Chapter 2
Theatrical Distributors
U.S. Theatrical Distributors
Because American motion picture audiences account for over thirty percent of the total combined worldwide motion picture income, this chapter provides an orientation into distributing motion pictures in America. These distributor relationships are increasingly sought after by international producers who want American audiences to swell their pictures’ global earnings—and these relationships are mandatory for most American motion picture producers.
This chapter reviews Studio (the “Majors”) and independent motion picture distributor relationships, the deals to be made, their earnings and relationship benefits. It specifically reviews who these distributors are and how they function. Though this chapter highlights U.S. distributors and distribution, much of the relationship approaches and deal terms are applicable to distributors in most major international territories.
Motion picture distributors, especially the major studios, are the greatest advocates of independent producers. This is evidenced by the majority of the pictures they distribute coming from independent producers. Why is this? Repeated in different ways throughout this chapter and elsewhere in this book is this important reality: It is by the distributor and from distribution that the greatest earnings share is almost always earned. This is especially evident when reviewing the earnings-distribution-waterfalls presented hereafter. This is why the most successful and profitable producers also license the rights or directly distribute some of their pictures’ rights.
The more producers understand how studios operate, the various relationships they may have with them, and why studios function the way they do, the more able producers will be to both understand and forge more productive relationships with them, and direct their production company’s growth to begin distributing some of their pictures’ rights.
The Studio Distributors: The Majors
The studio distributors are 20th Century Fox, NBC Universal, the Walt Disney Company, Paramount Pictures, Sony (TriStar & Columbia), Warner Bros. (WB), and Lionsgate. Most studios operate art house/classics/unique-genre divisions within their structures. These include Focus Features (Universal), Sony Classics and Affirm (Sony), and Fox Searchlight and Fox 2000 (Fox).
Each of the major studios is a massive, sophisticated media conglomerate, each annually earning billions of revenue dollars, while rigorously competing with each other in all markets and every media, worldwide.
The majors are the ultimate motion picture entities. They have evolved as completely self-contained entities, providing some or all of content development, production, distribution, and financing, in their varied relationships with independent producers. Each studio has the advantages of directing their own global theatrical and ancillary marketing and sales teams, operations teams, global holdings, and media alliances. Further, they each direct preferential bank, commercial, public, and equity funds. Additionally, their highly-developed statistical processes, combined with their historical data, provide them uncommonly accurate creative and operational forecasts, checks and balances. They each have their individual demanding operating styles, yet each focus significantly on marketing and distribution.
Each major studio is a global distribution entity with in-house development, and production that includes (with the exception of Lionsgate) owning its own soundstages and back lots. Within the studio, every department and all operations in their best form are geared toward stabilizing and optimizing motion picture marketing and distribution. Studios are distribution-focused chiefly for the following reasons:
- Distribution yields higher profits per picture than production.
- Distribution expenses and fees come off the top, before production cost.
- Distribution operations can accommodate a greater volume of pictures in play than production.
- Distribution connects directly with the marketplace.
- Distribution costs are similar, picture-to-picture, unlike production costs.
- Distribution timing is similar, picture-to-picture, unlike development and production.
- Distribution is a more stable, less risky, and a more predictable business model than development and production.
Being distribution focused, each studio has reduced the number of motion pictures they exclusively develop and produce in-house and significantly rely on independent producer relationships to deliver more of the pictures they distribute.
Studio executives are extraordinary negotiators, entering many more relationships with producers than producers do with studios. Knowing this, before meeting with a studio, producers should thoroughly prepare, in writing, what the studio must receive to consider a relationship, what they must have as producers, the deal points of a fair relationship for both sides, their negotiating strategy, and have reviewed and polished these with their entertainment legal counsel. An excellent book on negotiating we recommend is Fearless Negotiating: The Wish-Want-Walk Method to Reaching Agreements That Work by attorney Michael C. Donaldson.
Producers are classically under-prepared for their initial studio meeting. If they have a project worthy of the studio’s interest, they too often leave the negotiating table without obtaining the benefits and power they should have and with a substantially different understanding of their relationship than the documented deal points define.
Contract language is precise and often has a different meaning than traditional dictionary definition. It is enforced in its ultimate interpretation by contract law, and though most of the contract law language is stable, definitions can and do change. Producers should be prepared in every creative, business, and legal aspect relative to the production and distribution relationships they negotiate. They should expect and respect that studio executives are excellent negotiators and impeccably well prepared (See Chapter 9 Attorneys, Negotiations, and Entertainment Law).
Studio Accounting
Once producers enter into a U.S. studio distribution relationship, they may be confident the studio will deliver accurate, complete, and timely accounting for each picture. A review of the theatrical performance example presented later in this chapter reveals that producers and other profit participants who complain that their picture has a box office of $50 million but cost only $25 million, and conclude that the studio must have a creative accounting method if they do not show the picture in profits, are unfamiliar with marketing costs and earnings distributions to exhibitors and others. Where producers, their attorneys, accountants, and stakeholders should pay particular attention is in:
- Their review of the definition of Net Profits, Gross Profits, and/or other definitions typically in a separate addendum. These are often the key to understanding the contract.
- Performing a revenue, expense, and distributions waterfall that shows how the money flows from income, to Producer’s Net (see this chapter’s example, in later chapters, and examples in this book’s online counterpart). This can point to a producer’s break-even and, with the terms being considered, if a given project should be greenlit.
- Carefully consider the distribution relationships the studio may enter with entities it wholly or partially owns. These are usually at market rates and terms, but depending on the picture in play, may deserve more competitive rates and terms.
- Participation definitions are complex and subject to contractual definitions. Again, we stress the need for expert legal advice. We recommend reading The Biz by renowned entertainment attorney Schuyler M. Moore.
The Three Studio Arenas
Each studio has its own unique organizational structure. It is beneficial for producers to be familiar with the three-basic motion picture operational arenas the studios have in common:
- The executive arena, which consists of the ultimate studio chiefs over all its entertainment entities
- The distribution arena, which is a combination of each of the distribution organizations within the studio (for motion pictures the greatest impact and highest earnings are typically theatrical and home entertainment)
- The production arena, which consists of each studio’s development and production organizations.
Each of these arenas has its individual presidents. Some studios have multiple presidents within each of their distribution and production arenas.
Studio Executives
Studio executives are the studio chiefs and corporate-level directors of each studio. At the time of this writing, they include Steve Burke at NBCUniversal; Kevin Tsujihara at Warner Bros.; Stacey Snider at Fox; Michael Lynton at Sony; Robert Iger at Disney; and Jon Feltheimer at Lionsgate, along with their teams. At this writing, Paramount is tentatively overseen by a committee of executives until Brad Grey’s replacement is hired.
Only the largest independent producers play in this arena. The studio chiefs make decisions relative to conglomerate studio direction, studio assets, media alliances, major funding and financing, global market positioning, and the leaders, direction, and disposition of the various studio operating units. All presidents of studio units report to and are evaluated by the studio chiefs, including all financial, accounting, and legal departments.
This is the arena that ratifies and, when appropriate, negotiates relationship contracts with like chiefs in finance, equity, and other top level, entity-defining relationships. These include chief executives of other U.S and international studios, home entertainment, network, premium cable, and ancillary media, among other entity categories. Understanding these relationships can benefit the deal and negotiating of independent producers with the studios. These relationships are further reviewed in this and later chapters.
The Distribution Unit
Distribution units include the global distribution executives and their staffs as well as each of the sales organizations for theatrical and home entertainment, which are the heart of most major independent producers’ studio relationships. They also include every other international and domestic sales organization and their advertising, promotion, and publicity teams.
This unit’s success is dependent upon having a steady flow of exceptionally marketable/brandable, audience-attracting pictures to distribute. These pictures principally come from independent producers and production units within the studio.
The Production Arena
In most studios these are multiple organizations (such as Fox, Fox 2000, and Fox Searchlight at 20th Century Fox). These organizations are directed by production executives and their teams. The production arena manages a large motion picture development pool, fulfills all the production processes for in-house pictures, and participates in the development and production of independent films that are wholly or partially financed by the studio.
Studio Relationships with Independent Producers
The studios engage a broad variety of relationships with independent producers, dependent on what each are contributing, what each want, and the many divisional possibilities of equity, profits, waterfall positioning, and control of creative and branding. However, these all play within three conventional relationship constructs: in-house studio production, negative pick-up (the studio agrees to acquire certain rights, typically at least all U.S. rights, for a fixed amount payable upon delivery of the picture), and distribution only. Some independent producers progress in their studio relationships by evolving from studio pictures (producer is a work for hire), to negative pickup productions, and then to distribution-only relationships. Among the many deal derivations is a longstanding hybrid deal whereby the studio and producer will each equally share both the production costs, picture delivery and advertising costs (P&A) expenses.
There are many crucial deal points in each of these relationships. The central deal point categories common to all these relationships are as follows:
- Creative control
- Film negative and copyright ownership
- The specifics of the theatrical distribution commitment (especially minimums for advertising and number of screens)
- The distribution fees, studio charges and overhead, studio participation, and, for in-house producer relationships, the producer’s profit participation
- The profit participation definition (this is often a 15 to 30 page addendum to the agreement that crucially determines at what point the producer participates in profits) and the license or assignment of the film’s distribution rights between the producer and the distributor.
In-House Studio Production
This relationship is typically engaged through the studio’s production operations. The producer provides an acceptable story, plus the capacity to complete development and deliver a finished picture on schedule and within the budget. The studio provides all the development and production support, financial, and business (legal and accounting) resources to complete the picture, and is the global distributor. This relationship is less common, as the studios have reduced in-house development and increasingly look to independent producers to bring them at least partially developed projects.
Though the producer has creative freedom, the ultimate creative control typically resides with the studio. Also, the studio owns the negative, copyright, and all distribution rights. The producer is paid a production fee, refunded development costs, if any, and typically has a net, adjusted gross or gross-profits participation in the picture, commonly called points.
Some producers make all their pictures throughout their careers in this relationship, are creatively satisfied, and receive excellent earnings. A good example of this relationship is the early producing career experience of Andrew Davis, who brought Warner Bros. (WB) Above the Law and attached Steven Segal. He entered a studio production relationship with WB that allowed him to make the picture using the support of the production department, yet giving him the flexibility even to rough-cut the picture in his home. The picture received WB’s formidable marketing muscle and was successful enough to inspire a sequel and launch Davis’s subsequently prolific career.
Negative Pickup
This relationship is substantially more independent than studio production, and typically it is entered through a studio production unit. The producer provides an acceptable story and the capacity to complete development and deliver a finished picture and the picture’s production financing. The studio provides production support, a bankable contract for all or a substantial portion of the needed production funds to be paid upon delivery of the film, and license rights for global, U.S., or international distribution, as negotiated. The bankable contract typically states the studio will pay an agreed-upon amount when the film is delivered, plus royalties (a percentage of the picture’s profits, according to the “net profits” definition) to the producer. Negative pickup relationships commonly allow the producer more creative freedom during the production process, though the studio may have the right to determine the picture’s final cut.
Negative pickups are easier to understand and process than they are to receive, as studios have tight script, director, producer, and above-the-line criteria that can be challenging to satisfy.
Though it is a negotiable point, the producer typically owns the picture’s copyright, and as part of the agreement, the studio receives the distribution rights (as negotiated, consisting of global, U.S., or international rights). From the gross receipts collected by the studio, the studio is paid its distribution fee for all rights it sells, recoups its direct distribution expenses (DDEs), and may also have points in the picture.
An entertainment bank lends the producer the production financing, which necessitates that the producer have bank and completion bond relationships. The collateral provided to the bank for the production loan is typically a combination of a studio negative pickup contract and may also include foreign presale contracts and the unsold territories’ estimated value (gap) financing. This collateral must equal or exceed the picture’s negative cost, after deducting loan interest and fees. Contingency elements in the negative pickup contract are primarily that the producer will deliver the studio access to the picture’s negative and campaign materials, on or before the contract delivery date, and that the picture contains the preapproved above-the-line talent, primarily the director and principal cast. An insurance company provides the bank a guarantee (completion guarantee or completion bond) that the picture will be delivered within budget and by the contracted delivery date, with the specified creative elements intact. (Obtaining the production funding from the bank is thoroughly discussed in Chapter 6, completion guarantees in Chapter 8.)
Distribution-Only Relationship
This relationship typically is entered through the studio’s distribution arena. This is the most sophisticated relationship for producers to engage and delivers them the greatest overall benefits. This relationship naturally motivates the creation of consistently successful motion pictures, better prepares the various rights areas in the major markets, grants producers the greatest autonomy, earns the most revenues for each picture, and delivers the highest profits to the producer. Typically, this is the most beneficial relationship globally for audiences, studios, producers, and licensees. One of the most successful production companies in this arena is Alcon (The Blind Side, My Dog Skip).
The distribution-only relationship takes many forms. Generally, the producer engages a U.S. studio to distribute at least U.S. theatrical and home entertainment. In this relationship, the studio may not provide negative pickup, other financing collateral, or advance fees. The producer provides the finished picture, developed, produced, and financed, and in some relationships, part or all the direct distribution expenses (a hybrid deal). The studio’s distribution unit provides production and campaign consulting from the picture’s earliest development, along with U.S. theatrical distribution and, most commonly, U.S. home entertainment distribution.
Although the producer consults with major market distributors throughout the development and production of the film and is license-bound to deliver the picture represented to presale participants, the producer has complete creative freedom during the production process.
The producer almost always owns the project’s copyright and distribution rights and licenses distribution rights in and to all other territories and media that are not part of the Studio’s distribution agreement. From the gross receipts collected by the U.S. studio, the studio is paid its distribution fee for all rights it sells, recoups its direct distribution expenses, and may also have points (profits participation) in the picture.
The U.S. Independent Theatrical Distributors
Although the majors generate approximately 90 percent of the U.S. box office, independents still generate more than $1 billion annually in U.S. gross box office. Some examples of U.S. independent distributors include Open Road (owned by two exhibitors with a combined 12,567 screens), Roadside Attractions (owned 45% by Lionsgate), A24, Magnolia Pictures, Broad Green Pictures, and Bleecker Street.
Independent distributors typically do not have the capital to purchase the ad media necessary for a motion picture’s wide U.S. release ($40 to $80 million). However, some of them are very capable of wide theatrical distribution if the producer provides the necessary P&A and they each are experienced in strategically releasing pictures. This often includes theatrically opening in one or more (but few) U.S markets, purchasing sufficient media for those markets, carefully engaging the branding and booking, polishing these and their campaigns, as they spread to additional markets. Or, use social media and other web-driven promotion and opening in art houses, substantially relying upon compelling trailers and art-house audiences who anticipate uniquely entertaining pictures in these theaters. Through these and other release strategies independent distributors establish each of their picture’s brands theatrically, giving them this higher profile audience positioning, creating greater earnings power directly with audiences and subsequently with licensees. Both IFC and Magnolia have the added ability to book their films into theaters owned by their parent companies—IFC as part of Rainbow Media’s Cablevision (a sister company to the Clearview theatres) and Magnolia as part of HDNet (which includes Landmark Theaters). There are also a few niche market distributors, including Oscilloscope Pictures, The Orchard, and Pure Flix.
Finally, there are the DIY (Do It Yourself) or rent-a-system operations, whereby the producer provides the P&A and the distributor is paid only a distribution fee. Examples are Mark Borde’s Freestyle Releasing, and Richard Abramowitz’ Abramorama. (See Chapter 4 for more detailed information.)
Most independent distributors employ lower-cost distribution strategies that rely more heavily on viral and social networking promotion and campaigns, less expensive Internet advertising, and maintain minimalist distribution operations. Further, they often take advantage of off-peak release scheduling, rent-a-theater booking (four-walling), festival-ramp branding, and simultaneous theatrical and video-on-demand (VOD) release schedules.
Studio Relationship Comparisons
The following Figure 2.1 comparison of the three primary studio relationships clarifies the money flow and demonstrates the final affect for the producer.
Figure 2.1b Studio Relationship Cash Flow Comparisons
To access and use this formula-driven worksheet, you may visit this book’s eResources page, www.routledge.com/9781138050938, and select “Studio Relationship Comparisons.” You may perform “what ifs” and analyze the effect of differing gross box office (GBO), project Negative Cost (all-in cost of production), distribution fees, et al. As you move the cursor to each cell, the formula reveals its performance relationship to other cells. Each relationship example is for the same picture, earning the same from each distribution and rights area.
The following definitions will help those unfamiliar with the terminology used in this example.
Theatrical Distribution
Gross box office (GBO) refers to the total box office receipts collected from theater attendees for a particular picture. This example uses $50 million for the project. Sixty-two projects released in 2016 earned $50 million or more in the United States. This project’s greenlight analysis would need to validate that it could have a GBO among the top five pictures released during its same release month. Most films hitting this box office level generate the highest grosses in the major U.S. cities such as Los Angeles, New York, and Chicago. However, pictures with uniquely strong concentration of target audiences in non-major metros break this mold, such as The Blind Side, which had its highest grossing cities in Sacramento, Dallas, Birmingham, and Nashville.
Film rental is the share of the GBO due the distributor. The film rental agreement is the document setting forth the terms between the exhibitor and the distributor. Leading U.S. exhibitors are Regal Entertainment Group (7,307 screens), AMC Entertainment (5,260 Screens), Cinemark USA (4,582 screens), and Carmike Cinemas (2,942 Screens). The terms of these agreements commonly allow for higher earnings for the exhibitor early in the picture’s run, when the box office is highest, and lower as exhibition continues and the receipts are lower. The example uses the commonly applied portion of 50 percent each for exhibitor and distributor. Note that studios typically negotiate preferred rental terms because they have a stronger and higher volume of pictures than do independent distributors. Further, studios’ film rental collections, settlements, are usually fulfilled sooner and at a better percentage than that obtained by independent distributors for the same reason: stronger and higher volume pictures.
The distributor earns a theatrical distribution fee, which is calculated as a percentage of the film rental. For studios, this amount is typically 25 percent to 35 percent of film rental, unless the producer provides most or all the direct distribution expenses and negotiates a lesser fee. Established producers with a studio output relationship, regularly delivering pictures into their systems, negotiate significantly better distribution fee percentages.
Direct distribution expenses (DDE) are the expenses incurred by the distributor in the process of distributing a picture; the distributor can recoup these expenses from the picture’s gross receipts remaining after deducting distribution fees. These expenses are principally advertising (often $50 million to $70 million) and picture delivery which has significantly reduced (for example, $1 million for 2,500 screens with delivery via secure satellite feed, secure internet download, or secure hard drives). Together these are commonly referred to as P&A (picture delivery and advertising). However, direct distribution expenses also include campaign creation and production, promotion and publicity, exchanges for hard drives, and materials costs and festival expenses, among other direct distribution expenses.
The distributor’s theatrical net is the film rental less the distribution fee and direct distribution expenses. The application of fees and expenses are the same for all three distributor relationships, yielding the same amounts each. Consider how difficult it is for pictures even to recoup their distribution expenses from just North American theatrical distribution. With a $50 million GBO, the typical picture still remains eight figures away from even recouping its distribution expenses—far from beginning production cost recovery.
Home Entertainment Distribution
Home Entertainment Gross Income
Home entertainment remains the single most profitable earnings category for most motion pictures. Home entertainment earnings comes almost entirely from streamed to all screens, with comparatively minimal and diminishing income from DVD/Blu-ray purchases/rentals. Each project has its own earning dynamics in each sub-category, and changes (substantially higher for kids’ target-audience pictures), depending on its target audiences and the success of its theatrical campaign. Appropriately, its earnings are calculated as a percentage of either GBO or film rental. Home entertainment distribution is very sophisticated, but not nearly as much as theatrical distribution. This continually changing window is discussed more thoroughly in Chapter 5.
The streaming portion of the home entertainment release window is its highest earning and continues to be incrementally dissected into PPV, SVOD, and AVOD. So, this release window is no longer aptly termed “home,” as these earnings come from all screens, perhaps the greatest volume outside a home. Aspects of this area, including price point and every facet of marketing, will continue their business model evolution to OTT—expected to pass tipping point by 2020. The biggest anticipated changes include VOD releases beginning as early as one-week after theatrical release for a per streaming premium (currently discussed between $30 to $60) that decreases each week in perhaps three steps, until approximately reaching current VOD fees. Also, the streaming cost flexibility will be extremely affected by viewers who opt into pre-and perhaps mid roll ads that match each viewer’s profile.
Though this distribution segment’s value is expected to remain about the same, it will continue to morph in every aspect until OTT has settled in as the primary content delivery to all screens.
The segment’s distribution fee is negotiable, but in the example, it is 35 percent (studio), 30 percent (negative pickup), and 25 percent (distribution only).
DVD and Blu-ray Duplication and Distribution Expenses
DVD and Blu-ray are expected to survive in the short term, though will continue to shrink as audiences discover the superior ease of use and storage of keeping their purchased copies in their cloud video vault, available to stream at will.
DVD and Blu-ray duplication for sell-through and rental is very competitive. If the duplicator performs all aspects of printing the sleeve, duplicates the product, and manages the inventory and shipping, the typical 120-minute movie in DVD or Blu-ray is still about $2 each. The additional advertising, promotion, publicity, and other expenses vary widely from picture to picture, with the ad budgets of some major sell-through titles rivaling their theatrical budgets.
Distributor’s Home Entertainment Net
This is the home entertainment gross income less the distribution fee. The application of fees and expenses is the same for all three distributor relationships, yielding the same amounts to each of these categories, except for distribution fees. This segment’s dynamic evolution is expected to slightly increase its earnings for all surviving participants, while decreasing audience cost per use—the overall earnings increase coming from increased viewing overall, especially streaming in its various forms. Home entertainment gross income is expected to continue to exceed all other domestic earnings categories. Again, a picture’s brand power is established in its theatrical release, but the greatest potential U.S. earnings and profits comes from its home entertainment release.
Premium Cable Gross
Premium cable companies are those television networks in each of the major global territories that are commercial-free and earn their income principally through monthly viewer subscriptions. The major U.S. premium cable networks are HBO/Cinemax, Showtime/The Movie Channel, and Starz/Encore.
This category’s primary income follows the greatest audience tune-in, which occurs during the window that covers the picture’s premium cable premiere. The license for the premiere of a picture with a $50 million gross should be about 9.5 percent of the U.S. theatrical box office gross.
The premium cable distribution fee should not exceed the 35 percent used in the projections. Because the market for these rights is limited and the licensing is comparatively unsophisticated, it is common for some balanced producers to sell these U.S. rights direct from their production companies.
The premium cable direct distribution expenses are primarily legal fees, travel, and trade-show representation. They should not exceed the $150,000 indicated in the projections.
The distributor’s premium cable net is the premium cable gross income less the distribution fee and direct distribution expenses. The application of fees and expenses is the same for all three distributor relationships, except the distribution fee retention for the distribution-only category.
Network Television Gross
Network television refers to television networks that do not charge a separate subscription fee (i.e., free television) and are broadcast in every global territory where television programming is available. In the United States, these broadcast networks are principally NBC, CBS, ABC, and Fox, as well as major “net-lets” including CW and major cable networks including CNN, TNT, USA, TBS, Lifetime, and Spike.
The license income for the free television network premiere of a picture with a $50 million gross should be approximately 7 percent of the picture’s U.S. theatrical gross, as used in the projections. All television networks attempt to own their programming. Though this is a programming mantra, a higher dictum is to win more of your target viewers than any competing network in the given time-slot. Consequently, major brand pictures are able to license to the major television networks. However, the license fees of these sales are adroitly weighed against a network’s ability to create its own programming that may win similar audience shares. If pictures are not a major brand, they likely have no licensing chance with the major television networks but may fit well into the programming budgets of cable networks at license fees more proportional to those networks’ audience shares.
The free network television distribution fee should not exceed the 35 percent used in the projections. Because of the limited number of broadcast networks in most major territories and because the licensing is comparatively simple, balanced producers frequently also sell these rights directly from their production companies.
The free network television direct distribution expenses are primarily legal fees, travel, and trade-show representation. They should not exceed the $200,000 indicated in the projections.
Distributors’ free television network net is the network gross income less the distribution fee and direct distribution expenses. The application of fees and expenses is the same for all three distributor relationships, except the distribution fee retention for the distribution-only category.
Sales Agent Fees
For producers who directly manage their pictures’ distribution rights, the use of either a sales agent or an in-house sales division will be utilized to liquidate sales rights. Typically, the negative pickup producer performs all or some of the international sales independent of the primary release territory distributor, and the distribution-only producer performs all sales directly, even those within the primary release territory that do not become a part of that territory’s distribution agreement.
International Territory Gross
Chapter 3 reviews international territories in depth. These projections are for a U.S. core-territory picture. The calculation is based on two primary factors: a percentage of the budget for the base value or minimum guarantee (MG) for each territory (eg, all rights for Germany is valued at 8 percent of the budget) and the distributor’s projected earnings in its territory for all rights. The gross international sales are the total of those two primary factors, and the gross international overages are the profits revenue earned after the distributor earns back its distributor fees, direct distribution costs, and the minimum guarantee. The application of earnings is the same for all three distributor relationships.
Share Analysis Review
Total Distributors Net
This is an accumulation of the net income from all major earnings categories.
Production Financing Expense
This is the producer’s cost of interest and fees for production funding. Because the studio is a commercial lender rather than a bank, the financing is more expensive, typically 3 to 5 percent over LIBOR (London Inter-Bank Offer Rate). Further, because the distributor allocates all the funding at the time the motion picture documentation is engaged, it is common for interest to be charged on the entire amount from the first day of this relationship. Depending on the producer’s credit history with the bank, the ratio between the collateral pledged and the loan amount, among other factors, the bank may charge an interest fee of one half to 3 percent over LIBOR. It’s important to note that most of these bank financings are lines of credit, drawn down by the producer in increments as needed and accumulating interest only on the total amount drawn rather than the whole loan. This example uses a motion picture costing $25 million.
In this example, the advantage of bank interest and charges on only the amount actually in use will save the negative pickup and distribution-only relationships’ half of this expense.
Negative Cost
The negative cost refers to the actual total costs of creating the picture including contingency, delivery items, and completion bond, but excluding financing costs as we calculate that separately per the preceding paragraph for this exercise. This picture’s cost is $25 million. Though such expenses are not reflected here, studio relationships sometimes make it mandatory for producers to use their costlier studio facilities, equipment, and departments.
Studio Burden
This is a common expense for studio pictures. This expense is a portion of the studio’s total distribution arena overhead (this is separate from the direct distribution expenses). Each picture’s expense formula is set forth in the agreement. It may be a picture’s percentage of the studio’s total earnings for the year. (Considering theatrical earnings only, if a studio earned $750 million during the year and your picture earned $25 million, your studio burden expense would be 3.3 percent of the total.)
Producer’s Gross
This is primarily the distributor’s net, less the production’s cost, its financing expense, talent residuals, and direct sales agent’s sales expenses.
Talent Participations
These are the points in the film’s profits that are owed to key talent participants, typically the director, writer, and one or more key cast members. This projection applies 7 percent of the producer’s gross to talent participations.
Producer’s Net
This is the producer’s remaining revenue less any other distribution, production, or profit participant expenses.
Studio Share
This is the amount of the producer’s net in which the studio participates for its share as a partner of the producer in making the production and distribution of the picture a reality. For the in-house producer, this is the whole remaining amount except for the producer’s points—in this example 90 percent. For the negative pickup producer, this is 50 percent for the studio. For the distribution-only producer, no amount is attributed, if the studio is not a further participant.
Producer’s Share
This is the amount remaining for the producer after all production, distribution, and financing expenses and participants have received their portions.
The in-house producer’s shares are 0.1:1, the negative pickup producer’s shares are 0.7:1 net earnings-to-production cost ratio, and the distribution-only producer’s share is 1.6:1. This substantially greater profit share for the distribution-only producer is chiefly why balanced producers have the capacity to establish businesses with greater creative and financial freedom than many of their creative contemporaries.
Case Study
The Lunchbox India Produced Picture, Exploiting the U.S. and Other Major Territories
The Lunchbox is one of dozens of independent producer projects each year that owe their success to their producers who assured their picture played well in the U.S. and the global market. The Lunchbox’s mere $1 million budget motion picture’s home territory is India, and earned a global gross box office of $15 million, $4.2 million from the U.S.
The project’s concept and scripts were written and directed by Ritesh Batra, and produced by Guneet Monga, Aurag Kahyap, and Arun Rangachari. The project’s production companies eventually included DAR Motion Pictures, UTV, Dharma Productions, Sikhya Entertainment, National Film Development Corporation of India, ROH Films (Germany), ASAP Films (France), and Cine Mosaic (USA). Germany’s Match Factory was its international sales agent (ISA).
Their global branding strategy relentlessly used global film festivals, knowing their audience-engaging picture would create positive reviews and far reaching audience social media must-see waves. The Lunchbox opened in 29 film festivals throughout its theatrical run, 21 in the top 10 territories, especially building word of mouth for eventual streaming, with initial gross earnings estimated at nearly five times its global GBO (gross box office).
This picture had a 6-year development and production, assuring its creative and business integrity were dynamically matched, to the delight of hundreds of millions of its global audience and surely to the creative and earnings satisfaction of its producers and other partners.
Chapter Postscript
The Critical Effect of U.S. Distribution
For most producers, each of their project’s major distribution commitments are the core element that drives its branding, financing, and global earnings power.
For most of the producer’s lead talent, distribution and funding partners, their first query is, “Who is distributing the film in the producer’s home territory?” Because the U.S. is such a potentially large earnings area, many will also ask, “Who is the U.S. distributor? In every major international territory, U.S. studios have powerful reputations for releasing pictures with substantial earnings and related marketplace brand impact. Though every licensee internally assesses each picture, all potential partners are attracted to or wary of each project, depending on its distributor commitment.
For prospective equity financers, a strong home-territory distributor, U.S. distributor, international sales agent relationship with estimates, or one or more license agreements assuring recovery of all or most of the picture’s cost, should be mandatory—as independent pictures that are produced without distribution place themselves in a deep disadvantage to engage distribution after production, consequently earning little or no income. Production is a shallow accomplishment without distribution and its associated revenue. As a core part of each of their pictures’ development, producers should ally it with the distribution entity(ies) that will optimally brand that picture and assure its greatest earnings.