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By a1wes
October 6, 2006

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Hey guys! I am back. Been out of the loop for a bit due to some personal issues, but hopefully now I am back to stay. Certainly am enjoying the recent uptick in the NFLX stock price!

I don't think Lucas was advocating a bunch of poorly made cheap movies. Looking at the economics of a blockbuster, though, the chances of creating a profit are higher in smaller budget "indie" pictures. Let us start by assuming a $100 million dollar picture. That only includes the cost of actually filming. That does not include marketing. A blockbuster picture also has a blockbuster advertising and marketing budget, oftentimes coming in at another $50 million. So we have an initial negative cost of about $150 million. Let us say that this blockbuster happens to be 'successful' in its theatrical release and grosses $300 million. Looks good right? Well, first that $300 million has to be shared between the theaters and the studios. The theaters take roughly 50% of box office gross, leaving our studio with $150 million. Uh-oh. Well, at least they broke even, right? Well, it depends. Who directed the film? Oh, Steven Spielberg? He takes a 25% cut of that $150 million before the studio gets to touch it. Who starred in it? Tom Cruise? Well, take out another 25% of that. So the studio is now down to $75 million. Then there is the distribution fee, which is typically around 1/3 of film rentals (the money the studio takes in after the theaters take their cut). However, usually the distribution fee goes to the distribution wing of the studio and so remains within the same organization.

But still, a $100 million dollar movie took in $300 million at the box office. Looks profitable right? Well, it turns out that the studio is probably still in the hole about $75 million. Of course, it is possible that the studio hired a director who does not take a 25% cut and an actor that does not take a 25% cut. But the studios are typically not going to spend $150 million on an unknown director and an unknown star actor, unless some other vehicle is propelling the movie (think X-men or Spiderman, etc.) which brings in its own additional payments. The above movie is a very, very simplified version of "War of the Worlds", rounding down the production budget and rounding up the box office gross to take into account some of the international box office (international box office is typically difficult to calculate unless one has intimate knowledge with the exact international distribution deals--often the film is actually sold off for a base upfront fee and the actual gross does not affect how much the studio brings in).

Let us look at a movie such as "Little Miss Sunshine". Production? $8 million. Let us assume about a $22 million marketing budget. Total upfront cost of about $30 million then. Current gross? Roughly $55 million. Halved the studios take in $27.5 million. This particular film was bought outright and, as far as I understand (I am currently studying and analyzing this movie), there are no percentage participants at least to the extent that a Tom Cruise or Spielberg would be. So the studio actually takes in that $27.5 million, after expenses gets them to a tidy little profit of about $5 million, with the movie still performing well.

This is why Lucas said what he did. Also, look at television. The fracturing of the viewership calls for specialized and smaller budget creations. Food Network cannot pay 6 actors $1 million per episode, but the network has become one of the most successful over the past few years by targeting an audience and capitalizing on that audience.

The cost of making a blockbuster has rocketed to enormous heights. Jaws cost $7 million to make, unadjusted for inflation. That would be roughly $21 million today. $21 million is considered a "small" budget, borderline independent level funding. The cost of making movies has gone out of control as a result of big name actors, directors, writers, producers commanding huge salaries and percentages, computer animation, increased marketing costs, etc. And the risk with making a huge blockbuster that potentially appeals to everyone is that it can end up being so bland that it appeals to absolutely nobody. Think the remake of Poseidon that came out recently.

Ok, this became a little bit longer and more rambling than I intended it to be. Lucas was right on with the future of film making. Yes, there will always be the huge blockbuster, but it is likely that the day of constant blockbusters is beginning to pass us by.

To what extent this helps Netflix is indeterminable of course. It entirely depends on if Netflix chooses quality movies and handles them properly. As the marketplace gets more fractured, though, being centered on these small budget projects bodes well for the future.

Cheers!
-a1wes


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