Marketing Costs Handicap Biggest Indie

By Robert Marich

Marketing Analysis

   June 8, 2009 – Lions Gate Entertainment says it spends “well more than 25%” of its revenue on marketing expenses, which is sharply higher than what the major studio pay comparably, putting what is the largest independent film distributor at a competitive disadvantage.
   In a conference call with investors last week, the publicly-traded Lions Gate estimated that the media/entertainment conglomerates that own the major studios spend just 5-10% of their revenue on marketing expenses. Marketing to Moviegoers believes that a more accurate ratio is around one fifth (around 20%) for the majors, if excluding their TV divisions that really are separate businesses and that incur low marketing expenses.
   “Typically, this [marketing cost disparity] is the big issue you have in valuing our company,” a Lions Gate executive told stock analysts last week. “We are at an extreme disadvantage in the sense that our P&A (theatrical prints and advertising) percentage against overall revenue is so much higher than every major studio given (because) we are a pure play… This year I think we are expensing $550 million of marketing expense for our film and TV business.”
   That $550 million is over one third – or more precisely 37% -- of the $1.47 billion in total Lions Gate revenue for its prior fiscal year, which ended in March. The reference to “pure play” means Lions Gate is focused on filmed entertainment, unlike the diversified parents of the major studios that also own magazines, newspapers and local TV stations.
   “The average budget for (Lions Gate) films and average P&A are all over the map,” said a Lions Gate executive.
   Tyler Perry’s Madea Goes to Jail  “did $90 million (in domestic box office) on $20 million in P&A,” a Lions Gate executive said. “I think we’ve talked before on a larger action picture like 3:10 to Yuma or Rambo we’ve averaged $27 million, I would say, going in on the P&A budget. On some of either urban and genre pictures, I would say typically we would go in with $18 to $22 million in P&A. So it’s really all over the map.”
   Marketing to Moviegoers: Second edition puts that dollar spend of P&A (not the ratio) at roughly double the indie norm. In evaluating how much domestic marketing Lions Gate will lay out, it will calculate the net production cost of a film attributable to the U.S./Canada market for a benchmark. It starts with the actual production budget, and then subtracts foreign sales, soft money benefits such as tax credits for shooting in certain locales and co-investments by third parties. What’s left is something of a net domestic production expense.
   A Lions Gate executive said that the calculus is “what’s our exposure going into the domestic marketplace? We could have a film like (the upcoming) Five Killers where the net budget is $50 million but if we’re getting more than $30 million of international sales as well driving probably $10-15 million of incremental business beyond that packaging, we’re looking at that spread of call it $10-15 million of minimum guarantee. That’s a complicated answer. But that’s how we look our business.”
   The $20 million in P&A for the black-audience-appeal Tyler Perry/Madea movie that grossed $90 million is a great return. Perry controls his films, which typically just cost high-single digit to low teen millions of dollars to produce—versus tens of millions of dollars for star-driven contemporary dramas and comedies by the major studios. Perry is way under the major studio norm because he is the only star talent.
   A little understood aspect of the movie industry landscape is there are few companies in the middle-size range, where Lions Gate is a lonely occupant. At about $1.5 billion in revenue, it is sizable but not large. At the top of the heap are six major studios – each with $5-11 billion in filmed entertainment revenue that includes their integrated TV production, according to Marketing to Moviegoers. At the other end of the spectrum are small-frye film companies at low double digit million dollars in annual revenue—or less.
   Joining Lions Gate in the middle is fallen major MGM, which is a closely-held private company and has only has a trickle of new releases. MGM is thought to have shrunk to $1 billion in annualized revenue.
   Lions Gate told Wall Street analysts that it will release 10-12 theatricals the current fiscal year that ends next March, down from 16 in the prior year, and then ramp up to at least 14 releases in 2010—when films financed by third party will beef up its release slate. A 14+ clip is a more normal release count.
   According to BoxOfficeMojo, Lions Gate holds a respectable 5.6% share of domestic box office calendar-year-to date to rank seventh—making it far and away the top indie film distributor behind the six major studios.
    BELOW: "Tyler Perry's Madea Goes to Jail" grossed $90 million domestically on just a $20 million outlay in prints-and-advertising.