Insights into the Finances of the Film Industry
Have you ever wondered how cool it would be to produce movies and make millions of them? To be the instigator of a super hit, top grossing and Oscar winning movie?
Of course, you have!
We consider being a producer to be a very effortless and lucrative career. Select a script, co-ordinate the directing and editing, arrange the finances – lo and behold your brainchild. Now, obviously selecting a script and directing the scenes are based on personal preferences. But arranging the finances, which is no doubt an important aspect, requires contemplation and rigorous planning. This is particularly that part where our dreams crash and we get a reality check – pending assignments, nearing deadlines and upcoming projects.Let us jump in and aid your dying dreams by delving deep into the finances of filmmaking.
How do films get funded?
It’s understood that an enormous amount of money goes into the making of a motion picture and the question arises, where exactly do the funds come from? Technically, movie funding can and does come from anyone or any organization that has high volumes of cash and an interest in investing in the project. It includes banks, private investors, film distributors, and major corporations .
The basis of film financing is to forecast the revenue and determine the potential value of the cast, script, and its marketability. Therefore, pre-sales or selling the distribution right before a film is completed is a major contributor to studio film financing. Another significant source is private equity coming from people willing to bet their money in hopes of reaping rewards down the line, people who want to diversify their investment portfolio, or simply a wealthy person who just loves movies.
There are also a few entertainment banks that specialize in lending for movies. Producers can leverage the pre-sale commitments from distributors to secure bank loans and interestingly , the loan can also be taken against the film’s unsold rights.
And then, there is the multi-billion-dollar market for product placement in films and television. Big brands pour hundreds of millions to get their brands featured in the film. If you have watched Spider-man: No Way Home, you would definitely know that Hyundai was the automobile partner for the movie. What better way to raise your brand awareness than partnering with a blockbuster film?
A lesser-known fact is that governments also give grants and tax incentives for making movies in their country. Surprising, isn’t it? The aim is to stimulate employment, the economy, and even tourism as movies help in the promotion of their country and culture.
However, with the advent of the crypto era, non-fungible tokens (NFTs) are now set to overhaul film financing just like it revolutionized the art industry. A slew of NFT projects are now introducing the global audience to a new way of funding movies. Movie NFTs have the potential to disrupt the global movie-making industry especially indie films by granting the movie aficionado community the ability to empower new breeds of actors, writers, and directors and bring their movie ideas to life.
Why do most films have skyrocketing production budgets?
Budget for movies is always a gossip away and everyone tries to ballpark the expensiveness and average costs. Well, it’s not that simple. You could say it is a lot like eating a meal. There is no definite price for any dish, not even a hamburger! It all depends on the cook, the location and the brand name attached.
But production houses try to estimate the costs beforehand by preparing a budget. It’s conventionally divided into four main sections which are as follows:
Principal differences in a budget occur depending upon the genre, cast, visual effects, and other requirements. The major costs can be broken down as follows:
- Scripts and story rights: The script is the blueprint of any movie. Like any establishment, if the model fails, the building shall cave in as much. About 5-10% of the budget is easily allocated to writing and pertaining story rights.
- Production Costs: The production costs take anywhere between 30-40% of the total budget. This major chunk pays for the crew needed to produce the movie.
- Licensing and salaries: It includes salaries of the directors and central cast. A wholesome 20-25% of the budget goes to signing their contracts. This also includes the licenses and special permissions that might be required for certain scenes.
- Special effects and Music: These scenes are the bread and butter for movies and as such, a separate entry is made for these distinct moments. Anywhere between 15-20% is set aside for perfecting the climax.
- Miscellaneous and Contingencies: A contingency plan of about 10% is a must for any project. It is a lot better to complete the project below cost rather than going to investors to ask for fresh funds.
How do films make money and the stakeholders get their ROI?
Not one person can say they’ve never been jealous of the massive amounts of money that production houses, actors and directors make. But it just looks glamorous from outside. Producers making tons of money, going on vacations in private jets and celebrities gliding down red carpets is the facade that covers the reality of the film industry.The truth is that investment in films is one of the riskiest in the market even if big names are associated with the movie.While there’s a lot of money to be made in the film industry, the economics of movie-making are far from simple.
In earlier times, calculation of movie earnings was simple. Theater tickets and minimal merchandising! But recent times have made these investors realize that they have to find new revenue sources to mitigate the risk. Even today, the major source of income is ticket price revenue but it has become challenging, owing to the increase in popularity of streaming platforms. Merchandising bucks has been on the rise in recent years, especially with the fandom movies. Producers also sign contracts with foreign distributors to increase their coverage. It does not guarantee that the film will make good money, but it’s about as safe a bet one can make in this business.
Once upon a time, DVD sales were also a top priority in the show business. But now, it is all about television rights and streaming. As a matter of fact, these two sources have kept the film industry alive in these times. And every investor is now changing their focus to streaming channels and online downloads. The future is online and the higher coverage they get, the better their revenue charts are going to be.
After two years of chaos caused by the Covid-19 pandemic, OTT platforms are revolutionizing the way people watch films and can change the way movies look like and how they are consumed.We are left to wonder if streaming is more than just a trend or is it the future of entertainment? Is the cinematic experience in danger of decline? Or, is it a temporary phenomenon? That only time will tell but what is certain is that streaming cannot match the unparalleled experience of watching a film on the big screen, becoming fully immersed, having the atmosphere of an audience and the smell of popcorn in the air!
Curated By: Pratik Bajaj and Ratna Nangalia
(Pratik Bajaj is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)
(Ratna Nangalia is a 1st year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)