movie making: a high risk business of creativity

Creativity.....it is a business

Movie making as it appears is a pursuit of creative satisfaction and also fun. In addition, you get to make a lot of money. But is it really so?

 

I consider movie making as no different from being in any other business. You need to get your investing and financing decisions alright before you can think of any dividends. Here, the producer has  two very complicated numbers to estimate: One, costs of the movie. Two, net collections from the movie. Heck, more often than not you can't get these right, not even approximately right.

Movie failures could be pretty bad for the business. Check this out for the sample.

 

Then why is it that so many movies are being made all over? India, for instance, releases far too many movies compared to any other country; and why not, when about 1.25 billion people are constantly looking for some entertainment in life? It is another matter that the number of flops outnumber the number of hits. If this report has to be believed, the failure rate in India is as high as 95%. Also, hits and flops are being used very loosely. For instance, if the movie collections cross a certain threshold, say, Rs.50, 75 or 100 crores, it is considered a hit. In reality, however, it could be a super-flop movie for the producer. And it shows up: even for hollywood; just have a look at the net cash flows. 

 

The odds of the business....unpredictable cash flows

In general, the odds of making money is a movie business are stacked against the producer. Here is why. The costs of a movie include: 1) The actors' fees, the director's fees, other technicians' fees, and other costs of making the movie; 2) Printing costs; 3) Marketing and publicity costs; 4) Finance costs; and 5) Taxes. A significant part of these costs are not under the producer's control such as lead actors and director fees. Publicity costs which are imperative considering the shelf life of a move these days could run large. Finance costs could be large depending on how the capital is funded. Taxes are taken away by the government in various ways at different stages, not necessarily all from the producer though.

Reducing costs is not easy. Consider the choice of not-so-popular actors and director (lower costs) and higher chance of lower earnings or popular actors and director (higher costs). Talk about the odds.

 

Even when the costs are diligently managed, there is the next element in cash flows which are completely out of control, viz. the collections. The producer wouldn't know how much the ticket sales and other collections from sale of music rights, satellite rights, etc. are going to be until they are actually collected. If people like the movie, the collections are going to be higher; if not, they are going to be lower. On a majority of occasions this has nothing to do with the script, the story, the lead actors, or the director of the movie. The critics can give their opinions (which are more often biased anyway), but they do not matter. What matters is the opinion of the people (as much irrational as it may be) who watch the movie paying for the ticket. Eventually, that is what decides the producer's earnings. From these collections, there are other payments that are to be made such as distribution costs, exhibition costs, and entertainment taxes.

 

So what is under the control of the producer? Well, it may be only the idea. He might have this bright idea of making a movie which he might think might make money for him. However, net cash flows not ideas are important. If an idea, however bright, is not liked by the public it could spell disaster.

 

Overall, movie making is a risky business unless cash flows are carefully estimated and there is fair amount of luck. I wonder how financing is done in this proposition. It has to be the prospect of high returns.

 

There is one silver lining though in this whole process. There are some things that are stacked in favour from the start. Let's consider the Indian market: A growing population (more movie watchers), high inflation (increasing ticket prices) and that craze. Consider this: If only about 25 million people pay Rs.75 per ticket on average for a movie the gross collections would be close to Rs. 200 crores. And we are making a big deal about Rs.100 crores.

 

The only problem is that this business is very unpredictable and requires a lot of luck. Another way to generate cash, if possible, is to insure the movie against failure. That is a gamble for the insurer.

In the final analysis, if one ever wants to value a movie, one has to be sure to use the cost of capital associated with the riskiness of those cash flows. And boy, how risky!

It's a gamble

The statistics for relatively good years for India: for 2012 and for 2011 - not sure of accuracy as financial information is not published. And so far so bad for 2013.  All time disasters and toppers for hollywood.