How Do Studio Motion Pictures Get Financed?


Film finance is a patchwork of investor finance, studio production funds, tax credits, pre-sales, banks, insurance companies and lots of creative accounting, guesswork and glamor. The ‘Big 5’ studios account for the lion’s share of movie box office revenue.

Which Are The Big 5 Film Studios?

These are the biggest by revenue and stock price, not by the number of films and TV shows they produce and release. The Big 5 are the most powerful studios and dictate the summer blockbusters and tentpole films throughout the year. Given that over 90% of all studio films don’t make a return on their investment, they still manage to be profitable. They are run by corporations/ conglomerations which finance their films through their other businesses such as internet services, merchandising and theme parks. They offset a film’s loss against their other revenue streams.

Who are they?

  • Paramount Studios – Producers of the Mission Impossible franchise. They are owned by Viacom.
  • Sony/ Columbia/ Tristar – Producers of the Spiderman and Men In Black franchises.
  • 20th Century Fox – Producers of the X-Men, Avengers and Fantastic Four franchises.
  • Universal Studios – Producers of the Saw and Insidious film franchises. They are owned by Comcast.
  • Disney Studios – Producers of the Marvel comic franchise films.
  • Warner Brothers – Producers of the DC comic franchise movies. They are owned by Time Warner.

Who Decides What Films Get Produced?

Many studios have in-house deals with various production companies, often located on their studio lots. The head of the film studio has the discretion to finance lower budget films from studio funds without corporate/ parent company approval.

 

Green Light Committee

The green light committee is charged with producing bigger budget films, say over $100 million. This committee is a team of corporate/ parent company executives representing film production, marketing, creative, theme parks, merchandising and spinoff divisions. These elements are vital in estimating a movie’s potential revenue. Remember, a film rarely recoups its production budget through theatrical releases alone.

The green light committee uses a ‘black box’ system which scores a film’s revenue potential from 1-10 across several parameters, including the above the line star power attached (mainly actors, producers and directors), genre, demographics and comparable movies. If they come up with an aggregate score of 7 or above, the movie goes into production. If not, it goes into turnaround so they can sell it to another buyer, or they can retain it until the market conditions improve.

The mini-major film studios which include Newline, MGM, Lionsgate & Dreamworks are funded on a more local via partnerships, rather than corporate level.

Pre-Sales

Global cinema markets are divided into three types of territories based on their likelihood and size of a box office return.

TIER 1 – These territories offer the highest chance of box office return. These include English speaking countries such as the UK, Australia, Western Europe (such as France and Germany), and South East Asia (such as Korea and China.)

TIER 2 – Offer moderate chances of box office success. The regions include the Benelux countries (e.g Netherlands) and South Africa.

TIER 3 – Offer the lowest bid office returns and are generally the  poorer and smaller countries.

Film Production Tax Incentives 

These are specifically designed to attract film production activity to various states or countries and lower a major motion picture’s production budget by roughly 10-30%

Tax credits are often referred to as ‘soft money’ and can be either a tax exemption of preferential tax treatments (such as local sales taxes), a rebate after a minimum qualifying spend, or a credit that can be sold onto other productions companies via a broker, or maintained for a subsequent production.

Tax incentives require a minimum local hire of cast and crew (often around 20-25%)

Georgia, North Carolina and Louisiana offer the more lucrative state film production tax incentives in the USA. Internationally,  Canada, the UK, Australia and Eastern Europe (mainly Czech Republic, Romania and Hungary) also offer generous tax breaks to film there.

Bridging Loans/ Gap Financing

These are specialized bank loans using a film’s pre-sales as collateral. They are used to secure A-list talent and/or to plug budget holes to enable film production to commence.

Equity

These are often large hedge funds which invest a portion of their assets in films.

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