Last Updated on June 17, 2022 by Lil Ginge
Movies, you may have noticed, make a ton of money. A look at just this week’s grosses from Box Office Mojo shows that the latest mega-blockbuster release, Jurassic World: Dominion, grossed $145.2 million during its opening weekend, June 10th through 12th. That’s dino-sized revenue in the Post-Covid era.
But before movies can earn giant box office grosses, they need to be made. And before someone makes a movie, someone needs to pay for all that moviemaking. This is where film finance and film investors come in handy.
Of course, film investors aren’t handing out all that money for free. They expect a return on their investment. And generally a hefty one. In this article, we will take a peek into how film financing works and how investors make money from the movies they invest in.
What Is Film Financing?
Film financing is the process of raising money from various investors to create a film. While the traditional model of film financing has been through the major movie studios, these days film financing can come from a variety of different types of investors and sources. Filmmakers make lots of independent movies and need to be financed in addition to the movies of the large movie studios.
Film financing occurs prior to pre-production, during what is known as the development phase of a film. During development, producers need to determine how valuable a film is likely to be, and then need to raise money from investors accordingly. In order to do this, they need to budget the costs of the film and forecast all future revenues over a given time period (often ten years).
Film financing can come from many different sources. These sources include the major movie studios, film distributors, producers and production companies, and private investors such as private equity companies. Some financing can even come from the government through things like grants and tax breaks.
Like most investments, movies can be financed through equity or debt.
In equity financing, an investor provides a capital investment in the film in exchange for an ownership stake. In other words, they literally become part-owners of the film.
On the other hand, you can also finance a movie through debt. In debt financing, an investor agrees to lend the film money and the movie must pay back the lender with interest.
Who Invests In Film?
A producer or filmmaker has to be able to pay for the three stages of making a movie: pre-production, production, and post-production. The budget must cover all three of these stages. In order to do so, filmmakers need to raise money from investors.
Studio films are generally the largest products and will need the most financing. Major film studios include:
- Warner Bros. Pictures
These are known as “the Big 5” movie studios. They hold about 81% of the United States and Canadian movie market.
Specific film financing companies also exist to make money by funding films. They can take on a variety of different legal forms including public corporations, partnerships or limited partnerships, limited liability companies (LLCs), or other special legal structures.
Film Financing, Budgets and Returns on Investment
Producers need to forecast the potential revenues that a movie will generate. They generally do so on a ten-year basis, meaning they will try to forecast how much cash flow a film can generate over a ten-year life span.
Once all of the costs of making the movie are paid, whatever earned money is left over can be returned to investors. This is their Return on Investment (or ROI). Everything in the budget must be paid for before investors receive their ROI.
Income from a film production can come from a variety of sources. These included
- box office ticket sales
- DVD or Blu-ray sales
- streaming sales
- television licensing fees
Box Office Success and ROI
Whether or not a film is ultimately financially successful will depend on a variety of factors. These include whether or not the public likes it, whether film critics like it and other tastemakers like it, competition from other and similar movies released, and the star power of the cast, director, writer, or other major players involved.
Sometimes a film will look great on paper but go on to become a box office bomb. This makes it difficult to accurately forecast future revenues.
The required rate of return on a movie can vary. Often it is 25% or more for a risky project (of course all projects involve some risk). Present value calculations can be used to determine how much projected future revenues are currently worth.
If you enjoyed this post on film financing, be sure to check out my related blog post on SEO for movies.