Hundred million dollar budgets. Fifty million dollar openings. Billion dollar profits. Investing in movies sounds like a sure bet, but as Drew Turney discovers, the field is far from simple.
According to an August 2008 story in The Australian newspaper, the local mining industry generated a return on investment (ROI) of 160 percent, or $1.60 returned for every dollar invested. By contrast, the ROI in the Australian film industry has been as low as -21 percent, meaning average investment as a whole not only failed to generate any return but the operations of the industry cost a further 21 percent. Few movies make their money back, let alone reap Hollywood-style profits.
So which is the better investment? Not so fast – remember that some movies, just like some mines, strike pay dirt. If you’d invested in Titanic (1998) you would have received a little over USD$9 for every dollar you put in (900 percent ROI). For Crocodile Dundee (1986),$13 (1,300 percent ROI). For The Blair Witch Project (1999, the first sleeper hit of the web age), a whopping USD$7,103 (710,300 percent).
As Lorenzo di Bonaventura told us, “There are huge returns. It’s a high risk, high return business.” As the former head of Warner Bros Pictures and now an independent producer behind this year’s Star Trek, Transformers: Revenge of the Fallen and GI Joe, di Bonaventura’s seen films achieve and fail from every side of the fence.
And while he says it’s indeed easier to get films made in the hundred million dollar club once you have a Hollywood track record, that’s no guarantee. “One of the things that makes my job exciting is that the risk is difficult to assess each time,” he says. “You don’t know if you’ve been successful until you get it in front of an audience, and you can be wrong. In fact you will be wrong if you do it enough times.”
So just like a mine hitting a big commodity strike when the market price is right, contributing factors can ensure a film bombs and takes your house with it or sets you up for life, and those factors are a lot less tangible. “It’s not for the faint-hearted,” is how Jason E Squire, a teacher with the University of Southern California’s School of Cinematic Art sums it up. “You have to be comfortable with uncertainty.”
A casual glance at the films showing at your local multiplex reveals several distinct but fairly rigid business models for films. We’re all familiar with the overcooked blockbusters that appear during the northern hemisphere summer when hundreds of millions of North American and European teens are on school holidays. With as much spent on advertising as making them they succeed almost through brute force.
They’re expected to make most of their cinema revenues in just a few weeks, often before word gets around about how terrible they are. That’s not a sarcastic jibe either. The ‘drop off’ – a percentage of the decrease in audience numbers – is a keenly followed accounting science. Such films are carefully crafted for their cross-market appeal, often with video game, fast food restaurant and action figure licenses tied up before a story is even considered.
At the other end of the scale is the cheap long shot. Like most long shots, many cheap movies fail because small producers or backers simply can’t spend enough to promote them. Sometimes a film just ‘catches on’ with good word of mouth, critical acclaim or a strong hook giving it unimaginably strong theatrical business. In recent examples like Slumdog Millionaire (2008: 2,400 percent ROI) and Mamma Mia! (2009: 1,100 percent ROI), filmmakers have enjoyed the absence of a studio marketing committee breathing down their necks, but success for financiers is a very rare exception.
Seeking the sure thing
Sorting out which direction to go with your movie investment funds is no small task. Firstly, investing in movies directly is only really possible at the low, independent end where you know a producer or filmmaker who needs the money for a passion project. Strictly speaking, big American blockbusters aren’t open to public investment because the studios are owned by global entertainment and media conglomerates, so putting your money in films means you’ll also be exposing it to the fortunes of everything from Chinese subscriber TV and alcoholic beverages to theme parks and consumer electronics.
So while there’s no sure thing, certain films improve your chances if you have the means and access. At the end of 2005 the Christian research foundation Dove revealed that movies with G ratings were eleven times more profitable than those with the US R rating (equivalent to Australia’s M or MA15 ratings). Such numbers explain the computer-animated family films that have been crowding the action blockbusters out for the last few years and unsurprisingly, the Dove report went on to reveal that production of G rated films had risen 38 percent on the previous year.
Then there’s the increasing tide of quirky family dramas that come with a distinctive Sundance Film Festival flavour. Small, adult-targeted, cheap and – thanks to the explosion in influential festivals over the last decade or so – big business.
But not everyone’s happy with the new paradigm. As far back as 1997 Steven Spielberg was lamenting the decreasing number of film styles. He likened the American film industry to India, saying ‘there’s an upper class and a poverty class and no middle class. Right now, we’re squeezing the middle class out of Hollywood, and only allowing the $70 million plus or the $10 million minus films.’ One wonders what Spielberg thinks about the $200m budgets that are routine today, or whether he can see the irony in a recent injection of capital into his studio (Dreamworks SKG) by an Indian investment group).
But what makes film investment even more difficult is that a producer or financier can spend a considerable amount of money on a film and be left with nothing to show for it but cans of celluloid. Without an adequate deal from a distributor a film can gather dust, seen by nobody. In a crowded market there’s every chance a film simply won’t get a distributor willing to make their own investment (by taking it on).
Worse still for your pride if not your money, you can sign on the dotted line only for a distributor to change its mind about the profit potential or go bankrupt, deciding not to put a cent into screening or publicising your film even though it holds the rights. Plenty of films are famous for their losses such as Cutthroat Island (1995: ROI 10 percent).
But it was Zyzzyx Road (2006: ROI .0015 percent) which was screened only once in a single cinema to comply with Screen Actor’s Guild regulations and made just $30. Even the director of the world’s most profitable mainstream film isn’t immune, with Blair Witch Project co-director Daniel Myrick’s $8m thriller The Objective dumped in a single theatre and returning a box office gross of $95 earlier this year.
But if you get that far and your film reaches screens, the next hurdle is to connect with audiences. Veteran screenwriter William Goldman once said ‘nobody knows anything’, and you can see the same unpredictable audience behaviour here at home. High profile Australian releases with big names, critical acclaim and huge publicity efforts like Jindabyne (2006), Romulus My Father (2007) and Two Fists, One Heart (2009) all failed to take off as hoped while the AUD$1.6m Samson and Delilah (2009) was edging towards a box office take of AUD$3m by the end of July almost completely on word of mouth alone.
The Movie as an IP Asset
There’s a lot more to a film than the cinema. With the arrival of TV, film financiers finally got a second bite at the cherry with advertising revenues flowing back from broadcasts of the movie. Since the VHS and pay TV era the life cycle of a film has grown exponentially, and examples abound of movies getting a new lease of life in media other than cinema screens.
Long after director Ed Wood was dead and buried, cult horror fans in the 1960s drove popularity of his magnum opus Plan Nine From Outer Space through the roof after the camp late night horror movie broadcasts of the era. Today many films are quickly rushed through a short theatrical run, distributors well aware they’ll make their profits from DVD sales.
For starters, forget the conventional wisdom that movies can make their money back on the first weekend. The big Hollywood tentpole releases can make their budget back in just a few weeks, but remember only half the box office goes back to the studio as profit, the other half split between exhibitors (cinemas) and distributors. Transformers: Revenge of the Fallen, the biggest hit of 2009 so far, had taken $727m worldwide after three weeks of release. That’s more than triple the budget but it was a return of only $1.72 for every dollar invested by the studio, nothing to write home about in Hollywood accounting.
The real money, according to a 2005 Slate.com article, is in TV licensing, the ongoing payments from networks to broadcast the movie. That year, box office receipts totalled USD$23.3b while TV movie sales was worth USD$17.7b but remember, when you only have to pay to make a movie once but can resell it to a TV station time and time again, the economics become obvious.
With 90-year old back catalogues, the major Hollywood majors can keep themselves in production cash thanks to a steady revenue stream from TV sales. But not even the star names of Spielberg and partners Jeffrey Katzenberg and David Geffen could assure the future of Dreamworks, formed in 1995 and burning through capital so fast that in 2009 it signed a deal for an US$825m funding injection from Mumbai-based Reliance Big Entertainment.
“The real goal of any ongoing company is to enhance the library,” agrees USC’s Jason E Squire. “It’s the evergreen part of the business which provides reliable cash flow so future revenues of film entertainment can help finance a debt.”
So it’s understandable how studios panic at any impact on the cinema/DVD/TV business model. Despite more free to air and pay TV channels than ever before, TV has been losing eyeballs to other technologies at an increasing rate, and in May this year the LA Times reported that while cinema attendances were up about 15 percent on 2008, DVD sales were down by almost the same percentage, causing a panic among studio executives.
Once again the misguided predictions of what sells come into play, and though it doesn’t help much, ‘make a good movie’ is the only good advice there is. While the 2008 Paramount releases Iron Man and Indiana Jones and the Kingdom of the Crystal Skull performed similarly at the box office, the former (regarded by audiences and critics as the better movie) did much better on DVD.
It’s also not just about the amount but the period of the return. “It’s a myth that most films don’t make money,” a screen analyst told the New York Times in 2002, “The real question is: How long does it take for a film to make money?” Jason E Squire calls the theatrical release the ‘loss leader’ of the value chain.
Success down that chain can also be made more likely depending on the deal hammered out at the beginning. Often it can be a self-fulfilling prophecy, a distributor or backer taking extra care releasing a film they think will be a success, the effort leading to the success they were chasing.
Sometimes, as the producers of Australia’s Samson and Delilah have found, when a film catches on you’ve got a much better chance of getting the sort of DVD and TV deals that will ensure a better return for longer. Nothing breeds more success like success, but the business model – in this case, your budget – is critical. As Samson and Delilah producer Kath Shelper says, she and writer/director Warwick Thornton were free to make the film they wanted from the money they raised, whereas many filmmakers get their initial funding from DVD distributors and other ‘downstream’ financiers.
“We were lucky to not have to [get financing] and because of the success of the film theatrically we’re actually getting a really great DVD deal out of it, a lot better deal than we would have got at script stage because of the nature of our film,” she says. “If you’d read the script you probably would have said ‘who’s going to go and see this?’ But now it’s out there and getting well received it’s a better time to do a deal.”
Evolving technology, rethinking delivery
Digital technology has changed the movies like it has any other industry, not the least of which is that there are so many more people making movies. Being a film director was once a profession learned from the factory floor of a set, but today any kid with a camera and a good idea can call him/herself a director, and some who’ve done just that are now the most respected filmmakers in the world.
“Films embraced the technological change from analogue to digital quite early,” says Jason E Squire. “For anyone entering or dabbling in the business, traditional barriers for entry have fallen. Today there’s no excuse not to go out and shoot something.”
The change is also affecting the supply chain behind the scenes, and everyone from Hollywood right down to your shopping mall multiplex are doing away with heavy, dirty canisters of 35mm film that have come across the world for a projectionist to load onto a clumsy and expensive projector. Some movies are now shipped as electronic files to be shown through computerised digital projectors no different than the way your DVD player reads the data on a disc.
While it’s an enormous cost saving for distributors who can stop copying and shipping thousands of celluloid film reels, there’s been reluctance on the part of cinema operators who’d have to outlay hundreds of thousands of dollars to upgrade projection equipment. But in late 2008 a consortium of US exhibitors signed deals with four major studios to share the costs, and today you can experience digital cinema at major theatres in most Australian capital cities.
So in the near future of cinema investment it will be feasible to be a film distributor with no capital outlay. If you can sign a deal with the filmmaker you need only facilitate the delivery of a computer file to cinemas and then get to work creating awareness.
Cutting out the bulky, slow-moving Hollywood system is also an approach endorsed by no less than George Lucas, who told USC (his old school) in 2006 that Lucasfilm was getting out of the movie business and into TV, calling films ‘too expensive and too risky’. An avowed digital convert, Lucas is an enthusiastic proponent of a future where smaller, cheaper movies and shows will be downloadable for the audience to consume at their leisure.
Jason E Squire also thinks we’ll have more business models than just giant blockbusters and quirky dramas. “The real value of the web [is] to allow for niche programming and niche business models,” he says. “It’s just a matter of time before some hungry, smart people outside the mainstream are going to perfect that and others will follow.”
Even so, we shouldn’t get so carried away when considering the impact of technological innovation on cinema. The ups and downs of box office takings have traditionally relied far more on competition from other media and the economic mood than from the introduction of advances like sound or colour.
The most recent technological revolution was the advent of digital effects in the 1990s, as everything from backgrounds to explosions were added using computers in post production long after the actors had gone home rather than staging dangerous stunts or expensive sets. We’re in the throes of the next great leap forward right now, that of life-like 3D.
Studio bosses and visionary directors alike are behind the push, which begs the question – is it a creative tool to enable a more engaging way of telling stories or a desperate act to get people back into cinemas after steadily dwindling audience numbers in the home theatre and DVD age? You be the judge, but the signs that theatres are trying to draw the crowds back are obvious.
Both major Australian chains (Hoyts and Greater Union) offer premium services with large recliner seats and free popcorn. US theatres are establishing concierge desks, seating escorts and in-house Starbucks outlets to give cinemagoers an experience they can’t match in even the swankiest home theatre.
Of course, audience numbers at cinemas have fallen during the last decade (even though revenue has bucked the trend over the last few years and increased slightly, giving us an apparent market of fewer people buy more tickets each year). But with so many more avenues, films can enjoy a much longer life than ever before, in many cases making their money and achieving most of their popularity long after a cinematic run.
The spectre hanging over all this is piracy. The easier it gets to digitise a film for distribution, the easier it is to copy illegally. One thing many observers believe is missing is a ‘magic bullet’ – a high quality, legitimate alternative for people who want to watch movies on their computer or digital video device like the iTunes store is for music.
It’s hard to find statistics on how much iTunes has slowed the extended demise of the music industry that’s been going on since the arrival of file sharing service Napster, but there are few options as easy. Supported by iTunes’ enormous branding success that makes it virtually synonymous with buying music online, users simply select a song and click ‘buy’.
Of course, the iTunes store sells films too, but as an April 2009 LA Times story explained, the contractual obligations that see a film go from theatres to DVD to Pay TV to free TV keep it out of the ‘library’ phase where online services can offer it as a download for a long time, often several years. Are compulsive PC bound movie fans going to wait that long or turn to pirate peer to peer services where movies can often be found as soon as they’re released?
The commodification of culture
In the end there may only be one innovation that keeps audiences coming back and which makes films a good investment and that’s telling new and compelling stories, something the Hollywood system is notoriously bad at despite its creative accomplishments. “For me the innovation in filmmaking is in storytelling, not the tools,” says Kath Shelper. “It’s in how you tell it and the story you want to tell. That’s what sets [a film] apart from anything else.”
To USC’s Jason E Squire, such creativity should be a foundation stone rather than an innovation. “I don’t know if that would be innovative because you’d assume people have always been doing that,” he says.
An investor can look upon a movie as a large public company. You have a chairman (producer) who oversees the big picture of steering the product to market, the CEO (director) who leads a team of department heads to craft it into a certain form and a small army of specialists with diverse skills to carry out the director’s wishes. Once capital’s involved in the operation the venture usually lasts for a year, it can cost several hundred million dollars at the upper end of the scale and it has a very short shelf life, unlikely to see a return for several years.
The small, independent movies from DIY auteurs are more like the early days of Microsoft or Google – two guys tinkering in a garage. Find the right two guys and your fortunes will follow them into the stratosphere, but for every tech start-up that made people rich there are countless more that lost a lot of shirts. Throwing your lot in with either model is incredibly risky and like all investments, a safer bet is to diversify.
Maybe the reason movie profit is so wildly unpredictable is because when they’re made with honesty and intellect we should consider them contributions to human culture instead of commodities with investment utility like mobile phones or bananas.
At the independent end of the spectrum producers are often creative stewards, more interested in art than glued to their Blackberries talking numbers. “I’m no expert in the business side of feature films,” admits Kath Shelper, “I approach the films that I want to make as art rather than commerce. I come from the other end, making films I want to make and justifying it in a business sense.”
Shelper’s philosophy might serve as a surprisingly effective signal of investment potential. Critics and more discerning fans alike lament Hollywood studios for churning out broad, asinine comedies like Wild Hogs (2007: 317 percent ROI) and Night at the Museum (2006: 522 percent ROI), but maybe we can forgive them.
After all, the earnings from such efforts go towards terrible financial investments but visionary pieces of art like The Assassination of Jesse James by the Coward Robert Ford (2007: 50 percent ROI) or films that enter a much-loved historical canon like Grindhouse (2006), which barely returned forty cents for every dollar and went straight to DVD in many global territories.
Success in films can be gauged in many ways and if you’re only looking at the bottom line, you’ll likely do poorly in the short term. Robert Zemeckis’ groundbreaking live action/cell animation noir comedy Who Framed Roger Rabbit and Eddie Murphy vehicle Coming to America were both released in 1988 made similar money theatrically, but which one do movie fans remember 21 years later?
There’s no such thing as cultural investment but if you’d thrown your lot in with Zemeckis and his creative team you’d have enjoyed a better return over time for your money because ultimately, the market knows and rewards quality.
Like most investments, fly-by-nighters are extremely lucky not to get seriously burned. The secret is to know your target industry. Be film literate, read the movie magazines to see who’s doing what, which directors are getting attention and which studios or production companies are doing well.
And keep in mind the best and brightest in the business both here and in Hollywood have gone broke trying to second guess the market. Like filmmakers themselves, the secret might be to find a project you like with a story that grabs you and people whose success you want to share.
There’s absolutely a market for film investment, with so many poor wannabe directors and producers clamouring for what little money the government doles out. Connecting with them is the biggest challenge, and it’s one the Screen Producers Association of Australia (SPAA) is taking seriously. The Association runs a conference once a year for the higher, more pro end of TV and films, but the SPAAFringe conference (held every October) is the place for independent filmmakers to meet collaborators or backers.
A successful part of the festival so far has been The Melting Pot, an open forum where participants stand and tell the whole crowd what they’re looking for. It’s a great way of connecting the right people and the online version will be live very soon.
The Australian scene
33 Australian-made films were released here 2008 versus 158 that originated in the US. But it’s not just a matter of numbers – with only 20 million or so people, we have neither the potential audience nor the self-supporting financial structure of a studio system.
The Rudd government is mostly arts-friendly, with the national screen funding body (Screen Australia) offering a producer rebate where qualifying films can claim back 40 percent of their production costs. But without the back-up of a studio library bringing in steady revenue, most Australian financiers or producers are exposed to a huge amount of risk. That’s especially true when they’re competing against more expensively marketed, far flashier product from a market (the US) that shares our language and business infrastructure, making us a tailor made audience for them.
According to The Australian, 2008 would have been a year of record box office lows for our films if not for a film called – ironically – Australia (financed by a Hollywood studio, even more ironically). Without the backing of an established industry, almost every Australian film is an investment ‘one off’, and failure to turn a profit can mean unadulterated ruin for backers.
But it’s not all bad news. The philosophy above – good stories well told – is as true at home as it is anywhere. An unknown filmmaker named Greg McLean showed them all how it was done in 2005 with his grisly horror thriller Wolf Creek. Costing AUD$1.38m, it went on to earn almost $6m locally and AUD$34,720,480 globally (2,500 percent ROI).
Of course hindsight’s always perfect, and after Wolf Creek many local critics and filmmakers said it was just what Australia needed, a movie for audiences instead of the endless string of movies about impoverished suburbanites and struggling minorities that seemed to be made for social workers.
So once again Kath Shelper’s (Samson and Delilah) advice might be the only yardstick for what will work. “It’s a very personal thing,” she says, “it’s a heart, soul and instinct thing. If something can keep my interest I think other people are going to be interested in it as well.”
It cost how much?
Any time you read about how many hundreds of millions the latest Hollywood blockbuster cost to make, it’s usually the production budget – the amount spent before a single film print is copied or trailer cut together. In today’s world where Hollywood studios routinely spend as much marketing films as making them, the return on investment mentioned throughout this article is really the return on production cost.
It might be simple to account for marketing costs as well (and drastically downgrade the profits of most films), but the waters are further muddied by the business structure. Strictly speaking, a studio makes a film, and then everything from copying prints and booking theatres to advertising is the job of the distributor.
After studios, distributors and theatre chains were broken up by US antitrust legislation in the late 1940s, the lines were clearer. But over the last 15 years the Hollywood studios have not only been buying the distribution companies but abandoning any pretence about separation, rebranding them in the parent company’s name. Such finely enmeshed corporate structures makes the accounting of who pays for what even more labyrinthine.
Add to this mix, Hollywood’s often Byzantine accounting procedures designed to maximise – sometimes minimise – profits. The novelist Winston Groom reportedly cried foul when the film made of his book, Forrest Gump, in which he held ‘points’, supposedly failed to make a profit, despite worldwide box office of US$677 million. One can then readily see how establishing hard-and-fast ROIs is more difficult than making a good film in the first place.