AVATAR 2: By now, I’m sure you’ve heard
about Avatar 2. Against many people’s pessimistic expectations, Avatar 2 has crushed it at the box
office having crossed $1 billion within just 12 days. And by the time you’re watching this,
it may very well be at $2 or even $3 billion. $3 billion would make it the new box office king,
but then again, do you really expect anything different from James Cameron? What may be
surprising, however, is that Avatar likely won’t make all that much profit even if it
reaches these record breaking numbers. In fact, according to Cameron himself, Avatar 2 will have
to be the 3rd or 4th highest grossing film in history just to breakeven. This means that
Avatar must cross $2 to $2.2 billion simply to not lose money. Now, we all know that Avatar 2
cost a bunch of money to make, but there’s no way it cost $2 billion to make right? Well,
that’s correct. While Cameron hasn’t revealed exact production numbers, current estimates put
the film at $250 million. This means that for some reason, Avatar needs to pull in 8 times its budget
at the box office to breakeven. Even if we use higher estimates for the budget like $460 million,
Avatar would need to pull in over 5 times its budget at the box office. This makes no sense
when you consider that films with similar budgets have far lower breakevens. Take James Bond Spectre
for example. Spectre’s production budget was $300 million, but it only needed $650 million at the
box office to breakeven. Even Avengers Endgame which cost $400 million to make, only needed to
earn $1.1 to $1.2 billion. In other words, despite having a similar budget to Endgame if not lower,
Avatar 2 needs to earn twice as much at the box office to show a profit. Now, to be fair,
Cameron did admit that Avatar 2 doesn’t make sense from a studio financing perspective and
that its the quote “worst business case in movie history.” That still leaves the
question though, where’s all the other money going? So, here’s the baffling economics of Avatar
2 and why Avatar needs to earn $1.5 to $1.75 billion more than its budget just to breakeven?
UNFAVORABLE THEATER SPLITS:
Starting off, we have the most obvious factor eating into Avatar’s profit margins which is
splitting revenues with theaters. Now, having to split revenues isn’t unique to Avatar,
but there are two characteristics that are unique to Avatar that make splitting revenues especially
costly. Here’s the thing, most theater deals are setup to make the average movie as profitable as
possible for both parties. This means that studios get a larger percentage during the opening weekend
and the first few weeks while theaters get a larger percentage after week 3 or week 4. This
makes sense because most movies have a massive cliff after the first week or two. As a result,
theaters are able to sustain lower splits during the initial phases of a movie because showings
are packed and people are buying a bunch of concessions. But, during the later phases of
a movie, theaters need a higher split given that attendance is much lower and a fewer percentage
tend to buy concessions. This works out great for studios as well given that they get a larger
split while a given movie is pulling in the bulk of its revenue. However, as time passes,
they’re willing to settle for a lower split to maximize the time that a movie stays in
theaters. In terms of numbers, studios generally start with 55 to 60% of the revenue and they drop
down to 40 to 45% of the revenue. Sometimes this ends up being as low as even 30%. While this is
an ingenious design, it’s not all that beneficial for Avatar given that it doesn’t perform like the
average big budget film. You see, Avatar isn’t the type of film to have massive opening weekends like
Marvel. It’s much more of a slow burn. This is why we saw so many articles early on suggesting
that Avatar was getting destroyed at the box office when in reality that wasn’t the case.
And this is abundantly clear when we compare the staying power of Endgame and the original Avatar.
Endgame started off with multiple 9 figure days while Avatar barely had $20 million days. When
we look further down the line, however, this dynamic is flipped on its head. By day 51,
Avatar was still having 8 figure days, while Endgame was barely achieving 7 figures. While
this is great news for Avatar’s longevity, it’s not all the great when it comes to theater splits.
While Endgame likely only enjoyed splits of 55 or 60% for the first week or two,
given that that’s where all the revenue was, their average take in the US was likely closer
to 55%. Meanwhile, Avatar is much more likely to be weighed down by lower splits in later phases,
and their average take is likely closer to 50% or maybe even slightly lower. This may not sound
like a big deal, but when we’re talking about box office numbers of $2 to $3 billion, we’re
talking about $100 to $150 million less in studio earnings despite the same box office numbers. For
perspective, that margin itself would be enough to direct the entirety of Batman Begins. So,
due to the mechanics of theater splits, Avatar 2 has to earn a lot more to keep the same amount.
UNFAVORABLE GLOBAL SPLITS: While US theater splits are already a headache
for Avatar 2, that’s just the first of Disney’s problems with the movie. Another major hurdle that
Disney has to deal with is international revenue splits. Here’s the thing, western products usually
attract the richest and most well off people in a given country. Countries are well aware
of this and they want a share of the revenue. This is why products like the iPhone are hit with a 20%
tariff and imported cars are hit with a nasty 100% tariff in India. Cameron doesn’t get any freebies
in this realm and he’s gonna have to pony up an entertainment tax of anywhere between 2 and 50%,
probably closer to 50% in India. I’ve been picking on India, but they’re by no means
that only ones with such policies. The UK, for example, has a tax of 20%. Now, technically,
it’s the end customer who has to pay for these taxes, but it would stupid for studios to not
subsidize these taxes whatsoever. Otherwise, they’ll end up like Apple with 4% market share
in the second most populated country in the world. Disney obviously doesn’t want to do this because
unlike something like Top Gun, the vast majority of Avatar’s fanbase is actually international.
With the original Avatar for example, only a quarter of its box office actually came
from America while over $2 billion came from other countries. To maintain this international success,
however, Avatar 2 tickets have to be somewhat reasonably priced even after massive taxes of 40
or 50%. The only way to accomplish this though is to sacrifice margins significantly. Usually, this
reduces profit margins to somewhere between 20 and 40%. The UK for example is on average 30% while
China and Russia are 25% and 38% respectively. Now, Avatar is not the average movie, so it’ll
likely be able to boast a larger international premium than the average movie. But, even if we
call it 40%, that’s a big drop from the domestic 50%. Again, a 10% difference is worth $200 to $300
million at Avatar’s scale, enough money to direct a wholenother Avatar. If we apply these numbers to
Cameron’s breakeven of $2 billion, we can get a rough estimate of just how much the studio will
actually earn. As I’m making this video, the global domestic split for Avatar 2 is roughly
70/30, so we’ll just roll with that. This means that when Avatar 2 reaches $2 billion, the global
draw would be roughly $1.4 billion while the domestic draw would be $600 million. Using our
box office splits of 40% and 50%, we get a global keep of $560 million and a domestic keep of $300
million. This adds up to a total retained revenue of $860 million. And remember, that’s with our
Avatar premium tickets estimation. The real number may actually be closer to $700 to $800 million.
So, that explains $1.1 to $1.2 billion worth of the box office, but that still leaves us with
a $600 million gap between $860 million and the budget of $250 million. So, what happened there?
OTHER EXPENSES:
Well, the first thing that we should point out is that it’s highly unlikely that Cameron actually
stuck to the initial budget of $250 million. The initial Avatar itself cost $237 million to make,
and if you’ve seen the new Avatar, you know that there’s no way that this film only cost an
extra $13 million to make. If that’s actually the case, Cameron actually pulled off a miracle. But,
more realistically, the film actually cost $460 million to make like the higher estimates suggest.
With an estimated retention of $860 million, this only leaves us with $400 million and there’s still
plenty of expenses left like marketing. The original Avatar is estimated to have spent
$150 million on marketing. And that was when Avatar was a completely unproven concept. Given
that Avatar has since become the world’s highest grossing film and that Disney has acquired the
franchise and that they need an insane box office number to breakeven, I suspect that Disney will
be more than willing to outspend the last avatar in terms of marketing. The marketing budget is
likely $200 to $250 million. We’ll call it $200 million to be conservative which leaves us with
another $200 million. About $100 million of this will go to random miscellaneous expenses like
interest rates. Studios generally fund a lot of their production using debt, and this was likely
especially expensive on Avatar 2 given that it’s been in production forever meaning that there was
plenty of time for interest to stack on. Not to mention the recent rate hikes. Another place in
which Disney will lose some money is currency fluctuations and exchange fees. You can’t just
convert billions of dollars worth of foreign currencies to US dollars for free. Disney will
also have to spend some money on miscellaneous distribution expenses and sales agent fees. It
takes time and effort to actually get your films into the hands of thousands of theaters around the
world in dozens of formats and languages. Putting aside these miscellaneous expenses, we still have
a $100 million and this will likely be paid out to large stakeholders in the project. This usually
includes major actors. For example, Cameron offered 10% of Avatar profits to Matt Damon
if he joined the team. Avatar doesn’t star anyone like Leonardo Dicaprio or Brad Pitt or of course
Matt Damon. But, Sam Worthington does get 5% of the profits and other major characters like Zoe
Saldana may have similar agreements. It should be noted that these figures are based on profits, not
gross box office numbers, but there may very well be stakeholders that are paid off the topline.
One of the most notable stakeholders is of course Jimbo himself. He said that Avatar would have to
pull in $2 billion for the studio to make money, not for himself to make money. And given that
Cameron is worth $700 million, he’s clearly no stranger to making lucrative deals with studios.
THE ECONOMICS OF AVATAR 2: In the end, while it may be baffling
to hear that a $250 million movie needs $2 billion to breakeven, it actually makes a lot more sense
when we take a closer look and account for things like the movie going over budget, theater splits,
global splits, marketing, distribution fees, economic stuff, and key stakeholders. But,
at the end of the day, Cameron didn’t make this film to make money. If that was truly
his main goal, he wouldn’t have waited 13 years to release another movie. For him,
this is much more of a passion project and about bringing his vision to reality. With that being
said though, we can’t just completely ignore the economics because that’s what keeps the lights on
and allows Cameron to do all this crazy stuff. Fortunately for Avatar though, it doesn’t look
like it’ll have much trouble breaking even. And who knows, it might even become the new
world’s highest grossing movie especially if it has anywhere near as much sticking power as the
original. And this should go without saying, but if you haven’t yet seen this movie yet,
you absolutely should, but that’s just what I think. Are you a fan of Avatar? Comment that
down below. Also, drop a like if this video gave you more context regarding box office
revenues and profits. And of course, consider checking out our discord community to suggest
future video ideas and consider subscribing to see more questions logically answered.