V I D E O • A G E Se p t e m b e r/ Oc t o b e r 2 0 0 9 56 marketing and prduction executives providing for more incisive forecasts. The accounting departments develop the matrix with generics for overindexing and under-indexing estimates, while sales people supply the sales projections. These types of “ultimates” are also referred to as “income forecast” by independent film companies, and are unique to Hollywood, thus indicating the high level of sophistication that show business has reached in the U.S. To understand the set of difficulties that accountants face in meeting this challenge, consider that ultimates are initially prepared when a movie is still in the project stage and then used to evaluate whether or not the project should be “greenlit.” They’re used to estimate the returns for potential investors and to determine talents’ profit participation. Based on the initial ultimates, a studio can decide whether it wants to buy the “opening insurance,” and pay the stars’ large amounts of money (the concept behind this “insurance” is that stars help draw the audience in for the crucial opening weekend, and after that, the movie can depend on word-of-mouth). Not that the ultimates updates get any easier — estimates have to be prepared even before a movie is released theatrically in order to program the DVD sale, which for studios occurs anywhere from 100 to 200 days before the film is first released in movie houses (in technical parlance, this length of time is referred to as ARR or, Asset Rollover Rate). For the independent DVD release, the ARR can be as short as 45 days after theatrical release, but the standard is between 60 and 90 days. The basis for the ultimates is the film’s budget and other generics, such as star power (actors are “graded”), general budget and movie genre (e.g., comedy, action, drama, teen, etc.). From those generics the studios can begin forecasting the gross take at the U.S. and Canadian Box Offices (BO) and, subsequently, the revenues from various windows. Conversion rates from gross BO intakes to DVD sales vary from studio to studio and are fervently guarded to the point where former studios’ account executives are reluctant to even broach the subject. Reportedly, Lionsgate has the highest conversion rate of all. Conversion rates of DVD sales in relation to BO can have generics either in terms of dollar amounts or number of tickets sold. For movies with budgets between $25 million and $60 million, the conversion rate can reach anywhere from 50 percent to over 100 percent. For example, the movie Sex and the City grossed $152 million in the U.S. and Canada’s BO and sold $80 million worth of DVDs (53 percent) in the “domestic” territory. The Universal Pictures-distributed The Fast and the Furious (with Vin Diesel) generated $145 million in the U.S. and Canada and sold $132 million worth of DVDs (91 percent) domestically. On the other hand, movies like Old School (with Will Ferrell), grossed $75 million at the U.S. and Canada BO and sold $83 million worth of DVDs (110 percent) domestically. For the DVD release of the original The Fast and the Furious , Universal initially shipped four million units. The studios reached that figure either by pricing the “suggested retail price” at $20 (the majority of DVD releases are priced between $15 and $20. What a title may actually sell for at retail level is entirely up to the retailer), estimating gross sales at $70 million, or by assuming that the forecast 20 million BO tickets sold in the U.S. and Canada (the average BO ticket price is $8) would have a DVD conversion rate of 18 percent (about 3.5 million DVDs sold). Together with those assumptions came a set of generics including the “return rate.” In the past, studios assumed 50 percent return and usually got around 20 percent. Nowadays, studios set the “allowed” returns much lower. For example, Universal allows only 15 percent returns, while Warner Bros. and Disney go as high as 20 percent. In addition, Universal studios’ accountants took into consideration that up to 85 percent of DVD sales occur in the first six weeks after their release. For Sex and the City, Warner Bros/New Line shipped four million DVDs, thus, as generics, they could have used a conversion rate of 53 percent from gross BO and 18 percent from number of BO tickets sold. As in, the same generics used by Universal Studios’ accountants. Looking at movies budgeted at $150 million and above like The Dark Knight ($185 million), for instance, the U.S. and Canada BO was $533 million, while the DVD release generated $253 million, with 12 million units sold. One might assume that Warner Bros. accountants had assigned this movie a conversion rate of around 50 percent from BO gross and 18 percent from the number of BO tickets sold. On the subject of ultimates, a studio executive was only prepared to comment that the ballpark estimate for a $200 million BO movie is that it will sell five million DVDs at $20 each, and that 40 percent of that will go to the studios. Theatrically, studios average 50 percent of the BO (with higher percentages during the first weeks). A $50 million BO could represent close to one million DVD units sold with 50,000 returns. Unsold DVDs go back to the studios and are then recycled. According to American DVD business expert Tom Devlin, the low-cost DVDs seen at discount stores don’t come from studios, but rather are previously viewed discs from rental stores and overstocks from retail stores (above from the allowed returns) resold via brokers. Nowadays, the matrix for BO grosses to DVD sales conversion rates are made more complex by the fact that there are three types of DVD sales: retail (sellthrough, from which studios assume a conversion rate of at least 50 percent from BO grosses and 18 to 20 percent of BO tickets sold), electronic rental (via the Internet) and physical disc rental (e.g., stores like Blockbuster, mail services like Netflix and kiosk dispensers like Redbox). As for the electronic rentals, participating stores are being fitted with kiosks from which customers can download new release DVD titles to portable hard disk devices (such as memory sticks or the Apple iPod). From their devices, consumers transfer the movies along with security encryption onto a set-top box that stores their personal account information; no payment is required until the title is (Continued from Cover) “Ultimates” Game actually viewed. The rental business has its own sets of generics. For example, revenue sharing arrangements (which could account for 85 percent of total U.S. movie rental fees) offer lower DVD costs to rental stores (something like $8 per disc) but studios share up to 45 percent of rental fees from customers, while stores benefit from day-and-date release. Another generic is to charge rental stores up to $65 per DVD and then have them wait for 28, 30 or even 45 days after the DVD release before they can rent them. Usually, in terms of forecasting, the rental business represents 20 percent of the DVD sales business. After the DVD release, studios’ accountants fill the pay window entry and here the conversion rate from the BO could be lowered to 15 percent. This window has several generics: T-VoD (for transaction) and A-VoD (for advertisingsupported), which come up 30 days after the DVD release but can also be dayand-date with DVD. Plus, PPP followed by premium pay and subscription TV, about 90 days after DVD. For example, considering that Sex and the Citywas sold to subscription pay (to E!) for a reported $7 million (the premium rights went to Warner Bros’ HBO), one could see how the $23 million (15 percent of BO) estimate is not too far off. Free television, most commonly called free-to-air or FTA, also has a 15 percent BO conversion rate and two generics: network (18 months after payTV) and syndication. Then there are international rights with generics that duplicate the domestic ultimates’ matrix with BO total grosses usually estimated at double the domestic counterpart (e.g., domestic BO gross of $100 million for international gross of $200 million). However to benchmark DVD sales are used BO grosses on a territory Eight countries provide up to 80 percent of International TV revenues (Canada, U.K., Germany, Italy, France, Australia, Japan and Spain). Some commercial series could fetch as much as $3 million per hour worldwide Today’s ultimate forecast is sunny and clear with no chance of rain. (Continued on Page 58)
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