The summer of the film profit math model

With all major mass media and trades atwitter about the "box office slump" signaling the end of the movie industry as we know it, Slate's Edward Jay Epstein, author of The Big Picture: The New Logic of Money and Power in Hollywood, points out that movies earn their money from a variety of sources. In fact, he takes a stab at demystifying the numbers between theatrical, home video and television in his article.

The main point Epstein makes is that there is tremendous money and profit in the television zone of the distribution windows. While it is inaccurate to breakdown the contribution of each platform to a movie separately -- a movie should be thought of as a separate business investment and it's lifetime cash flows and costs should be analyzed -- the following is also very true:

"What makes television licensing, both at home and abroad, especially profitable for the studios is that virtually all the expenses required to market a television program, including tapes and advertising, are borne by the licensee. The studios only have to pay the residuals to the guilds and unions, which varies between movies and TV and average roughly 10 percent. The studios get to keep the other 90 percent. In 2004, this amounted to slightly more than $15.9 billion, making it the studios' single-richest source of profits."

You can find these numbers and more on Epstein's site.

Finally, besides pointing out that studios do make money from making movies, even if it's not at the theaters, is that the volatility of movie returns can only be effectively hedged by a library of television and movie titles that provide a constant cash flow from continued play on television and home video. And with DreamWorks appearing to be on the verge of disappearing into the NBC-Universal world, the point is that standalone "studios" require luck -- in the form of strong movie choices -- and significant capital.