The Business of Selling Movies
Young, S. Mark, Gong, James J., Van der Stede, Wim A., Sandino, Tatiana, Du, Fei, Strategic Finance
Once a movie is produced, it's all about getting as many eyeballs as possible to see it, as they say in the industry. But the competition is steep given the available entertainment options for consumers: Video games. Television. Home video. Music. Sports. In this sequel to "The Business of Making Movies" in the February issue of Strategic Finance, we'll present our research (which included data on more than 2,000 movies) on the key success factors that lead to box-office success. Now on with the show.
MARKETING AND DISTRIBUTION
The term "distribution" often covers both the marketing and placement of movies in theaters and, ultimately, other markets, such as DVD, video-on-demand (VOD), and television. For major studio movies, both the production and marketing budgets are committed simultaneously. While a studio makes the movie, its marketing division is developing a comprehensive marketing and distribution plan for the film.
Many people now consider marketing to be the key factor that leads to box-office success. Over time, marketing costs have been escalating. An average amount for a Motion Picture Association of America (MPAA) film in 2006 was $34.5 million compared to $25 million in 1999, an increase of almost 40% in seven years.
A movie's marketing budget often reaches as high as 50% of its total negative cost (production cost) for blockbuster films (the ones that studios are betting will be their financial salvation for any bad decisions they made over the course of a year). Research from Harvard Business School shows a studio spends 90% of a film's marketing budget before the movie reaches theaters. While the marketing budget for each film is thought to be fixed, there's some discretion to increase it if the movie is faring well. According to an interview with William Murray, former executive vice president of the MPAA, television, print, radio, and outdoor billboards account for approximately 75% of the total marketing budget, with the lion's share (typically 40% or more) going to marketing on television. The remaining budget pays for trailers, posters, pre-release behind-the-scenes documentaries about the film, appearances, and, in general, attempts to develop a buzz about the film before the studio releases it.
Studios also use viral marketing techniques to promote their products, typically employing e-mail and other electronic media campaigns to encourage people to pass along messages about a new movie.
One of the best-known examples of viral marketing involved the 1999 release of The Blair Witch Project, an independent film that cost $60,000 to produce and that aired at the Sundance Film Festival. Artisan Entertainment purchased the rights to the film for $1 million, spent $20 million on a marketing campaign, and distributed the film. Launched on the Internet, the campaign suggested that the film was a real documentary about three students who disappeared in the secluded woods of Maryland. The movie went on to gross $249 million worldwide at the box office.
Licensing is another critical part of marketing. One of the best examples is the 10-year relationship between McDonald's and the Walt Disney Company. Said to be a $1 billion deal, McDonald's paid Disney $100 million a year and did 11 promotions of Disney films that included Finding Nemo, The Incredibles, Cars, and Pirates of the Caribbean: Dead Man's Chest. The deal ended when Disney decided to distance itself from the fast-food franchise.
Regardless of its quality, a film will never see the light of day without a distributor. An independent company or a subsidiary of a major studio distributes the film by acting as a negotiator between the film-production company and theater owners, who are known as film exhibitors. A studio's distribution division distributes most major films, while a smaller proportion of films is distributed by independent distributors, such as Artisan's The Blair Witch Project. …