The Movie Industry is one of most exciting and informative
businesses in the world, a business where the revenue of a single
feature film (such as Titanic), can approach or exceed $1
billion.
In 2001, worldwide gross revenues generated by motion pictures
in all territories and media (including music and ancillaries)
amounted to over $40 billion. Over 70% of the population rents or
goes to movies regularly, thus accounting for over 1.5 billion
movie attendances each year in the U.S.
Prior to 1985, feature motion pictures had one major source of
revenue in the United States and abroad: the movie theater. Today
much of the world is undergoing a mass communications revolution;
hence, new movie markets (such as home video, cable and pay-per-view)
have been growing so rapidly that they are no longer just
ancillary markets to the basic theatrical market but have become
basic markets in themselves.
Industry statistics reveal that the past ten years have marked
an overall increase of at least 30% in many "ancilliary markets"
and, over 200%, as in the case of home video. The ability to
exploit a movie in many markets diminishes investment risk and
increases earning potential. In many instances, low budget movies
have lost money theatrically and still earned profits overall from
ancillary sales.
With the advent of the new computer-based technologies,
"cable" markets and direct digital-delivery of motion pictures via
satellite and the Internet are expected to increase dramatically
over the next five years, creating an accelerated demand for
original and re-run motion pictures.
The worldwide market for the sale and exploitation of feature
motion pictures is divided into "territories" and "media." The
territories are divided into two major regions known as "foreign
territories" and "domestic territories." The broad foreign
territories are Europe, "AustralAsia," Latin America, Eastern
Europe and Others (that include Israel, the Middle East, South
Africa and Turkey). The United States and Canada are usually
grouped together and referred to as the "domestic territory," from
the point of view of the United States.
The current "media" by which feature motion pictures are
delivered to the territories includes movie theaters, home video
cassettes, cable TV (monthly subscription and pay-per-view), direct
broadcast satellite TV, free broadcast TV (Network and
Syndication), and ancillaries (such as airlines and libraries).
According to a study conducted by Monitor Co., the movie and
television industries contributed over $16 billion to the
State of California's economy, directly employing 164,000 and
indirectly employing another 184,000. The study also found that the
vast majority of feature films and television programs are produced
by independent producers. Independent production is becomming more
prevalent in other areas of the United States, especially Nevada,
North Carolina and the Tri-State Area (of New York, New Jersey and
Pennsylvania).
There are thousands of screenplays in development at any given
time, however each year only 450 to 500 of these are produced into
35mm motion pictures. Although the majority undergo principal
photography in the United States, aproximately 60 to 80 are shot
offshore (including Mexico and Canada). Of these approximately one-third
come from the major studios (also known as the MPAA
companies), and approximately two-thirds from the "independents."
"Independents" are those companies engaged in
the production and/or distribution worldwide in all media of all
motion picture and television programs that are not generated by
the recognized major studios. It includes those independent
productions, even those distributed by a major studio, in which the
producer retains a significant ownership interest and is at risk
for a significant portion of the production cost.
Of the 450 to 500 features produced each year, less than half
recieve a theatrical release. Thus a significant
number of features do not get a theatrical release but are released
directly to home video and other media. There were over 350 features released
in 1998 by major and mini-major studios as compaired to about 290 in 1997.
Producing and/or financing the above product are approximately
7 major studios (8 if you count DreamWorks SKG), 16 mini-major studios,
50 to 80 major independent production companies and over 1,750 smaller
independent production companies, many of which may never produce even
one feature or produce only one feature every two or more years.
Including the major studios, there are over 600 entities that
directly or indirectly distribute feature motion pictures to the
various worldwide markets (with approximately 350 specializing in
foreign territories and approximately 250 specializing in domestic
territories). Of these, approximately 225 companies distribute
motion pictures to the theatrical markets, 250 to home video, 310
to television, 70 to pay-per-view and 95 to the syndication
markets.
Exhibiting the above feature output are 4 major television
networks, 37 cable channels (of which 6 or 7 are major cable
networks) and hundreds of independent stations in the United
States.
Theatrical exhibition is the traditional market for the
initial presentation of "feature" motion pictures.
Despite intense competition with other forms of entertainment (such
as music and sports), movie attendance has exceeded one billion
paid-admissions annually since 1976. According to statistics
provided by the Motion Picture Association of America (MPAA),
U.S. box office hit $8.4 billion in 2001, a 9.8% increase over the previous
year. Worldwide box office receipts for feature motion pictures have
grown from $1.2 billion in 1970 and $2.8 billion in 1980 to over 15
billion in 2001. This increase is all the more remarkable because
ancilliary markets such as home video, cable and (foreign)
television markets have undergone explosive growth during this same
period.
Despite these burgeoning statistics, the fact remains that
motion pictures with high production and marketing costs, often
entail greater risks with less likelihood of return than lower-cost
pictures released in the non-theatrical markets. The reasons:
marketing and promotional costs (combined with substantial fees
paid to exhibitors, usually 40% to 65% of box office gross),
distribution fees (usually 33%), overhead, interest and expenses
(paid usually to studio distributors) and gross participations,
greatly reduce the revenue stream flowing to the producer and net
profit participants. According to the MPAA the average negative
cost of a studio feature motion picture (which includes production
cost, studio over head and capitalized interest) as of 2001 was $47.7
million. As of 2001 the average initial marketing costs (prints and
advertising) as of the a feature is in excess of $20 million. Five years
ago the average negative costs of a feature was $39.8 million.
These statistics alone make the task of recouping production and
marketing costs for MPAA pictures formidable. Low and medium budget
pictures produced by the independents (typically for less than $1.5 million
and $10 million, respectively), have less difficulty recouping, however low
budget pictures often go direct to home video in lieu of a release
in the theatrical market.
Theatrical exposure, no matter what the projection medium, is
often a major method of enhancing the value of the ancillary
markets (home video, cable and free TV), as these ancillaries
benefit directly from word-of-mouth advertising and ad campaigns
created by the theatrical release. Thus, any increase in the value
of ancillary rights decreases the reliance on theatrical exhibition
as a source of revenue. On the other hand, a successful theatrical
release has proven time and again to be extremely valuable for
exhibitors, distributors and producers alike.
As of 2001 there were approximately 6,596 theaters with
36,110 indoor "screens" and 474 drive in theaters with 654 drive-ins "screens"
in the United States. As of 1996 there were approximately 7,215 theaters with
only 28,864 indoor "screens" and 583 drive in theaters with 826 drive-ins "screens"
so clearly the average number of screens per theater has been going up, while
the number drive in screens and theaters have een dropping steadily.
As of 1998, there were approximately 32 theater circuits
in the U.S. with more than 100 screens each. The top three circuits at
that time were United Artists (2,398 screens), Cineplex Odeon
(1,715 screens) and American Multi-Cinema (1,623 screens).
The average studio feature ("A-Picture") is in first-run
release for approximately 8 weeks garnering between 1,000 and 2,700
screens and grossing $10 to $40 million over such period. The same
picture is in second-run theaters for the balance of it's
theatrical life, such being approximately 6 months. Independent
pictures gross much more modest sums, but, as mentioned, their
production and marketing budgets are considerably less as well.
The top 10 grossing limited release films of 1995, for instance,
grossed between $9.4 million (The Brothers Mc Mullen) and $3.7
million (Bad Company).
About 16 new major features are introduced to the theatrical
marketplace each month, playing 800 to 2,500 screens, or an average
of about 1,650 screens. Since first-run is usually 8 weeks, this
means that between 12,800 and virtually all of the existing 26,500
screens (during the peak times of Summer and Christmas holidays),
are booked with major studio product, leaving, at best, between
6,850 and 13,700 screens available for independent productions for
limited periods of time or during off-season periods. Each
independent production plays on about 5 to 75 screens (or an
average of approximately 40 screens) making it possible for about
260 pictures to be absorbed by the market in each 6-month period.
According to the Television Bureau of Advertising, as of 1994,
79% of all TV households (such numbering 211 million, excluding
Alaska and Hawaii) had a VCR, such number of VCR being approximately
70 million. According to Neilson Media Research as of 2001 there are
now 96.2 million VCR households and 105.5 million TV households.
Although growth in the worldwide home video market as of 2001
seems to be rebounding, this market, once considered an ancillary
market, out-paced even the most optimistic growth projections over
the past decade and has emerged as a "basic" market. While theatrical
exhibition will never be replaced (any more than television replaced
radio or movies), home video can be key to a picture's success in
other markets.
According to the U.S. Bureau of Census, there are over 22,000
establishments in the United States dedicated to renting and
selling home video cassettes. When one considers the thousands of
other outlets (such as super markets, department/convenience
stores, gas stations and increasingly ubiquitous vending machines),
this figure is considerably higher.
Video stores usually purchase between 5 and 25 video cassettes
of each major studio release for as much as $79 per cassette. It
is not uncommon for such an outlet to purchase 100 copies of a
blockbuster release and discounted prices can be expected for such
quantities, as well as lesser quantities, especially to large
chains, such as a Blockbuster Video chain. Of the total universe
of video outlets, including dedicated video establishments, only
about 5,000 tend to regularly purchase features made by independent
production companies. In such case, each outlet tilically
purchases at least two video cassettes (in case one breaks) for as
much as $40 to $65 a cassette. Each cassette rents approximately 2
to 10 times a week, depending on how many copies of a particular
title the video store has on display and other factors.
According to Investor's Business Daily, Paul Kagan Associates
project that by 1999 revenues generated by the domestic home video
market will be aproximately 185% of the domestic theatrical market.
Of the 108 million TV households in the U.S., (such
representing a 97.5% penetration), 60.5 million subscribe to cable
TV.
There are two kinds of cable TV. The first is regular cable
TV known as "pay TV" the second is "pay-per-view." Pay TV, which
is subscribed to and paid on a monthly basis, includes basic
service and is available with premium channels such as HBO and
Cinemax. Pay-per-view is paid for upon the user's demand -
currently by calling an 800 number or ordering it on a hotel
television set. Consumers only pay for what they purchase
directly.
Pay TV has grown steadily over the past ten years,
accelerating somewhat during the past five years with the addition
of new pay TV subscriber services. According to the U.S. Bureau of
Census, 45% of all television households currently subscribe to
basic cable services. Of these, many subscribers pay a premium for
additional services such as HBO, Showtime and Cinemax. Often cable
companies compete vigorously with the home video window for a prior
run option.
The main staple for most pay television services is feature
motion pictures which have been released theatrically. Home Box
Office has a 400 film appetite annually and Cinemax, its sister
service, has a 200 film appetite. These services combined
represent approximately 50% of the market. Showtime/The Movie
Channel has approximately 30% of the market, while the other
smaller services make up the remainder.
Pay-per-view on cable is gaining market share rapidly and may
eventually replace both subscription cable and home video by the
turn of the century. The number of pay-per-view customers is over
20 million, up from 6 million in 1989. Combined cable sales total
approximately 20% of theatrical revenues.
It is not anticipated that there is a market for independently produced
low-budget features on network television except in the
case of extremely successful pictures, or in the event pictures are
made-for-television (such as movies-of-the-week, also known
as MOWs).
Syndication, the act of selling features to each of the
thousands of local independent television stations across domestic
U.S., Canada and abroad, may proceed for 5 years or longer for each
film.
Independent television stations (stations not affiliated with
a network) have recently become another source of revenue for
theatrical motion pictures and the importance of local independent
television stations is a relatively recent phenomenon, in foreign
markets as well.
With the major networks producing movies exclusively for
broadcast on their own stations, independent television stations
have become increasingly important outlets for theatrical features
produced by independent producers. Typically, independent
television rights are sold to a syndicator who in turn sells to
individual stations or small networks across the country.
While terrible films cannot be syndicated no matter how good
the marketing and great films often sell themselves, the vast
majority of films in between can generate significant revenues,
equaling or well exceeding theatrical revenues, given an ample
marketing campaign and the long window of time typical of
syndication.
Star Wars was one of the first motion pictures to demonstrate,
on a major scale, how valuable ancillary markets (consisting of
such spin-offs as toys, games, T-shirts and novelty items) can be.
In a continuing trend to present day, Jurassic Park, for instance,
continues to generate spin-off sales which may eventually be as
significant as revenues the picture has already earned in various
other markets.
Typically, independently produced features do not generate
significant ancillary revenues of this nature, although this trend
has been changing in the recent past.
Interactive video and computer games are another huge new
market that is rapidly expanding. At this time it is difficult to
predict how significant this new ancillary market will become, but
it could represent a major segment of the future motion picture
industry.
With the advent of DVD's ("digital video discs," also known as
"digital versatile discs"), VHS tape, as the predominant delivery
system for home video, will most likely go the way of 78rpm, 45rmp
and 33rpm vinyl records. In fact, due to DVD's huge storage
capacity (4.7 gigabytes per layer, with up to 4 layers possible
within the next five years), light weight and relatively low cost
of production, this new medium may give birth
to an entirely new direct-sale, retail market, replacing the
current video cassette rental market of today and modifying the
doctrin of first sale.
Direct broadcast satellite, which in essence delivers a cable-quality
(or better) image directly to the home by satellite, has
become increasingly popular in recent years due to a wide variety
of programming and reduced costs. It is uncertain at this date as
to whether direct broadcast satellite will eventually replace cable
delivery systems or work in tandem with them, as a significant
cable infrastructure is already in place. It is conceivable that
many foreign and third-world territories will base their
infrastructure on wireless delivery systems and in such case Direct
broadcast satellite, as well as direct, high-bandwidth, Internet
delivery, may be the norm in the future.
Export sales to foreign markets from independent producers hit
an all time high of $1.8 billion (up 22% from 1996). The
European foreign market accounts for 56% of global revenues (all
media) generated by English-language, independently produced films.
Television sales (which include pay and free TV), account for 44%
of all foreign revenues and were up 11% over the last year, for the
third consecutive year. The largest single improvement in sales
for fiscal 1996, however, was theatrical (up 37%). Home video
remained flat, at 25% of all revenues, as it has the past several
years.
As of February of 2000, the most important foreign territories
are: Japan, Germany (including Austria), Italy, the United Kingdom
(including Ireland), Spain, France (including French Belgium),
Korea, Australia/New Zealand, Brazil, Mexico.
According to The Hollywood Reporter AFM 1997 Special Edition:
Japan is the largest foreign market even though it is fighting a
dilapidated theater infrastructure and declining attendance
records. Nevertheless, consumers spend more than $6 Billion in the
home video market (majors and independents), and significant new
markets are opening up with respect to satellite, TV, cable, pay-per-view
and DTH services. Germany, the number one European
market, is television-driven, however there are signs of a
leveling out. With a record theatrical year, the country is
building multiplexes and will have approximately 5,000 by 2002.
Italy is the only major European country without cable. The
television market is hindered by political strife over proposed new
communications legislation and the video industry is hampered by
serious piracy. Nevertheless, even though there is a major
shortage of theaters, Italy is the top market for independently
produced features. The United Kingdom/Ireland market is steady but
highly selective about theatrical product due to a paucity of local
distributors. Nevertheless, it could strengthen due to a new cable
infrastructure going into place. With the lifting of certain
quotas on Spain's imports, this territory is expected to grow with
new co-production opportunities for independents. Currently,
massive joint efforts between Spanish and American exhibition
entities will provide more multiplex theaters to offset the decline
of the home video market here. France is having problems with
theater construction even though such market is strong for films
other than B-pictures due to television quotas and the decline of
home video market. Second only to Japan as Asia's top market for
buying motion pictures, South Korea is the world's fastest growing
market. Although the country lacks screens, there are extensive
programs to remedy the situation as the country becomes more open
to foreign competition and global markets. Australia's theatrical
market is growing rapidly due to an expansion of its 1,200 screens
with additional multiplexes. Although direct-to-video sales are
off and satellite services are precarious, the territory has a
strong market for television and home video which will usher in a
dynamically maturing major market over the next decade. Latin
America, long in the doldrums, is experiencing a multiplex boom.
The fact that there is essentially only one distributor-buyer for
the entire country makes it relatively easy to sell TV rights, even
though buying power will remain poor until the country's exchange
rates improve. There is now positive indication that this is
happening today.
Generally speaking, if an English-language film made for U.S.
release does well domestically, it becomes popular in foreign
markets, particularly in Europe.
Of the total U.S. population (which is about 265 million), the
two largest groups that go to the movies are 16 to 20 years of age
and 30 to 39 years of age. Each group makes up approximately 19%
of the theatrical, movie-going population. Attendees under 30
years old are, and have been, the dominant force in the movie-going
public. Of the total population, 21% go to the movies at least
once a month, 34% go once in 2 to 6 months and 12% go less than
once in 6 months. 32% never go to the movies. The national
average price paid for a movie ticket is approximately $7.45.
Although it should not be construed that it is easy to
generate returns as stated below, the figures represented
have been obtained by many independent producers.
Quality B-Pictures produced by independent production
companies in the past have been able to routinely generate revenues
in excess of $2 million when one considers not only theatrical,
but home video, foreign and ancillary revenues. Using data on the
top 253 "low budget," independently produced B-Pictures covered by
The Hollywood Reporter, the average 10-year gross for each feature
(adjusted for 1996 dollars), was in the neighborhood of $9 million.
The top 8 pictures grossed more than $30 million each and the top
picture earned just over $70 million. The lowest picture in the
sample earned $1.6 million.
A feature film "costs" what a producer can't obtain for free,
or what costs he or she has deferred for payment at a later date
from the proceeds of the film's exploitation. When one hears of a
feature costing under $50,000 to produce, yet it is making a
million dollars at the box office, several facts have usually been
omitted. Among the omitted facts are: (a) most of the cast, crew
and equipment costs have been deferred but are payable out of the
sale proceeds. This amounts to $50,000 to $100,000. (b) $10,000
to $40,000 must be spent in editing to clean up flawed production
sound tracks, ADR to improve poor acting delivery and a host of
photographic problems that are routine, must be addressed. (c)
$30,000 must be spent to blow up the 16mm negative to 35mm. (d)
better music must be purchased or a score written. This costs
anywhere from $10,000 to $30,000 for a low budget project. Thus
the real cost of the "$7,000 feature" is at lease $150,000 to
$200,000.
Very occasionally, features made for less than $50,000 will
gross hundreds of thousands or even break the multi-million dollar
mark, but more times than not, the low initial production budget is
used as "hype" to promote the picture, or the director of the
picture. Return Of The Secacus 7 and Clerks are examples of
features that were made for under $50,000 and grossed over a
million dollars, and they are very rare. Films costing between
$200,000 and $700,000 which gross several million are more
realistic examples of what can be expected from super low budget
pictures. She's Gotta Have It, Night Of The Living Dead, The Blob,
Eating Raoul and Grizzly are examples.
Of course, many pictures have earned much less and many have
not recouped their production costs at all, especially if not
completed, produced for too high of a budget or present an
unengaging story.
The fact that THE BLAIR WITCH PROJECT, which was shot in digital video
at a production cost of about $25,000 (with a post production cost of
$230,000) has grossed over $120,000,000 - will change the dynamics of the
movie industry and may contribute to the demise of the "brick and mortar"
major studio/distributors within the next decade.
The Hollywood Reporter, Variety and other trade publications
publish, on a weekly basis, the national and international box
office grosses of all MPAA (studio) and Independently-produced
features that do significant business. Ultimately, most A-Pictures
have been able to generate receipts of at least $30 million,
especially when all media and territories have been exploited.
Many A-Pictures routinely generate $30 million within even 14
weeks of theatrical release. For example, in the combined last
quarter of 1996 and the first quarter of 1997, over 40 pictures
took in revenues in excess of $30 million. When one considers home
video, foreign and ancillary revenues, such returns may increase by
a factor of two or more. In fact, from October, 1996 through
April, 1997, for instance, 12 of the features in release grossed
more than $100 million in the U.S. theatrical market alone.
Independence Day, released in 1996, grossed over $280,000,000 in 10
weeks.
Adjusted for inflation, Gone With The Wind is the top grossing
movie of all time. In terms of raw 1993 dollars, (and not
considering the recent re-release of the Star Wars trilogy),
Jurassic Park is the largest-grossing movie in history, earning
over $900 million in the worldwide theatrical markets alone. Given
this exposure, there is a strong possibility that when Jurassic
Park has been exploited in all ancilliary worldwide markets (home
video, cable, TV, spin-offs, etc.), gross revenues may exceed 2
billion dollars, especially if it is re-released at some future
date.
Usually, the largest, most impressive grosses, are generated
by high-budget A-Pictures, financed and/or released by the MPAA
companies; however, such pictures do not always create the optimum
rate of return, especially for net profit participants, who,
unfortunately, only see profit participation in 5% of the pictures.
Competition
The Theatrical Market
Home Video Market
Cable TV Markets
Network Television
Syndication
The New "Ancillary" Markets
The Foreign Market
Demographics
Box Office Gross Sales - B Pictures
Box Office Gross Sales - A Pictures
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