How Exactly Do Movies Make Money?

From a distance, the movie business might look pretty glamorous. Celebrities and producers glide down red carpets, clutch their Oscars and vacation in St. Barts…just because they can. While there's a lot of money to be made in the film industry, the economics of movie making are far from simple.

Something you’ll likely hear if you walk through the halls of any movie studio is “nobody knows anything.” And it’s true. The public can be fickle, the industry is in flux, and just about any movie is an extremely risky investment, even a film starring big name actors and actresses. According to the Motion Picture Association of America’s (MPAA) Theatrical Market Statistics Report for 2017, the U.S. and Canadian box office came in at $11.1 billion. This was a 2% decline from 2016. Globally the box office for films hit $40.6 billion in 2017.

This is nowhere as straightforward as the early days of cinema when a movie would come out in theaters, make the vast majority of its revenues via ticket sales and then disappear. Major studios and indie filmmakers alike now spend much of their days looking for new sources of revenue, because ticket sales are no longer the be-all and end-all for films.

In general, major studios don’t disclose the full budgets for their films (production, development, and marketing/advertising). This is in part because it costs far more to make and market a film than it seems. For example, the production budget for a summer blockbuster such as Marvel’s "The Avengers" is recorded as $220 million, but if you factor in marketing and advertising costs, that number spikes.

Indeed, for many films, the print and advertising (P&A) costs alone can be extremely high. A $15 million film (which is considered a small-budget film in Hollywood) might have a promotional budget that's higher than its production budget. This is because many films that don’t have a built-in audience (like those based on best-selling books like “The Hunger Games” or even “50 Shades of Grey”) need to get people into the theater. Romantic comedies or some children's films need to promote themselves via TV commercials and media advertisements, and those costs add up quickly. For a film budgeted between $40 and $75 million, its P&A budget might be over $20 million.

For any type of film, whether a blockbuster or an indie production, things like tax incentives and revenues from product placements can help pay down the budget. If they're given an incentive to shoot a film in Canada or Louisiana or Georgia, producers will usually hustle to do so.

Going back to the “nobody knows anything” mantra, occasionally there are surprise hits like the indie “Little Miss Sunshine,” which is a Cinderella story when it comes to film finance. Its budget was around $8 million and it sold to distributor Fox Searchlight for $10.5 million at the Sundance Film Festival. The film made $59.89 million in U.S. theaters, which is almost unheard-of for an indie. By contrast, you have the Walt Disney (DIS) movie "John Carter," which had an estimated budget of $250 million, but only made $73 million at the U.S. box office.

So there's no sure path for a film to turn a profit since factors like brand awareness, P&A budgets and the desires of a fickle public come into play. Still, there are a few tried and true ways that films can attempt to make money.

Theater attendance has been challenging over recent years, making it even harder for studios and distributors to profit from films. Usually, a portion of theater ticket sales goes to theater owners, with the studio and/or distributor getting the remaining percentage.

Traditionally, during the opening weekend of a film, the larger chunk went to the studio, while as the weeks went on, the theater operator's percentage rose. So a studio might make about 60% of a film's ticket sales in the U.S., and around 20% to 40% of that on overseas ticket sales.

The percentage of revenues an exhibitor gets depends on the contract for each film. Many contracts are intended to help a theater hedge against films that flop at the box office by giving theaters a larger cut of ticket sales for such films, so a deal may have the studio getting a smaller percentage of a poorly performing film and a larger percentage of a hit film's take. (You can see the securities filings for large theater chains to see how much of their ticket revenue goes back to the studios.)

Studios and distributors generally make more from domestic revenue than from overseas sales because they get a larger percentage. Still, overseas ticket sales are incredibly important, especially today. This may be partly why you’re seeing more sci-fi, action and fantasy films, and why superhero movies are such a phenomenon. They’re easy to understand, whether you’re in Malaysia or Montana. It’s much harder for an indie comedy to translate.

It all started with “Star Wars.” Since the first George Lucas-helmed movie premiered back in 1977, the franchise has made tens of billions in revenue from toy licensing alone, not to mention licensing costs from third-party companies. In 2015, "Star Wars: The Force Awakens" brought in $700 million in retail sales.

This strategy obviously doesn't work for every film (action figures for a comedy like Amy Schumer’s “Trainwreck” probably wouldn’t bring in billions), but for big-budget films that appeal to kids and Comic-Con junkies alike, merchandising is a cash cow. See Disney’s “Toy Story” franchise, which has brought in billions of dollars in retail sales.

However, some analysts suggest remaining on the lookout for "movie fatigue," as kids are increasingly attracted to other types of entertainment besides movies, such as YouTube and other social media outlets. 

When a producer cobbles together the budget for an independent film – modestly budgeted at, say, $25 million – selling the distribution rights in foreign territories is crucial to cover the film’s budget and, hopefully, bring in revenue. Independent filmmakers can actually make money if they have a great foreign sales agent who can sell their film in key overseas markets.

Producers will often make their “wish list” when casting a film and the list will typically be full of well-known names that “travel” overseas. If you have Tom Cruise or Jennifer Lawrence as your star, you’re much more likely to sell the rights to China and France. This isn’t a guarantee that your film will make millions (or billions), but it's about as safe a bet as you can get in this business.

Once upon a time, it was all about DVD sales. Now, it’s far more about television rights, video-on-demand (VOD) and streaming. 

For some producers, selling pay-TV and international rights is a big source of profit because the producer doesn't have to pay for marketing and P&A costs. Films have to leave the theater at some point, but they can remain evergreen on TV. How many times have you flipped through channels and come across “The Notebook” or “The Shawshank Redemption” yet again? There's also money to be made 32,000 feet in the air, as airlines pay hefty sums for in-flight entertainment.

As for VOD, revenue from these deals should add hundreds of millions to a studio's bottom line. For indie films, there are several VOD release strategies: day-and-date (movies released simultaneously in theaters and VOD), day-before-date (VOD before theatrical) and VOD-only. Many movies that don’t have the special effects and big-name stars to lure people to the theater often profit from this model.

And while the DVD market may have slowed dramatically, it’s not a lost cause yet – at least, for some films. “Moana” sold 4.12 million copies in 2017 on DVD, so if a property is branded or has a huge built-in audience, DVD/Blu-Ray sales still could be fairly robust.

As the saying goes, nobody knows anything in Hollywood. The film industry is in flux, and ticket sales alone don't drive revenue. There’s merchandising, VOD and streaming-on-demand sales, foreign sales and a plethora of other distribution channels that can help filmmakers, producers and studios turn a profit. So who knows, the little indie that you invest in could just be the next “Little Miss Sunshine.” Or not. In Hollywood, there are no guarantees.