The Basics of Film Financing — Kathryn Arnold | The Entertainment Expert

Open Menu<br>Close Menu

Open Menu<br>Close Menu

The Basics of Film Financing

Aug 27

Written By Kathryn Arnold

Financing of film projects often requires an elaborate patchwork of investors, banks, soft money tax credits and in-kind services, and some companies specialize in financing specific stages of production. One of the overall themes of the industry that can at times make obtaining financing hard is the risks involved in making films, many of which may have very little tangible value at the end of the process.<br>In broad terms, the “negative costs” of feature films is what it takes to pay for talent, labor, materials and effects, in order to produce the film “negative.” Additional costs can be for prints, advertising, marketing and promotion. Film budgets are determined by what the market will bear to purchase the film once completed. In order to deliver a film within the budget, many costs may be deferred for payment at a later date, paid out of revenues generated from the film once its distributed. Many times the producer must defer his/her own fee for producing the movie, in order to meet the budget. The hard costs of physically producing the film vary dramatically depending on the film, with low budget films ranging from $200,000 to $1 million, high budget films usually around $50-$75 million, and blockbusters − like the recent James Bond film “Casino Royal” − which was produced for $150 million.<br>The following excerpt from an industry document provides an overview of factors contributing to these “negative” costs and reveals that the risk associated with investing in these high budget A-films can be significant.<br>“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 overhead and capitalized interest as of 2001 was $47.7 million. As of 2001 the average initial marketing costs (print and advertising) as of the feature is in excess of $20 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.”<br>Typically the high-budget blockbusters, which are financed and/or released by the MPAA companies, generate the most money in the movie industry. In the example of “Casino Royal,” between its release on November 17th to December 3rd, box office ticket sales in North America were reported to be $115 million. As of April 2007, the movie had grossed over $593,352,994 globally.6 However because of the huge negative costs − in addition to marketing, promotion and advertising costs, company overhead etc, that they incur − these films do not necessarily generate the highest returns. While the big studios have traditionally dominated Hollywood, independent films have taken off over the last few years. Films such as “Slumdog Millionaire” and “Saw” are excellent examples of independently financed films that have generated high financial returns. This is simply a function of how the industry works, and many talented and successful producers must go outside the studio structure to make their films. Because of the risk involved and the desired return on investment, studios typically play it safe and stick to set genres of movies that have a proven track record of success at the box office. This is why studios love the summer blockbuster, the action movie and the romantic comedy – they perform time and time again and are based on an established formula of story + name actor + name director that often adds up to a box office winner.<br>Going the studio route to get the film made can be easier for the producer than seeking independent film financing because the studios are “one stop shopping” so to speak. They handle many of the arduous chores associated with getting the picture though production and distribution. However, in exchange for the studio’s money and the convenience of the process, the producer is forced to surrender much of the control to the studio when it comes to making the picture, including creative decisions, accounting, and whether the movie gets made at all. In the event the movie does not get made, and the producer wants to take the project elsewhere for financing, the producer may be responsible for repaying the studio the development costs accrued by the first studio, if they get financing from another studio...