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by James Jaeger


Overview

The Movie Industry is one of most exciting and informative businesses in the world, a business where the revenue of a single feature film (such as Titanic), can approach or exceed $1 billion.

In 2001, worldwide gross revenues generated by motion pictures in all territories and media (including music and ancillaries) amounted to over $40 billion. Over 70% of the population rents or goes to movies regularly, thus accounting for over 1.5 billion movie attendances each year in the U.S.

Prior to 1985, feature motion pictures had one major source of revenue in the United States and abroad: the movie theater. Today much of the world is undergoing a mass communications revolution; hence, new movie markets (such as home video, cable and pay-per-view) have been growing so rapidly that they are no longer just ancillary markets to the basic theatrical market but have become basic markets in themselves.

Industry statistics reveal that the past ten years have marked an overall increase of at least 30% in many "ancilliary markets" and, over 200%, as in the case of home video. The ability to exploit a movie in many markets diminishes investment risk and increases earning potential. In many instances, low budget movies have lost money theatrically and still earned profits overall from ancillary sales.

With the advent of the new computer-based technologies, "cable" markets and direct digital-delivery of motion pictures via satellite and the Internet are expected to increase dramatically over the next five years, creating an accelerated demand for original and re-run motion pictures.

The worldwide market for the sale and exploitation of feature motion pictures is divided into "territories" and "media." The territories are divided into two major regions known as "foreign territories" and "domestic territories." The broad foreign territories are Europe, "AustralAsia," Latin America, Eastern Europe and Others (that include Israel, the Middle East, South Africa and Turkey). The United States and Canada are usually grouped together and referred to as the "domestic territory," from the point of view of the United States.

The current "media" by which feature motion pictures are delivered to the territories includes movie theaters, home video cassettes, cable TV (monthly subscription and pay-per-view), direct broadcast satellite TV, free broadcast TV (Network and Syndication), and ancillaries (such as airlines and libraries).

According to a study conducted by Monitor Co., the movie and television industries contributed over $16 billion to the State of California's economy, directly employing 164,000 and indirectly employing another 184,000. The study also found that the vast majority of feature films and television programs are produced by independent producers. Independent production is becomming more prevalent in other areas of the United States, especially Nevada, North Carolina and the Tri-State Area (of New York, New Jersey and Pennsylvania).


Competition

There are thousands of screenplays in development at any given time, however each year only 450 to 500 of these are produced into 35mm motion pictures. Although the majority undergo principal photography in the United States, aproximately 60 to 80 are shot offshore (including Mexico and Canada). Of these approximately one-third come from the major studios (also known as the MPAA companies), and approximately two-thirds from the "independents." "Independents" are those companies engaged in the production and/or distribution worldwide in all media of all motion picture and television programs that are not generated by the recognized major studios. It includes those independent productions, even those distributed by a major studio, in which the producer retains a significant ownership interest and is at risk for a significant portion of the production cost.

Of the 450 to 500 features produced each year, less than half recieve a theatrical release. Thus a significant number of features do not get a theatrical release but are released directly to home video and other media. There were over 350 features released in 1998 by major and mini-major studios as compaired to about 290 in 1997.

Producing and/or financing the above product are approximately 7 major studios (8 if you count DreamWorks SKG), 16 mini-major studios, 50 to 80 major independent production companies and over 1,750 smaller independent production companies, many of which may never produce even one feature or produce only one feature every two or more years.

Including the major studios, there are over 600 entities that directly or indirectly distribute feature motion pictures to the various worldwide markets (with approximately 350 specializing in foreign territories and approximately 250 specializing in domestic territories). Of these, approximately 225 companies distribute motion pictures to the theatrical markets, 250 to home video, 310 to television, 70 to pay-per-view and 95 to the syndication markets.

Exhibiting the above feature output are 4 major television networks, 37 cable channels (of which 6 or 7 are major cable networks) and hundreds of independent stations in the United States.


The Theatrical Market

Theatrical exhibition is the traditional market for the initial presentation of "feature" motion pictures. Despite intense competition with other forms of entertainment (such as music and sports), movie attendance has exceeded one billion paid-admissions annually since 1976. According to statistics provided by the Motion Picture Association of America (MPAA), U.S. box office hit $8.4 billion in 2001, a 9.8% increase over the previous year. Worldwide box office receipts for feature motion pictures have grown from $1.2 billion in 1970 and $2.8 billion in 1980 to over 15 billion in 2001. This increase is all the more remarkable because ancilliary markets such as home video, cable and (foreign) television markets have undergone explosive growth during this same period.

Despite these burgeoning statistics, the fact remains that motion pictures with high production and marketing costs, often entail greater risks with less likelihood of return than lower-cost pictures released in the non-theatrical markets. The reasons: marketing and promotional costs (combined with substantial fees paid to exhibitors, usually 40% to 65% of box office gross), distribution fees (usually 33%), overhead, interest and expenses (paid usually to studio distributors) and gross participations, greatly reduce the revenue stream flowing to the producer and net profit participants. According to the MPAA the average negative cost of a studio feature motion picture (which includes production cost, studio over head and capitalized interest) as of 2001 was $47.7 million. As of 2001 the average initial marketing costs (prints and advertising) as of the a feature is in excess of $20 million. Five years ago the average negative costs of a feature was $39.8 million. These statistics alone make the task of recouping production and marketing costs for MPAA pictures formidable. Low and medium budget pictures produced by the independents (typically for less than $1.5 million and $10 million, respectively), have less difficulty recouping, however low budget pictures often go direct to home video in lieu of a release in the theatrical market.

Theatrical exposure, no matter what the projection medium, is often a major method of enhancing the value of the ancillary markets (home video, cable and free TV), as these ancillaries benefit directly from word-of-mouth advertising and ad campaigns created by the theatrical release. Thus, any increase in the value of ancillary rights decreases the reliance on theatrical exhibition as a source of revenue. On the other hand, a successful theatrical release has proven time and again to be extremely valuable for exhibitors, distributors and producers alike.

As of 2001 there were approximately 6,596 theaters with 36,110 indoor "screens" and 474 drive in theaters with 654 drive-ins "screens" in the United States. As of 1996 there were approximately 7,215 theaters with only 28,864 indoor "screens" and 583 drive in theaters with 826 drive-ins "screens" so clearly the average number of screens per theater has been going up, while the number drive in screens and theaters have een dropping steadily.

As of 1998, there were approximately 32 theater circuits in the U.S. with more than 100 screens each. The top three circuits at that time were United Artists (2,398 screens), Cineplex Odeon (1,715 screens) and American Multi-Cinema (1,623 screens).

The average studio feature ("A-Picture") is in first-run release for approximately 8 weeks garnering between 1,000 and 2,700 screens and grossing $10 to $40 million over such period. The same picture is in second-run theaters for the balance of it's theatrical life, such being approximately 6 months. Independent pictures gross much more modest sums, but, as mentioned, their production and marketing budgets are considerably less as well. The top 10 grossing limited release films of 1995, for instance, grossed between $9.4 million (The Brothers Mc Mullen) and $3.7 million (Bad Company).

About 16 new major features are introduced to the theatrical marketplace each month, playing 800 to 2,500 screens, or an average of about 1,650 screens. Since first-run is usually 8 weeks, this means that between 12,800 and virtually all of the existing 26,500 screens (during the peak times of Summer and Christmas holidays), are booked with major studio product, leaving, at best, between 6,850 and 13,700 screens available for independent productions for limited periods of time or during off-season periods. Each independent production plays on about 5 to 75 screens (or an average of approximately 40 screens) making it possible for about 260 pictures to be absorbed by the market in each 6-month period.


Home Video Market

According to the Television Bureau of Advertising, as of 1994, 79% of all TV households (such numbering 211 million, excluding Alaska and Hawaii) had a VCR, such number of VCR being approximately 70 million. According to Neilson Media Research as of 2001 there are now 96.2 million VCR households and 105.5 million TV households.

Although growth in the worldwide home video market as of 2001 seems to be rebounding, this market, once considered an ancillary market, out-paced even the most optimistic growth projections over the past decade and has emerged as a "basic" market. While theatrical exhibition will never be replaced (any more than television replaced radio or movies), home video can be key to a picture's success in other markets.

According to the U.S. Bureau of Census, there are over 22,000 establishments in the United States dedicated to renting and selling home video cassettes. When one considers the thousands of other outlets (such as super markets, department/convenience stores, gas stations and increasingly ubiquitous vending machines), this figure is considerably higher.

Video stores usually purchase between 5 and 25 video cassettes of each major studio release for as much as $79 per cassette. It is not uncommon for such an outlet to purchase 100 copies of a blockbuster release and discounted prices can be expected for such quantities, as well as lesser quantities, especially to large chains, such as a Blockbuster Video chain. Of the total universe of video outlets, including dedicated video establishments, only about 5,000 tend to regularly purchase features made by independent production companies. In such case, each outlet tilically purchases at least two video cassettes (in case one breaks) for as much as $40 to $65 a cassette. Each cassette rents approximately 2 to 10 times a week, depending on how many copies of a particular title the video store has on display and other factors.

According to Investor's Business Daily, Paul Kagan Associates project that by 1999 revenues generated by the domestic home video market will be aproximately 185% of the domestic theatrical market.


Cable TV Markets

Of the 108 million TV households in the U.S., (such representing a 97.5% penetration), 60.5 million subscribe to cable TV.

There are two kinds of cable TV. The first is regular cable TV known as "pay TV" the second is "pay-per-view." Pay TV, which is subscribed to and paid on a monthly basis, includes basic service and is available with premium channels such as HBO and Cinemax. Pay-per-view is paid for upon the user's demand - currently by calling an 800 number or ordering it on a hotel television set. Consumers only pay for what they purchase directly.

Pay TV has grown steadily over the past ten years, accelerating somewhat during the past five years with the addition of new pay TV subscriber services. According to the U.S. Bureau of Census, 45% of all television households currently subscribe to basic cable services. Of these, many subscribers pay a premium for additional services such as HBO, Showtime and Cinemax. Often cable companies compete vigorously with the home video window for a prior run option.

The main staple for most pay television services is feature motion pictures which have been released theatrically. Home Box Office has a 400 film appetite annually and Cinemax, its sister service, has a 200 film appetite. These services combined represent approximately 50% of the market. Showtime/The Movie Channel has approximately 30% of the market, while the other smaller services make up the remainder.

Pay-per-view on cable is gaining market share rapidly and may eventually replace both subscription cable and home video by the turn of the century. The number of pay-per-view customers is over 20 million, up from 6 million in 1989. Combined cable sales total approximately 20% of theatrical revenues.


Network Television

It is not anticipated that there is a market for independently produced low-budget features on network television except in the case of extremely successful pictures, or in the event pictures are made-for-television (such as movies-of-the-week, also known as MOWs).


Syndication

Syndication, the act of selling features to each of the thousands of local independent television stations across domestic U.S., Canada and abroad, may proceed for 5 years or longer for each film.

Independent television stations (stations not affiliated with a network) have recently become another source of revenue for theatrical motion pictures and the importance of local independent television stations is a relatively recent phenomenon, in foreign markets as well.

With the major networks producing movies exclusively for broadcast on their own stations, independent television stations have become increasingly important outlets for theatrical features produced by independent producers. Typically, independent television rights are sold to a syndicator who in turn sells to individual stations or small networks across the country.

While terrible films cannot be syndicated no matter how good the marketing and great films often sell themselves, the vast majority of films in between can generate significant revenues, equaling or well exceeding theatrical revenues, given an ample marketing campaign and the long window of time typical of syndication.


The New "Ancillary" Markets

Star Wars was one of the first motion pictures to demonstrate, on a major scale, how valuable ancillary markets (consisting of such spin-offs as toys, games, T-shirts and novelty items) can be. In a continuing trend to present day, Jurassic Park, for instance, continues to generate spin-off sales which may eventually be as significant as revenues the picture has already earned in various other markets.

Typically, independently produced features do not generate significant ancillary revenues of this nature, although this trend has been changing in the recent past.

Interactive video and computer games are another huge new market that is rapidly expanding. At this time it is difficult to predict how significant this new ancillary market will become, but it could represent a major segment of the future motion picture industry.

With the advent of DVD's ("digital video discs," also known as "digital versatile discs"), VHS tape, as the predominant delivery system for home video, will most likely go the way of 78rpm, 45rmp and 33rpm vinyl records. In fact, due to DVD's huge storage capacity (4.7 gigabytes per layer, with up to 4 layers possible within the next five years), light weight and relatively low cost of production, this new medium may give birth to an entirely new direct-sale, retail market, replacing the current video cassette rental market of today and modifying the doctrin of first sale.

Direct broadcast satellite, which in essence delivers a cable-quality (or better) image directly to the home by satellite, has become increasingly popular in recent years due to a wide variety of programming and reduced costs. It is uncertain at this date as to whether direct broadcast satellite will eventually replace cable delivery systems or work in tandem with them, as a significant cable infrastructure is already in place. It is conceivable that many foreign and third-world territories will base their infrastructure on wireless delivery systems and in such case Direct broadcast satellite, as well as direct, high-bandwidth, Internet delivery, may be the norm in the future.


The Foreign Market

Export sales to foreign markets from independent producers hit an all time high of $1.8 billion (up 22% from 1996). The European foreign market accounts for 56% of global revenues (all media) generated by English-language, independently produced films. Television sales (which include pay and free TV), account for 44% of all foreign revenues and were up 11% over the last year, for the third consecutive year. The largest single improvement in sales for fiscal 1996, however, was theatrical (up 37%). Home video remained flat, at 25% of all revenues, as it has the past several years.

As of February of 2000, the most important foreign territories are: Japan, Germany (including Austria), Italy, the United Kingdom (including Ireland), Spain, France (including French Belgium), Korea, Australia/New Zealand, Brazil, Mexico.

According to The Hollywood Reporter AFM 1997 Special Edition: Japan is the largest foreign market even though it is fighting a dilapidated theater infrastructure and declining attendance records. Nevertheless, consumers spend more than $6 Billion in the home video market (majors and independents), and significant new markets are opening up with respect to satellite, TV, cable, pay-per-view and DTH services. Germany, the number one European market, is television-driven, however there are signs of a leveling out. With a record theatrical year, the country is building multiplexes and will have approximately 5,000 by 2002. Italy is the only major European country without cable. The television market is hindered by political strife over proposed new communications legislation and the video industry is hampered by serious piracy. Nevertheless, even though there is a major shortage of theaters, Italy is the top market for independently produced features. The United Kingdom/Ireland market is steady but highly selective about theatrical product due to a paucity of local distributors. Nevertheless, it could strengthen due to a new cable infrastructure going into place. With the lifting of certain quotas on Spain's imports, this territory is expected to grow with new co-production opportunities for independents. Currently, massive joint efforts between Spanish and American exhibition entities will provide more multiplex theaters to offset the decline of the home video market here. France is having problems with theater construction even though such market is strong for films other than B-pictures due to television quotas and the decline of home video market. Second only to Japan as Asia's top market for buying motion pictures, South Korea is the world's fastest growing market. Although the country lacks screens, there are extensive programs to remedy the situation as the country becomes more open to foreign competition and global markets. Australia's theatrical market is growing rapidly due to an expansion of its 1,200 screens with additional multiplexes. Although direct-to-video sales are off and satellite services are precarious, the territory has a strong market for television and home video which will usher in a dynamically maturing major market over the next decade. Latin America, long in the doldrums, is experiencing a multiplex boom. The fact that there is essentially only one distributor-buyer for the entire country makes it relatively easy to sell TV rights, even though buying power will remain poor until the country's exchange rates improve. There is now positive indication that this is happening today.

Generally speaking, if an English-language film made for U.S. release does well domestically, it becomes popular in foreign markets, particularly in Europe.


Demographics

Of the total U.S. population (which is about 265 million), the two largest groups that go to the movies are 16 to 20 years of age and 30 to 39 years of age. Each group makes up approximately 19% of the theatrical, movie-going population. Attendees under 30 years old are, and have been, the dominant force in the movie-going public. Of the total population, 21% go to the movies at least once a month, 34% go once in 2 to 6 months and 12% go less than once in 6 months. 32% never go to the movies. The national average price paid for a movie ticket is approximately $7.45.


Box Office Gross Sales - B Pictures

Although it should not be construed that it is easy to generate returns as stated below, the figures represented have been obtained by many independent producers.

Quality B-Pictures produced by independent production companies in the past have been able to routinely generate revenues in excess of $2 million when one considers not only theatrical, but home video, foreign and ancillary revenues. Using data on the top 253 "low budget," independently produced B-Pictures covered by The Hollywood Reporter, the average 10-year gross for each feature (adjusted for 1996 dollars), was in the neighborhood of $9 million. The top 8 pictures grossed more than $30 million each and the top picture earned just over $70 million. The lowest picture in the sample earned $1.6 million.

A feature film "costs" what a producer can't obtain for free, or what costs he or she has deferred for payment at a later date from the proceeds of the film's exploitation. When one hears of a feature costing under $50,000 to produce, yet it is making a million dollars at the box office, several facts have usually been omitted. Among the omitted facts are: (a) most of the cast, crew and equipment costs have been deferred but are payable out of the sale proceeds. This amounts to $50,000 to $100,000. (b) $10,000 to $40,000 must be spent in editing to clean up flawed production sound tracks, ADR to improve poor acting delivery and a host of photographic problems that are routine, must be addressed. (c) $30,000 must be spent to blow up the 16mm negative to 35mm. (d) better music must be purchased or a score written. This costs anywhere from $10,000 to $30,000 for a low budget project. Thus the real cost of the "$7,000 feature" is at lease $150,000 to $200,000.

Very occasionally, features made for less than $50,000 will gross hundreds of thousands or even break the multi-million dollar mark, but more times than not, the low initial production budget is used as "hype" to promote the picture, or the director of the picture. Return Of The Secacus 7 and Clerks are examples of features that were made for under $50,000 and grossed over a million dollars, and they are very rare. Films costing between $200,000 and $700,000 which gross several million are more realistic examples of what can be expected from super low budget pictures. She's Gotta Have It, Night Of The Living Dead, The Blob, Eating Raoul and Grizzly are examples.

Of course, many pictures have earned much less and many have not recouped their production costs at all, especially if not completed, produced for too high of a budget or present an unengaging story.

The fact that THE BLAIR WITCH PROJECT, which was shot in digital video at a production cost of about $25,000 (with a post production cost of $230,000) has grossed over $120,000,000 - will change the dynamics of the movie industry and may contribute to the demise of the "brick and mortar" major studio/distributors within the next decade.


Box Office Gross Sales - A Pictures

The Hollywood Reporter, Variety and other trade publications publish, on a weekly basis, the national and international box office grosses of all MPAA (studio) and Independently-produced features that do significant business. Ultimately, most A-Pictures have been able to generate receipts of at least $30 million, especially when all media and territories have been exploited.

Many A-Pictures routinely generate $30 million within even 14 weeks of theatrical release. For example, in the combined last quarter of 1996 and the first quarter of 1997, over 40 pictures took in revenues in excess of $30 million. When one considers home video, foreign and ancillary revenues, such returns may increase by a factor of two or more. In fact, from October, 1996 through April, 1997, for instance, 12 of the features in release grossed more than $100 million in the U.S. theatrical market alone. Independence Day, released in 1996, grossed over $280,000,000 in 10 weeks.

Adjusted for inflation, Gone With The Wind is the top grossing movie of all time. In terms of raw 1993 dollars, (and not considering the recent re-release of the Star Wars trilogy), Jurassic Park is the largest-grossing movie in history, earning over $900 million in the worldwide theatrical markets alone. Given this exposure, there is a strong possibility that when Jurassic Park has been exploited in all ancilliary worldwide markets (home video, cable, TV, spin-offs, etc.), gross revenues may exceed 2 billion dollars, especially if it is re-released at some future date.

Usually, the largest, most impressive grosses, are generated by high-budget A-Pictures, financed and/or released by the MPAA companies; however, such pictures do not always create the optimum rate of return, especially for net profit participants, who, unfortunately, only see profit participation in 5% of the pictures.




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