Saturday, July 30, 2011

Case Study: Estimating Film ROI - Crash (2004)

We often use box office receipts as a metric when we consider how much ROI investors in a film can expect.  Clearly the entire box office receipts don't magically appear in the production company's bank account - but how much does?

There are some lousy distribution deals ... but imagine that you have a non-studio film that distributors really want.  Let's even imagine that the film is successful - it covers the distributor's P&A spend and returns money. What could you reasonably expect your income from the film to be?

There are a few estimates out there - I've always used the 'one third of box office' guideline - so if a film makes $30 million in box office we can expect about $10 million to eventually filter back to the production company.  Clearly this guess has limitations - it won't work for a film that was a hit on DVD but a flop in the theatres.  But it is a start to estimating how much money will be coming in to pay back the production budget - hopefully leaving something over for the investors

But how accurate is this estimate?

Firstly, not everyone uses my 'one third' rule.  For example, Martin Walsh uses an estimate of a 55%-60% exhibitor cut followed by a 30% distributor fee - which gives a figure ranging from 28% to 32% of box office.

That's close enough to my '33%' rule of thumb for me to be fairly comfortable about my estimate.

What we really need is for a production company to open up the accounts for one of their films and let us view them to compare.  Ideal - but most people would say that it is an impossible ask.

This is exactly why I monitor lawsuits - because the strife over Bob Yari's handling of the income from his film 'Crash' has resulted in some of the company accounts being released publicly in the court records.

So lets look through the court records to see how my rule of thumb adds up.  If I didn't have access to this new data and had to rely only on publicly available information ..what would my estimate have been?  And how does it compare to reality?

My Estimated Gross Receipts =$32,796,000 (= Global Box Office÷3  =  $98,387,109÷3)
Actual Gross Receipts =   $33,777,545  (From Court Records)

That's spookily close: 34% of reported box office instead of 33%.  Given the number of factors ignored it's an impressive demonstration of the power of Fermi Estimations  .

It's also a chance to see how accurate the reported numbers are.  Here is what I would normally rely on - the data from the website 'www.the-numbers.com' :
Crash (2005)  
Total US Gross $54,557,348
International Gross $43,829,761
Worldwide Gross $98,387,109
Reported Production Budget $6,500,000
Reported P&A Budget $21,000,000
It was interesting to see how the reported production budget wasn't quite accurate:

Reported Budget:  $6,500,000
The real Budget:     $7,303,082

I'm not sure if the budget changed or if the number revealed in the audit included some deferments that kicked in early.

Let's have a look at the court records closely:

Crash (2004)

Gross Receipts: $33,777,545  
Production Budget:-$ 7,303,082
Marketing/Advertising/Distribution:  -$   133,686
Foreign (Non-US) Sales Expenses:-$   150,319
Residuals:-$ 1,122,292
Deferments:-$   957,600
Interest:-$   269,175
Publicity:-$    43,386
Taxes & Licenses:-$    48,869
Legal & Misc. -$   286,517
Remaining: $23,462,619

Based on these accounts - how much could the investors expect to have returned to them?
I'm going to make a few assumptions here for simplicity:
  1. This film was funded entirely via equity investment
  2. They raised $7.5 million to cover the production budget and some initial expenses
  3. The equity investors had their original investment returned first (with no interest), then had a 50:50 split with the production company
  4. Any profit participation with the stars was taken entirely out of the production company's portion of the 50:50 split.
These assumptions are obviously not correct - but this is a 'ball-park' type estimation of what would be possible with a similar film. 

Let's look at what the production company should have left in their bank account for the film:


Net Receipts (Calculated above):$23,462,619  
Original Investment:$ 7,500,000

Total:$30,962,619


The first step is that the investors get their original investment back:

Total Amount: $30,962,619   
Return Original Investment:-$ 7,500,000

Remaining: $23,462,619



Then we'll assume that the remainder is split 50:50 with the production company:

50% of Remainder: 
$11,831k (50% of $23,462,619)

Therefore, over about 4-6 years the original investors could expect a ROI of about +158%
If we annualise this return for a fair comparison : it is equivalent to +21% return over 5 years.

Even if the bulk of the income occurred in 3 years, it is only +37% return over 3 years.

This is an eye-opener for those indie film business plans that somehow project massive returns for investors.

Yes, 21% p.a is great compared to the 7% available at the time for no risk ... but is it really worth the incredible risks - the likely outcome of having no return?

Even if you win 3 Oscars, have recognisable stars etc - is it ever possible for an indie style film to generate a reasonable ROI for equity investors ?

7 comments:

  1. It is also worth looking at the results from a similar project - John August's `The Nines`

    http://johnaugust.com/2008/nines-post-mortem

    Both are indie-style passion projects, both deserved to do quite well.

    The theatrical gross from 'The Nines': $63,165

    ReplyDelete
  2. Another point worth noting - Rather than the expected 32.5% distributor fee, Lionsgate & D.E.J charged more:

    $960,976 Extra for Lionsgate
    $1,297,989 Extra for D.E.J

    That is income that this film would have had (and the investors would have shared in) if the distributors hadn't billed it to this film. However, to be fair, Lionsgate did spend about $2 million to buy the Oscars/campaign for the Oscars.

    ReplyDelete
  3. Good analysis, couple of questions though...

    What about all other ancillary revenues (Crash sold a solid amount of DVDs)?

    Why are you deducting the budget twice from the Gross receipts?

    ReplyDelete
  4. Hi Anon,

    1. "What about all other ancillary revenues?"
    I included all income that came into the production company from the project -that included licensing deals, TV, DVD etc. That is why it is surprising that the '1/3rd' estimate is even in the right ballpark.

    2. You are totally right. I got it wrong. I've corrected the article now - for the record my original calculations gave:

    ROI of +106% … equivalent to +15% over 5 years and 27% over 3 years.

    ReplyDelete
  5. I agree with a lot of what you're saying here but it could do with more detail. They stayed away in droves.

    ReplyDelete
  6. Great breakdown but a couple things I wanted point out/ask:

    1. Are you assuming the 4-6 year return period (or the 3 year return period) encompasses the day the investors give money to the production company to the end of the movie's profit stream life-cycle? If so (and I assume that's what's going on), shouldn't it be noted that the profits would be significantly weighted towards the theatrical life-cycle of the film where movies make the bulk of their money (as opposed to the downstream TV/DVD deals) and so that period might be more realistically in the 2 year range (or perhaps even shorter) from money in to end of post production and end of theatrical release period (say 2 months at max in theaters)? Point being that while you might still see checks for your investment 4-6 years from now, you really will see the bulk of it in a much shorter span of time (if, of course, it is a success) and thus the ROI percentage would be much higher over that 2 year cycle as opposed to 4-6 year cycle?

    2. The $7.5 million equity investment doesn't seem to take into account any state film tax credits/incentives which, let's say, are around 20% of the budget (I know they vary state from state so just taking an average rational number) and then, on top of that, the losses the investors could choose to take as material participants (say 35%-45% of their investment depending on their tax bracket) or at the time of "Crash", section 181 (Jobs Creation Act) which allowed even non-material participants to take the same percentage loss off their income that year. That could equate to an initial immediate return to investors of say 40%-60%?

    I'm still new to all this so would love to get your thoughts...

    ReplyDelete

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