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April 26, 2005
How NOT To Make Any Money On A Hollywood Blockbuster
Slate has apparently assigned Edward Jay Epstein the Hot Button beat. And this piece on German tax breaks is interesting. It's not really accurate, but it is interesting.
The impression of the piece is that other countries essentially pay for the entire production of films budgets over $80 million out of vanity. The reality, which he forces you to unearth in his "lead with what sounds cool" writing is that $65 million on Tomb Raider was, according to him, pre-sold to the six largest action markets outside of the U.S. and Australia. According to his numbers, $10 million came from the German tax deal and another $12 million for shooting in the U.K. That left Paramount's bill at $7 million, which they covered by pre-selling to Showtime... a cable network owned by Viacom and in the case of a huge success, a win that could make production partners angry to the point of litigation (see: Lord of the Rings).
What Epstein fails to mention in all this is that this strategy put, in some part, the last regime at Paramount on the street. More than half of Lara Croft: Tomb Raider’s non-domestic theatrical income came from the six markets Paramount sold off (according to Epstein) before production. The studio won that battle overall, in theory. But only because the film didn’t do that well. And Epstein does not take into account any of the home entertainment sell-off that went with those territories. Just using theatrical, the $65 million in territory pre-sales that went to the budget returned roughly $50 million in theatrical rentals in those countries. A minor win. But if Home Entertainment right went to that $65 million in pre-buys (it probably did), this “way of making the movie with no risk” actually cost Paramount money. And the better the movie did, the more money Paramount would have “lost.”
This is at the core of the difficulty that is the studio business. When Paramount’s strategy of pre-selling and partnering every movie led to mediocre grosses, everything was okay. They were even profitable in some years without any real hits. But when a few slightly more expensive, less protected films lost big, the studio lost money in spite of the conservative approach.
Lara Croft: Tomb Raider returned about $115 million in rentals outside of the six sell-off markets. Figure that worldwide marketing on the film cost Viacom about $90 million, considering that there was a big marketing partnership with Pepsi on the film. Epstein sees a potential franchise with no risk. I see a huge drain on studio focus and resources that made the originating studio less than $25 million in worldwide theatrical.
Take, on the other hand, Sideways, which Epstein worries for, with Fox unable to throw off the budget to foreign countries. Let’s start with the fact that this is a false notion. Searchlight backs many of their films with outside money. And had Searchlight and Alexander Payne been willing to compromise artistic vision for cash, they could have pre-sold all day and all night and doubled the size of the budget to accommodate, say, George Clooney.
Nonetheless, this is a funny choice by Epstein, since little, subsidy-hamstrung Sideways was slightly more profitable in theatrical than Lara Croft: Tomb Raider. The film will return about $65 million in rentals. It cost $16m and marketing was around $20 million. That leaves, by Epstein’s broad numbering, about $19 million in profit in theatrical alone.
Of course Lara Croft: Tomb Raider made more in Home Entertainment... enough to spawn a sequel that cost almost everyone money with less than $170 million total in net returns from theatrical and home entertainment worldwide. But the bigger point is that you can tax shelter a studio to death. At some point, avoiding loss is the same as not being in business at all.
The point is made dramatically by Fox’s The Day After Tomorrow. The budget was bigger than the one for Lara Croft: Tomb Raider... about $125 million. (Note: Epstein doesn’t account for budget overruns that, word has it, occurred on the film... but that would be begging the point.) Fox didn’t sell off the foreign... which is where the money really comes from in Epstein’s spun piece.
The results?
With a hit, Fox got rental returns of over $325 million. Even if you assume a worldwide marketing budget of $150 million, that’s $150 million in profit for the company in theatrical alone. And that was only the sixth highest grossing film in the world last year.
Had Fox been “fortunate” enough to sell off the territories that Paramount did on Lara Croft: Tomb Raider, they would have earned safety. But if they has gotten $65 million in pre-sales for this film that had no video game back-up, no big stars and a director who was a bit in the dumps, it would have cost Fox more than $35 million... in theatrical alone for those six territories.
So had Fox presold, they would have lost more in the six pre-sold territories than Paramount made theatrically on the whole pre-Home Entertainment safety-netted Lara Croft effort.
I’m not saying that Epstein should not have written a story about tax loop holes in which movies hide. But for one thing, he should have used a case that wasn’t four years old. The German situation has changed dramatically since Epstein researched his book. (The internet as repository for old info... grand.) But more importantly, he should have offered perspective. Something for nothing in the film business is really cool... until you succeed... or have personal gross points.
Posted by poland at April 26, 2005 09:30 AM
Comments
Reading about the financing complications makes my head hurt. All I know is, last night Tomb Raider was on cable. I hadn't seen it, so watched it for a bit. I absolutely hated it, turned it off and felt much relieved.
I bet the studios wish they could hand off a dog like that so easily.
Instead of forcing myself to endure the pneumantic lips of Jolie [which seem to be a screen character all to themselves], I put my DVD of Sideways into the player and listened to the accompanying commentary by the stars. It was a hoot. Terrific, entertaining film. I hope everyone involved with Sideways made a lot of money and will decide to put more money into films of it's quality and originality. It's so simple when you look at financing in those terms.
Posted by: hatchling at April 26, 2005 12:28 PM
I know this is probably a simplistic and stupid point, but it seems to me that if they actually put some effort into the script and made a good action movie that people want to see over and over then they wouldn't have to play these games. Both TombRaider movies were crap, and Paramount must have smelled it since they didn't bother putting much of their own money into it. It just seems to me that this type of financial mess is a bigger gamble then risking their own money on a solid script.
Posted by: teambanzai ![[TypeKey Profile Page]](http://www.mcnblogs.com/thehotblog/nav-commenters.gif)
at April 26, 2005 12:45 PM
Excellent, excellent piece. Epstein's piece explains how the detestable "Lara Croft" could produced by a big studio, and the post explains why it wasn't nearly as successful as Epstein's dated numbers might make it appear. (This is a big problem with books purporting to give an insider perspective on Hollywood: By the time they appear, they're usually passe.) But one note of caution should be injected: yes, "The Day After Tomorrow" can be compared with "Lara Croft" in that they were both big, bad movies that played well overseas. But "The Day After Tomorrow," although lousy, was a different kettle of fish: not based on a pre-existing property, and not built on star casting. The special effects were terrific, yes, but maybe too this was a story people actually wanted to see. Imagine how big it could have been if it had actually been a good movie.
Posted by: Christopher Brooks at April 26, 2005 12:55 PM
"But for one thing, he should have used a case that wasn’t four years old. The German situation has changed dramatically since Epstein researched his book."
Well, actually not true. The numbers used by Epstein are still representative of a typical defeased deal today once you recognize that Epstein is confusing the NPV of the Studio guarantee payment with the NPV of actual negative cost. Most all the deals today guarantee something like 120% of the negative cost back - but that it is not paid for somewhere between seven and twenty years.
Laura Croft is misleading as a representative German tax deal in that there was a real relationship between the investor and the production entity. LC was produced and partially financed by the Mutual one of whose principal owners (Kloiber) personally used the shelter. The Mutual concept was a good one from the Paramount perspective - it laid off the risks to German shelters and territorial pre-sales on the risks it was most uncomfortable with such as LC or Time Zone and kept the ones it felt secure with such as Saving Private Ryan.
Posted by: JJ at April 26, 2005 04:57 PM
I celebrate smart blog readers.
Posted by: David Poland at April 26, 2005 05:56 PM
I still believe there is a really good movie in the Lara Croft story somewhere. Maybe when they actually write a coherent script and take a chance on a good director.
Posted by: Mark at April 26, 2005 09:52 PM
I hated the first Lara Croft movie. I wanted my money back, my time back and my dignity back.
The second I watched because...I have no idea actually. I must have seen it for free. I didn't mind it though. Which I guess is because the first had set my expectations so low. I'll never watch either again though. That's for sure.
I'd be curious to know where this really good movie would come from though. I haven't played much of the game but it does seem pretty simplistic.
Posted by: Dan R% at April 26, 2005 10:07 PM
..."and my dignity back"
My god, hyperbole runs rampant in the replies of this blog, doesn't it.
Posted by: KamikazeCamel at April 27, 2005 07:16 AM
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