Creating a Film Ultimate has become a common exercise for studios as they look to estimate the total revenues from a film to justify the large production costs of making a movie. Although studios have been creating Ultimates for years, several common mistakes often take place during the Ultimates process. Some of these mistakes are resource related, some are due to poor planning and some center on mitigating outside influences. In the following article, we asked team members Paul Paredes and Lester Robert to expand their exploration into Film Ultimates by discussing mistake-prone areas of Film Ultimates.
Inaccurate Participations Calculations
Participations are clearly an important aspect of the cost of movie Ultimates, yet an area that tends to lead to a lot of mistakes. Participation contracts have become increasingly more complex over the years as movie talent works to extract as much value from their likeness as possible. At the same time, new avenues of revenue are being used by studios to recoup their costs. Solid working relationships between legal, finance and accounting are paramount in ensuring contracts are read, understood and translated properly into forecasting systems.
Having a specialized finance professional is key in making sure that participations are calculated accurately throughout the process and any rate triggers are captured. They should understand contracts and be comfortable digging into the details, while bringing the financial acumen and creativity to build that understanding into your financial system or Excel model.
Lack of an Enterprise Resource Planning (ERP) System
The importance of an ERP system is something that is recognized in corporations, as they need to combine actuals and forecast into a flexible, single tool that can be used by several different departments. Many forecasting solutions now offer some type of Ultimates building process that can be purchased as an add-on, or they may offer a custom build depending on your budget.
However, having seen ultimate spreadsheets with 25-30 tabs that link to other sets of Excel templates, the chances of “fat finger” mistakes aren’t something you should have to worry about. Having a finance professional who has experience in ERP systems is critical when building a new Ultimates solution. (We’ve covered common ERP implementation mistakes and offered insight into selecting ERP solutions previously.)
Misaligned Licensing Revenues
Licensing revenue has become a staple in creating a Film Ultimate, as studios have unlocked the long-term earning potential that consumer products, games, and even theme park entertainment can offer a studio, all without the burden of production costs or inventory risk. Simply receiving a minimum guarantee based on royalties earned has added to both revenues and operating income for studios.
Studios need to be aware of the latest market trends when factoring in licensing revenues. For example, as toy play patterns continue to evolve or as gaming changes from console-based games to mobile- and free-premium-based gaming, studios need to be more connected to consumer purchasing behavior to determine projected revenues. Further, with the changing retail landscape, big box retailers are shifting shelf space up/down on a frequent basis and have moved away from license merchandise in apparel in favor of in-house brands. It is important that your finance team has built enough of a relationship with sales and category managers to understand the changing environment and be savvy enough to build those potential trends into the Ultimates process.
Learn more about best practices for competitive studios in our ebook:
Comparative Analysis that Lacks Consistency
The Ultimates Process may also lack proper comparative analysis when determining the potential revenue for a title, comparing the new title to titles that share similar features or by comparing the previous version of the title when it’s a sequel or further iteration of a movie series. Usually this mistake can come in either of two situations.
One vulnerability occurs when the film has a different release timing than the comparable title, and the studio fails to do enough analysis to truly consider variables such as seasonality, or additional bumps from proximity to holidays (e.g., Easter Sunday, Christmas or Thanksgiving Break, or Summer Blockbuster season).
Secondly, studios may assume sequels will produce the same level of revenues without taking a step back to examine the total makeup of the film. Have audiences really clamored for a second installment of your film? (Planes 2, anyone?) Or, is the market already flooded with merchandise from the original film? (Cars 3 merchandise was difficult to sell as Cars and Cars 2 merchandise had become staples in the marketplace.)
Inaccurately Factoring Title Performance in the International Market
With significant revenue (sometimes well above 50 percent) coming from distribution outside of a film’s home country, it is vital that film companies understand all the international components and how to properly structure an ultimate model. A common oversight in perfecting a Film Ultimates model that utilizes future film revenue from the international market is failing to consider the release windows of a film in the International Free TV, Pay TV, SVOD and Home Entertainment spaces. Each release window of the film requires its own unique financial model that takes into consideration the nuances of those international markets within those windows, which is vital to fully monetize the film product.
Not Factoring in Future Currency Movement
Another common oversight when creating a film Ultimates model is not taking into consideration the proper exchange rates involved when international revenue is being forecasted in a particular window that may occur two or three years out. By properly developing currency exchange rate models within the Ultimates, a studio can make informed decisions to help minimize risks and maximize returns.
Change in the Home Entertainment (Declining DVD and Blu-Ray) Environment
The Motion Picture Association of America (MPAA) in its annual Theatrical Home Entertainment Market Environment (THEME) report revealed that physical media sales have decreased significantly worldwide over the past five years. Whereas physical media sales have fallen off, digital spending has more than made up for the gap. Another common oversight when creating a film Ultimates model forecast is not properly monetizing this change. Digital Home Entertainment contracts are complex with many nuances that need to be considered in the Ultimates model, given that digital film downloads (both Domestic and International) are on the rise. Having a well-experienced entertainment finance professional or consultant will help avoid any oversights when planning.
Need Help Creating a Film Ultimate?
Although these common mistakes happen all the time, they can be easily mitigated by seasoned finance professionals with experience in the Ultimates Process. If you have any questions, please contact 8020 Consulting for this unique Entertainment finance expertise. You can also download our free breakdown of our services by clicking the button below.