Box Office Flop: Hollywood Caught Off Guard
By: Jenn Oswald
Tags: Movies, Covid 19, Cinema, Current Events, Film Industry

Competitive Forces

Within the North American film market, the “Big Six” studios have the largest control in the marketplace. These studios include Paramount Pictures, Sony Pictures, Universal Studios, Warner Brothers, Disney, and Twentieth Century Fox. In 2019, these major studios made up 81.9% of the North American market share (Statista, 2021) and account for the vast majority of all earnings at the box office in North America with both Disney and Fox amounting to around 40% (Statista, 2021).

Figure 3 — The Bix Six Studios and others that dominate the North American film marketplace

The substantial barriers to enter the film industry create an environment of imperfect competition, due to the high capital investment, technology requirements, and extremely high competition within the primary distribution channel to get film to theatres. Most movies are funded by an elaborate network of investors, a different strategy than seeking the traditional support of a Schedule I Banks. These big movie studios have built globally strong brand names, creating difficultly for smaller independent films to attract the funding they need for a release.

Film production is an extremely risky investment especially because of unpredictable consumer tastes. Interestingly there is no trend that the revenue of a movie has any correlation to production costs, meaning movies with large budgets may not necessarily please mass audiences. To help recover some costs and limit the financial risks, a blockbuster or an indie production can take advantage of strategies like available tax breaks and revenues from product placements. Often when there is an incentive to film in Canada, producers will hustle to do so, strengthening our domestic film market.

Film Revenues

Theater releases are extremely important for generating income and contributing to the profitability of creating, producing, marketing, and distributing a big budget film. Studios will receive on average between 40–50% of the total film revenue in domestic markets from the theatre admissions of a feature film and 20–40% in overseas ticket sales (Zipin, 2020). Studios generally make more from domestic revenue than from overseas sales because they get a larger percentage from ticket sales. The remaining percentages of the income generated are shared across several factors including TV rights, home video, merchandise, Video on Demand, and streaming (Zipin, 2020).

As we progress further from the beginning of the Covid-19 pandemic, some overseas theater markets including China and Japan, have restored cinema earnings to near pre-pandemic levels. Foreign ticket sales are becoming more important to broaden the audience reach and income generating potential for each film. This is part of the reason why you see more sci-fi, adventure, fantasy, and superhero movies produced because the use of action and special effects require no translations (Zipin, 2020).

However, the hard-to-predict theater closings and re-closings in the US, Canada, and elsewhere have made it difficult for the North American studios to plan global releases (Schilling, 2020). Due to the closed theatres, the pandemic has disrupted a significant form of distribution and corresponding theatre income for studios.

Film Production and Market Supply

Figure 4 — Number North American of movie releases per year (2000–2020)

In 2020, there was s significant decline in the total number of movies released in the United States and Canada, with only 329 movies and almost 800 were released in the previous years. The notable hit from 2020 was Sony movie ‘’Bad Boys for Life’’, with 426 million of worldwide gross income (Statista, 2021).

Studios, cinema owners, and producers now find themselves with a dilemma. They want to leverage the legacy distribution for films through the theatres but patiently wait to overcome the industry threat of the COVID-19 pandemic. As COVID-19 cases rise, studios are getting cautious. Even with around 40% of the cinemas open worldwide, the major studios still have been and remain unwilling to release the films in the foreseeable future. Film executives have been monitoring the results of the cinema re-openings to gauge the consumer’s willingness to return to theatres and the corresponding income potential. With consumer behaviour patterns not yet established, the path for return to theatres is likely going to be gentler.

Figure 5 — Movie delays due to Covid-19

Far more than 329 movies were anticipated to be released in 2020, more are ready and waiting in the wings for release and others have been stalled by covid-19 production challenge after challenge. These movies that have been delayed will bring excitement back to theatres with their releases (Vulture, 2020). While many movie producers have struggled to keep actors behind the camera, a trend that we might notice is that the production of animated features have proceeded since animators can work in relative isolation (Schilling, 2020).

Canadian Tax Incentives

The outlook of Canada’s film and television industry continues to remain strong despite the COVID-19 pandemic’s challenges. Both the federal and provincial governments have made film and video tax credits available to bring movie production in all phases to Canada. These tax credits can be as high as 45% of labour and 50% of production expenditures, depending on the film’s specific requirements and circumstances. The use of these incentives have proven to make Canada a globally known hot spot for filming and video production.

Federal Tax Incentives

The two current Federal Tax Incentives include the Canadian Film or Video Production Credit and the Canadian Film or Video Production Service Tax Credit (Government of Canada, 2021). A brief highlight of the tax breaks and how to qualify are outlined in the table below.

Figure 6 – 2021 Federal Tax Incentives to support the Canadian film industry

Provincial Tax Incentives

In addition to these federal incentives, provincial incentives are also available to bring more interest to big-budget movie producers to specific Canadian provinces and territories. These incentives aim to save costs based on their location, production, and labour requirements (PwC, 2021).