An ultimate is an entertainment industry-specific forecasting model that is an all-encompassing P&L from a title perspective. In other words, for a specific entertainment asset (e.g., film, TV show):
- What are all its potential revenue streams?
- What are all its associated costs?
- How profitable do we expect it to perform over its lifecycle?
Ultimate forecasting models are necessary tools for entertainment companies to gauge investment profitability scenarios for both future concept and existing projects.
In a recent project, I had the opportunity to support an entertainment company in building a model to run scenarios for by-title ultimates. When constructing a bottoms-up, by-title ultimate model, you should include obvious considerations such as release windows and production costs, but less-obvious considerations will help to fine-tune the forecasting ability your model. Let’s go over some of those less-obvious considerations now.
Use Comparable Title Release Data to Get Out of the Model and Into the Real World
If a production company has a new intellectual property concept for a film, how can it successfully gauge its expected profitability at the box office? Many factors can go into forecasting box office performance, including seasonality of release, number and location of theaters, level of competition, the praise or criticism of others and the brand equity of key cast members. If you are a huge studio like Warner Bros., you can probably leverage data from your deep release library to take an educated guess, but what if you are a small- to mid-sized production company with only a handful of releases under your belt? Or what if it is the first film a company is producing?
The answer to building a reliable forecast lies in leveraging comparable title release data. Entertainment industry data companies likes Nielsen and ComScore can provide reports on by-title revenue across a variety of release windows, including theatrical box office. But which titles should be selected as the most comparable titles for your project? You should work to identify 3-5 comparable titles to your film by answering the following questions:
- Which films have lead actors with a similar market reach to that of your film’s lead actors? Leverage tools such as the celebrity “e-scores” from E-Poll Market Research to uncover comparable celebrity reach. Then, leverage websites such as imdb.com to find recent films that these comparable lead actors have starred in.
- Which of the recent films containing comparable actors also have a similar level of investment (production budget) with a similar release date as your film? Leverage free online tools such as the-numbers.com to discover titles with similar budgets and release dates.
Taking an average of box office receipts across comparable titles will offer a great foundation to begin forecasting theatrical release window profitability for a new title.
Apply Decay Curves to Release Windows to Improve Scenario Analysis
Once you have sized up expected revenue within each release window for a given asset, how do you forecast the allocation of revenue among the periods within each window?
A nuance about by-title ultimate cost amortization is that capitalized production costs are amortized based on a current period’s proportionate share of ultimate revenue, so it is important to consider the timing of expected revenue. This is where the almighty “decay curve” comes into play.
The flow of revenue often follows a decay-curve pattern within a given release window: After an influx of sales or transaction revenue at release and shortly after, the revenue exponentially declines with time. A good ultimate model should have a decay curve for each release window to toggle scenarios of how ultimate revenue could be collected—and in turn, how capitalized production costs should be amortized.
Learn more about scenario analysis:
- Scenario Analysis and Sensitivity Analysis in Financial Forecasting
- Scenario Analysis Example: Business Planning During the Pandemic
Allocate Your SG&A Across Multiple Projects Equitably
If you are a smaller production company in a growth period, you face the challenge of appropriately allocating your corporate overhead to a by-title P&L ultimate as you move from being singularly focused on one project to producing multiple titles in tandem.
A time allocation approach can be leveraged to do this equitably. Those employees actively involved with producing or publishing assets (e.g., producers) can forecast how they would split their time among projects within a given forecast period. Then their overhead (i.e., their fully burdened compensation), plus the general company overhead (including the compensation of supporting shared-service functions, such as Finance and Human Resources employees) can follow this forecasted by-title time allocation. Labor is usually the largest cost line item on a P&L, so it is crucial to have a basis to equitably gauge what share of this burden should be allocated to a particular project.
Embrace Nuance and Flexibility
No one can predict the exact ultimate profitability of a new project with 100% certainty, but a good ultimate forecasting model paves the way to derive a sense of comfort in your investment. An ultimate model allows you to run multiple scenarios to sensitivity test a given investment versus its expected performance over time. Due to all the nuances in releasing an entertainment asset through various windows, it is important to incorporate multiple tools within your model to provide flexibility in forecasting different outcomes.
If you’d like support, we have entertainment finance and accounting consultants who can help you through the process. You can learn about how we work with our clients in our media and entertainment finance services guide.
You can also download our free ebook, which explores how operational finance can be employed to make your entertainment company more effective:
About the Author
Jaime has 12+ years of diverse finance and project management experience in the real estate, entertainment, video games and technology industries. Prior to joining 8020, Jaime was the Director of Studio Finance and Operations at Activision Publishing, and had previously worked for WB Games, Warner Bros. Entertainment, Mesa West Capital and SL Green Realty Corp. Her expertise centers around FP&A, operational strategy, budgeting and forecasting, cause of change analysis, reporting, cash flow forecasting, asset valuation, process design and financial systems implementations. Jaime holds a B.S. in Economics from the Wharton School of Business at the University of Pennsylvania.
Categorized in: Entertainment, Financial Planning & Analysis