The Economics of Hollywood
Principal photography for John Wick began on October 7, 2013 in and around New York City on a reported budget of ~$30 million dollars. Upon release in 2014, the film went on to earn $86,085,139 internationally with three sequels and a spin-off to follow.
Eva Longoria who had just come off an eight year run on Desperate Housewives provided a key investment of $6 million to get the film into production on the advise of a Hollywood agent. Not even her agent.
I can’t be certain of the financial numbers here as Hollywood is notoriously opaque but when interviewed by Variety in October of 2024, Longoria stated she made around $12 million from the investment. A 100% return over an 11 year period or 6.5% when annualized.
If you think she has humbly understated it is notable she did not invest in any of the sequels.
The reason, I think, is likely easy to understand. Ignoring dividend yield the SPY 0.00%↑ returned ~16% over this time period.
My first run in with film production was in 2000 when an associate of mine who owned rental propertied in quite seedy parts of Los Angeles, funded a comedy-drama, to the tune of $7 million. This film which has a 6.5/10 user rating and has a couple of hundred thousand views on YouTube never got distribution and made less than $10,000. So little it doesn’t even show up on any box office tracker. It did have a premiere though.
And an after party.
But, for all intents and purposes, he lit $7 million dollars on fire. He would go on to have three more such bonfires since though he did get smart and took the role of fund raiser more than investor.
You have to ask the question: Why would anyone invest in a film?
Well, there are a few reasons. First, and predominantly, because Hollywood is opaque and no one knows just how little most films return to their investors.
Second, because most people aren’t looking for a return but to be part of the rarified Hollywood crowd. Or maybe they just want to meet someone far more attractive than they could find otherwise. There are more than a few billionaires married to starlets.
Third, because quite a lot of films are underwritten as vessels for someone’s daughter to play director or to start their acting career. Occasionally, they go on to win Oscars.
And lastly, and what I want to talk about here, because the sales pitch an investor hears is never about returns.
It’s always about taxes.
I don’t want to conflate John Wick with what I am about to explain. I have no knowledge other than what has been written online. What I am about to tell you relates to other films I have direct or indirect knowledge of.
When a film, especially a small budget, non-studio, independent film is being financed the sales pitch goes something like this:
You provide $1 million upfront to fund 20% of the production and you can take the full production budget of $5 million as a tax write off in the calendar year of production. An advertised return of 5x. Seems great. You cut your tax burden and get to stand on a red carpet.
Unfortunately this isn’t true.
Usually, this sales pitch is a cold call or email as well. Much like a random agent calling you.
I don’t want to get into the weeds as this topic but if you want to know more read this. I am sure there are YouTube videos of shark skin suited car salesmen-types explaining how all this “works” under IRS Rule 181.
The reason this is relevant to market participants now is this rule was not extended by Trump’s Big Beautiful Bill and will sunset later this month.
CA Rep. Judy Chu is trying to bring it back though.
The flow of capital into smaller budget films is now mired in… reality.
This is one of compounding issues (decreasing attention span, lack of quality, online competition, etc) why the cinema industry in the US is neck deep in quick sand and sinking fast and why so many film smaller film studios are being frantically being converted into data centers or breweries or rock climbing gyms. Not bad things.
Or just being foreclosed upon.
And why AI is so compelling as a potential alternative means of production over both location-based and studio-based filming. The sales pitch hasn’t shifted away from walk the red carpet with an A-lister to we will digitize you into the film if you invest.
But, it will pretty soon.