Kocent 1
Matt Kocent
Production Cost & Box-Office Success
A common phrase in the business world advises; “You need to spend money,
to make money.” The research conducted for this study applied that statement to
the film industry by analyzing the impact of production cost on the success of multimillion dollar blockbuster movies. The research hypothesis and primary variable
were defined as follows: A greater investment in the production budget will influence
a direct positive effect on box-office success.
Seeking financial backers for a blockbuster film production is a gamble for
potential investors. What confidence can a producer provide in order to amass the
$100-200 million needed for the production budget? What might be the financial
benefit or “Return on Investment” that a potential investor might expect? Looking at
past blockbuster movie investments and returns will identify trends and lessen the
risk.
In order to evaluate this hypothesis, the top ten grossing films of all time
were evaluated (not taking into account inflation). These included: Avatar, Titanic,
The Avengers, Harry Potter and the Deathly Hallows – Part 2, Iron Man 3,
Transformers: Dark of the Moon, The Lord of the Rings: The Return of the King,
Skyfall, The Dark Night Rises, and Pirates of the Caribbean: Dead Man’s Chest. Each
one was then dissected, looking into its production cost and its domestic, foreign,
and total worldwide gross revenues. “The production budget includes the costs for
camera equipment, set design, location fees, directors, actors, producers, stage crew,
make-up, artists, special effects designers, costumes, etc…”
(http://digitalcommons.iwu.edu/cgi/viewcontent.cgi?article=1109&context=econ_
honproj) Essentially this represents the monetary value covering all major logistics
of creating a film.
After identifying this cost, the next set of data evaluated was the gross
revenue that each film made including both domestic and foreign markets. In most
cases, the foreign market created a larger share of revenue than that at home in
America. Blockbuster movies are clearly a worldwide entertainment investment.
Subtracting the total Production Cost from the Gross worldwide revenue yields a
movie’s Net Profit. Finally, once the net profit was attained, the most important
piece of information was explored, the return on investment or ROI.
The ROI is a performance measure used to evaluate the efficiency of an
investment or to compare the efficiency of a number of different investments. To
calculate ROI, the benefit (return) of an investment is divided by the cost of the
investment; the result is expressed as a percentage or a ratio.
(http://www.investopedia.com/terms/r/returnoninvestment.asp)
The return on investment formula:
Kocent 2
ROI = Gain from Investment – Cost of Investment
Cost of Investment
In the above formula "gains from investment" refers to the worldwide gross
revenues made by the film and the “cost of investment” is the Production Cost.
Return on Investment is a very popular metric because of its versatility and
simplicity in comparing potential investment opportunities. That is, the higher the
ROI, the more likely one will want to invest in this venture.
A commonality in this study is that all chosen subjects were high-grossing
blockbuster films, that all spent approximately $200 million to produce. (The Lord
of the Rings and Harry Potter films were exceptions, which will be addressed later.)
This first graph includes the production cost, total worldwide gross revenue, and net
profit for each movie, and all figures are addressed in the millions of U.S. dollars.
3,000
2,500
2,000
1,500
Production Cost ($M)
Total Gross ($M)
Net Profit ($M)
1,000
500
0
***Note: Short Hand Movie Titles Expressed on Graphs***
- Avatar
- Titanic
- AV = The Avengers
Kocent 3
-
HP = Harry Potter and the Deathly Hallows –Part 2
IM3 = Iron Man 3
Trans = Transformers: Dark of the Moon
Lord = Lord of the Rings: The Return of the King
Skyfall
Knight = The Dark Knight Rises
Pirates = Pirates of the Caribbean: Dead Man’s Chest
Among the obvious findings in this graph, from left to right, the highest total
gross revenues (in red) are closely correlated to the highest net profits in green. The
production costs (in blue) are noticeably small in comparison to the revenues and
profits.
The next graph illustrates the Return on Investment (ROI). For each of these
films, this graph depicts how much ROI was created, shown as a percentage. As
mentioned earlier this was calculated by dividing the net profit by the production
cost. In general, the results from left to right show the more expensive the
Investment, the higher the Return, descending from over 1000% for Avatar to
nearly 400% for Pirates.
Return on Investment (%)
1,200
1,000
800
600
400
Return on Investment
(%)
200
0
There are two outliers within the findings. HP2 (Harry Potter and the Deathly
Hallows – Part 2) and Lord (of the Rings: The Return of the King.) Harry Potter Part
1 and 2 were actually filmed coincidentally, then broken into two separate films due
to their long length. This unusual process had a total production cost of $250M that
was simply divided in half at $125M for the purpose of this study leading to a most
likely skewed ROI. Lord of the Rings: The Return of the King. This movie was
Kocent 4
actually the final episode in a trilogy that each spent roughly $94M to produce. This
outrageously successful trio took an unprecedented risk of filming all three movies
at once, then releasing them in a sequence. The risk paid off as the three movies
production costs leveraged into one, yielded a huge net profit of $1,025,929,521 and
a record ROI of 1,090%.
Besides those two exceptions, one can identify from the ROI graph that there
is a clear trend of declining ROI; starting with Avatar receiving an ROI of 1,070%
working all the way down to The Dark Night Rises and Pirates of the Caribbean:
Dead Man’s Chest gaining almost identical ROIs of 371% and 374%.
These findings validate that hypothesis that for blockbuster movies, the
greater the investment, the greater the return. There is substantial risk in investing
in a $200M entertainment production, but this research shows a consistent formula
for large production costs yielding highly profitable results. The hypothesis for this
study was therefore validated, that there is a positive correlation between increase
in production cost and box-office success, and when it comes to Hollywood, you
indeed need to spend money to make money.
Kocent 5
Appendix :
Data from Box Office Mojo

Avatar
o Production Cost: 237,000,000
o Domestic Gross: 760,507,625
o Foreign Gross: 2,021,767,547
o Total Worldwide: 2,782,275,172
o Net Profit: 2,545,275,172
o ROI: X-10.7

Titanic
o Production Cost: 200,000,000
o Domestic Gross: 658,672,302
o Foreign Gross: 1,528,100,000
o Total Worldwide: 2,186,772,302
o Net Profit: 1,986,772,302
o ROI: X-9.93

The Avengers
o Production Cost: 220,000,000
o Domestic Gross: 623,357,910
o Foreign Gross: 888,400,000
o Total Worldwide: 1,511,757,910
o Net Profit: 1,291,757,910
o ROI: X-5.87

Harry Potter and the Deathly Hallows – Part 2
o Production Cost: 125,000,000
o Domestic Gross: 381,011,219
o Foreign Gross: 960,500,000
o Total Worldwide: 1,341,511,219
o Net Profit: 1,216,511,219
o ROI: X-9.73

Iron Man 3
o Production Cost: 200,000,000
o Domestic Gross: 409,013,994
o Foreign Gross: 805,7000,000
o Total Worldwide: 1,214,713,994
o Net Profit: 1,014,713,994
o ROI: X-5.07
Kocent 6

Transformers: Dark of the Moon
o Production Cost: 195,000,000
o Domestic Gross: 352,390,543
o Foreign Gross: 771,403,536
o Total Worldwide: 1,123,794,079
o Net Profit: 928,794,079
o ROI: X-4.76

The Lord of the Rings: The Return of the King
o Production Cost: 94,000,000
o Domestic Gross: 377,845,905
o Foreign Gross: 742,083,616
o Total Worldwide: 1,119,929,521
o Net Profit: 1,025,929,521
o ROI: X-10.9

Skyfall
o Production Cost: 200,000,000
o Domestic Gross: 304,360,277
o Foreign Gross: 804,200,736
o Total Worldwide: 1,108,561,013
o Net Profit: 908,561,013
o ROI: X-4.54

The Dark Night Rises
o Production Cost: 230,000,000
o Domestic Gross: 448,139,099
o Foreign Gross: 636,300,000
o Total Worldwide: 1,084,439,099
o Net Profit: 854,439,099
o ROI: X-3.71

Pirates of the Caribbean: Dead Man’s Chest
o Production Cost: 225,000,000
o Domestic Gross: 423,315,812
o Foreign Gross: 642,863,913
o Total Worldwide: 1,066,179,725
o Net Profit: 841,179,725
o ROI: X-3.74