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How the Box Office Really Works

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Contrary to popular belief, most films are not profitable at the box office. Despite the hundreds of millions of dollars that movies generate every year, the way the box office system works doesn’t really provide a great business model.

Whether you’re a studio like Universal or an independent like Magnolia Pictures, a movie distributor will typically split the theatrical revenue with an exhibitor such as Arclight or Regal at about 50-50 rate. That’s why even a movie like Mission: Impossible – Rogue Nation, with an estimated production budget of $150-million, is not a slam dunk: The $188million it has so far earned at the North American box office will bring its studio, Paramount Pictures, only about $94-million.

Keep in mind, however, that the box office revenue is calculated AFTER the studio has collected its distribution fee from the exhibitor.  This is usually in the form of a percentage of revenue generated at the box office in any given market. This percentage can range from as low as 10% all the way up to 50%. A typical distribution fee is 30%. Distributors collect this first before exhibitors collect their portion of the aforementioned 50-50 split.

Distributors will pay the owners of a film a “minimum guarantee” in exchange for most rights (theatrical, DVD, iTunes or cable-TV video-on-demand, pay TV, free TV, airlines etc.) to a film within a given territory. The distributor is first in line for any resulting revenue, until the minimum guarantee has been earned back and the film crosses into so-called “overages,” at which point the film’s equity investors might start to see some money. (The structure is different for Hollywood’s major studios, which both produce and distribute films.)

“Historically, the theatrical release of a film – even for big studios – is a loss leader,” said Hussain Amarshi, the founder of Mongrel Media, a large independent Toronto-based distributor. It was early August, and he sat at a tiny table outside the Federal on Dundas Street West munching on a sandwich and talking about the costs of building a film’s brand. “You spend more money on marketing than you will ever get from the film rentals [at the box office]. Where you make money is in the second and third window,” such as DVD or pay TV, where the profit margins are higher. “That is exactly what justifies the kind of money that we spend. That everybody spends.”

 

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