Tuesday, June 26, 2012

The Hollywood Economist by Edward Jay Epstein

Edward Jay Epstein. The Hollywood Economist: The Hidden Financial Reality Behind the Movie. (Release 2.0) Brooklyn, N.Y.: Melville House, 2012.
The author notes that ticket sales are just a part of movies’ incomes to studios. There are also sales from DVDs, foreign distribution, digital purchases, video game affiliations licensing rights, etc.
In 2007, the average costs of advertising and prints was $40 million per major studio film An average of $3.7 million per movie was spent on newspaper ads, Newspapers in return hype movies and ticket sales news.
Film distributors generally receive from 15% to 33% of all theater receipts.
In 1929, an average of 95 million Americans (about 80% of the population able to go to movies) went weekly to one of 23,000 movie theaters. Actors, directors, and screenwriters then worked under contracts with specific movie studios. Studios owned movie theaters until the U.S. Supreme Court ordered studios to divest their theaters,
Movie theaters with stadium seating, which is where everyone is about 14 inches above the row in front of them, increases attendance between 30% to 52%. People are found to drive up to 20 miles in favor of theaters offering stadium seating, due to the better views of screens, over theaters that don’t offer such seats..
Movies seek promotional tie-ins with retail companies. 
Of almost 1,4 billion movie theater tickets sold in 1977, about 500 million are sold during summer. 230 million are sold from Thanksgiving to New Year’s.
The Americans with Disabilities Act requires theaters with 300 or more seat to have wheelchair access to all rows.  Most movie theaters have less than 300 seats.
An R rating for nudity makes a movie unattractive to toy manufactureres and fast food tie-ins.
$17.9 billion in DVD sales were registered in 2007. Walmart and Sam’s Club sell about a quarter of all DVD sales. Walmart has a “decency policy that puts movies with nuridy into its adult section which lowers sales.
Analog films costs about $1,500 to print per film. Some films may have prints for 9,000 U.S. theaters and 12,000 foreign theaters. The costs are assessed to a film production company, created separate from the studio. After a few weeks, all print except for a few hundred sent to military bases, are destroyed to capture the silver in the film. Movies are moving towards digital projection.
For “Terminator2”, Arnold Schwarzenegger created Oaks Productions Inc. for tax advantages in being paid a guaranteed $29.25 million plus 20% of worldwide gross receipts including videos, games, DVDs, etc.
Movie stars who get $20 million per picture often agree to work on independent moves at or near the $788 per day scale. This often allows actors to work in more artistic projects they enjoy, especially if they have no other work at that time. The existence of a star attached to an independent movie allows the independent movie company to pre-sell it to foreign distributors. Since these pre-sales are promised payments, the independent film production company may get a bank loan against the promised sales to pay for making the movie. The company obtains a completion bond that guarantees the bank will be repaid should the film fail to be made on time or at all.
Film Finance, Inc. and the International FIlm Guarantors provide most of the completion bonds These two companies are owned by Lloyds of London and Fireman’s Fund. The bonds generally require the movie to have full insurance on the star actor and must provide the bond company with complete budgetary control The bond company usually is paid 2% of the budget.
One per cent of 2,000 independent films the Sundance Film Festival receives find a distributor.
If someone is pad a “contingent compensation” above “cash breakeven”, it is important how “cash breakeven” is defined. Even actors, directors, and others on the same film may have contracts with different definitions of “cash breakeven”. the definition depends on what costs are considers, including the contingency payments paid ot others, advertising, printing, etc.
Few who have “net points” even receive anything for net points. The points are often based on profits to the separate production company that often absorbs the overhead and distribution costs. These companies rarely show a book profit.
Nicole Kidman injured her knee while acting in “Moulin Rouge”. This created a $3 million insurance loss. She withdrew from “Panic Room” which had a $7 million insurance loss to obtain Jodie Foster as her replacement. Fireman’s Fund refused to insure Nicole Kidman for “Cold Mountain” Kidman put $ million of her salary in escrow towards insurance while Lakeshore Entertainment added $500,000 to this escrow in order for International Film Guarantors to issue a completion bond for “Cold Mountain”.
A movie’s actual budge is usually known to people within the studio.
Merrill Lynch started hedge fund investing, eventually through Melrose Investors, that provided 18% funding of all 26 Paramount movies made in 2003 and 2004. Paramount charged a 10% distribution fee that lowered payments to the hedge fund. Similarly, Warner Brothers used Legendary Pictures as hedge fund investors who funds about $500 million into some of their films.
MGM no longer has the physical capacity to make films, such as a sound stage or a backlot. It has a library of 4,000 movies and 10,600 television episodes. This library includes the James Bond movies, which is the most valuable film franchise there is. Sony paid $300 million to put MGM titles in Blu-ray, thus creating Blu-ray as the industry standard. Comcast paid $300 million to show MGM titles on Pay Per View cable. A group of investors borrowed $3.7 billion from 200 banks to invest in MGM only to discover MGM’s DVD sales fell from $140 million in Fiscal Year 207-2008 to $30.4 million in Fiscal Year 2009-2010. MGM could not pay mandatory interest payments. Creditors gave MGM a forbearance to raise cash since insolvency would contractually revert the rights of the James Bond franchise to Danjaq, LLC. MGM obtained funds with a deal for Sony to distribute a new James Bond film with Sony providing half the financing. MGM had $4 billion of debt removed y a bankruptcy court and received $500 million in credit for JP Morgan Chase.
If a director, screenwriter, or one of the two highest paid actors in a film in Canadian, Canada offers a tax credit which in 2008 was 16% of the labor costs and a 20% tax break on any digital efforts produced in Canada. British Columbia provides an additional 18% rebate on labor costs. Over 1,500 movies and TV productions are done in Canada.
Movie studios usually obtain about 15% of foreign movie gross after paying for foreign advertising, translations, foreign prints, taxes, insurance, etc.
40 states compete with each other by offering incentives from filming movies within their states. New Mexico offers a 25% production cost rebate. 
The leader of Louisiana’s film program pled guilty to receiving $67,500 in bribes to overstate production costs so film companies could receive larger tax credits.
Each of the six major movie studios owns their own distribution company. Movie theaters bank with these distributors as they know the studios advertise nationwide for their films. The distribution companies create zones so movie theaters do not lose to each other in competition. The distribution companies will create favorable terms for poorly performing movies.
The distribution costs of distributing a movie is usually around 8% of costs.
Even though Paramount had six of the ten best grossing movies in film history from 1994 to 2004, a series of six financial disappointments led to Paramount Chairman Sumner Redstone to bring in new management and to fire over 100 executives. Existing film projects were canceled and Paramount found they did not have enough movies that they needed for distribution to maintain income. Redstone bought Dreamworks SKG for $1.6 billion and financed the deal by selling the Dreamworks library for $900 million. Redstone also discarded Tom Cruise’s deal with Paramount where Cruise received 22% of theatrical release gross and 12% of DVD receipts.. Thus Paramount ended its relationship with Cruise’s Cruise-Wagner Productions. Stephen Speilberg left the new Paramount-Dreamworks and created a new studio for $500 million that was borrowed from investors from India.
Tom Cruise starred in and produced the movie “Mission Impossible: 2” for no salary in return for 22% theatrical gross and 12% DVD sales. Ordinarily a star could be entitled to 10% of video gross. Yet some studios keep 80% for costs of manufacturing, distribution, and warehousing so that 10% in gross in reality becomes 2% of gross. Cruise received $70 million for “Mission Impossible”.
For “Mission Impossible 2”, Cruise agreed with Paramount for 30% gross share and a DVD share of 40%. In addition, Cruise paid director John Woo from his share. This earned Cruise $92 million. Cruise earned more money that did Paramount on “Mission Impossible: 2”. MGM the signed Cruise to a United Artists contract.
The National Research Group (NRG) began as a part of Nielsen Entertainment. NRG created a “Competitive Positioning” document for the six largest studios. NRG conducts telephone polling of likely movie attendees to see which movies they have heard of, which they may see, and their age and gender. Reports are made for males under age 25, males over age 25, females under age 25, and females over age 25. Studios often arrange to release films that are not in competition with other studios for the same demographic, Sometimes NRG data can warn a studio of a conflict and if a studio releases a move it may lose the competition. This my delay a movie’s opening to a different date.
In 2008, more studios received over $8 billion. Studios get distribution fees ranging from 10% to 33%. Studios obtain funds for movies projects through pre-sale agreements to foreign market rights, hedge fund investments, product placement deals, leasebacks on title copyrights, and tax relief deals. This often amounts to 20% to 60% of the film’s budget. Studios use funds from other movies or “revolvers”, which are bank credits.
Studios look for movies that are remakes, sequels, TV spin-offs, or from video games.
Movie stars no longer guarantee box office sales. Julia Roberts in “Everyone Says I Love You”, released by Miramax, had an opening weekend of $132,000 while her next film, in the same romantic comedy genre, “My Best Friend’s Wedding”, distributed by Sony, had an opening weekend of $11.7 million, or 150 times more. Similarly, Mel Gilson in “What Women Want” released by Paramount had an opening weekend receipts of $13.6 million while his next film “Million Dollar Hotel”, released by Lion’s Gate, had $20,483 opening receipts, or 1,000 times less. The difference was mostly the pre-release advertising committed by the studio.
The author states the “Midas Formula” for movie success is a movie 1.) based on something familiar to children, 2.) has a child or adolescent protagonist, 3.) has a flawed youth turn into a hero, 4.) has only platonic relationships between the sexes, 5.) has characters available for game and toy licensing, 6.) has no bloodshed, 7.) ends happily, 8.) uses animation, and 9.) does not use major stars that demand shares of the gross. Such a film can earn a studio $400 million to $600 million.
Disney used to release “Snow White and the Seven Dwarfs” every seve years to a new group of young audiences. It became the first movie to reach $100 million in gross.
Movies need to find villains that will not enrage ethnic groups. Corporate executives are often acceptable villains.
Many action films had over 70% of their earnings from foreign viewings. The formula is to be high on action and low on dialogue.
Studios have a limited number of theater availabilities to release their films. Small budget films may have a large profit margin, yet some studios will not consider even very profitable ventures if they are not expected to hit $150 million in box office receipts. Several independent and mini-major distributors had closed by 2010. The American value of an American independent movie today is almost nothing An independent film will require a foreign pre-sale agreement in order to be made. A bank loan or subsidy will be necessary. A completion bond will be required. Even then, there is usually a gap in financing.
Move theater receipts were 55% of studio revenues in 1980 and 20% in 2007.

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