On Sept. 8, The Scotsman published an article quoting Grand Theft Auto V's development and marketing budget at 170 million pounds, or roughly $265 million. The news was met with a collective gasp across the video game industry. The total would put the game's development and marketing costs on par with some of Hollywood's biggest blockbusters.
However, any concern over the game's cost was quickly muted upon its release. In its first three days, Grand Theft Auto V collected $1 billion in sales. That total, according to the game's publisher, Take Two Interactive (NASDAQ:TTWO), was the quickest any entertainment property has ever hit a billion in sales.
The enormous cost and sales of Grand Theft Auto V begs an interesting question: How does the business of video games stack up against the movie industry?
Not quite as expensive as you'd think
When news of Grand Theft Auto V's $265 million budget broke, several sites were quick to report its budget would rank second all time in production costs if it were a movie. Currently, the most expensive movie production of all-time was Disney's (NYSE:DIS) Pirates of the Caribbean: At World's End, which cost roughly $300 million to produce.
Yet, such a comparison isn't quite apples to apples. Movie production budgets don't include marketing the film. The rough rule of thumb in the movie industry is that a marketing budget is equal to 50% of the film's production budget. So, Pirates of the Caribbean: At World's End total production and marketing costs is likely closer to about $450 million.
When considering both production and marketing costs, Grand Theft Auto V's $265 million budget would rank about the same as Evan Almighty, which is roughly the 42nd most-expensive movie ever made. Bottom line, Grand Theft Auto V was expensive, but video games still aren't approaching the total cost of the world's most expensive movies.
But, what about the sales?
From a sales perspective, Grand Theft Auto V has no peer in terms of speed to $1 billion in sales. Whether or not it has peers in terms of its lifetime sales will be another question.
The highest-grossing film of all time, Avatar, took 17 days to hit the billion milestone. However, Avatar also wound up hitting $2.8 billion across the global box office. That total also doesn't include home video sales, merchandising, and later revenue selling the film's rights to broadcasters.
Although much fanfare around movies focuses on their opening weekend box office, the total amount a movie can generate on its opening weekend is limited by a very finite obstacle: there are only so many seats for moviegoers to sit in. With video games, the only real restricting factor is distributing discs of the game. In a world where Apple can ship 9 million iPhones on an opening weekend, shipping 15 millions discs isn't much of a constraint. So, major video game events, like Grand Theft Auto and Call of Duty, tend to be more front-loaded in terms of sales.
What about the middle men?
One other area to watch is how much distributors of different forms of entertainment get to keep. Conventional wisdom is that movie box office hauls are split 50/50 between distributors and the theaters that play the film. However, bigger-budget movies have enough leverage that the scale has been tilted toward distributors.
Overall, for major films in America, only about 30% of gross goes to theaters. When movies are newer, the distributor keeps more of the box office. In later weeks, the theater increases its percentage of the gate. The interesting wrinkle here is that box-office sales are moving overseas (73% of Avatar's box office came from overseas), and the equation changes in different countries. For example, in China (where Avatar made $182 million), foreign distributors currently get to keep only about 25% of ticket sales.
In video games, the middle men are retailers instead of theaters, which keep roughly 20% of sales. In addition, Microsoft and Sony keep a console owner fee that's around 10% of game sales. Add it up, and the cut from various middle men in the movie and video-game business is surprisingly similar.
Overall, only 17 movies have attained box office totals of a billion dollars. Of those, only three have gone over $1.5 billion, with The Avengers in third place at $1.51 billion. It's highly likely that, by the end of its run, Grand Theft Auto V would beat that box office total and be the equivalent of the third highest-grossing movie of all time.
Apples and oranges
At the end of the day, video games are more of the "upstart" form of entertainment compared to television, movies, and music. As such, its fun to compare them against other forms of media. However, as we've seen here, making direct comparisons across various forms of media can prove very difficult, due to the unique economics of each field. For example, while the recent Pirates of the Caribbean stalled at the box office, the series still has huge merchandising tie-ins, and even feeds into rides at Disneyland. Such benefits are either unknown, or very hard to measure.
Still, the initial sales numbers out of Grand Theft Auto V are extremely impressive. With Call of Duty: Ghosts set to hit on Nov. 15, its records might be short-lived.
Eric Bleeker, CFA has no position in any stocks mentioned. The Motley Fool recommends Take-Two Interactive and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.