The Blockbuster Strategy: Safety Sort of Guaranteed
I’ve recently been interested in the changing landscape of slates within the studio system. The studios have steadily been moving away from midsize movies and focusing instead on fewer, mega-budget movies. In 2006 the seven major studios combined made 187 films. In 2013 those same studios made only 139 films (a decrease of 26%). Those films generated $8.2 billion in 2006 and $8.8 billion in 2013 in real box office revenue domestically (an increase of 6%). More simply, fewer films are sharing more revenue.
On the other end of the spectrum, we’ve seen a huge explosion of indie filmmaking thanks in large part to a dramatic decrease in the cost of high-quality film equipment and in smaller part due to platforms like Indiegogo and Kickstarter. Indie distributors then acquire a select number of these finished films for theatrical release.
So this has left a seeming vacancy in the middle. I was curious about whether this strategy made sense from a financial perspective for the studios. After all, they all exist either as a subsidiary or business unit of a publicly traded company or as one itself (Lionsgate) and any publicly traded company exists to maximize shareholder value. To understand the financial implications of slate building, I looked at the risk-reward profiles of different sized movies.
Breakdown of Profitability by Different Budget Levels
The Numbers makes available a set of movies for which they have complete box office and budget data. The set I used included 2,649 movies released as early as 1/1/2000. While budget information is often under reported or outright misreported (studios purposely alter their budgets to tell whatever story they want), it’s the best estimate that is broadly tracked.
Below is a breakdown of number of films by ROI and budget.
Return on Investment (%)
<100%
<150%
<200%
<250%
❤00%
❤50%
<400%
>400%
<=$1mm
82
8
7
5
6
1
5
62
176
($1mm,$5mm]
131
20
15
13
9
9
7
88
292
($5mm,$10mm]
135
23
28
21
11
13
11
63
305
($10mm,$20mm]
202
52
42
37
31
25
21
109
519
($20mm,$50mm]
218
97
81
76
53
47
32
117
721
($50mm,$100mm]
111
56
60
50
41
29
18
58
423
($100mm,$200mm]
17
22
24
26
23
13
11
51
187
>$200mm
2
2
4
2
3
4
4
5
26
Total
898
280
261
230
177
141
109
553
2,649
This gives us a basic reference points for what movies are being made and what their profitability is. A basic threshold to measure is the percentage of films that are profitable — that is, they make back their production budget. And for all those that lose money, what loss in cash does that represent overall.
% of Movies Profitable
Total # of Films
Cash Loss ($mm)
Cash Loss as % of Total Rev
<=$1mm**
53.41%
94
$30
3.72%
($1mm,$5mm]**
55.14%
161
$277
5.82%
($5mm,$10mm]
55.74%
170
$819
12.18%
($10mm,$20mm]
61.08%
317
$1,714
7.65%
($20mm,$50mm]
69.76%
503
$3,328
5.79%
($50mm,$100mm]
73.76%
312
$2,909
3.93%
($100mm,$200mm]
90.91%
170
$675
0.83%
>$200mm
92.31%
24
$92
0.46%
**The decreased percent cash loss at the lower end is likely due to reporting, i.e. smaller budget movies are tracked more often if they are widely released and hence more likely to earn more money.
I noticed that as movies get bigger, they become less likely to fail. That’s likely partially engineered — marketing budgets are huge and international sales bolster revenue. But it does seem that the studios then are onto something by moving toward fewer, larger-budget movies. The success rate of movies budgeted over $100 million is over 90% with less than 0.5% in revenue loss. That means for every potential dollar, there’s less risk to losing money. Obviously, a big flop means bad press, but from a pure dollar risk standpoint, it’s actually safer. That said, the loss in the middle range is spread across many players (or across a slate of films for a studio), so that minimizes risk as well.
At the end of the day, if you’re a studio and looking to mitigate your overall financial risk, I guess it sort of does make financial sense stick with mega-budget films. So you have permission to greenlight Avatar v. Terminator v. Batman: The Oz Adventures!
Where To Put Your Money: Top Performers
I subsequently wanted to look at which movies are most successful within different tiers. Even though there’s an argument for studios to make mega-budget movies, there are only so many they can make before they start to cannibalize each other (not to mention the bad publicity they get from a large flop). Looking at total dollars by budget, I found that the bulk of theatrical revenue came from movies between $10-$100 million, approximately 58% of the total.
I started breaking down movies into different groups based on budgets and took note of the highest grossing film by ROI (gross divided by budget) in each category.
Total Budget ($mm)
% of Total
Highest ROI Film
Best Pic Oscar Noms
<$1mm
$88
0.09%
Super Size Me
0
$1-$5mm
$896
0.89%
The Devil Inside
5
$5-$10mm
$2,470
2.47%
My Big Fat Greek Wedding
9
$10-$20mm
$8,302
8.29%
The King’s Speech
16
$20-$50mm
$24,597
24.56%
The Passion of the Christ
31
$50-$100mm
$30,804
30.76%
The Twilight Saga: New Moon
16
$100-$200mm
$26,655
26.61%
Harry Potter and the Deathly Hallows: Part II
12
>$200mm
$6,341
6.33%
Marvel’s The Avengers
2
Total
$100,152
100.00%
That got me thinking about whether there were trends in each of the groups, so I listed the top five movies by ROI in each (Rotten Tomatoes score shown in parentheses for reference). This gave some interesting anecdotal evidence of the superstar performers in each group. It also gives us an idea of where you get the most bang for your buck in each budget group.
Under $1mm — Very Little in Common
Super Size Me (93%)
Paranormal Activity (83%)
Once (97%)
Napoleon Dynamite (71%)
Open Water (72%)
$1-$5mm — Low-Budget Horror
The Devil Inside (6%)
Saw (48%)
Insidious (66%)
Paranormal Activity 2 (58%)
The Lives of Others (93%)
$5-$10mm — Horror Sequels, Comedy
My Big Fat Greek Wedding (76%)
Paranormal Activity 3 (68%)
Fahrenheit 9/11 (83%)
Juno (94%)
Insidious Chapter 2 (38%)
$10-$20mm — Oscar Films
The King’s Speech (94%)
Slumdog Millionaire (94%)
Black Swan (87%)
High School Musical 3 (65%)
The Grudge (39%)
$20-$50mm — Little in Common
The Passion of the Christ (49%)
The Conjuring (86%)
The Hangover (79%)
Bridget Jones’s Diary (81%)
Gran Torino (79%)
$50-$100mm — Sequels
Twilight Saga: New Moon (28%)
Shrek 2 (89%)
Despicable Me 2 (74%)
LOTR: Return of the King (94%)
Ted (68%)
$100-$200mm — Franchises
HP & Deathly Hallows: Part II (96%)
HP & Chamber of Secrets (82%)
LOTR: Fellowship of the Ring (91%)
HP & Sorcerer’s Stone (80%)
HP & Deathly Hallows: Part I (78%)
Over $200mm — More (Mega) Franchises
Marvel’s The Avengers (92%)
Avatar (83%)
Iron Man 3 (78%)
Skyfall (92%)
Toy Story 3 (99%)
For ultra low-budget movies, you’re throwing everything at the wall and seeing what sticks. You can’t really predict what’s going to be a hit. And this makes sense, because there are so many films being made in this segment. It’s a healthy mix of taking a big creative risk and hoping audiences respond.
In the $1–5 million bucket, a clear pattern emerges and it resembles Blumhouse. These are your Conjurings and Paranormals of the world. Weirdly, when you move to the $5–10 million bucket, you see the sequels to those movies along with some indie comedies.
The $10–20 million bucket looks to be prime territory for Oscar favorites, while the $20–50 million bucket you get your higher budget original movies. Once you get over $50 million, however, there’s an overwhelming trend of movies based on pre-existing material and franchises (many times both). These are movies like Harry Potter, Lord of the Rings, Twilight, and anything Marvel.
Whether this is indicative of what will be successful in the future is uncertain. A movie like Avatar definitely isn’t based on any pre-existing characters, but it comes with all the bells and whistles of a franchise movie (and it now is a franchise). It’s possible that you’ll hit big with an original concept and should spend the $100 million to make it, but what appears to be a safer bet is a proven concept with an existing fan base.
So whether or not audiences will get tired of these mega franchises based on existing IP, they have proven to have the most compelling return profiles. Likely, the studios will continue the course.
