Inside the Economics of the Modern Indie Studio: Forget Home Runs, Aim for Singles and Doubles

“They’re operating in a completely different universe from their major blockbuster studio counterparts,” Comscore’s Paul Dergarabedian says

The economics of running a successful independent film studio can be wearing. As former Relativity Studios head Ryan Kavanaugh said recently, “You’re on the edge at all times. You need $1 billion in cash a year just to keep it going, between releasing movies and making movies… it’s very hard.”

And he would know. Kavanaugh last year saw his company essentially fold, for a second time, joining the likes of Open Road and The Weinstein Company as independent studios to fade from view in 2018.

Add that to the narratives of turbulence and scaling-back that have circled other indie production and distribution houses like STX Entertainment and Annapurna Pictures, and the industry paints a picture of almost perpetual uncertainty among indies.

Still, experts caution that the box office performance of indies can’t be compared to that of major Hollywood studios. “They’re operating in a completely different universe from their major blockbuster studio counterparts,” Comscore senior media analyst Paul Dergarabedian said. “It’s a completely different model. It’s like a big box retailer and then you have a boutique store, which offers maybe a cooler, but less accessible product.”

As Hollywood gets more consolidated, with behemoths like Disney, Warner Bros., Universal and their blockbuster-centric IP eating up more and more market share, many have questioned whether indie studios making and releasing low- to mid-budget films can still find their space — and eke out a profit.

Amazon Studios, an indie when it comes to theatrical releases, spent a whopping $14 million for the Mindy Kaling, Emma Thompson comedy “Late Night” last January in Sundance. But while the film debuted two weeks ago on four screens to the highest limited release per-screen average of 2019 ($62,414), it grossed just $5.1 million on 2,220 screens in its second weekend.

Meanwhile, the dialogue swirling Annapurna’s “Booksmart” through its first few weeks in wide release were in some respects confounding. Olivia Wilde’s well-reviewed teen comedy starring Beanie Feldstein and Kaitlyn Dever opened during a crowded Memorial Day weekend against major-studio films like “Aladdin” and “Brightburn.” The film has grossed nearly $20 million in four weeks of its theatrical run on a production budget of nearly $6 million, not counting marketing costs.

Given its budget, the film is far from the underperformer that some have labeled the film — and other releases from indie studios. “Our business model is fundamentally different from the major studios, and not just because our overhead is 1/20th of theirs,” an insider at STX Entertainment said. “So, while it’s easy to get your arms around a box office number, if that’s all you’re looking at you miss the whole point. Our business is designed to get to profitability faster in success and at lower box office numbers and in failure to radically mitigate the losses.”

Bruce Nash, founder of box office and Hollywood data website The Numbers, said it’s increasingly difficult for the non-major studios to get traction for their product in the current box office marketplace.

“Analyzing breakout hits is hard, but there may have been a period in the early 2000s where it was easier for a film like ‘Juno,’ ‘My Big Fat Greek Wedding,’ or ‘Little Miss Sunshine’ to become a really big hit,” Nash said. “Historically, about one in 20 films have been substantially profitable for independent distributors. If that’s down to one in 50, and you’re only releasing five films a year, you could be waiting a very long time to get a big pay-out.”

During TheWrap’s Grill conference earlier this month, Kavanaugh credited upstarts like STX Entertainment and other indies that have managed to remain above water despite reports of their troubles in a blockbuster-dominated world. In 2018, STX dropped plans for an IPO on the Hong Kong exchange amid volatile market conditions in Asia and a recent run of underperforming films like “Mile 22” and “The Happytime Murders.” (STX’s “The Upside,” an acquisition from the wreckage of The Weinstein Company, grossed an impressive $108 million earlier this year.)

“Everybody is on the verge of either IPO or bankruptcy if they are successful in building a studio from scratch,” Kavanaugh said, noting that STX’s recent box office disappointments had earmarked in the media as a studio in trouble.

“I hear the same thing: They’re either IPO-ing or they’re having problems, but you know what, they’re staying alive. This is a tough job and they’re doing a great job doing it,” Kavanaugh said.  “You can have a great year and then for some reason the next year you don’t raise enough money to cover your movies and your distribution, it doesn’t matter how good you’ve done, you don’t have the money and it requires a huge amount of capital.”

What is a rule for making and distributing a movie one day can often turn into a complete anomaly the next, Dergarabedian said. And that’s a struggle for indies that don’t have deep-pocketed corporate overlords to shoulder occasional flops.

Kavanaugh noted that indies are often not expecting $100 million grosses the way the major studios do — and don’t have the overhead where they need those megahits. They can curb their risks as much as possible and play for singles and doubles, he said.

“We would cover, call it, 75 to 90% of the risk before we picked a movie up, so for us people would say, ‘Oh, your movie only did $30 million, you must have failed,'” he said, referring to the business model of the now-dormant Relativity Media. “I mean, we didn’t make a fortune, but it was a singles and doubles model. It was, ‘Did we make $5 million? Did we make $10 million?’ And if we could do that 10 times, and we can have one movie that does $50 [million] and make $20 million on it… maybe we have a movie that does $10 [million] and we lose $4 million on it, but it’s a nice model.

“It’s not going to create a $50 billion company, but it’ll create a couple billion-dollar company, and STX is doing that. When I hear people say, ‘How can they be making money?’ I know exactly how they’re making money, but sure, had I [Relativity] had a huge home-run hit, everything would have been fixed,” Kavanaugh said. “Let’s put it this way: What is there other than STX? Every independent studio that I’ve seen in the last 15 years, I haven’t seen anyone that’s made it more than four or five [years].”

Indeed, many in the industry see value in indie studios in the Hollywood ecosystem. “There will always be turnover in this part of the market, but I don’t think they’ll ever go away,” Nash said.

Trey Williams

Film Reporter covering the biz • trey.williams@thewrap.com • Twitter: @trey3williams



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