A deep dive into the $360 million cost of The Little Mermaid

Long before the live-action Disney remake The Little Mermaid was released at the end of May last year, there was no doubt that the film would be a hit.

Black actress Halle Bailey was cast as the title character, a marked departure from the 1989 cartoon on which the film was based. This sparked a racist reaction on the Internet, and when the first visuals were released, the film gained another wave. They showed that Disney had replaced the cast of cute characters from the animated original with computer-generated alien-looking creatures.

However, one of the biggest surprises was the amount of money Disney spent on the film. The first hint of this came when we revealed it in a British newspaper Daily express expenses for this The Little Mermaid it reached $325.6 million (£243.5 million). Then, last month, we broke the news that costs had risen to more than $350 million, according to the latest figures.

It was clear that this made it one of Disney’s most expensive live-action remakes, but the exact cost of the film was never revealed. Until now.

Filmmaking costs are usually a closely guarded secret because studios typically combine expenses for individual shoots into total expenses and don’t itemize the budgets for each shoot. However, as we have often reported, productions shot in the UK are an exception to this rule The Little Mermaid was one of them.

They benefit from the UK Government’s Audiovisual Spending Relief, which gives studios cashback of up to 25.5% of the money spent domestically.

To qualify for a refund, films must pass a scoring test based on factors such as how many members of the production team are from the UK and the amount of post-production work carried out in the UK. Furthermore, at least 10% of the underlying production costs must be related to UK operations and to demonstrate this to the government, studios there have set up a separate film production company (FPC) for each picture.

The terms of the return state that each FPC must be “responsible for pre-production, principal photography and post-production of the film and for delivery of the completed film.” Studios are not allowed to hide costs with other companies, as the terms also state that “only one FPC may apply per film.”

The financing process varies slightly from film to film, but generally they all follow a similar model that starts at the very beginning of production.

A Hollywood studio buys a script from a screenwriter and gives the green light to make a movie about it. If the studio decides to shoot the film in the UK, it will set up a subsidiary there, which will acquire the script from its US-based parent company.

Obtaining the script gives the British company the rights to make a film about it, and the Hollywood studio pays it a small fee for production services. Under the regulations, a British company must be responsible for everything from pre-production and principal photography to post-production, delivery of the finished film and associated payment for goods and services. Then the financial magic happens.

If a British company makes a profit, the financial benefit from the British government will be in the form of a tax cut. However, if it makes a loss, it will get its cash back in the form of a tax break, so studios finance companies in a way that engineers this.

As you can see in the diagram below, the studio buys the rights to the film from the British company but only gives it about 74.5% of the expected production costs. The remaining 25.5% is provided by the studio in the form of a loan. The loan and proceeds from the sale of rights provide the British company with 100% of the film’s production budget, which forms the basis for a cash refund.

Loans are not included in income because they must be repaid. Thus, the British company suffers a loss equivalent to approximately 25.5% of the film’s budget. The UK government then steps in and compensates for this loss. Since the amount of the refund is equal to the loan the company owes to the parent company, the cash can be transferred to the Hollywood studio as repayment. With these twists, the UK government covers 25.5% of the film’s cost, thus reducing the studio’s net spend on the film.

British companies must submit financial reports that shed light on the exact cost of producing a film. The documents show everything, from the number of employees and salaries to total costs. Disney does not comment on the costs of its productions, but documents show that it spent exactly $362.1 million (£270.5 million) on it. The Little Mermaid until August 31, 2023

Most importantly, marketing costs are not reported on financial statements because they are typically paid directly by the studio. Similarly, revenue from theater ticket sales, merchandise and home entertainment, including streaming subscriptions, also goes directly to the studio.

Financial statements are intended solely for the company that is making the film and are submitted in stages. This starts in pre-production and continues well after release to give the studio time to collect all the receipts and get paid for them. This means that production costs can continue to increase many years after release, although usually not as much as at the time of production.

In case The Little Mermaid, costs are unlikely to increase much more because the financial statements were prepared three months after the film’s release. That’s not all. Since the manufacturing company also had over 250 employees, it even had to disclose the gender pay gap as well as the percentage of women in the workforce. It takes some detective work to get the information.

The cash the studio pays for the rights to the film is reported as revenue on the British company’s financial statements, and most importantly, its expenses constitute the total cost of the film. The largest component of production costs is usually reported in financial statements as selling expenses, while administrative costs mainly consist of auditors’ fees and currency translation losses or gains. Interestingly, if a company earns a foreign exchange profit higher than the fees paid to auditors, it can earn net income from administrative expenses.

The maneuvers left the British company with a very small net profit, equal to the fee for production services charged by a Hollywood studio. This is not profit in the conventional sense because it is not generated by external revenues. The British company is wholly owned by the Hollywood studio, so the profit is simply money that stays in its right hand, not its left.

Hit movie profits come from ticket sales, and theaters typically keep about 50% of the proceeds. The remainder is paid directly to the studio and if this offsets net expenses, the picture will make a profit from ticket sales. This really is the happy ending they are looking for.