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Why Box Office Results Don't Really Explain How Movies Make Money

When you try and find out how much money a movie like Solo: A Star Wars Story made, the figure you'll almost always come across first is the film's box office haul. 

The weekly box office figures are widely reported on, and they are one of the only measures we have for how commercially successful a movie is. Unfortunately, those gross numbers don't provide any insight into whether a movie actually makes money. 

In this video from our YouTube channel, we break down all the costs that go into making a movie, and why you shouldn't anchor to a big box office number. 

 

Narrator: In this video we're going to look at how movies make money, and why box office numbers are misleading....

There was a time not all that many years ago when the public didn't generally know how much money a movie earned at the box office on its opening weekend. That made it possible for a film to start slowly and, if it had good word of mouth, become a hit over time.

Now, box office totals are widely reported.

But it's important to remember that box office totals reflect how much people have paid theaters for tickets for a movie. And a film becomes profitable after the movie company has recouped all the money it spent not only making the movie but marketing it.

So, let's take a hypothetical superhero movie based on lesser-known DC character Marvelous Man. Due to the success of Aquaman, Marvelous Man: The Movie gets a green light and a budget of $100 million -- a relatively small amount for superhero film. And let's further assume the movie actually comes in exactly on budget. At this point the studio is $100 million in the red.

It then has to let the public know the movie is coming. It does this by advertising, promotional tie-ins (like a Marvelous Man Happy Meal toy), and media junkets with the film's stars. That all costs money too and that has to be recouped as well before the movie can be considered profitable.

Let's pretend that another $50 million was spent on marketing Marvelous Man: The Movie – there's no hard and fast rule for marketing budgets, but half of production budget isn't uncommon.

Now that movie has been made and promoted, it's time for opening weekend. Say Marvelous Man: The Movie sells $100 million in tickets on opening weekend. It's a big number, but it's very important to remember that the studio does not receive all of that money -- the theaters get a cut.

How much is that cut? It varies. For a huge film like a new Star Wars or Avengers movie, Disney has leverage. It can negotiate a bigger cut and demand the theater show the film on multiple screens. It can also ask for a higher percentage of the gross in succeeding weeks.

In general, the studio's percentage gets lower the longer a film has been in theaters. That's done to entice theaters to keep films playing longer.

So, in the first week of a film that's not a sure thing, the company producing the film might get 60% of the box office. That means that on the shocking $100 million in tickets sold by Marvelous Man: The Movie at the domestic box office, the company that made the film gets paid $60 million... meaning it's still $90 million in the red.

Foreign box office is even more complicated but it's all based on the theaters getting a cut and the movie producers getting a cut. The math varies, but in a very broad sense movies haven't made any money until their box office roughly equals twice the money spent on production.

Of course, a movie isn't done once it leaves theaters. Money is paid for streaming rights -- a number that can be challenging to actually apply to any one movie since deals tend to be studio-based for multiple films. There's also DVD sales, rentals, an eventual pay cable window, then maybe a free cable or broadcast deal. And don't forget about licensing opportunities with merchandise.

But in general, the bulk of a film's revenue comes from its theatrical run.

Let's take a look at a real example to break down how fixating on just the gross box office figure warps the picture of a movie's profitability.

Much-maligned film Solo: A Star Wars Story made $392 million globally at the box – but the studio only got a cut of that total.

It had a reported production budget of $275 million and had a big marketing campaign behind it. We don't know the exact number, but it's safe to assume promotion cost $100 million, maybe even $150 million.

So it's entirely possible that Solo lost a decent chunk of money, even on the nearly $400 million it posted in ticket sales.

Unfortunately running the numbers on the movie industry involves a lot of guesswork because the cuts on ticket sales aren't always reported and marketing spend often isn't made public.

The bottom line, however, is that most movies make the bulk of their money from the revenue split with theaters and there's no clear way for the public to know exactly how much money any given film makes or loses.

Now next time you see a big box office number, you'll know there's more to the story!

Thanks for watching this video – which movies do you think were the biggest box office flops? Sound off in the comments section.

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The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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