News

Wishful Thinking For Cost Cuts

Published by Kagan Research LLC

Oct. 4, 2005 -- With box office suffering a slide, Hollywood is warming to the idea of reducing marketing expenses in theatrical release to bolster profits. But analysts should be careful about trimming their forecasts of future studio spending on prints and advertising. Hollywood's tough talk about cost control looks to be an exercise in wishful thinking.

First let's assume the axe would fall heaviest on mid-budget films. There's too much invested in big budget extravaganzas (no studio would penny pinch when introducing the $135 mil. production of "War of the Worlds”) and low budget films tend to have the smallest marketing campaigns where savings would be minimal.

Well then, how about releasing "on the cheap" a comedy related to Santa Claus with a no-name cast that cost just $32 mil. to make-- half the budget of an average major studio release? Thank goodness New Line Cinema didn't do that with "Elf," which made Will Ferrell a star and went on to gross $173 mil. domestically (U.S. and Canada).  

A 2003 release, "Elf" generated a 3.24 Kagan Profitability Index; a KPI of 1.40-1.75 is breakeven. KPI is a ratio of film revenue to costs, and the higher the number the more profitable. According to Kagan Research's "The Business of Movie Production and Distribution 2005," "Elf" is the sixth most profitable wide release of 2003 in the KPI ranking, ahead of "X2: X-Men United" and "Matrix Revolutions," each of which cost over $100 mil. to make.

"Theaters won't carry over additional weeks for films with weak marketing support because it means fewer box office dollars for them," said Wade Holden, analyst at Kagan Research. "Movies often defy pre-release expectations, so a distributor could miss a hit by giving up on a film based on results of pre-release audience testing." 

Each big major studio release gets $15 mil.-$50 mil. in domestic marketing support. This prompts studio brass to talk up the virtues of low-cost approaches such as emphasizing publicity or Internet promotion instead of pricey network TV commercials and newspapers, where movie spending is being trimmed.

But the alternatives such as cable TV and the Internet typically sport higher costs per thousand and are less efficient in reaching mass audiences. Film distributors have to pile cable ad buys high to match audience levels of network TV. 

Cutting back would be risky because movie screens are getting more crowded. According to Baseline/Filmtracker, the major studios launched 130 releases in 2004, up from 116 in 2003, and ending a dip in output early this decade.

Each Hollywood major studio spends about $500 mil. each year for advertising buys to support U.S./Canadian theatrical releases, according to "Marketing to Moviegoers," a handbook published by Focal Press and written by Kagan Research's Robert Marich. "Most film releases are analogous to _new product' launches," the book notes, even though film stars may be familiar. 

It's tempting to say movies should skip cinemas to go directly to the cash-cow medium of home video. But the reception a film receives in movie theaters establishes its value in subsequent video and TV windows.

*****

Avg. domestic marketing spend* per film for major studio releases

1984 $6.65 mil.

1994 $16.06

2000 $27.30

2001 $31.01

2002 $30.62

2003 $39.05

2004 $34.35 

* Marketing spend includes advertising buys, cost of creating ads, in-theater trailers, consumer research and release prints for theaters; domestic refers to U.S. and Canada.

Motion Picture Association of America.

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WADE HOLDEN, ANALYST

Wade Holden is an Analyst at Kagan Research with a specific focus in the Motion Picture and Home Video segments. He is a major contributor to the MOTION PICTURE INVESTOR newsletter and oversees the weekly KAGAN BOX OFFICE REPORT.