Film producers and distributors rarely manufacture film-related products themselves, but license the right to sell these products to other companies (called licensees). In most instances there is no risk to the producer or distributor (the licensor) because the licensee incurs all manufacturing and distribution expenses. The producer/distributor typically receives an advance payment for each product, as well as royalty payments, often between 5 and 10 percent of gross revenues from sales to retailers (in other words, the wholesale price). If the movie does not succeed and the products do not sell, the manufacturer is responsible for the loss (Cones, 1992).
The owners of licensable film properties are most often the major film studios. Special licensing divisions often are organized to handle the company's own copyrighted properties, and sometimes those owned by others as well, for example, Warner's Licensing Corporation of America (LCA) and Disney's Consumer Products division. But even smaller successful film producers sometimes become involved in licensing, as represented by Lucasfilm Licensing. Studios' revenues from merchandise vary greatly depending on the films released in any one year. However, these companies have serious interests in merchandising and consumer goods, as indicated by the $2.5 billion revenues reported by Disney's Consumer Products division in 2004, and the 3,700 active licensees handled by Warner Bros. Consumer Products division.
The major studios realize that not only can the sale of movie-related products generate substantial revenue, but the presales of merchandising rights can sometimes contribute to a film's production budget, as in the case of Lord of the Rings , when 10 percent of the budget for the trilogy was apparently raised by selling rights to video games, toys, and merchandise companies. In addition, these products can be useful in promoting films and thus movie-based merchandise is often part of the massive, coordinated promotional campaigns often started months before a film's release. Typically, 40 percent of movie merchandise is sold before a film is released.
Although movie-related merchandise often is common, products based on films are sometimes considered risky for merchandisers, as they ultimately may not be successful and often have short life-spans. Licensees may have to take further risks initially by sinking money into a film that is not completed (or sometimes not even started). On the other hand, a studio may need to change a release date, especially to coincide with the lucrative Christmas season or to avoid other competing films.
In addition, studios and licensees have been cautious after some significant losses in the past. For instance, most agree that the huge number of products associated with Star Wars: Episode I—The Phantom Menace (1999) was ultimately unproductive. One problem is that Hollywood-related merchandise has a relatively short time to prove itself on retail shelves before the next big property arrives. As Andrea Hein, Viacom's president of consumer products, explains: "Licensing is all about wanting a piece of something. You've got to have the time and place for that property to be nurtured" (Goldsmith, 2000). Evidently, the success of the merchandise is tied directly to the success of the film. A representative of LIMA states that, "… marketing and merchandising is [sic] never the major driving force behind a film. If a film's no good, no one will buy the product" (Monahan).
It might be noted as well, that many, if not most, movies do not translate well into merchandise and thus have limited merchandising potential. While the Star Wars and Harry Potter films produce additional revenues from a seemingly endless stream of merchandise, films like Saving Private Ryan (1998) and Life is Beautiful (1997) have much less merchandising potential. Musicals such as Saturday Night Fever (1977), Grease (1978), and Dirty Dancing (1987) can earn substantial revenues from soundtrack recordings. Moreover, a hit song can promote a film. In fact, music videos have become important marketing tools. The ideals, of course, are film franchises such as Star Wars , Harry Potter , and other similar films that continue to inspire additional commodities, and thus, additional profits.
Thus, for many films, licensing represents a potential source of income to film companies and merchandisers. The potential merchandising bonanza represents sizable profits as sales of merchandise licensed from movies continue to grow. While the first Batman in 1989 grossed $250 million at the box-office and earned $50 million in licensing fees, subsequent films have generated even more products and produced even more revenues. Recently, the Lord of the Rings trilogy is said to have attracted over $1.2 billion thus far in merchandising revenues.