Saturday, July 8, 2017

Paramount's Transformers may be dead.

The Last Knight, which hit theaters on June 21, has grossed only $102.1 million. The previous installment, Age of Extinction, topped out at $245.4 million, versus $342.4 million for Dark of the Moon and a franchise-best $402 million for Revenge of the Fallen.

Actually, I learned something VERY interesting about film economics while reading about the failing franchise.

(1) In the United States and Canada, the movie theater owner will take 50 percent of the box office gross, with the remainder going to the studio. (It's actually more complicated than that. In the first weekend, the studio gets like 70 percent. But the percentage declines over each successive week. A big hit that lingers in theaters, like Guardians of the Galaxy Vol. 1, can end up with 90 percent of revenues going to theater owners after eight weeks.)

HOWEVER: Overseas, studios get a lot less. There are very rigid laws and regulations about revenue sharing, which means no negotiation. (Studios often negotiate special deals with North American theaters regarding certain big-grossing films like the Star Wars and Marvel films. They might, for example, take only 40 percent of box office the first week if the theater chain agrees to put the film on ten screens rather than six.) Theater owners overseas take about 60 percent right off the bat, and their take climbs slightly to about 80 percent over time. Most countries also have a quota system for foreign films (they can account for only a certain percentage of films released and box office per year), to protect their indigenous film industries.

Thus, foreign box office is NOT the salvation for a lot of movies. The Mummy (2017), for example, is raking in 80 percent of its profits ($300 million of its $376 million total) overseas. But just $180 million is coming back to the studio. The Last Knight is in the same boat: 75.6 percent of its profit is coming from overseas. It may be fair to say that the studio is probably getting about what The Mummy did, which means those big foreign box office totals don't mean much.

(2) Domestic box office predicts licensing revenue -- which is where massive amounts of money is made. A whopping 85 percent of all licensed material (bedsheets, t-shirts, posters, action figure, trading cards, diapers, disposal picnic plates, Burger King soda cups, tea cozies, collectible swords and jewelry, snowglobes, etc.) are sold in the United States and Canada. Very little of this junk is sold outside North America. In part, it's because the wealthy foreign markets (Western Europe and Japan) are so small in comparison to the North American market. But, in part, it's because these other cultures don't value this stuff. The Germans, for example, will buy Transformers because they are toys. But they don't buy Transformers breakfast cereal or shampoo or collectible spoons. Even the media-hungry Japanese don't purchase that gimcrack.

Licensing deals can make or break movies. Hasbro Studios (the co-producer, with di Bonaventura Pictures) made about $60 million on licensing alone after the first Transformers movie, covering 40 percent of the film's budget (but not any of the prints and advertising costs, which were about $100 million). That number was only a little higher after the $200 million second film, Revenge of the Fallen. But it shot to $80 million for the third (Dark of the Moon) and fourth films (Age of Extinction).

The Last Knight hoped to top $1 billion in box office gross, like the last two films, which would have given Hasbro Studios $80 million again. The studio had hoped for even more licensing income than that: The studio partnered with two Chinese film companies to get around quota and revenue-sharing rules. This gave the film much greater access to the Chinese market, and everyone assumed the Chinese would buy licensed stuff. But the film saw a massive 76 percent drop-off in its second week!! China represented 63 percent of the film's foreign opening, but the picture is now bombing there. (After making $123.4 million its first week, it made a horrific $24.3 million its second week.)

Moreover, the budget for The Last Knight rose to $250 million (not including the $100 million P&A budget), an eye-popping increase over the past four films. With both domestic and foreign box office running 50 percent lower than expected, and no "China boost" in licensing revenue, Hasbro Studios could see its licensing revenue drop to $40 million -- the lowest of the franchise ever. This wouldn't even cover the increase in budget.

From a licensing perspective, the only way to save the franchise would be to slash the budget to under $190 million (which is where the first film was). Even then, the next film would only break even.

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