The movie industry has apparently made the decision that you can't make a successful movie on a low budget – and that's hurting the profitability of moviemakers. The Lone Ranger and 47 Ronin are just two examples that demonstrate spending a lot of money does mean making a lot of money.
The average production budget of a major studio film now is in the region of $106 million, so we can start referring to a $100 million movie as low-budget. But movies don't have to be so expensive.
How film budgets are spent
In general, reported movie budgets include costs incurred during pre-production, the actual filming (crew and actor salaries go here), and post-production. The salaries are a big component of that middle chunk -- an A-list actor and director could take up to $40 million combined – 20% of a $200 million film. And that doesn't even include marketing costs, which could be up to 50% of the total budget .
But movie budget is only loosely related to grossing. If nothing else, The Lone Ranger has proven this. A look at the list of biggest-budget movies makes the picture clearer.
Comparing the titles above with the list of highest-grossing movies, only five appear on both. Fifteen movies with lower budgets have brought in more money than 15 movies in the list above. Granted, some of those – Titanic, for instance – weren't exactly cheap to make. But we can see that there's no guarantee of profits for high-dollar films.
The actors know
When Johnny Depp lamented the reviews for The Lone Ranger – 2013's biggest box office bomb – he said minds were made up months before the film was even released, just because he, Gore Verbinski, and Jerry Bruckheimer were on board: "They had expectations that it must be a blockbuster," he said. "I didn't have any expectations of that. I never do. Why would I?"
Because Disney (NYSE:DIS) spent close to $300 million on it, Johnny.
Depp is both experienced and smart, so he clearly knows that big-budgets don't guarantee success. When Mark Wahlberg added, "They're spending $250 million for two dudes on a horse? Where's the money going?," it reinforces the idea that actors know that there is something wrong with the tent-pole strategy.
Moviemakers also know
Disney has a host of examples. You can rightly argue that Pirates of the Caribbean: At World's End justify its bill. But when you think that this same Disney made The Lion King – one of the all-time highest-grossing films – you can safely say that Disney knows that the tent-pole strategy isn't very effective at enhancing profitability. In addition, if budget were directly proportional to profitability, then Pirates of the Caribbean: At World's End should be Disney's highest-grossing movie.
In fact, Time Warner's (NYSE:TWX.DL) case clearly shows that budget and grossing are loosely related. If they were, Harry Potter and the Half-Blood Prince should be Time Warner's highest-grossing film – and not Harry Potter and the Deathly Hallows: Part II.
Interestingly, Harry Potter and the Half-Blood Prince – $250 million – cost as much as Harry Potter and the Deathly Hallows: Part I & II combined – $125 million each.
Even more interesting is the fact the Harry Potter and the Deathly Hallows: Part I & II combined has grossed about 60% more than Harry Potter and the Half-Blood Prince worldwide. I bet Time Warner has noticed this too.
From above, we've seen a pattern that proves that a reasonable portion of the budgets that are allocated to movies could be removed without hurting their profitability.
Apart from the ones above, lower budget films like Despicable Me 2, The Lord of the Rings: The Return of the King, The Lion King, Jurassic Park, and Star Wars Episode I: The Phantom Menace also attest to it.
A shift of focus is needed
It's brilliant that moviemakers want to enhance their profitability. But, unfortunately, they're taking the wrong route. In general, there are two ways to enhance profitability – increasing sales and/or reducing costs.
Apparently, moviemakers are looking to increase sales with big-budgets. But, in reality, they're not in total control of their sales. They have more control over their costs. So the best way for them to enhance their profitability would be to reduce costs – the exact opposite of what they're doing.
What moviemakers should focus on is engagement and not hype. They need to spend more time understanding the tastes of their target audiences and not try to brainwash people by saying, "We spent a lot on that movie so you can expect it to be awesome". And as shown by movies from the 80s and 90s still being talked about, moviemakers need to be taught that engagement is the type marketing that best suits the business of moviemaking.
The end result of engagement
Simply put, focusing on engagement would foster moviegoers' loyalty, which, in the end, would enhance profitability. Here is how it works. If a moviemaker produces a movie that engages its audience, chances are they'd want to see it again – and even again. This means that the movie in question has won the loyalty of its target audience. And when someone goes to see a movie more once, more money goes to its maker.
Ray Adey has no position in any stocks mentioned. The Motley Fool recommends 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.