Have you ever wondered how film budgets are allocated, particularly in the studio system, where expenditures of $100 to $200 million are the norm? Most film budgets are deliberately obtuse in nature. They are either grossly inflated to impress the audience, or deliberately depressed to appease investors and the IRS.
What elements contribute to production budgets? Private jets, exotic lunches, film stock?
Budgets are typically broken down into PHYSICAL PRODUCTION and P&A (prints and advertising) budgets.
Let’s look at what constitutes the physical production budget. Everything involved in getting a movie produced. Executives, talent, crew, equipment, studio hire, location fees and consumables to name a few.
Studios take 10% as a fixed overhead to pay their studio executives and the physical office space they “rent”.
The next budget group is called ABOVE THE LINE talent. It specifically refers to the writer, director, (sometimes Director Of Photography), producer and principal acting talent. These are fixed costs negotiated before the final budget is approved.
BELOW THE LINE budgets relate to equipment, consumables, technicians, extras and work for hire crew. These costs are variable and the first to be slashed during budget modifications.
The P & A budget is the most flexible, depending on how wide studios want to go out with a movie release. Perversely, the advertising budget of a movie can be sometimes be higher than the shooting costs if the movie is an unexpected hit such as “The Hangover”. Studios have separate divisions dealing with P & A. They routinely charge exorbitant fees to seemingly inflate production budgets and generate either a paper loss or minimal profit. These are accounting artifacts resulting in funds transferred between divisions of the same film conglomerate.
Distributors typically receive 30% distribution fee, and cinemas (exhibitors) are charged a license fee for prints. Prints can cost about $2000 each. This can cost around $6 million for a wide 3000 cinema release. These costs are born by the studio. VOD license fees are usually absorbed by the distributor. Again, the distribution arm is often an entity of the studio producing the film, so a release can easily be made to generate a paper loss using creative accounting. This knock on effect is exacerbated by the fact that studios aren’t allowed to own cinema chains in America due to competition laws.
Sometimes studios can offer exclusivity to cinemas for a low price, in exchange for them recouping a larger chunk of the box office receipts. Since the opening weekend is the most critical period in the box office window, studios will absorb the lions share of box office receipts during the opening week and lower their share in subsequent weeks.
The balance is shifted in favor of exhibitors during the second week. Sometimes this results in a 50:50 split, but overall it’s often 60:40 split in favor of the studios. Delayed or second run film deals are often structured on favor of the cinemas.
Advertising for indie films is typically born by production company. These include advertising in a cinema program, viral and internet marketing. Costs such as lunches, costumes, hair for awards etc are also born by the production company (studio) rather than the distributor or exhibitor.
Secondary film income is derived from the cable/ terrestrial TV, VOD, DVD hotel, cruises and ancillary markets. This was how studios traditionally relied on recouping their mammoth investment on theatrical releases. Given the relative collapse of these markets in the past few years, studios either need to spend less on physical production or find other commercial avenues to exploit such as merchandising and theme parks. Residuals for writers are usually triggered during these secondary after markets.
Hopefully this creates some level of understanding of the complexity of film finance accounting.