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 making movies are far from simple.

Something you’ll likely hear if you walk through the halls of any movie studio is “nobody knows anything.” And that’s true. The public can be fickle, and the industry is in flux. 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 2019, the U.S. and Canadian box office came in at $11.4 billion. Globally, the box office for films hit $42.2 billion in 2019.

It is not nearly 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. Unfortunately, the closing of most theaters during early 2020 makes other streams of income more important than ever.

Key Takeaways

  • While there's a lot of money to be made in the film industry, the economics of movie-making are far from simple.
  • 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.
  • Theater attendance in the U.S. has been challenging over recent years, making it even more important to earn money in foreign theaters.
  • Ever since Star Wars, merchandising has played a major role in revenue for films that appeal to children.
  • Television rights, video-on-demand, and streaming services are increasingly important sources of income for movie studios.

Movie Budgets and Costs

In general, major studios don’t disclose the full budgets for their films (production, development, marketing, and advertising). This mystery arises in part because it costs far more to make and market a movie than most people expect. For example, the production budget for a summer blockbuster like Marvel’s "The Avengers" is recorded as $220 million. Once you factor in marketing and advertising costs, the budget spikes.

Indeed, for many films, print and advertising (P&A) costs alone can be extremely high. A $15 million film, which is considered a small-budget movie in Hollywood, might have a promotional budget that is higher than its production budget. Many films that don’t have a built-in audience (such as those based on bestselling books like "The Hunger Games" or even "50 Shades of Grey") need a way 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 movie 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 breaks and revenues from product placements can help pay the bills. If they're given an incentive to shoot a film in Canada or Louisiana, producers will usually hustle to do so.

Going back to the "nobody knows anything" mantra, there are some surprise hits like the indie film “Little Miss Sunshine.” That movie 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." It 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 to make money from films.

Ticket Price Revenue

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 distributor getting the remaining money.

Traditionally, a larger chunk went to the studio during the opening weekend of a film. As the weeks went on, the theater operator's percentage rose. A studio might make about 60% of a film's ticket sales in the United States, 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. That is achieved 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 higher 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. Despite this arrangement, foreign ticket sales became more important in the early 21st century. That is part of the reason why you see more sci-fi, adventure, fantasy, and superhero movies. Action and special effects require no translations. They’re easy to understand, whether you’re in Malaysia or Montana. It is much harder to build a foreign audience for an indie comedy.

Merchandising Dollars

It all started with Star Wars. Since the George Lucas sci-fi saga began back in 1977, the franchise has made billions in revenue from toys alone, not to mention licensing income from other 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. You don't see a lot of action figures for romantic comedies. However, merchandising is a cash cow for big-budget films that appeal to kids and Comic-Con fans alike. For example, Disney’s “Toy Story” franchise has brought in billions of dollars in retail sales.

On the other hand, some analysts suggest remaining on the lookout for movie fatigue. Kids are increasingly attracted to newer types of entertainment, such as video games and YouTube.

Foreign Sales

When a producer cobbles together the budget for an independent film, selling the distribution rights in foreign territories is crucial. It helps to cover the film’s budget and hopefully brings in revenue. Independent filmmakers can actually make money if they have a great foreign sales agent who can sell their movies 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 find a partner willing to buy the rights in China and France. That isn’t a guarantee that the film will make millions (or billions), but it's about as safe a bet as you can get in this business.

Some American films make more money internationally than they do in the United States.

Television Rights, Streaming, and VOD

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 TV and international rights is a significant 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?

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 films that don't have the special effects and big-name stars to lure people to the theater often profit from this model.

Streaming video is a new source of revenue for Hollywood movies. VOD revenues tend to dry up after a few years, but movie studios can still make money from older films by licensing them to Netflix or Amazon Prime. However, the success of original content on the streaming services also draws audiences away from traditional movies.

The Bottom Line

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, streaming video, 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.