I’ve been consulting for a Film Fund project that intends to raise money for a slate of low-budget film projects. In the course of this, I was pondering the structural problems of the feature film business and had a very simple, realisation.
The cost of customer acquisition is unacceptably high.
Let me illustrate what I mean.
Consider two of the success stories of 2012: “The Avengers” and “Argo“. The budgets of these two films couldn’t be more different. Ditto for the box office receipts. The first made roughly $1.5b worldwide and reportedly cost $220m to make (although, I don’t trust that figure). The second made about $230m against production costs of $44m. If we make certain assumptions about the total cost of bringing these films to market (production, financing, marketing, promotional, etc) we might estimate that the first cost $500m and the second $90m. Where do I get these assumptions from? Well, marketing these days is running pretty close to the production budgets, themselves. Then, we need some padding to account for financing and other issues.
Doing a little back-of-the-envelope calculation informs us that “The Avengers” had to deduct roughly $3 per ticket to cover their cost of bringing the film to market, whereas “Argo” spent $2.7. This is what I’m calling the cost of customer acquisition. In both cases, it cost the studio nearly the same amount of money to buy their respective audiences- $3 per view.
Given that the average box office ticket around the world is supposed to be $7.96, and factor in that the exhibitor takes a cut of more than 50%, we are left with a startling conclusion: less than a dollar per ticket goes to the bottom line.
Wow. That’s a pretty low margin. We’re talking something in the region of 10%. In fact, neither film made more than a quarter of their costs back at the cinema. Are the ancillary markets really going to make up the difference? Doubtful.
What does this tell us?
Well, first of all, we can see how it’s become a volume business. No wonder Studios are looking for bigger and bigger productions. Also, it doesn’t matter really the size of the film – the cost of customer acquisition for both these pictures was essentially the same.
But, how does this affect profitability?
Profitability is important. After all, it’s called “the film business” for a reason.
Clearly, “Argo” has a much lower cost basis and, presumably, gets into profitability faster.
Let’s have a look. The box office gross margin could be in the region of $20m. Hmm. That’s probably around one-quarter the cost of bringing that film to market.
For “Avengers“, it’s in the region of $150m. Oh dear. That’s exactly the same. Problem is, “The Avengers” has a much longer road to recoupment than the $70m that “Argo” needs – and it has to do this against a bunch of back-end deals to talent that keep shifting the break-even point away from profit. Then, there’s that pesky problem of DVD sales plummeting and lower revenues from ancillary platforms. “Argo” is starting to look better and better.
So, we’ve managed to debunk the hubballoo over box office numbers. Profitability is going to be increased by driving down that cost of customer acquisition.
How do we do that?
Improving Marketing Efficiency
Marketing Efficiency is, also, a made up term. To me, this means that once you identify the target audience, you market the product to them as effectively as possible. In other words, you create the awareness and the call to action, then give them the product in whatever form they want at a price they find reasonable – with the least amount of friction.
Creating arbitrary windows used to maximise revenue when distribution was tightly controlled. Nowadays, in our “anything, anywhere, anytime, oh-and-by-the-way free” economy, we can’t rely upon this method anymore. Instead, we need to make sure that people can instantly act upon our ‘call to action’ (i.e. watch the film).
In terms of technology, it’s getting easier to market niche product to the people that want it. It’s time to use more of this technology in film to do so.
Improving Production Value
Profitability is also affected by the cost basis as it relates to market size.
Production value is not an industry standard term. To me, it’s the idea that you get as much of your money on the screen and that the budget of the film is in-line with the potential size of the audience.
A good illustration of this is to look at the performance of the films of Wes Anderson. The box office of his films seems to remain within a narrow range, irregardless of how much is spent on production. Under these circumstances, it would be fair to wager that he has a fan base of a certain size. Making the production bigger doesn’t correlate to an increase in the size of that fan base, so it would be prudent to optimise the budget to his audience.
Putting the pieces together
If you improve both the production value and marketing efficiency of the project, you increase the profitability.
Studios are not particularly adept at either. They have such huge overheads that they tend to squander value. And they rarely carry out low-cost, long-term, niche-specific, surgical marketing campaigns. In the end, they spend a lot of money to “buy their audience” by recreating one each and every time they release a movie. This is really inefficient.
Improving the production value is more about cost management. There are plenty of well-understood ways of mixing grants, rebates, co-pro subsidies, deferred payments, etc, in order to get more money on the screen and pay back investors. That part is hard, but fairly well understood.
The challenge is in improving marketing efficiency. This know how is spread across many people in different organisations. So, how do we do that?
That’s what SEAM is working on. There’s a reason why transmedia is such a buzzword. It’s one of the ways that you can improve your marketing efficiency. But more on that another time….
Independent cinema is our greatest hope. Audiences want them. Cinemas want them when seats are empty during the week. But distributors can’t agree on them and few of them want to pay upfront. They’d rather pick it up at a festival. Perhaps, it’s time we accept that the Middle-Man is the problem.
The first book in the Endangered Species series is available now. Here’s a short description:
Once-famous naturalist and animal tracker, Chuck Collins is doing his best to save nature’s forgotten and least-loved animals from extinction. Problem is – animals hate him. They can’t wait to tear him apart. Dogged by the epic failure of his utopian theme park, “Animal Land”, Chuck is given a new lease on life when his hapless crew stumble upon a plot to poach our planet’s most dangerous species for sport. This leads him on a hunt across the globe to scupper their plans, but, ultimately, unveils a fiendish conspiracy to save the planet by nefarious means.
Click here to read more about the project.