The film industry is one of the few places where a million dollars is considered a relatively modest amount. From a distance, it might seem like an ideal world with rich celebrities walking down the red carpet, extravagant Oscar parties, and, of course, big money flying around.
Yes, the American film industry surely rakes billions each year. However, the real economics under the surface is much more complex. Let’s explore the technicalities of filmmaking economics and try to understand how do movies make money.
2023 registered one of the biggest clashes in Hollywood, with Barbie and Oppenheimer gripping the attention of the global audience and achieving remarkable success. While Oppenheimer, with a budget of nearly $100 million, nearly made a billion, Barbie created havoc at the global box office by generating more than 10 times its $140 million budget.
But how do movies like these make this much money? How is the revenue generated and shared? Let’s break it down further.
How Does the Film Industry Work?
The cinema industry is a complex and multilayered business involving thousands of individuals playing their parts in a collaborative effort. From the spot boy to the lead actor and distributor to the cinema hall proprietors, each of these individuals gets compensated for their services and subsequently shares the revenue generated by the movie (at least most of them).
It all begins with a concept, typically coming from the director or writer, which later is transformed into a script by screenwriters, consisting of plot structure, storyline, characters, dialogues, and more.
Pre-production and Production stages are where the financial framework of the movie takes shape. Starting from a producer who is willing to invest in the project, followed by hiring the cast and crew members, the cost of filming, securing locations, and allocating salaries of technicians, editors, music directors, and others involved in the filmmaking. Based on all the financial requirements, a budget is created, and production begins.
How Do Movies Actually Make Money?
Just like any other business venture, movie-making is a tricky and risky investment since there is no guarantee of success. How often we’ve seen a big-banner movie going down at the box office despite industry heavyweights involved in the project? In the wake of COVID-19 and the emergence of OTT platforms, the cinema industry has become more vulnerable than ever. For more than half of the releases, it’s a positive sign if they manage to recoup the production cost itself.
As market dynamics keep changing over time, it’s not like the early cinema days when a movie would released in a theater and generate almost the entirety of its revenue through ticket sales only. So, how do movies make money nowadays?
A number of local and global sources play a part in generating revenue for a movie, both during its theatrical run and in the post-theatrical phase. Let’s take a look at some crucial ones:
1. Box Office Collection:
Although it’s been challenging to bring the audience to the theaters in the past few years, it remains the single biggest contributing factor to the movie’s revenue. In the USA, the average movie ticket cost is around $10, relatively higher compared to European and Eastern markets.
Ticket sales typically involve a shared pre-arrangement among the production company, distributor, and theater owners. Typically, a larger share goes to the studio during the initial week following the release of the film. If the movie generates enough interest to survive for longer, the distributor’s percentage increases.
Usually, these deals and arrangements are finalized way before the theatrical releases. On average, the studio can harvest more than 50% of the ticket sales in the United States. However, the numbers are lower in the international markets.
That being said, the revenue directly depends on the public perception. If word of mouth is positive, theaters are forced to schedule more shows, adding to the movie revenue.
2. Distribution & Licensing:
The next significant portion of income for movie makers comes from selling distribution rights. Typically, the deals between distributors and theater chains are signed while the movie is still in the production phase.
Once the movie finishes its theatrical run, the studio can sell its broadcasting rights to cable networks, TV channels, streaming services, etc. Often, the telecasting rights are negotiated separately for different countries due to various location-based restrictions and requirements. It allows platforms to broadcast the movie as per the pre-determined financial agreement.
3. Streaming and Home Entertainment:
Who would have thought that OTTs (streaming services) would emerge as one of the most used platforms to consume movies? Nowadays, production houses have been using these platforms to further add to their movie revenue. But how do films make money on Netflix and other streaming platforms?
Studios can sell the distribution rights to popular streaming platforms like Netflix, Amazon Prime Video, HBO Max, etc., for a hefty amount. Naturally, the deal entirely depends on the popularity and audience’s prior response to the movie. In some cases, the platform owners are ready to pay hundreds of millions to stream a movie.
These deals allow the streaming partners to run a movie for a limited period, and based on the public’s response, the tenure can be increased by paying the producers more.
Similarly, home entertainment is another popular means of generating income for the movie. It involves selling distribution rights for creating and selling DVDs’ Blu-rays, and digital downloads. Apart from the deal, the revenue from home entertainment comes from the sale of digital copies, DVDs, digital rentals, and downloads.
4. Merchandise:
The sale of movie merchandise, such as toys, clothing, and other collectibles featuring beloved film characters, has emerged as a powerful marketing trick to cash on the movie’s popularity. This approach has been particularly effective for major blockbusters that can leverage popular logos, characters, and names to create licensed merchandise.
Producers can secure patents for key movie elements, such as logos, characters, and names, and license brands to create and sell the items associated with the film. Star Wars, a popular 1977 movie, started this trend of selling official merchandise, and since then, it’s been an integral part of movie marketing. Can you believe that since its theatrical release, the movie has raked up over $10 billion just by selling its merchandise, such as clothing, toys, etc?
This method can do wonders with big-budget fiction movies featuring popular characters that can connect to youth on different levels. For example, the iconic Godfather movie won’t do much by selling its merchandise, but on the other hand, movies based on comic book action heroes like Iron Man, Spiderman, and Avengers can appeal to the younger generation, subsequently generating better income from retail sales.
5. Syndication:
Movie makers can also license the movie for syndication on television, which basically means that the TV channel can telecast it repeatedly over the years. The strategy works best for classic blockbuster films. However, due to the rise of video-on-demand platforms, syndication is no longer the most effective revenue-generation model. I mean, when was the last time you waited for a movie to be telecasted on TV?
How Much Does the Average Movie Cost to Make?
The money that goes into movie-making fluctuates depending on the project, star cast, the scale of release, and, perhaps most importantly, the market appeal.
For instance, a movie with a $15 million budget is unlikely to spend $40 million on marketing and promotion. On the contrary, a high-budget action movie has to plan an extensive marketing and promotion strategy in order to generate appeal for the film, which may well increase the budget of the film.
So, how do movie finances work in the American film industry? Let’s get down to it.
1. Pre-Production Cost: Development and Financing:
The pre-production phase involves the development of the project. The producer secures the funding through studios, individual investors, production houses, or multiple sources. The budget is determined, and a financial structure is developed for the film.
After financing is done, the next stage is to cast actors and negotiate their roles and compensations. Usually, it’s followed by hiring key personnel, such as screenwriters, editors, music composers, production directors, and directors of photography. Additionally, all behind-the-scene crew members, such as make-up artists, technicians, location managers, spot boys, production assistants, etc., are also hired.
Depending on the financial demands of these individuals, a final budget structure is created, and funds are allocated for each member.
2. Production Cost: Utilization of Funds:
During production, the funds secured for filming will be used. This includes location rentals, set constructions, catering, transportation, costumes, make-up, and more. A shooting schedule is also developed to stay within the budget, as extended filming periods may result in higher expenditures.
3. Post-Production Cost: Editing, Marketing and Distribution:
Once the filming is finished, the movie enters the post-production stage, where the final touch-up is done, such as sound mixing, special effects, music, and editing. Each part is accomplished by specialists hired during the pre-production phase, and respective compensation is disbursed accordingly.
Next, a large chunk of the budget goes to marketing partners to generate hype and interest regarding the movie. In the last few years, producers have started investing a lot more in marketing, as it usually pays off in the end. Steps like selling movie merchandise are a good way of promoting movies through conventional markets. Lastly, the movie is delivered to distributors and theatres as per the prior deals and is officially released.
How do Movies Make Money from Theaters?
Cinema theaters are the oldest and most unique way to experience a film. Naturally, it’s the single most profitable source of revenue for filmmakers. Three key steps determine the box office collection of a movie:
1. Box Office:
As I mentioned earlier, the theater tickets contribute to the movie’s box office gross collection. However, this amount is shared by distributors, theaters, and production houses. Interestingly, theaters get a higher share for a poor-performing film in order to protect them from financial loss. However, in the case of a box office blockbuster, the filmmakers get to keep the higher portion of the revenue.
2. International Release:
Art knows no boundaries, and we are witnessing more and more global releases every year. Except for China and India (Bollywood), Hollywood film industries dominate most regional markets in the world. Films can earn a hefty amount, depending on the number of screens, exhibitor’s cut, and, naturally, the movie’s popularity.
In many cases, movies manage to earn more money at the global box office than it does in American markets. This usually depends on the globally popular star cast, pre-release hype, and super strong audience response.
3. Opening Weekend and Word-of-mouth:
Despite the quality of the film, a strong box office opening can create excitement among viewers. The common movie-goers are usually sparked by the buzz, queues outside theaters, and overall movie appeal and tend to rush toward the cinema hall.
To create such a favorable atmosphere, producers and distributors invest heavily in marketing campaigns and promotional activities because they know it will yield returns.
However, in the longer run, the box office earning depends entirely on word-of-mouth, critics’ rating, and general public opinion. A quality film is always likely to last longer in theaters, which significantly adds to the revenue.
4. Awards, Recognition, and Re-release:
Lately, we’ve seen the emerging trend of critically acclaimed classics getting theatrical re-releases, often in 3D, 4K, IMAX, and other new technologies. Not only does it give younger audiences a chance to enjoy cinematic gems on the silver screen, but it also opens a new avenue to add to the movie earnings.
Last year in February, the 1972 iconic crime drama The Godfather was re-released for three days in over 150 American theatres and hundreds of global cinema halls. Astonishingly, the movie collected nearly $1 million in America and another $1.4 from global markets. Not that Al Pacino would be asking his share, but who doesn’t like an extra million for a work completed decades ago?
Frequently Asked Questions:
Movies on Netflix make money through the subscription-based model, where users pay monthly fees to access a library of films. Producers sell the license to Netflix to broadcast the film for a certain period.
Movie profitability determines whether it’s a blockbuster or not. Usually, it’s a combination of positive word-of-mouth, exceptionally high revenue, and widespread popularity.
As per the survey of over 250 popular Hollywood movies done by Stephen Follows, nearly 51% of the movies registered a profit at the box office.
Avengers: Endgame (2019) holds the record for the most successful film at the box office, grossing over $2.7 billion worldwide.
Final Word:
The film industry is not what it used to be. With each passing year, it’s getting more challenging for filmmakers to attract crowds to the theatres and keep their projects profitable.
Clearly, in this age of Netflix and HBO, selling theater tickets is not going to drive revenue, and producers are realising it slowly. No wonder we are witnessing a huge number of OTT releases, particularly after the pandemic.
Also, the ever-changing audience perception is making it difficult for the makers to come up with projects that can lure viewers to the cinema halls. Very often we see the empty theatres for a movie that goes on to win multiple Academy Awards later on. I am sure now you know how do movies make money but, again, in Hollywood, there are no guarantees.
I am an engineer by education, tech writer by profession, and a motor sport fan by heart.
