History at the Box Office: Why Are Films Making More Money Than Ever?

Reaching $1.01 billion in worldwide ticket sales this weekend, the final Harry Potter installment, Harry Potter and the Deathly Hallows Part 2 became one of only nine films to surpass the billion-dollar mark in just two weeks at the box office. The Warner Brothers (NYSE:TWX) film is the eighth and last in a franchise that has grossed nearly $7.4 billion dollars.

But Deathly Hallows 2 won’t be the only film joining that exclusive billionaire’s club this summer; after four weeks in theaters, Paramount’s (NYSE:VIAB) Transformers: Dark of the Moon has grossed $982.9 million globally, and looks set to pass the billion-dollar mark soon. The other two Transformers films grossed $709.7 million and $836.3 million, bringing the franchise total to $2.53 billion.

Earlier this summer, Pirates of the Caribbean: On Stranger Tides became the eighth film in history to reach $1 billion at the box office. The film is the fourth in Disney’s (NYSE:DIS) Pirates of the Caribbean franchise. On Stranger Tides is the second film in the Pirates franchise to gross $1 billion in sales, while Deathly Hallows 2 is the first in its franchise, as will be Dark of the Moon if and when it should reach that point. All three films were available in 3-D.

The three aforementioned films join only seven other films to meet or exceed $1 billion in sales, including Avatar ($2.8 billion), Titanic ($1.8 billion), The Lord of the Rings: The Return of the King ($1.11 billion), Pirates of the Caribbean: Dead Man’s Chest ($1.07 billion), Toy Story 3 ($1.06 billion), Alice in Wonderland ($1.02 billion), and The Dark Knight ($1.00 billion).

Of the films above, all but Paramount’s Titanic were released during the 21st century, and six since 2010. Titanic was released in 1997, Return of the King was released in 2003, Dead Man’s Chest was released in 2006, and The Dark Knight was released in 2008. Of the remaining films, three were released in 2010, and three in 2011.

It seems curious that films should be making more money than ever, especially given that the U.S. and Europe are both dealing with sovereign debt crises and recovering from recessions. And in fact, one sees a very different picture when taking into account the price of movie tickets, which climbed to a new high during the second fiscal quarter of 2011, reaching an average of $8.06. That’s an increase of 2.15% over last year’s average of $7.89. At an average of $8.06 a ticket, a film would have to sell roughly 124 million tickets worldwide to reach the billion-dollar mark.

The increasing price of movie tickets has made up for the 10% decline in attendance since 1999. With more and more movie channels available through services like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWX), and the advent of online streaming services like Netflix (NASDAQ:NFLX), it’s no wonder fewer people are venturing out to the theaters.

In fact, when adjusting for inflation, Avatar is the only of the above films to even come close to setting a box office record, coming in fourteenth place overall. Gone with the Wind, released by MGM studios in 1939, takes the top spot with an inflation-adjusted $1.6 billion just in domestic sales, followed by the original Star Wars in 1977 with an adjusted $1.4 billion domestic, then The Sound of Music in 1965, E.T.: The Extra Terrestrial in 1982, and The Ten Commandments in 1956. Titanic came in sixth place when adjusting for inflation.

Fewer Americans are seeing movies than in the past, even before World War II when our population was only a fraction of what it is now. Of course, more movies are being released every weekend than was the case in 1939, which means attendance is less concentrated than in the past, but overall attendance is still down 10%, and the studios actually like it that way. As long as they can continue to charge higher prices for tickets, it makes more sense for them to sell less product at a higher price than more at a cheaper rate. Fewer film reels need to be distributed, theaters don’t have to accommodate such large audiences as they have in the past, and theaters can cut back on the number of employees servicing customers.

A large part of the industry’s push toward 3-D (NYSE:RLD) has been the additional surcharge on 3-D ticket sales, which more than makes up for the added cost of production. It certainly hasn’t been audience demand that’s been responsible for the surge of 3-D films, with something three-dimensional being released seemingly every weekend. In fact, with the exception of dramatic, action-packed films like Avatar and Dark of the Moon, the majority of theater-goers for any given film prefer the 2-D format, and that’s most likely because 3-D films often cost $2 to $5 more than a comparable 2-D ticket for the same film at the same theater.

But the question remains, why do studios keep making big-budget films that appeal to large audiences when ticket prices are the real factor that determine profitability? Dark of the Moon cost $195 million to produce, and with roughly $1 billion in ticket sales, that’s a return of just over 500%. The King’s Speech, which took home four Academy Awards this year including Best Picture, cost roughly $13 million to produce, and grossed nearly $400 million worldwide, a return of over 3000%. While not all films can be The King’s Speech, it just goes to prove that well-made films appealing to smaller audiences can be just as profitable as big-budget, lowest-common-denominator films. A studio could have made 15 King’s Speeches with what it cost to make Dark of the Moon, for a total gross of $6 billion. Just something to think about…