Monday, December 19, 2011

Hollywood Profits: Quantitative Drivers of Motion Picture Profitability

Sticking points: - From 1980 to 2000, production costs rose by 600%, marketing spend by 800% - ROI for under $10m film outperforms films with budgets over $10m. According to another article from Strategic Finance magazine March 2008, marketing is still one of the key factors contributing to film's success: - Viral marketing for 1999 release of "The Blair Witch Project", an independent film that cost $60K to produce and bought over for $1m by Artisan Entertainment. AE spent $20m for marketing and distribution. Worldwide gross box office is $249m. - Cost-Revenue association indicates that marketing costs are much more strongly associated with revenue streams: 10% change in production cost (say better quality) results in 2% revenue change, while 10% increase in marketing budget results in 10% increase in cumulative box-office revenue. Film rating is another contributing factor. R rating will have lesser audience than PG rated films. Distribution channels are another huge chunk of cost. Based on above alone, one can connect the dots of why "straight to DVD" releases are becoming a lot more popular. One another interesting observation: Netflix's profit sharing model for independent film producers. In a nut-shell: a low budget film releases to DVD to be "distributed" by Netflix. Clever low-cost marketing techniques pushes up rental revenues that are split by both parties. If successful, consider re-release or sequel at main stream.

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