Legend of Tarzan continues to confound naysayers and do better than the “experts” expect — so there is a great deal for fans of the project and fans of Edgar Rice Burroughs and his legacy to be happy about. But as LOT’s global total went past $180M, (the presumed production budget), excited cries of “It’s profitable!” started showing up in the ERB groups on Facebook and elsewhere. This is understandable because there is nothing more confusing than movie profitability. But …. be patient — we’re not there yet. I will try to explain it. If you are the impatient type, then all you really need to take away from this is that a film needs to achieve global box office of somewhere in the range of 2x to 2.5x of its production budget for it to be “on track” for profitability. Thus LOT needs to get to $360M to $450M global box office before we can start talking profitability — and even then, there are caveats. So hold yer zebras . . . . we’ve got a ways to go before we can declare victory.
Anyway those who have the stomach for it — here is a longer discussion about movie profitability.
The Old “2x Budget = Profitable Movie” Really Means, and Doesn’t Mean
Anyone who pays much attention to box office reporting has probably heard that if a film performs at global gross of 2x or 2.5x of its production budget, it’s profitable. You’ll notice, however, that when I mentioned this in the first para, I said “on track for profitability”. I’ll explain the difference. “Profitable” would mean that as soon as it has earned 2x or 2.5x at the box office, it’s already “in the black” and that’s not true, and that’s not what this formula means. What the formula means is that if a film earns that much at the global box office, then it is “on track” for eventually achieving profitability after all of the revenue streams have come in — meaning theatrical (most of which comes in during the first year), blu-ray/dvd/digital home (most of which comes in later in the first year into the second year), premium cable (year two), regular cable, broadcast, ancillary, etc, etc. A film earns income over at least 10 years (which is the amortization schedule used for films–similar to a car being depreciated over 7 years) and it is not until sometime well into that period that a film will actually be “in the black.” But …. experts have come to believe or realize that if a film achieves global box office of 2 (some films) or 2.5x (other films), then it will probably eventually be profitable when all is said and done and all income streams have been realized.
How Box Office Dollars Are Shared
Domestically in the US, box office receipts during the opening weekend are heavily favored to go to the studio — 80 or even 90% of those box office dollars go to the studio. But as the run continues, the scale swings to the exhibitor (theater), so that eventually, toward the end of the run, it’s 80% to the exhibitor. Traditionally a figure of 50% going to the studio is what is used when doing a general assessment of what the studio is getting from a theatrical release in the US.
Abroad, the percentage is less. 40% is what is usually used for estimating the studio share in most countries, except for China, where it is 25%.
So let’s take LOT and say that it does $400M this way:
$130M in the US @ 50% = $65M Net
$60M in China @ 25% = $15M Net
$210M in Rest of the World @ 40% = $84M Net
$400 M Gross = $164M Net
So that’s almost the $180M of the budget, so it’s almost there?
Marketing and Promotion — or “Prints and Advertising” — “P&A”
The production spend only gets the film “in the can” and ready for release — it then has to be marketed, promoted, and technically distributed. The cost of this goes on top of the production budget and for a huge blockbuster release — $100M is the figure that usually gets used in making an assessment, or even as high in some cases higher still. For John Carter, Disney definitely spent $100M. For Tarzan — no one knows for sure, but it looks like WB was more frugal. Their TV spend, according to RelishMix which tracks such things, was $24M as of opening weekend, and that’s usuall 80% of the spend for all marketing and promotion. That would put it at maybe $40M in the US, plus foreign — so maybe 70 or $75M. Maybe. But it’s also possible that after all the foreign promotion is considered, maybe it will reach $100M. But let’s be optimistic and call it $75M.
So now — that would mean:
$180M — Production Investment (Budget)
$ 75M — Marketing Investment (Budget)
$255M — Total Investment (Total Budget)
Note that I’m calling it Production Investment — it’s not really right to call it “budget” because budget is what you set out to make the movie for, not necessarily what it actually comes in as.
So what we would be looking at, then, would be:
$400M Box Office Gross
$164M Box Office Net
-91M Yet to Be Recouped After Theatrical
That $91M would be what is expected from DVD, Premium Cable, Regular Cable, Broadcast — and remember, there is always gross and net.
But Wait …. It’s Worse Than That
Ahh, you think it’s pretty simple, right? $400M gross, $164M net, $255M invest — means $91 to recoup.
But we forgot something.
You see, WB Studios Distribution is different from WB Studios, the producer. (Or in this case, WB Studios/Village Roadshow, who coproduced.)
So remember that $164M Net?
Well, let’s lop 20% off of that. This would go to WB Studios Distribution.
So that $164M is really $131.2M, which is all that the producer (WB Studios/Village Roadshow) would make on the $400M gross. And that, then, would be the starting point for the additional recoupment from DVD/Blu Ray, etc.
But Wait …. It’s Even Worse Than That
- What about any “Gross Participation” by anyone involved in the film? Oh yeah, that would have to come out. Who might have such a deal in LOT? Fortunately, almost no one. Maybe Jerry Weintraub’s estate.
- Accrued financing charges? Oh yeah, while the money is out, whoever provided cash is charging interest on that, so the investment continues to grow by the amount of the interest. So $180M could become $190M, or $195M depending on how long it takes for the money to come in and trickle back down to the WB/Roadshow, the producers.
What About Rebates?
LOT was shot in the UK where it should have been able to avail of a rebate that is 25% on the first L20M and 20% thereafter. This is not on all expenses — but would be on most, since the film qualifies as a UK production by all the various criteria including creative participation (many UK citizens), location filmed (all UK except for some second unit in Gabon) and story content (UK). Plus they availed of a Quebec tax rebate as well. So it could be that the $180M is gross production investment before rebates — and thus the $180M could be $150M. Or it could be that $180M is net of rebates — thus $220M minus $40K rebates equals $180M.
Oh, there’s more . . .
Here’s a good one. If a sequel is approved, the investment of the first film will get reduced by as much as 10%? Huh? Yeah, that’ exactly what happened with Avatar, which was, as I recall, around $270M before they approved a sequel, then ended up at $229M. This is because, if there is a franchise, the one-time development costs that will be to the benefit of the whole franchise, not just the first film, will get spread across the franchise. Avatar got a bigger bump from this than most, because there were new technologies that had to be developed that were part of the production cost — and which resulted in a bigger amortization than might be the case with LOT if it gets a sequel. But still, some of those production costs would be removed and then spread over the franchise.
It is because of all the foregoing, that the shorthand 2x to 2.5x budget is used to gauge whether or not a film is profitable. Actual profitability is very hard to calculate and takes time — and of course, with Hollywood accounting, sometimes even the most successful films are never declared to be “in profit.”
Have I forgotten anything?
Well, merchandising, spinoffs, etc . . . Oh yes, also “residual library value” — that’s the asset value of a film after the 10 year income stream is finished. With less successful films this may not be much — but look back 10 years to the films that did well in 2006, and wonder what you would have to pay to buy those films now, assuming they were for sale:
Pirates of the Carribbean: Dead Man’s Chest
Ice Age: The Meltdown
I’ve got a headache now so I’ll stop. If people out there think of more stuff I should have included, just put it in the comments. I need a tylenol.