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December 29, 2005

Thinking About The Movie Business

I wrote the following for StreetInsight.com while vacationing last week in chilly Bayfield, WI on the shores of Lake Superior:

I've been working "lightly" this week, spending time with my family at our place in Northern Wisconsin on the shores of Lake Superior. We have a blanket of snow about a foot deep and since there are only a few hundred people up here this time of year the environment is best described as pristine. Even better, we don’t have to go anywhere unless we want to, so commuting in the snow is not an issue.

The closest movie theatre is 25 miles away in Ashland, WI. It is an old theatre with a half dozen screens. Tickets are just $6 and popcorn and candy will only cost you $1 each. Our teenagers will actually go to the movies with us while we are up here since they don’t have to worry about bumping into their friends at the mall, so we decided to take in the two big blockbusters of the holiday season: King Kong and The Chronicles of Narnia: The Lion, The Witch, and The Wardrobe. Both films were very well reviewed and in our family both actually exceeded expectations. I think it was the simple stories with special effects that didn’t come across as technology. Each film reminded us of something that would have been made in Hollywood decades ago....

Of course, I can’t go to the movies without thinking about the movie business. Both these pictures have huge production and marketing budgets. I believe King Kong cost over $200 million to produce and Narnia around $150 million. Marketing budgets for each film will exceed $50 million. With this in mind, while sitting in the theatre, I began thinking again about movie industry accounting and remembered a post I recently found on a Yahoo! Finance Message board. I contacted the poster and got his permission to reproduce it, so here is the best explanation I've ever read about movie accounting with my clarifications in parentheses:

Say Box office of $100M (for Lions Gate Entertainment production Saw II). Theatres keep roughly half, plus or minus adjustments for co-op advertising, advertising credits, etc., leaving $50 million for LGF to divvy up as manager of the clearinghouse. LGF takes out a 30% (plus or minus) distribution fee, plus all out of pocket print and advertising (P&A) costs. Assuming $20 million P&A, this puts $15 million (net) in LGF pockets and leaves $15 million in the pot. There could be participations from this $15 million for producers, writers, directors, in front of the camera, behind the camera, under the executive producer, who knows. Say $5 million. LGF then would get its costs advanced for the negative costs, plus an interest factor. Say another $5 million. This leaves $5M to divvy up (with producers as "profits").

Next is DVD/ home video. This is where the industry is still in lala land. Even though it costs $2 max for the DVD production, packaging, and artwork, generally the contracts provide for a cost of sales allowance of 50% or more. Sometimes it is as little as 20% that goes to the profit split from the sale of DVD's.

Other ancillary revenue steams include say $5 million from cable (and broadcast TV) licensing. Right off the top to LGF is a 20% to 30% distribution fee. Then more allocated marketing costs, more participation costs, plus, of course, the residual deals with SAG (Screen Actors Guild). Wait until they start packaging Saw, Saw II with other films in marketing deals. Allocations have to be made to each film.

What is amazing to me is that some of these analysts say they can figure it out before hand. Right! All the contracts are confidential, unless it goes to court. Of course, they never go to court as the attorneys meet at The Ivy, cut a deal, and no one knows.

So there you have it. No wonder my major screw-up this year was LGF, a pure play movie and TV studio. Thanks to my Yahoo poster buddy who I can vouch for as someone who knows what he/she is talking about.

Posted by Steve Birenberg at December 29, 2005 09:12 AM in Media