advertising (P&A) costs are the black hole from which money never returns. The only rule of thumb regarding movie math that is still remotely applicable is the basic cost + half model. A movie is successful if the domestic gross covers the production budget + half again. So if a $100 million dollar movie makes $150+ million domestically, then it’s a success. The assumption there is that the P&A costs are half what the movie cost to make. That’s usually true (unless you’re Disney—then you spend on P&A like money is going out of style). In Polydore’s case, they have an internal marketing department who handles all their P&A.
Blockbuster 1, Superheroes Punching Faces, cost $203.45 million to make, which gets reported as $200 million, because when do you ever see anything but nice round numbers on a budget projection? The P&A ran another $110 million (extra spendy to make sure the mega-investment is returned). They need to top $310 million, domestically, to be considered a success. The theaters are going to get 35% of the revenue, but that money will pay out from other funding. At the end of the year, Superheroes Punching Faces is a big hit, pulling $500+ million at the US box office. Hooray!
Polydore will still declare it a loss.
How? P&A. It’s an expenditure for which there is no revenue. The production budget relies heavily on investors who must be paid back and also accounts for talent salaries, including back-end deals. Talent and investors with enough clout will get points on first-receipt revenue, meaning they get paid before anyone else, but it’s not uncommon for people to get screwed out of their points when the studio declares their movie a loss. But the marketing department doesn’t have to be paid back—they’re pure overhead. It’s kind of like in a law office, where the attorney has billable hours but the legal assistant is salaried, which is just overhead the firm absorbs. So Polydore has one statement saying they spent $110 million on P&A and another that’s been magicked by the accountants to explain why they’re never getting that $110 million back, and so the movie is a $110 million loss. When internal documents were leaked from Warner Brothers showing Harry Potter and the Order of the Phoenix was a $167 million loss, despite making over $900 million globally, it basically came down to WB not paying themselves back for marketing costs.
What about foreign box office and VOD/home video/rental grosses? Gravy. That’s all gravy. The cost + half model assumes that if you break even domestically, at the least, then anything beyond that is gravy. This is why twisting the numbers is a losing game—the studios are just looking to recoup the total cost of the film domestically, since they can write down P&A and then keep the foreign/home-platform revenues for themselves. Once you get into, “Yeah but they’re only getting X% of the box office,” you’re making assumptions about something that not only do you not really know about, but is probably not actually happening anyway, and ultimately won’t matter when they write off the marketing costs as a loss regardless of how the film performs. All you’re doing there is making a bunch of liar-liar-pants-on-fires look better than they are. They’re pirates. Stop making them look good.
In reality, though, foreign box office is often not as lucrative as it looks on paper. Between the shitty dollar and more aggressive exhibitor deals—percentages are still the dominate factor—the studios typically see less than half, even often less than a third, of their foreign gross. Polydore will end up getting more back, eventually, through their parent company, which has fingers in many international pies, but that’s why they want to make cost + half domestically, so that what they do end up with is pure profit. Ditto for the home video/VOD market, which thanks to diminishing DVD sales, is no longer the cornerstone of movie financing. I’m not sure the emerging VOD market will ever fully match the DVD market of the 1990’s/early 2000’s, so the only real “cure” for slacking movie profits is to lower the cost of filmmaking. This is why movies like Angry White Man Seeks Revenge and Comedians Farting In Each Other’s Faces have become the heart of the studio’s slate—they’re made on the cheap and can turn 200% profits.
So. The numbers. They mean nothing. Trying to twist them to suit your own purposes just plays into an already obfuscated system and feeds the cycle of misinformation and outright propaganda the studios want you to believe about financing and where the money goes. All you really need to know is that none of this ultimately matters because it’s all a mess and they’re probably declaring it a loss anyway, for the tax write-off. If you want to use the numbers to judge the success of a movie, just go by cost + half and forget percentages and foreign take and who’s getting what. If they meet cost + half domestically, they’re going to make a profit, no matter what the final profit and loss statement ends up saying.
*All of these numbers are completely made up and are just nice, round numbers my math-challenged brain can handle. Polydore Pictures is not a stand-in for a real movie studio.
This entry was posted on June 27, 2012 at 10:28 AM and is filed under Movies with tags Creative accounting, Don't be a fanboy, It's all relative, Let it go man, Lying liars, Movie math, The numbers are meaningless. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.