Wednesday, June 3, 2009

2% of Gross better than 50% of Net

You may have wondered how a movie that generates hundreds of millions of dollars at the US box office (let alone box office from overseas, DVDs, TV sales, etc) can show zero dollars for those who receive a piece of the "net". You probably think, "why would a major movie studio keep pouring huge sums into producing movies if they don't turn a profit?"

And there's the rub: "profit" and "net" are two very different things.

In a "gross" deal, an actor or director (the "participant") would receive a percentage of the "Gross Receipts" collected by the studio. That term Gross Receipts is always defined by the contract between the studio and the participant. It ordinarily represents most of the cash received by the studio from distribution of the movie, with a few exceptions. The biggest of these exceptions is that money collected by the studio from sale of DVDs is ordinarily reported at 20% (this figure dates from when VHS and Beta video-cassettes were "new media" back in the 1980s).

Note also that while movie theaters may collect $100 at the box office, they typically pay about half of that to the studios; the half kept by the movie theaters goes to cover their rent, electricity, salaries, etc. (Movie theaters keep all of the money they collect from popcorn and candy; none of that goes to the studios.)

In a "net" deal, a participant would receive a percentage of the "Net Proceeds" of the movie. Note that the term Net Proceeds is often used (and defined in the contract) to differentiate it from something else which may be called "profits".

The amounts paid to the participants are referred to as "participations".

Contracts differ tremendously, but Net Proceeds are typically defined as Gross Receipts less the following items:
  1. Distribution Fees -- these fees vary from around 10% to 50% of the Gross Receipts from each of theatrical, DVD, and TV.
  2. Distribution Expenses -- the costs incurred by the studio to market and advertise the movie, plus the costs of the film prints shipped to theaters.
  3. Negative Cost -- the costs to produce the movie, the final result of which is the completed negative of the movie (from which positive prints will be made). This includes salaries for cast & crew, the costs of sets, special effects, travel to locations, costumes, music, etc.
  4. Interest -- this is charged by the studio at a contractually-defined rate, and is applied to Negative Costs, and often to Distribution Expenses as well.
  5. Participations -- this would certainly include Gross participations, and may also include Net participations paid to others
Note that items 1 and 4 above are not actually cash costs paid by the studio. When the studio looks at its "profits", they do not charge themselves Distribution Expenses; and they will often not have a per-movie line-item for interest either.

Distribution Fees and Interest can be very large numbers on hit films, and they (along with the 20/80 split of DVD receipts) are much of the difference between "Net Proceeds" and "profits".

Regardless of the perceived success of a movie, it is very rare for "Net Proceeds" actually to be reached.

The moral of the story is that 99.999% of the time, you are better off with a single-digit percentage of Gross Receipts than you are with a double-digit percentage of Net Proceeds.

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