Have you ever wondered, how do movie theaters make money? Well, if you have, then you’re in luck! This article takes a look at the key income streams and costs that need to be managed effectively to ensure cinema is still viable today.
Movie theaters have operated with primarily the same business principle for decades. However, the industry is starting to change and adopt new ways of presenting films.
Without further ado, here is how movie theaters make money. Stay tuned for everything you need to know!
Movie theaters receive approximately 40% of each ticket sold.
They also make money from concessions, which help to pay for the overhead expenses. Such as employee salaries, rent, maintenance, and cleaning.
Movie theaters originate their income from numerous sources. The most significant being:
The majority of income is from screening new release films and selling confectionery, food, and popcorn to the audiences who attend.
A hit film results in high ticket income and high concession sales. There is little a cinema can do if there is a poor run of film releases.
Income is calculated as, total admissions x average ticket price. While concession revenues are based on average spending per admission.
Ticket pricing considers various factors. The top being local competition, which dictates what people are prepared to pay.
If there is a nearby multiplex charging £7.50, it wouldn’t be wise to charge more unless you offer something exceptional.
As a general rule, the estimated annual admissions is 80,000 for a 3-screen cinema. The average ticket revenue £6.00 and the annual ticket income is £480,000.
Friday and Saturday evening tickets attract higher prices. Whereas Monday or Tuesday evenings are usually discounted. Special promotions (such as two for the price of one) can be used to raise profile and secure short-term increases in admissions.
Let’s dive a bit deeper.
However, the movie studio usually gets 60% of the proceeds from American box offices or anywhere from 20% – 40% overseas.
This depends on the film distribution arrangements, agreements, and other costs associated with foreign distribution. Theaters receive the remaining 40%.
The only direct costs for film exhibition are film hire costs.
These depend on various factors. Such as the number of screens in the theater, the length of run, bargaining power with distributors, and the projected popularity of the film.
In the UK, distributors have most of the power.
They decide which cinemas get which films and when, in order to maximize revenue. The percentage of film hire is anywhere between 25% and 60% of the box office.
High profile movies need lots of advertising, even the suspected shockers.
In case you are curious, this differential in ticket percentage going to the studios is a major reason why box office totals are reported in terms of money, and not in terms of tickets.
The Recoupment Waterfall is how a film’s income is collected and distributed.
Here are the elements that create the Waterfall:
Income gets delivered from various sources and the money is then offered back to the filmmakers via a number of third parties.
Along the way, these third parties can regain the money they spent up front promoting the film and also charge a pre-agreed fee for their work.
What’s left after a party has repaid costs and kept their fees will be passed down the chain to the next party.
The last part of the waterfall is listed as ‘Producers’ Net Profits’. This is when the outstanding money gets to the bank account of the production company (or that of their appointed collection agent) and is then divided.
Usually, the investors are repaid in full, and then the money is split 50:50 between the Investors’ Pool and the Producers’ Pool.
In numerous instances, investment deals can be somewhat more complex, such as:
The vast majority of mainstream movies released in the UK work on an income split. Whereby the exhibitors and distributors split the ticket income after VAT (UK sales tax) is removed.
There isn’t one common figure. The split between exhibitors and distributors can be different for each film and is a point of negotiation when deliberating the deal.
The difference changes over time, in favour of the exhibitor. Distributors can typically transfer a better deal in the opening week and so the longer a movie plays, the more the exhibitor will keep from each ticket sold.
Only the largest films commonly claim more than 50% of income. When this happens, it is nearly always from a major distributor and only in the first week or two of the film’s run.
Distributors of independent films typically receive around 28% to 35% of income. This means that for some ‘specialist’ titles (art house films, small foreign language films, documentaries), the exhibitors are keeping up to 72% of the ticket sales.
The UK has among the highest exhibitor splits in the world. This is partially due to the comparatively high cost of media advertising in the UK. It is also due to historic deals between British cinemas and distributors.
As additional movies are being pushed into the UK theatrical market, exhibitors have rising power to demand better terms from all but the major pictures.
Furthermore, the smaller films are being squeezed by exhibitors and the big films are squeezing the exhibitors.
As a film enthusiast, you should now have a pretty good idea of how movie theaters make money!
To conclude, movie theaters derive their income from several sources. Such as ticket sales (and membership income if applicable), food, drink, and merchandising sales, and lastly, advertising revenue.
Ticket prices will typically be based on local competition, so it’s worth considering this the next time you go to the cinema.
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