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Why $1 billion doesn't mean what it used to in Hollywood

Published: Thursday, May 23 2013 3:30 p.m. MDT

Daniel Craig stars as James Bond in Metro-Goldwyn-Mayer Pictures/Columbia Pictures/EON Productions’ action adventure "Skyfall." (Francois Duhamel) Daniel Craig stars as James Bond in Metro-Goldwyn-Mayer Pictures/Columbia Pictures/EON Productions’ action adventure "Skyfall." (Francois Duhamel)

In 1997, James Cameron’s “Titanic” made cinematic history when it became the first movie to ever earn more than $1 billion in worldwide box office. It took two more years — and George Lucas’ most powerful Jedi mind trick yet — for that feat to be repeated with “Star Wars: Episode I – The Phantom Menace.”

Since then, though, the number of films that have crossed the $1 billion line has grown exponentially.

The formerly ultra-exclusive club now has a membership of 15 movies. That includes four from last year alone: “The Avengers,” “The Dark Knight Rises,” “Skyfall” and, most recently, “The Hobbit: An Unexpected Journey.”

But in today’s Hollywood, the box office numbers put up by major studio tent poles can be more than a little misleading, and $1 billion doesn’t mean quite what it used to. Here’s why:

Martin Freeman as Bilbo Baggins in New Line Cinema’s and MGM's fantasy adventure “The Hobbit: An Unexpected Journey," a Warner Bros. Pictures release. (James Fisher) Martin Freeman as Bilbo Baggins in New Line Cinema’s and MGM's fantasy adventure “The Hobbit: An Unexpected Journey," a Warner Bros. Pictures release. (James Fisher)

Inflated ticket prices

After 2011’s dismal end-of-year figures, including the lowest movie theater attendance in more than a decade, 2012 was hailed as a victory for the movie industry. Not only were ticket sales up but 2012 actually managed to set a new record for cumulative box office, pulling in more than $10.8 billion domestically.

Not coincidentally, though, 2012 also saw the average ticket price climb to an all-time high of $8.12, according to the National Association of Theatre Owners, thanks in no small part to the preponderance of 3-D movies. By contrast, the average ticket in 1997 cost only $4.59.

The result of inflated ticket prices, of course, is that a $1 billion box office is more attainable now than ever before for studios, but it actually means a lot less.

From left, James Nesbitt as Bofur, Martin Freeman as Bilbo Baggins, Stephen Hunter as Bombur, Graham McTavish as Dwalin, William Kircher as Bifur, and Jed Brophy as Nori in New Line Cinema’s and MGM's fantasy adventure “The Hobbit: An Unexpected Journey," a Warner Bros. Pictures release. (James Fisher) From left, James Nesbitt as Bofur, Martin Freeman as Bilbo Baggins, Stephen Hunter as Bombur, Graham McTavish as Dwalin, William Kircher as Bifur, and Jed Brophy as Nori in New Line Cinema’s and MGM's fantasy adventure “The Hobbit: An Unexpected Journey," a Warner Bros. Pictures release. (James Fisher)

After adjusting for inflation, only two of the 15 titles that crossed the $1 billion line, “Titanic” and “Avatar,” still rank on a top 10 list of the highest-grossing films.

By today’s ticket prices, however, 1939’s “Gone with the Wind” actually managed to out-gross them all with a staggering $3.3 billion.

They sure don’t make them like they used to, huh?

Rising production and marketing costs

While inflated ticket prices distort box office figures, the cost of making and marketing a movie is higher than ever before. It’s become much harder to turn a profit.

In 1997, “Titanic” made history. Back then, it was the most expensive movie ever produced. At $200 million, Cameron’s film cost more than the real Titanic did to build, and many expected it to sink the entire studio.

In this film image released by Warner Bros., Christian Bale portrays Bruce Wayne and Batman in a scene from "The Dark Knight Rises." (Ron Phillips) In this film image released by Warner Bros., Christian Bale portrays Bruce Wayne and Batman in a scene from "The Dark Knight Rises." (Ron Phillips)

Last year, though, at least seven movies had budgets in excess of $200 million, including bombs like “Battleship” ($209 million) and “John Carter” ($250 million), the latter of which left Disney with a $200 million deficit.

Keep in mind, production budgets don’t include the marketing costs, which, for a high-profile release, can add upwards of $100 million to $150 million to the final price tag. When one factors in the cut of box office receipts paid to theater owners (usually around 45 percent), it’s easy to see how a film like “Pirates of the Caribbean: On Stranger Tides” can earn more than $1 billion and still barely make a profit.

A good rule of thumb for most movies is that they need to double their budgets in order to be profitable.

Christian Bale as Batman in a scene from the action thriller "The Dark Knight Rises." (Ron Phillips) Christian Bale as Batman in a scene from the action thriller "The Dark Knight Rises." (Ron Phillips)

As ridiculous as it might seem, because of ballooning production and marketing costs, $1 billion is fast becoming the new benchmark for success in Hollywood. Franchises like Star Wars, The Avengers and Superman are viewed in terms of potential billions, not millions.

Growing international markets

More and more, international markets — particularly China, the largest film market outside the U.S. — are becoming a crucial factor in a film’s overall success.

In the case of a movie like “Pirates of the Caribbean: On Stranger Tides,” for example, of its $1 billion worldwide gross, about 77 percent ($802 million) came from foreign releases. Even movies that tank in the U.S., like “Battleship,” can now sometimes recoup their expenses overseas.

Leonardo DiCaprio and Kate Winslet in "Titanic." (Twentieth Century Fox) Leonardo DiCaprio and Kate Winslet in "Titanic." (Twentieth Century Fox)

Because of this, Hollywood is developing a new global perspective, making decisions that will maximize films’ international appeal.

However, foreign box office doesn’t play by the same rules as domestic, making the numbers a lot less reliable.

As described in “The Hollywood Economist” by Edward Jay Epstein, only about 40 percent of the revenue from foreign releases goes to the studio. But after expenses, including tariffs for distribution, the studio might be lucky to ever see 15 percent of that.

Conglomerates like Time-Warner and Disney can occasionally snag better deals, according to David Mumpower of Box Office Prophets, but not always.

In other words, domestic box office frequently counts for more than foreign. Many of the movies that have crossed the $1 billion line thanks to huge international releases might not be nearly as profitable as they appear on paper.

In this film image released by Disney, Chris Evans, portraying Captain America, left, and Robert Downey Jr., portraying Tony Stark, are shown in a scene from "Marvel's The Avengers." (Zade Rosenthal) In this film image released by Disney, Chris Evans, portraying Captain America, left, and Robert Downey Jr., portraying Tony Stark, are shown in a scene from "Marvel's The Avengers." (Zade Rosenthal)

A native of Utah Valley and a devoted cinephile, Jeff is currently studying humanities and history at Brigham Young University.

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