How Do Movies Make Money? Explained!

The movie industry might appear glamorous from a distance. They stroll down red carpets, hold their Oscars, and vacation in St. Barts – just because they can. Despite the fact that filmmaking makes a lot of money, the economics of it are not straightforward.

You’ll probably hear “nobody knows anything” at a movie studio. And that’s true. Public opinion can change with the times, and the film industry is constantly evolving. Investing in a film starring a big-name actor or actress is a risky undertaking. 

Movie box office in the U.S. and Canada for 2020 was $2.2 billion, down 80% from the previous year, according to the Motion Picture Association of America (MPAA). In 2020, the box office for movies reached a low of $12 billion, down 72% over 2019.

In the early days of cinema, a movie released in theaters made the vast majority of its revenue by selling tickets and then disappeared. 

It is now mandatory for both studios and indie filmmakers to look for new sources of revenue, as ticket sales are no longer the end-all and be-all for movies. With most theaters closing in early 2020, other revenue streams will be more important than ever.

How Do Movies Make Money?

Film revenue isn’t driven solely by ticket sales, since the industry is in flux. Filmmakers, producers, and studios can turn a profit with merchandising, video on demand, streaming video, foreign sales, and other distribution channels. 

Below is a breakdown of the income sources:

1. Ticket Price Revenue

Recent years have seen declining attendance at theaters, making it harder for studios and distributors to profit from movies. Theatre owners usually receive a portion of ticket sales, with the studio and distributor getting the remainder.

Traditionally, the studio received more money during the opening weekend. The theater operator’s percentage increased as the weeks progressed. Ticket sales in the United States make up about 60% of a film’s revenue, and overseas ticket sales make up around 20% to 40%.

According to the contract, each exhibitor gets a certain percentage of revenue. Many theater contracts aim to protect them from box office flops. 

This is done by giving theaters a larger cut of ticket sales, so a studio may get a smaller cut from a poorly performing film and a higher cut from a hit film. See how much of the ticket revenue goes back to the studios by checking the securities filings for large theater chains.

Studio and distributor revenue from domestic sales tends to be higher than revenue from overseas sales as the studios and distributors get a larger share. Even so, foreign ticket sales grew in importance in the early 21st century. 

You see more sci-fi, fantasy, adventure, and superhero films because of that. Action scenes and special effects do not need translations. No matter where you live, they’re easy to understand. For an indie comedy, reaching a foreign audience is much harder.

2. Merchandising Dollars

Star Wars is where it all began. The George Lucas sci-fi franchise has earned billions of dollars from toys alone since 1977, not to mention revenue from licensing. “Star Wars: The Force Awakens” grossed $700 million at the box office in 2015.

Obviously, this doesn’t work for all films. Romantic comedies don’t tend to have a lot of action figures. Merchandising, however, is a cash cow for big-budget films that appeal to both kids and Comic-Con fans. Disney’s “Toy Story” franchise, for instance, has generated billions of dollars in sales.

However, some analysts suggest staying alert for movie fatigue. Video games and YouTube have become increasingly popular among kids.

3. Foreign Sales

The sale of distribution rights in foreign territories is essential when a producer is trying to put together a budget for an independent film. Distribution rights ensure that a film’s budget is covered and it generates revenue. A great foreign sales agent can make money for independent filmmakers if their movies can be sold in key overseas markets.

When producers make a film’s “wish list,” they tend to fill it with well-known names who are willing to “travel” overseas. You can find a partner willing to buy the rights in China and France much easier if your star is Tom Cruise or Jennifer Lawrence. Although that’s no guarantee of a million-dollar hit (or billion-dollar hit), it’s about as safe a bet as you can make in this industry.

4. Television Rights, Streaming, and VOD

DVD sales were all the rage once upon a time. Streaming and video-on-demand (VOD) have far more influence now.

Some producers make a lot of profit when they sell TV and international rights because they don’t need to pay marketing or P&A costs. On TV, films can remain evergreen for years after they leave theaters. How many times have you seen “The Notebook” and “The Shawshank Redemption” over and over again?

VOD deals can bring studios hundreds of millions of dollars in revenue. VOD release strategies for indie films include day-and-date releases (movies released simultaneously in theaters and on VOD), day-before-date releases (VOD before theatrical release), and VOD-only releases. There are many films that profit from the model when they don’t have big stars and special effects to grab people’s attention.

Movie studios are finding new ways to make money with streaming video. Movie studios can still earn money from older films if they license them to Netflix or Amazon Prime after a few years. Streaming services are also attracting audiences away from traditional movies due to their success with original content.

The Costs of Movie Production

In general, major studios do not disclose their entire film budgets (production, development, marketing, and advertising). Making and marketing a movie costs much more than most people think. An estimated $220 million was spent on the production of Marvel’s “The Avengers” for example. Marketing costs and advertising costs add to the budget.

In fact, printing and advertising costs alone can be extremely high for many films. While the production budget of a $15 million film may be higher than its promotion budget, Hollywood considers it a small budget. 

It can be difficult to get people into theaters for films that do not have a built-in audience (such as those based on bestselling books like “The Hunger Games” or even “50 Shades of Grey”).

In the case of romantic comedies or some children’s movies, commercials and media advertising are required to promote the film, and those costs add up quickly. P&A budgets might be over $20 million for a movie budgeted between $40 and $75 million.

Tax breaks and product placements can help finance any film, whether it is a blockbuster or an independent production. Producing companies are usually eager to shoot a film in Canada or Louisiana if given an incentive.

The Cinderella story of film financing is the indie film “Little Miss Sunshine.” This film is an example of the “no one knows anything” mantra. The Sundance Film Festival sold the film to distributor Fox Searchlight for $10.5 million, a budget of around $8 million. It made $59.89 million in U.S. theaters, an almost unheard-of amount for an independent film.

Comparatively, the Walt Disney (DIS) movie “John Carter” only made $73 million at the U.S. box office despite an estimated budget of over $250 million.

Films don’t always turn a profit since factors like brand awareness, P&A budgets, and the desires of a fickle audience have to be taken into account. There are, however, a few tried and true methods of making money from films.

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