Hollywood
101
The entertainment industry
has never been more robust or profitable. Despite
the large number of enticements made available
to the public for its leisure-time dollar over
the past ten years, theater going has remained
a constant form of low cost entertainment.
According to The National
Association of Theater Owners, ticket sales totaled
$9.5 billion in 2002 - a growth of more than 123.5%
since 1987.
Total admissions were 1.63
billion - an increase of over 50.9% since 1987.
Between 2000 and 2010, global box office revenues
will grow to $28 billion.
[back
to top]
The
Advent of the Independent Producer
The end of the 1990s brought
downsizing and restructuring to large corporations
in industries across the United States. The studios
were no exception.
Maintaining expensive production
facilities and supporting top-heavy infrastructures
have become false economy. Add to that monolithic
overhead expense the demands of unions and guilds,
runaway production budgets, and attrition across
international borders (especially to Canadian
competitors) and studios have had to make drastic
adjustments to the relative economic inefficiency
of their vertically integrated model for the manufacture
of feature films.
One strategy is to release
fewer films – homogenized down to the lowest
common denominator - banking on marketing counsel
as to which assets might “guarantee”
increasingly unrealistic expectations for grosses
per film.
Blockbusters like these
are what drive this strategy: Titanic earned $600
million, Star Wars $460 million, Harry Potter
$317 million, Lord of the Rings $310 million,
Pearl Harbor $198 million, and Spider-Man $115
million - in its opening weekend alone.
Studios are increasingly
willing to pay whatever is necessary to assemble
the right “elements” in a film to
achieve a “blockbuster” – but
the major flops far outweigh the handful of record
breakers.
Another strategy is to
follow the cue of other large corporations in
other industries that have turned to out-sourcing,
joint ventures, and every conceivable variation
of virtual creative teams to minimize (ie: “share”)
the risk (and wealth).
Studios have found it far
more economical to hire, on a film-by-film basis,
the professionals who once comprised much of their
permanent staff. Whereas in the golden days of
cinema, the development, packaging, financing
and production of a film were activities all conducted
in-house, each of these activities are now often
undertaken by a constantly changing constellation
of independent contractors or partners.
As a result, there now
exists a whole community of film professionals
outside the studio system, willing and able to
partner in the production of feature films. These
professionals are available on very favorable
terms to independent production companies.
Craft guilds and unions
almost uniformly have provisions in their basic
agreements lowering the floor for wage and benefit
terms as well as staffing concessions to accommodate
the economics of modestly-budgeted films.
In exchange for roles or
films that are more challenging and meaningful
than those generally offered by the big studios,
actors and directors of considerable reputation
will often work for a fraction of their normal
salaries on modestly-budgeted projects.
Recent examples of this
are films like Chasing Amy, In The Bedroom, Monster’s
Ball, Billy Elliot, The Usual Suspects and Snatch
whose budgets were $250,000, $1.7 million, $4
million, $5 million, $6 million and $6 million,
respectively; which featured such talent as Ben
Affleck, Billy Bob Thornton, Halle Berry, Benicio
Del Toro, Sissy Spacek, Marisa Tomei, Kevin Spacey,
and Brad Pitt.
[back
to top]
Movie
Making 101
The production of a motion
picture can take roughly six to twenty-four months
and generally consists of four stages: Development
(including financing and packaging), Pre-Production,
Production (or principal photography) and Post-Production.
[back
to top]
DEVELOPMENT
A film usually begins one
of three ways:
The rarest (but most publicized)
is when an agent circulates a great script by
an unknown writer. If this (speculative) “spec”
script is bought, that screenwriter is the “flavor
of the month” - and (if he or she is smart),
parlays that “heat” (word of mouth
and publicity) into a career launcher.
More often, a proven-successful
writer presents an idea for a script he or she
would like a studio or production company to pay
him or her to write. This famous “30-second
pitch” may result in the Development Executive
contracting the writer to flesh out a treatment
and/or screenplay - which will then become the
property of the hiring entity.
Perhaps most common is
when a Development Executive inside a studio or
an independent production company comes up with
a concept (one or two lines of a story idea) or
has perhaps optioned a book or the life rights
to someone’s true-life story – and
interviews writers to “develop” the
concept under their tutelage. Again, this literary
property remains an asset of the hiring entity.
Once the script has been
acquired, redrafts are usually commissioned, sometimes
by the original writer, but more often than not,
a high profile writer, known for his or her particular
style or strengths (and thus providing some measure
of comfort to the studio and/or investors), is
matched to compensate the weaknesses of the spec
script. Sometimes multiple “hired guns”
are brought in to punch up the dialogue, make
it funnier, more exciting, solve structural problems,
adjust for casting preferences, accommodate the
Director’s vision, and so on.
As scriptwriters are hired
(and fired), a short list of A-list Actors and
Directors is developed (also constantly changing),
budgets are approved, and producers assigned.
This is the “Development” process.
[back
to top]
PACKAGING
After an approved screenplay
has been fully prepared, the film enters the “packaging”
stage, during which the studio or production company
pursues the director, principal actors and other
key creative personnel, estimates the film’s
budget and preliminary production schedule.
Often, the addition of
these new players necessitates further development
of the script to accommodate actor and/or Director
prerequisites to committing.
[back
to top]
FINANCING
The producing entity must
also raise financing for the film. Sometimes this
happens before development – or at any point
during or even up to the first day of Principal
Photography.
The number and combination
of financing sources and vehicles is limited only
by the imagination. Most common are private investors,
publicly or privately raised pools of investment
capital, and/or film studios and pre-sales of
ancillary rights or merchandising and licensing
contracts.
Independent production
companies typically finance their production activities
from discrete sources – with a goal of completely
financing their motion pictures before the commencement
of principal photography.
Producers using bank financing
for production most often use private funding
for development. This structure allows them to
option literary properties, attach directing and
acting talent, and cultivate multi-territory relationships
for their pictures. Critically, this funding structure
also allows them to develop and produce multiple
picture slates and to own the copyrights to their
pictures.
Development funding is
usually accomplished through subscribing investors
in multi-picture development company offerings.
The production company and the investors own the
development company. There are a variety of development-offering
scenarios, but most of them deliver the investors
returns from the development slate until they
recoup their investment and allow them to participate
in the completed pictures' earnings.
[back
to top]
PRE-PRODUCTION
The two to four month period
between the approval (ideally) of the finalized
script and before cameras roll is called “Pre-Production.”
This period is when written
commitments, often backed with non-refundable
“pay or play” money, are sought for
talent, budgets and schedules are finalized, insurance
and a completion bond are obtained (if required),
shooting locations, studio facilities, and stages
are secured.
This phase is usually about
a 1:1 ratio for the production schedule (i.e.:
a sixty day shoot would have sixty days of pre-production).
(Obviously, there is a
lot of overlap between each of the phases and
rarely, if ever, do they break down as cleanly
as we are trying to illustrate them herein for
simple clarity).
In an ideal world, producers
try to have all the contracts negotiated and consummated
before the first frame of film rolls through the
camera. Notoriously, this isn’t always the
case. Some films even (Casablanca being a classic
example) have actually entered into production
without a completed script.
[back
to top]
PRODUCTION
The actual filming of the
motion picture is called “Principal Photography.”
Independent films take
typically 3 – 12 weeks while most studio
films take between 3 - 5 months, all of which
can vary widely based on budget, location, weather,
and specific requirements (special effects, etc.)
Major cast members are
rarely used for the entire time period due to
their exorbitant rates. The schedule is usually
set around their prior commitments and contingent
on their complicated logistics.
Once the production has
gotten to this stage, it is unlikely that a studio
will shut the picture down - even if the picture
goes over budget.
[back
to top]
POST-PRODUCTION
Immediately following principal
photography, the film is edited and synchronized
with dialogue, sound effects, and music soundtracks.
And in some cases, special effects are added.
This phase is generally referred to as Post-Production.
It is often said that the
film is “created” three times: once
when the script is written, once when the actors
and directors bring their collaborative spirit
to the actual shooting of the script, and finally,
when the director and editor actually put the
film together out of the raw footage obtained.
The Editor and Director agree upon takes and cuts,
they can even re-arrange the storyline or change
the tone through the editing process. Once the
titles are completed, the film is “locked”
and a negative is created from which release prints
are struck.
Marketing
During post-production,
materials are created directly relating to the
distribution of the film (e.g. trailers for television
and theatrical exhibition and advertising campaigns
that include posters and print ads).
The post-production period
used to require six to nine months, but recent
technological developments have dramatically shortened
this time frame to two-to-five months for most
films.
[back
to top]
DISTRIBUTION
Shortly after post-production,
a film is ready for distribution.
Before the audience can
buy a ticket or rent a video, the movie has to
get off the producer’s desk and into the
movie theaters. This is called “Distribution.”
All industries have wholesalers.
Whereas in other industries, the wholesalers are
customers for the manufacturers who buy inventory
product at discount prices, add a price mark up,
and then resell at a higher price; in the entertainment
industry, these intermediaries are studios (for
films they have not produced themselves) and/or
independent distribution companies.
While the major studios
usually distribute their own product, independent
producers license these rights to the studios
or to independent distribution companies. These
rights may be for domestic or international theatrical
distribution, for home video, pay-per-view, cable
or syndicated television, or any combination of
media and markets.
Bifurcation
of Rights
Independently financed
films have the additional opportunity to keep
revenue streams from domestic (United States and
Canada) and international markets separate –
thus maximizing earnings potential. This process
is called “Bifurcation of Rights.”
Revenue
The economic life of a
feature film may last for decades but generally
the bulk of the revenues will be earned over the
first three-year period.
Often, investors and producers
see their first profits when a film is acquired
by – or a contract is negotiated with –
a distribution company. Shine, Slingblade, and
The Spit Fire Grill were all financed by independent
sources and secured $10 million each through their
initial distribution contracts.
Shine had a direct cost
of $4.5 million and received $10 million in domestic
and international advances . Slingblade had a
direct cost of $1 million and was acquired by
Miramax for a $10 million guarantee . The Spit
Fire Grill cost $6.1 million (including deferred
compensation) and was acquired by Castlerock for
a $10 million advance .
Miramax paid $5 million
for Swingers (which had a budget of $250,000).
$750,000 of that amount went to pay off deferments
while another $1 million was paid in commissions
to agencies, leaving about $3 million for producers
and equity investors.
The Blair Witch Project,
while undeniably an anomaly, is worth mentioning,
as it seems to be the pie-in-the-sky lottery benchmark
by which popular culture gauges film investing.
The production company received $1.2 million from
Haxan Films as an advance on a film that cost
less than $350,000. Their eventual share of the
US box office was $45 million. After payments
to attorneys, investors, and so on, the production
company’s five-member team split the remaining
$20 million.
Today, most theatrical
motion pictures are released in this sequence:
domestic then international movie theaters, home
video, Pay-Per-View, cable, pay TV, satellite,
network TV, and finally free TV (independent television).
A movie will appear in these markets in a two-year
window following its completion and then will
often re-appear in several of the television markets
in a second two-year period.
Once in the distribution
phase, the first year’s revenues will consist
primarily of theatrical receipts. The second year’s
income is made up of remaining theatrical receipts
and the bulk of the home video income. The third
and fourth year’s revenues will be derived
from the principal television runs and continued
home video rentals.
The five markets that have
the biggest impact on the revenue produced by
films are: home video, DVD, pay TV, satellite,
independent television, and traditional theatrical
release.
- Major Theatrical Distribution
like Paramount, Columbia, Fox, etc.
- Cable networks like
HBO and Showtime
- First run satellite
premieres like Direct TV, Starz, etc.
- Video chains like Blockbuster
and Hollywood Video
- Foreign-market distributors
Theatrical
Distribution Strategies
Theatrical Distribution
is achieved by an experienced distributor’s
licensing and marketing of a film for exhibition
in theaters on a rental basis. The distributor
is responsible for development and placement of
advertising, publicity and promotional material
in appropriate advertising media, as well as the
purchase and delivery of film prints to theaters.
A studio has the ability
to put 3,500 prints of one film in circulation
on opening weekend. A “wide” release
for an independent film would be more like 700
– 1,200 screens, adding more theaters as
it increases in popularity.
Although the terms of a
film’s theatrical distribution vary greatly,
there are certain fundamental economic relationships
that are constant. The actual theater showing
the film is called the “exhibitor”
(AMC, Pacific, Loews, Edwards, etc.) The exhibitor
retains a percentage of the picture’s box
office receipts (called “rentals”)
and disburses the balance to the studio or distributor.
A major studio release usually has a 50/50 split
while independent films average 49 percent (up
from 47% in 1997 and 45% in 1994). The exhibitor
keeps all the income from popcorn, candy, drinks,
etc.
When a film has been financed
and distributed by a major studio, the studio
usually divides its gross film rentals in a number
of ways. The studio pays itself a distribution
fee. Ordinarily this fee equals 30-35% of the
U.S. and Canadian theatrical rentals, 35% of those
from other English-speaking countries and 40%
from the remaining international markets. In addition,
the studio reimburses itself for all costs related
to the advertising and promotion of the film.
A general overhead fee will also be taken by the
studio-as-distributor. And finally, as financier,
the studio recoups all actual production costs
plus interest and then takes an additional overhead
fee equaling 10-25% of the actual budgeted costs.
This overhead payment defrays the costs of the
studio’s production facilities, staff, and
investment in the development of the other motion
picture proprieties they have developed that never
got produced. An additional fee is usually collected
if the studio’s facilities are actually
used to produce the picture.
After all such costs have
been recouped and fees paid, the remaining net
receipts are deemed profits. These amounts are
disbursed to the parties who have a profit participation
of profit interest in the film.
Obviously, the later a
studio is brought in, if at all, and the less
involved they are in the project, the greater
the profits are to the producers and their investors.
Ancillary
Markets
The new movie markets are
growing so rapidly that they are no longer just
supplements to the basic theatrical market, but
have become key markets themselves. Domestic theatrical
receipts, for the majority of films, now contribute
only twenty percent to a film’s total revenue.
This figure continues to drop. As a movie is exploited
in several markets, the investment risk is diminished
and the earnings potential increased.
Home
Video/DVD
The home video (Beta/VHS)
market began in the United States during the mid-1970’s
and grew steadily until 1981. Explosive growth
occurred in late 1982 and early 1983.
Cable
and Broadcast Television
Television exhibition includes
over-the-air reception for viewers either through
a fee system (cable) or the advertising-supported
“free television” (national and independent
broadcast stations. The proliferation of new cable
networks in the last fifteen years has created
what’s called in the industry as the “fragmentation
of the dial,” increasing competition –
and opportunity – on all fronts.
Cable television has grown
steadily over the past twenty years, accelerating
during the past ten years with the addition of
many pay TV subscriber services. In 1984, 43%
of all the television households in the United
States had basic cable, totaling approximately
36.5 million households. Currently there are 34.1
million pay cable households, 12.9 million satellite
households and 69.1 million computer households.
The main staple for many
pay television services is motion pictures originally
released in theaters. Home Box Office has a 400
film a year appetite, and Cinemax, its sister
service, has a diet of 200 films per year These
services combined represent 60% of the market;
Showtime/The Movie Channel has a 28% market share
and other smaller pay television services make
up the remainder.
Independent
Syndicated Television
Independent television
is a major source of revenue for theatrical motion
pictures. Historically, the six major networks,
CBS, ABC, NBC, WP, UPN and FOX, have dominated
television broadcasting. For advertisers, the
networks have always insured the greatest product
exposure and most efficient use of their dollars
by broadcasting programs with the widest audience
appeal.
Foreign Theatrical and Ancillaries
Most films today made for
U.S. release generate more revenue abroad. Generally,
if a film does well domestically, it becomes popular
in most foreign markets, particularly in Europe
and Australia. Until recently, 50% of the revenues
were realized overseas.
Ancillary sales including books, soundtracks and
merchandise must be set seven to fourteen months
in advance of the theatrical release.
Distribution
Strategies
In order to increase the
chances of a film becoming a “blockbuster,”
studios have come to rely on “wide”
releases - a pattern of distribution in which
a film’s initial exposure consists of 3,500
theaters, or more.
Each print of a film costs
approximately $1,500. Thus, for a 1,000-print
initial release, print costs alone can total $2
million. Add to the cost of prints alone the cost
of advertising and promotion for a nation-wide
release, and the average distribution cost of
a studio film now totals $20 to $40 million. In
short, the total cost of launching an average
studio film comes to $47.7 million. Assuming that
approximately 50% of the box office receipts are
returned to the distributor, a Hollywood film
must now make $80 million at the box office just
to break even.
This strategy has resulted
in some massive losers, but it has also paid off
with blockbusters. While the losers outnumber
the winners, the winners are so successful that
Hollywood’s overall profit margin remains
high, thus, the strategy continues.
The fastest way to release
a film is to release it “wide.” Studios
use this strategy on well-known or easily exploitable
subjects (a best selling novel, a favorite comic
book, celebrity cast, etc.) that lend themselves
to massive television advertising campaigns.
Wide release allows for
a big opening weekend when thousands of their
prints open simultaneously around the country.
Assume a film opens on 2,000 screens, the average
mall theater seats 500 people, and the film shows
three times a day - you have around a million
people leaving the theater on Saturday - and if
they tell their friends to see it – the
film has “legs,” which means that
it’ll run for a long time at the box office.
Studios and economic forecasters often use opening
box office weekend numbers as a surprisingly accurate
measure of what the total domestic box office
will be (and subsequently, foreign distribution
and rentals.)
A moderate release might
open with fewer than 500 theaters overall. The
standard definition for an independent used to
be a film that opened in 475 theaters or less.
A slow release would bank
on a gradual familiarizing of the public through
favorable reviews and articles and the deliberate
spreading of word of mouth.
Saturation, platform, rollout,
sequencing, or cascading are various distribution
strategies. The film starts in a few select theaters
and moves out in some sort of a pattern. The film
may open in a particular market because it was
shot there, there’s an affinity for the
geographic area, or the locals will go see it
for other affinity reasons.
Films with difficult themes
or at least an unpredictable audience may open
in New York and Los Angeles. Capitalizing on the
cosmopolitan nature of those cities. Boys Don’t
Cry opened on two screens and expanded to twenty-two
screens. After Hilary Swank’s Academy Award
nomination, their distribution hit a high of 365
screens. Had the word of mouth not continued to
grow, the film (which was originally released
10/8/99) would have likely been re-released after
the February nominations were announced (but in
this case, it was still in theaters). The film
had a $2 million dollar budget and grossed $11
million in the US.
One print of a film usually
costs between $1,200 - $1,500 (depending on the
length of the film and the current film stock
costs). Thus, a wide distribution can cost over
$3 million for prints alone. Add to that the costs
of ads in major city newspapers (running anywhere
from $1,000 - $10,000) and its no wonder many
independent films expand their distribution at
the limit of their advertising budget.
Producers who fund their
own prints and advertising (called “P &
A”) can negotiate a lower distribution fee
often ranging from 10 – 22.5% with the most
common fees being 15 – 17.5%. These deal
are often called Rent-A-Distributor or hired gun.
Distribution fees typically range between 15 –
50% (usually 30 – 35% for new filmmakers).
|
