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Today, we'll discuss the basic economics of Hollywood, or how movies make money, in just 4 minutes to read.

— Matthew

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"An investment in knowledge pays the best interest."

— Benjamin Franklin

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Trivia

Hollywood Economics: How Movies Make Money

The economics of movies

The film industry isn’t all glamorous. For every big hit that makes hundreds of millions — like “Oppenheimer” and “Barbie,” countless films go virtually unheard of.

There are major blockbuster films like James Cameron’s “Avatar” (2009), grossing $2.92 billion worldwide, the most of all time. On the flip side, Walt Disney’s “John Carter” (2012) had a budget of over $250 million, yet it only made $73 million…just like a venture capital investment that fails big.

Most movies are a risky investment, not unlike venture capitalism — you take a swing, well aware that it might not pan out, even with big-name actors and actresses. But some films deliver and earn millions of dollars, even billions.

And it’s not all ticket sales at the box office. In the old days, a movie would come out in theaters, make most of its revenue via ticket sales, and then occasionally appear on TV in the years after. Not anymore, with streaming and several other ancillary revenue streams.

So, how exactly does the industry work? Let’s dive in.

‘Nobody knows anything

A phrase in Hollywood defines the uncertainty of the industry: “Nobody knows anything.” It sounds like humble investing, where nobody knows for sure what the future will hold — not even Warren Buffett.

Nobody knows anything” was coined by the Oscar-winning screenwriter William Goldman, who wrote “All the President’s Men” and “Butch Cassidy and the Sundance Kid.”

As Goldman once said, “Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what’s going to work.”

“Little Miss Sunshine” (2006) embodies the phrase. It’s a true Cinderella story, with a budget of $8 million. Yet it earned about $60 million in U.S. theaters, almost unheard of for an indie film.

Or take “The Blair Witch Project” (1999), which had a $60,000 budget and grossed $250 million globally ($140 million in the U.S.)

How movies make big money

One of the only things that’s widely known in the industry is where the revenue comes from:

Box office: Take “Avengers: Endgame,” one of the most lucrative movies ever because it had a massive theatrical release, earning over $2.7 billion worldwide at the box office — well more than its roughly $350 million product budget and $200 million marketing budget. (It needed $550 million just to break even.)

“Even big hits can take years to break even,” one entertainment industry analyst noted. “Many other industries have a higher return on investment.”

Still, a large chunk of revenues do come from ticket sales. Often, big studios can make 50%-60% of ticket sales in the U.S., and 20%-50% overseas. A portion of all sales go to theater owners, while the studio and distributor keep the lion’s share.

Home entertainment: After their theater run, most movies become distributed through various home entertainment channels. That includes digital downloads and streaming platforms like Disney+.

Other streaming services like Netflix use subscription revenue to buy the streaming rights for new films, which in turn drive new subscribers.

Merchandising: Popular films like “Avengers: Endgame” will sell millions of dollars in related merchandise for action figures, clothing, toys, and video games featuring characters from the movie.

“Star Wars” (1977) became a cash cow on merc alone. The George Luca sci-fi saga has earned billions from its toys alone, paving the way for films like “Toy Story” (1995), which has also brought in billions in retail sales.

Television rights: TV networks and cable channels can acquire the rights to air movies, which generate millions of dollars in additional revenue, usually through licensing agreements.

International distribution: “Avengers” had a strong international presence, with significant revenue generated from theatrical releases in markets worldwide. Home entertainment sales and licensing deals also contribute to revenue from international markets.

Product placement and sponsorships: Some brands will feature aspects of the film or characters in products or sponsorships to capitalize on the film’s large audience.

Ancillary revenue: “Avengers: Endgame” spawned ancillary revenue streams, including soundtrack sales, theme park attractions (Avengers Campus at Disney), and live events related to the movie’s release.

The movie later launched on Disney+, helping Disney retain existing subscribers and drive new subscribers solely to watch the film.

The appeal

Movies can evoke a range of emotions, transport audiences to new worlds, and ignite feelings of nostalgia. They can touch our hearts and leave a lasting impact, whether it’s a heartwarming romance, a gripping drama, or a poignant tragedy.

They transport us back in time, evoking nostalgia for bygone eras, cherished memories, and childhood dreams — helping people reconnect to their roots and relive cherished moments from their past.

No matter the genre, movies have enriched lives for generations with their emotional depth, powerful narratives, and timeless appeal.

As the author Eckhart Tolle once said, “The power of movies lies in the fact that it enables the viewer to enter the reality, to some extent, of the characters.”

There’s enormous value in that.

Dive deeper

Watch more on the economics of Hollywood.

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