The revenue source no one talks about

Typically, the most common source of revenue discussed in trying to figure out if a movie is profitable is its box office results. No surprise there, since box office numbers are the one thing that’s publicly accessible for nearly every film released theatrically (the occasional Roma aside). Yet while theatrical receipts are a major part of a movie’s revenue, they don’t provide the full picture. Television licensing is also a major factor, even if its less easy at first to deduce their numbers.

As an example, here are the revenue numbers for the most recent top 10 most profitable movies list from Deadline; TV licensing consistently makes up around 20% of a movie’s total revenue:

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The television market also has the benefit of a much higher profit margin. There’s no theaters or major retailers that you have to share revenue with like there is at the box office or with home entertainment.

Where Goosebumps comes in

As mentioned earlier, the business of TV licensing is murky at best. Yes, the yearly estimates of the most-profitable movies from Deadline are helpful for getting an idea of the range of licensing revenue. However, Deadline only analyzes a handful of pictures per year, they’re only estimates, and the publication doesn’t provide any explanations for how they reached their numbers. There’s only one source out there that lets us look all the way into the business of TV deals – the Sony Pictures hack, which leaked out dozens of contracts and other sensitive documents.

To start out our analysis, let’s look at this leaked email from October 2013. It’s a discussion between a number of Sony executives about how to properly label what would be become the 2015 movie Goosebumps. The question they’re grappling with is whether the film, which is primarily live-action but contains a number of CGI characters, should be categorized as a standard live-action movie, or as an “animated” title released under Sony Animation. For anyone unfamiliar with the film, here are two shots showing how the computer-generated creatures interact with the otherwise real world of the rest of the film:

Goosebumps (Sony)

The reason why what seems at first to be a pedantic distinction between logos on a movie is so important to the execs is because depending on what category they drop the film in, it’ll go under a completely separate TV licensing agreement, which means big differences in profit. If they categorize Goosebumps as a standard Sony release, it shows up on the Starz network. If they make it a Sony Animation one, after theaters it goes out through Netflix. From John Fukunaga in the emails, the former vice president of legal affairs at the studio:


This one is a little tough to answer without seeing the film (which I know isn’t possible) and getting a better sense of how “animated” it is.  As Chris alludes to below, the question isn’t so much the number of pages on which animation appears, but the total amount of animation in the film (extreme example–if you had an animated butterfly in every frame, not sure that makes the movie animated).  But assuming as Chris does that the film is roughly 38% animated, two things:
 
1)      I don’t think there’s a black & white legal definition of “substantial”.  Although I’d argue that 38% is substantial, it’s not a black & white standard so intent of the parties will be helpful.  Chris seems pretty clear that, based on the discussions he had with Starz during the negotiation, the parties’ intent was that this would fall within the definition of animated.  On that basis, you should be ok.  That said, it’s always possible that Starz puts up a fight over it if it suits them (remember they tried to bounce THIS IS IT because they said it was an ineligible concert film, even though it was clearly a documentary).


2)      I assume this is something everybody’s thought of, but we will obviously want to make sure that this qualifies as an animated film under the Netflix deal.  Wouldn’t want to pull it from Starz but then have Netflix reject it as non-animated.  I’ll defer to Chris on this point.

via WikiLeaks

So the question now is – how different were the Starz and Netflix agreements that people would be willing to go through this labeling hassle? Lucky for us, those agreements were also leaked, so we can take a look.

What Starz is, and why they want to license movies so much

For those unfamiliar, Starz is a premium cable network that’s been around since 1994. The premium cable business can be quite a lucrative one, because TV subscribers have to pay an additional fee on top of their regular monthly charges to access these networks. The best-known channel of this type is probably HBO, but Showtime and Starz have also been able to carve out a profitable niche for themselves in the business. With the growth of streaming, you can also subscribe to these kinds of networks directly online, e.g. HBO Now.

Unlike your average television channel that can just get by offering some new shows and calling it a day, premium networks need to go the extra distance to invest in high-quality content so that they can justify that additional $10-15 fee on their subscriber’s bills. Most premium networks do this by offering a combination of premier shows exclusive to their service (the best-known example being Game of Thrones for HBO), and by offering big-name movies available first only on their service.

To get good movies and to get them relatively quickly after they release on home video, premium networks enter into “first-run” agreements with studios. A first-run agreement is exactly what it sounds like – it means the service gets those movies before they appear on any other television or streaming service, albeit still after the movie’s traditional theatrical and home entertainment launch periods.

The Sony/Starz agreement

Starz’s relationship with Sony has been a long one, with the studio having a first-run agreement with the network since 2005. The most recent negotiations in 2013 extended that relationship to 2021. I’ll be focusing on the rates Sony is getting for their 2017-2021 movies, and in particular on this presentation from WikiLeaks that describes the deal.

At the core of all TV licensing agreements is the “rate card”, how much money the studio will receive from the network in exchange for the rights to show a certain film. There are other ways Sony gets money from Starz in the deal, including a yearly bonus, but the per-movie rate is where most of the revenue comes from. Here’s the rate card for the current Starz/Sony agreement:

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So for any applicable theatrically-released movie, the main revenue that Sony receives is based directly on how well it performs at the box office, with certain milestones leading to better or worse rates. (I believe this is based on just the domestic box office, considering Starz’s very limited international presence at the time, and how comparable the rates are here to Netflix’s, which is explicitly labeled as based on domestic-only.)

You may notice on that slide there are discussions of “A” verus “B” films, etc. It’s explained further in the presentation I linked to above, but essentially all standard mainstream movies from Sony will receive the full value from the rate card. For less desirable titles such as films that never received a full wide theatrical release or were bought by Sony from another studio, Sony receives only a percentage of the rate card amounts.

To make it easier to visualize, I’ve graphed out the comparison between a movie’s domestic box office take and licensing revenue under the Starz deal:

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The option to license outside of Starz

The relevant part to Goosebumps is that there was a clause in the Starz deal allowing the studio to license Sony Animation-branded titles to another service instead:

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By the time of the email discussed earlier, the studio had already chosen to take advantage of this option and had signed a separate licensing deal just for Sony Animation titles with Netflix.

The Sony/Netflix agreement

I don’t think there’s a need to explain what Netflix is here, and its voracious appetite for new content, even at the expense of racking up huge debt, is very well-known. For this section, I’ll be looking at this copy of the Sony/Netflix deal found on WikiLeaks. The most relevant part here is once again the rate card, located on the 41st page of the PDF:

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Why Netflix was the better licensing choice for Goosebumps

So if we put the value of the Netflix deal versus the Starz one on the same graph, I think its pretty clear why Sony executives would hope they could send Goosebumps towards the streaming service:

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While Starz has the benefit of better rates for smaller releases, as soon a movie goes above $70M, it gets increasingly profitable to license with Netflix instead.

In the end, the studio decided to go with giving Goosebumps to Netflix, and releasing the movie under the Sony Animation banner. Considering the film ended up at $80M domestic, that means Sony made $17.25M from Netflix in licensing money. If they had stuck with Starz, they’ve would’ve gotten only $15.4M.

So, making nearly two million dollars extra just because you stuck a different studio label in front of the title…maybe sometimes there is such a thing as easy money.

Credits: Header photo of television by Anika on Flickr, source. Photo used under Creative Commons License CC0 1.0.

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