How much does the company spend on promoting a new DVD?

Discussion in 'Archived Threads 2001-2004' started by Jianping, Sep 20, 2002.

  1. Jianping

    Jianping Extra

    Jun 14, 2002
    Likes Received:
    The profit gained from the video and DVD selling is now more than half of the total profits for the studio, then how much does the company spend on promoting a new DVD?
    For example, Monster Inc.? Any ideas?
  2. Lew Crippen

    Lew Crippen Executive Producer

    May 19, 2002
    Likes Received:
    I’m not really sure of the question. And I expect that there is more to the definition of profit than is suggested by your comment.

    For example, one reason that some movies appear not to make as much money as would be expected is the methods that companies use to account for their promotional expenses against the movies box-office revenue and the accounting practice of charging the whole production costs against the box office. While this seems reasonable on the surface, there are some reasons why it this does not show the whole picture.

    For example, assume the following: a movie costs $53M to make (production costs) and the studio spends another $10M on promotional and other costs, 75% of which are direct (advertising, etc.) and 25% of which are indirect (entertaining, etc.—note that this is very hard to track accurately). Additional there are another $2M of overhead expenses (studio overhead, such as executive salaries, etc.) that are attributed to the picture. From an accounting perspective the cost associated with the film are $65M. Now assume that this picture is a modest hit bringing in $85M, or a profit of $20M. Or a profit of just a little over 30% of expenses or nearly 25% if looked at from a revenue perspective. Either way, pretty good business.

    Now the movie is sold to such secondary markets as airlines and TV. Assume that there is no promotional expense to the airlines and the studios either help subdise the TV promotions (or cut a deal upfront for TV advertising), but either way the studios spend almost nothing in promotion. There will be some cost of sales (lets put that at 10% of revenue, which is probably reasonable, as the secondary markets want the hit, so this is a seller’s market). Assume that the secondary market sales are $5M, but and now the expense only $500K, leaving a profit of $4.5M, or 90%. Note that even if the cost of sales (and I include both direct and indirect expenses) is 20%, its still a very good business. Take out another 10% for re-cutting the film to meet TV standards. It is still a very good business.

    The point is that the promotional and production costs for the secondary market are close to zero or very mininual for the secondary market, so the profit margin is very high. This is because the production cost have not been amortized across all of the revenue. And the marketing or promotional costs that helped to make the film a hit have already been paid and are applied to the cost of the picture. So one reason that the secondary markets want the movie is due to the promotions and advertising during the theatre run.

    Now look at video and DVD production. The production and marketing costs will be higher than the secondary market, but still much lower than the costs incurred while making and promoting the movie. So the profit margin will be higher, but a significant portion of the promotion costs associated with DVD sales will have already occurred during the theatre run of the movie. For example one reason that a good many of us lined up to by LOTR, is due to the promotion that occurred while (and just after) the movie was made.

    And finally note that the DVD and video has another hidden advantage in cost v revenue. Not many DVDs get made of pictures that failed. A part of studio or production overhead is having to absorb costs related with failures. The percentage of outright failures in the DVD and video market is much lower.

    I don’t know if this addresses your question or not, but its something to think about. Note that I made up all the numbers, but they are probably not too unreasonable.

Share This Page