All Risk is Creative
How a new company used an old idea to disrupt Hollywood.
Since its founding in 2012, in just over a decade, A24 has made Everything Everywhere All At Once, Euphoria, Uncut Gems, Lady Bird, Past Lives, Moonlight, Ex-Machina, The Whale, Beef, Ramy, The Zone of Interest, Love Lies Bleeding, Room, Hereditary, Midsommar, Aftersun, The Disaster Artist, The Iron Claw and about 120 other films and TV shows. Its films have been nominated for a total of 62 Oscars, winning 18. In 2023, it made Oscars history by being the most nominated studio ever by bagging 18 nominations. It has inspired a sub-culture of very passionate cinephiles through its whacky social media strategy and meme-game. The ‘A24’ logo has become a stamp of quality, signalling originality and high-creativity in the movie business. Naturally, this has made A24 a favourite home for world’s best creative talent. And it achieved all this with just a 1.55% market share. It is a textbook case study of how a small company made an outsized impact in an industry dominated by multiple 100-year old, 100-billion-dollar companies.
But first, a quick 30-second primer on how the movie business works:
A Studio, like A24 or Disney, puts in some money to produce and promote a film, and hands it over to exhibitors, i.e. the theatres. When the audience buys a ticket, about 50%1 of the ticketing revenue goes to the theatres, the rest goes to the Studio. Therefore, a film needs to earn about twice the original investment through Box Office revenue2 for the Studio to break even. Consider the case of Fast X, the 10th film in the ‘Fast & Furious’ franchise. The film earned over $700M in box office returns but still could not turn in a profit because of its elephantine production budget of $340 M, which does not include the cost of promotions. Because the revenue of a film is highly uncertain and depends on the subjective quality of the film, this dynamic makes movies a very risky investment.
How do studios minimize risk in a business like this?
The big studios solved this problem by embracing the franchise system. The basic idea is to create an endless stream of ultra-high-budget films based on popular IPs. That way, fans remain engaged, and invariably return to the theatres to watch the next film in the franchise. This reduces the risk as a large portion of the revenue is somewhat guaranteed. The strategy has worked so well that every big Hollywood studio owns at least one cash-juicy franchise. Disney has Marvel and Star Wars. Warner Brothers has DC. Paramount has Mission Impossible. Universal has Fast and Furious. Sony has Spiderman.
But how do you manage risk if you are A24 and don’t have large capital at your disposal? A24 adopted the exact opposite strategy of the big studios. Instead of making a few tentpole high-budget franchise films, A24 makes numerous small-budget indie films. This way, they are able to spread the risk by investing in multiple small-budget ‘original’ films hoping that one or few of them will bring in outsized returns, making up for the lukewarm performances of the others.
Take the year 2022 as an example. A24 produced and distributed 12 films for which I was able to get data for the 10 shown below.
It’s evident from the chart above3 that ‘Everything Everywhere All At Once’ was the clear outlier that brought in disproportionate upside returns for A24, and more than made up for the lukewarm performance of some of the other films.
This sounds very similar to how a Venture Capital firm operates. A Venture firm increases its chances of finding outliers by having a robust deal flow - access and exposure to the best entrepreneurial talent in the market. Similarly for A24, to make outliers like EEAAO, it has to attract the best creative talent in the world. But it cannot pay them large sums of money like Disney or Warner Bros. Then how does it attract the best talent? A24 realised that great creative talent does not value money alone. Equally important to them is intellectual freedom, a safe space for creative experimentation, access to other great talent, and most importantly, recognition for their work. This is easier said than done. On A24’s part, it required years of creative risk taking, contrarian thinking and patience to make the strategy work.
As an example, consider the case of Daniel Kwan and Daniel Scheinert, or Daniels, the filmmakers of EEAAO. A24 discovered them in 2016 when they had just made their debut film ‘Swiss Army Man’. It is about a man stranded on a deserted island who befriends a farting corpse and uses it as a ‘Swiss Knife’ to find his way home. You read that right. It is actually that weird, but boy that film is good. Of course no big studio had any interest in the film. A24, on the other hand, instantly recognized the genius of the filmmakers. They bought the film rights and released it worldwide. The film proved to be a critical success but a commercial failure.
But A24 knew they had something great on their hands. They doubled down on their creative conviction, by giving the Daniels $25M in budget for producing their next film, Everything Everywhere All At Once. Their conviction paid off. The film made ~$110 M at the Box Office and became A24’s biggest commercial hit ever. But they did not stop there. They erected a massive Oscar marketing campaign for the film, ensuring that their talent gets recognized for their work. The result: the film became the most nominated film of the 2023 Oscars with 11 nominations and 7 wins, including a win for the Daniels. In fact, A24 has built a formidable reputation of building strong Oscar campaigns for its talent. This ‘package’ of creative freedom, access and recognition helps them get talent at a discount to the market price, further allowing them to invest in more talent and spread the risk wider. Thus, the flywheel keeps running. Adam Sandler drastically reduced his salary to star in Uncut Gems. This reduced budget made the film possible, and commercially viable. No big studio could have pulled this off.
Turns out, the strategy of providing a valuable ‘package’ to disrupt a market filled with mighty incumbents isn’t new. In 2009, when Marc Andreessen and Ben Horowitz were founding their VC firm, Andreessen Horowitz, or A16Z, they were taking on the mighty incumbents of Benchmark Capital, Sequoia and Kleiner Perkins. To succeed, they had to do something more than just providing capital to attract the best entrepreneurial talent. They took a contrarian position. Like A24, they identified a ‘package’ that founders value, which other VCs did not provide. Before A16Z, the idea that a tech cofounder could be the CEO was not popular. Horowitz himself had faced the brunt of this belief in his career. A16Z challenged this notion. They believed in giving complete freedom to tech cofounders to make business decisions. This is similar to A24 giving their filmmakers a creative freehand on every aspect of the film. Then came the idea of the ‘package’. They realized that a founder needs access to a network of talent, companies and vendors for hiring, selling their products to, and building support functions within their company. None of the other VCs were doing that. They swiftly put together a platform through which their founders could access these individuals. This is exactly what a studio like A24 does - opens up access to top industry talent for the young, inexperienced filmmakers. A16Z also invested heavily in marketing the founders and their companies, allowing them to build a parallel distribution. Transpose A16Z’s go-to-market strategy to the entertainment world, and you get A24.
Interestingly, A16Z itself got their ‘package’ idea from another iconic entertainment company - CAA, or Creative Artists Agency, cofounded by Michael Ovitz. I’d highly recommend this Acquired episode on A16Z to understand how Andreessen and Horowitz were inspired by Michael Ovitz’s playbook while launching their VC firm. The basic idea is simple - great, passionate talent, creative or technical, doesn’t care about capital alone. Capital is only one of the ways to realize their creative fantasy. They need support, conviction, and public recognition for turning their dreams into reality. It sounds trite but this insight has helped create at least three successful, wildly different companies, in 3 separate decades.
A24 has successfully resuscitated the dying indie film industry through a strategically sound business model. The by-product of their success is a slate of spectacularly original films that pushes the craft of cinema forward. A24 came into being because one evening while driving on a highway to Rome, Daniel Katz, an employee in the financing division of Guggenheim Partners got an idea to challenge the old Hollywood system. He took the learnings from his job and decided to apply them to his passion of making great films. That creative idea on a highway to Rome became the genesis of his new film company. The name of that highway? A24.
The share of revenue split varies by territories, films and the duration the film has played in theatres. 50% is a good napkin-math approximation.
There are a few other revenue streams for a film - streaming, TV licensing, physical media sales, music rights, etc. But Box Office returns form the lion’s share for wide theatrical releases.
Caveats - A24 is a privately held company, and any financial data is hard to access. Production budget does not involve the promotion and other costs, just like A24’s share of revenue does not include revenues through other means, as pointed out in footnote #2. The chart, however, is a good approximation of how the films fared for A24, and is supposed to be read directionally.
Interesting read, Palash! Also love how cleanly you write.
Good post. I liked it. [A production house I am impressed by is Blumhouse. I will never watch their movies (genre issues) but have a lot of respect for them.] A16Z is an interesting example though given its massive size, not sure if it is the right one. Perhaps a good parallel is Primary Venture Partners:) see https://twitter.com/sajithpai/status/1767763213230522794
But, this was good!