Thursday, December 23, 2010

Budget vs. The Cost

By Anant Mathur (December 23, 2010)

Over the years, I have been asked on several occasions the difference between the budget and the cost of a film. I thought I would take the opportunity to explain in this post.

The Budget of a film is defined as the expense of making a film, this includes the payments to actors, technicians, producer, director, writer, music director, lyricist, etc. It also includes other expenses that take place during production (shooting of film) such as catering services, hotel expenses, photography equipment, lighting, etc.

The Cost of a film is the expense the distributor bears for the film. This can depend on many factors such as whether the producer has sold the complete rights to the film or has chosen a different strategy where he retains some of the rights. For example, the producer might only sell theatrical rights to a distributor and retain the satellite and dvd rights or he may sell the rights (based on the territory) to more than one distributor. For our purposes we will suppose that the producer has sold the rights in toto to one distributor. When the distributor purchases the film from he gives him the amount of the budget plus a profit.

Let’s say the budget of a film is 20 crores, the distributor gives the producer 30 crores for the complete right of the film. The producer makes a 10 crore profit and he’s happy. The distributor is the one who pays for the prints and promotion of the film, so he has to add another 5 crores to his expense. The distributors total expense 20 Crores (Budget) + 10 Crores (Producers Profit) + 5 Crores (Print and Promotion) = 35 Crores. The 35 crores is the cost of the film. So, even though the film cost 20 crores to make, it has cost the distributor 35 crores.

Now, in order for this film to breakeven, the distributor need to earn 35 crores from the nett profits, anything above that is the distributor’s profit anything less than that is the distributor’s loss. As explained in my earlier posts, nett profit is the money left after all entertainment tax has been deducted from the gross receipts (Box office collections). The nett profit is divided between the exhibitor (theater owner) and the distributor, usually 45% to exhibitor and 55% to distributor. Let’s imagine the film earns 50 crores – the exhibitors get 22.5 crores and the distributor earns 27.5 crores. If the distributor didn’t own the complete rights and only owned the theatrical rights he would suffer a 7.5 crore loss. But because he does own the other rights, he can actually turn the loss into profit. If the distributor sells the satellite rights for 10 crores and dvd right for 2 crores – this would give him a profit of 4.5 crores. The film would still be considered a flop because it couldn’t recover its cost from theatrical release. Hits and Flops are measured by the success of a film at the Indian box office and does not include revenues from overseas rights, satellite rights, music rights, dvd rights, merchandising, etc. There’s a simple reason for this, since the producers can keep satellite and all other rights, they make a profit from these rights while only the distributor can lose money from the theatrical rights and he's the one who pays for the entire budget.

© Anant Mathur. All Rights Reserved.

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