Variety Film Summit panel: Box office poor indicator of films’ financial success

Hollywood has always been the epitome of creative financing. Movies may gross hundreds of millions of dollars but no one sees any money. A panel at the recent Variety Film Summit helped shed some light on movie funding.

The box office is not a horse race

Nothing says success better than being number one at the box office, right? In America, there is a strong desire to identify winners and losers, and box office rankings are the perfect vehicle for labeling movies as such. In reality, we miss a core business principle by hyper-focusing on box office numbers: it doesn’t matter how much money you make, it matters how much money you keep.

Box office numbers only represent a quarter of a movie’s overall revenue and provide no information about a movie’s expenses, a figure studios don’t accurately disclose. After the opening weekend, a blockbuster may be number one, but nowhere close to recouping its full investment. An indie, on the other hand, may be making investors very happy coming in seventh. Unfortunately, only industry insiders know this. Here’s a chart comparing top grossing movies vs top profitable movies.

Paranormal Activity, which has only been out for two years, was 702 times more profitable than Avatar, which doesn’t even rank in the top twenty.

Doubles versus grand slams

Blockbuster financing resembles the venture capital model in which 50 movies lose money, 10 break even, 10 do OK and 1 or 2 do well enough to pay for all the others. The mini-majors are changing the whole financial risk/reward ratio. Their strategy is to aim for singles and doubles instead of grand slams where the likelihood of striking out is high.

Relativity Media manages compensation packages to keep upfront costs down and backend incentives high. Steven Soderberg took scale and profit participation for Haywire instead of his typical upfront fee, which made him a de facto head of production. With his potential profits on the line, he was forced to decide if that extra crane at $20,000 per day was truly necessary. Soderberg delivered the movie on time and on budget, and if the movie is successful, it will make far more money than if he’d been paid upfront.

This approach worked great for Cameron Diaz, who took a huge paycut for Bad Teacher in exchange for profit participation and won in the end. The entire movie, which grossed $200 million worldwide, was made for less than her $20 million salary on Charlie’s Angels: Full Throttle. Her profit participation not only let the movie move forward, it made her an undisclosed, but tidy, sum of money.

Film financing goes from major studios to friends and family

Film funds are changing quickly. Money was easier to come by in 2005. The result was terrible films that had no business being made. That all changed in 2008 when the credit crisis wiped out most movie financing and consolidated funding activity to ten banks. Now there are 35 banks providing film financing, along with sophisticated independent financing partners and even crowd-sourced financing operations.

Kickstarter is an online marketplace that crowd-sources funding for music, film and other creative projects. Kickstarter has raised $20,000,000 for film projects, which accounts for roughly 20 percent of its overall funding activity. Typical campaigns have between 30 and 45 days to meet its goal or else all of the money is returned to financiers. Friends and family kick account for 80 percent of the investment money with strangers picking up the remaining 20 percent. Kickstarted espouses three mantras for a successful campaign:

1. Don’t be shy: Teams that cannot ask for support will not succeed
2. Ask for a realistic funding goal: Do your research and figure out exactly what you need
3. Connect with your fans: Most funding comes in the first and last days of the campaign, but involvement increases as you build momentum