Show business has always been one of the most glamorous industries. After all, it’s the hub for all our favorite actors, actresses, and movie franchises.
But behind all the red carpets and Oscar award ceremonies is a business like any other that has to make money. If it doesn’t, studios close down and people lose their jobs.
On the face of it, global box office takings seem enormous. The film industry made around $42 billion worldwide in 2019 before the coronavirus epidemic hit.
But the reality is that the economics of the movie industry isn’t nearly as kind as you might imagine. There are a small number of winners, a lot of people struggling to get by.
The Bell Curve
In most industries, success follows a bell curve. Most people are average, earning perhaps 20 percent above or below the median. And then there are a few people doing extraordinarily well, and others struggling to keep their heads above water.
In the film industry, though, it’s a different story. Here, there are a vast number of people who aren’t getting anywhere, and just a handful of famous actors at the top who win all the spoils.
The distribution of outcomes in the film industry, therefore, is quite wild. You can have some actors who can’t afford to put food on the table, and others who can buy a new luxury mansion every week their pay is so high.
The same principle applies when it comes to movie sales. There are a lot of movies being made, but hardly any of them see the light of day. And an even smaller number are commercial successes.
So what makes the industry tick?
Before anyone starts making a movie, they first have to come up with a budget. They need to cover the costs of production, marketing, and advertising the film to audiences around the world.
How much a movie actually winds up costing, though, is notoriously tricky to attempt to estimate. Many directors have to literally “feel” their way to a complete project. And that means a lot of trial and error.
How much a studio should spend on a movie really isn’t particularly well known. Little Miss Sunshine, for instance, was supposed to be just a small film for a limited audience. The total budget for it was about $8 million. And yet the message of the film (and the comedy) was so powerful, it eventually wound up grossing more than $60 million in its first year, providing nearly a 1,000 percent return.
Sites like phillipkingston.com discuss weird and interesting economic issues like these. In some cases, you have studios investing very little in films that hardly go anywhere. And in other cases, you have big-budget films that fall flat on their faces. It’s not about the money, it seems.
Most movies make their money through ticket revenues – at least when theatres were open. Studios would typically collect around two-thirds of the revenue, with other businesses, like cinemas, picking up the remaining royalties.
Despite the growth in streaming services, ticket sales actually became slightly more important in the first couple of decades of the 21st century. The movie industry became more international and had to start appealing to a global audience to drum up more revenues. Films are now essentially exports according to Investopedia.com, not creations for a wealthy western market.
That’s part of the reason why there are now so many superhero movies flooding the market. Action effects don’t require translation. And they don’t touch on any political or social issues that other countries or governments might try to edit or ban.
Lastly, many movies make their money through merchandising. They create a unique IP and then charge a markup on any goods they sell underneath it.
George Lucas – the creator of Star Wars – was one of the pioneers of this. He and his team created a bunch of toys, clothes, and posters that allowed the film to gross more revenue than through ticket sales alone. It turned out, much to everyone’s surprise, that people were willing to part with cash for memorabilia associated with the films. The Force Awakens, for instance, made nearly $1 billion through merch revenues.
The success of merch, however, is another example of skewed incentives in the film industry. It’s hard to make merchandise related to factual or hard-hitting films. But it is much easier if those movies are part of a wider universe of characters, like Star Wars, DC, or Lord of the Rings.