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Main Article
Hiding behind all the paparazzis, palm trees, and popcorn, Hollywood seems to be a world of its own, mysterious and distant. The truth, however, is far less glamorous. Just like any other industry, the show business runs on money. In this article, we hope to demystify Hollywood by gauging into film finance - a realm unbeknown to the common audience. More specifically, we will study the different factors influencing the Return On Investment (ROI) of a movie project.
As the budget varies widely from movie to movie, the commonly used box office revenue as a measure of financial success is in fact misleading. ROI, a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments, is therefore a more truthful representation of a film’s profitability.
In this case, ROI is calculated by dividing a movie’s gross profit by its budget, and is then compared with its genre, budget and runtime, and critical reception - factors known to have an impact on a picture’s financial success. By doing so, we hope to determine the secret formula behind a profitable movie: What combination of these factors will generate the highest ROI?
Our data are drawn from the 610 of the most popular movies on IMDB in the last 10 years.
ROI vs. Genre
When a new movie is introduced, genre is always one of the first things that come into mind. Therefore, we will first look into the relationship between genre and ROI by studying eight genres with the largest number of movies produced each year. While the above graph showcases the spread of each genre, the following analysis targets the mean of ROIs. Considering the decline of film industry in the past decade, it is surprising that all genres still generate a positive ROI on average - the box office is still outperforming the budget! Among them, thriller generates the highest ROI of nearly 200%. Comedy, drama, and romance also manage to produce revenues twice their budget. Crime and Sci-fi come next. Finally, action and adventure films are the least profitable, on average generating ROI of mere 48.6% and 31.2%.
While most blockbusters are indeed filled with actions and special effects, our results prove that it is actually those with a gripping plot carries more weight in generating profits.
ROI vs. Budget/Runtime
Budget and movie length are two predictors that we thought might have high impact on profitability, and we were correct: both factors do have a relationship with a movie’s ROI.
The budget varies from $230 thousand to $380 million; the movies are categorized into short (<2h) and long (> & = 2h). The associated effect of budget on ROI appears different between long and short movies. Unsurprisingly, there are more short movies with a small budget and there are more long movies with a large budget. Short movies begin with higher ROI than long movies, but as budget goes above $100 million, long movies start to embody a higher ROI. The majority of outliers with an extremely large ROI are short movies with a small budget. In fact, 9 out of the 10 movies with highest ROI are short movies with a budget below $10 million!
To conclude, movies with a smaller budget and shorter length have higher ROI on average. Ironically, to get a higher return, a movie should start with smaller initial investment.
Conclusion
Which factors determine a profitable movie? Our analysis suggests that a thriller with small budget and short runtime would be a killer combination. Drama, comedy, or romance with small budget and short runtime are also good choices for potential movie investors. Additionally, a movie with positive critical reception also performs better financially. Just like the annual celebration of the infamous golden statuettes, the taste of the critics matters more.
And there you have it, the secret formula behind a profitable picture. But how to make a good movie, you ask? That’s a question we do not have the answer to.
DISCLAIMER: We cannot guarantee that these combinations will always ensure a profitable movie, but they should be considered when the goal is to create a high return movie. A film is an intricate system influenced by numerous factors. Therefore, our analysis is neither comprehensive nor absolute, thus “a beginner’s guide.”
Supplementary Materials
In order to confirm our conclusions about the affect of budget and runtime on ROI, we can further analyze the regression table:
| (Intercept) |
1.4171413 |
0.3493222 |
4.056832 |
0.0000565 |
0.7310581 |
2.1032245 |
| budget_millions |
-0.0066167 |
0.0028293 |
-2.338650 |
0.0196905 |
-0.0121735 |
-0.0010599 |
| runtime_lengthshort |
1.2137165 |
0.4212953 |
2.880916 |
0.0041111 |
0.3862751 |
2.0411579 |
| budget_millions:runtime_lengthshort |
-0.0141130 |
0.0041661 |
-3.387607 |
0.0007526 |
-0.0222954 |
-0.0059307 |
As stated in the article, movies with a shorter length and lower budget on average have a higher ROI. This is confirmed by a regression table of the plot. Based on the regression table, it is clear that budget and movie length interact to create an effect on ROI. As budget increases, ROI decreases. All other things being equal, for every increase in $1 million in budget, on average there is an associated decrease of $.0064 million in ROI. Short movies have a mean ROI that is $1.22 million higher than the mean ROI of long movies. This means that shorter movies get a boost. On average, short movies have a slope that is 1.2 higher than long movies. ROI is on average higher for short movies than long movies.
