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Q: Measuring the financial success of movies ( Answered,   1 Comment )
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 Subject: Measuring the financial success of movies Category: Arts and Entertainment > Movies and Film Asked by: corby-ga List Price: \$5.00 Posted: 08 Jul 2004 09:02 PDT Expires: 07 Aug 2004 09:02 PDT Question ID: 371330
 ```Every week we are told how movies did at the box office over the past week or weekend. What does "Spiderman took in \$100 million" mean? Surely that's not all gross profit to the studio producers. I assume the theatre gets some, the distributers some and God know who else gets some before we get to promotion and advertising. And then there's the cost of actually making the film and overhead. How can one tell when "Spiderman", for example, is actually turning a profit for those who have backed it?```
 ```Hi corby, Generally, if one hears that "Spiderman took in \$100 million" that value refers to the gross ticket sales, meaning the total sum of the face value of all the tickets bought. That is what most news agencies and movie statistic refer to, because it is an accurate and simple measure of how many people went to see the film across the country in a given time period. It is easy to calculate from individual theater records, and a big sum of money like "100 million dollars" has more of a "wow" effect than does "15 million people went to see____". Clearly, all of that money gets split among many many organizations, companies, and people. An excellent description of how this money is broken down and how much a particlar group, such as the producers, will get in the end, can be found in PDF format at: [ http://www.lapointerosenstein.com/fichier/listelibrary/58/Jsi-profit%20participation.pdf ] Or in HTML format at: [ http://216.239.41.104/search?q=cache:s_WghureeRQJ:www.lapointerosenstein.com/fichier/listelibrary/58/Jsi-profit%2520participation.pdf+movie+gross+money+actually+goes+actors+producers+directors+studio&hl=en ] In particluar: "Participation in net profits- Most producers and talent are unable to secure gross receipt participations of any kind. Net profit participations (in the realm of 2-10 percent) are far more common, but less attractive. Essentially, the net profits of a film is the money remaining after all allowable deductions have been made from the gross receipts. The inevitable question becomes: What are the allowable deductions? A distributor will typically seek to recoup the aggregate of the following costs and expenses from the total gross receipts before making any payments to net profit participants, in the following specific order: (a) Distribution fees - In a nutshell, these fees include general operating and overhead costs. The problem with these costs is that they are not necessarily attributable to the specific film to which the profit participants are attached.19 Instead, fees will vary from year to year depending on the total gross receipts earned by the distributor for all films distributed in any given year.20 Moreover, while they are customarily referred to as ?fees?, they are, basically, merely another arbitrary cash grab. The particular fee deducted in the context of a single film will typically hover around 30-40 percent of the total gross receipts earned domestically (i.e. United States and Canada), closer to 40 percent of the gross receipts earned in the United Kingdom and often in excess of 40 percent for the rest of the world. There are a few exceptions to this fee structure, but these are beyond the scope of this article. Additional difficulties arise when the distributor contracts a subdistributor that charges a distribution fee of its own. Thus, generally, the distributor will deduct a 30-40 percent distribution fee from all domestic gross receipts, notwithstanding that a distributor's actual operating and overhead costs will rarely exceed 15 percent of gross receipts. An unconscionability challenge (in the common law) to the imposition of such burdensome distribution fees would not be implausible. Nonetheless, such fees have become so entrenched and customary that a viable challenge seems unlikely. (b) Distribution expenses - These expenses will only be deducted after the distribution fees have been deducted and will typically include, inter alia, laboratory release print costs, advertising expenses, an added 8-12 percent advertising overhead charge, licenses, foreign duties, taxes, checking costs21, collection costs22, guild residuals, association dues and assessments23, translation and subtitle costs, reissue (or re-release) costs, film reformatting costs, shipping costs, copyright registration costs, insurance premiums, litigation expenses (if any) and royalty costs. Thus, the distributor will deduct all distribution expenses, the most significant of which will be the film print and advertising costs. Since advertising costs can consume up to 50 percent of a film's budget, distribution expenses are a sure way of whittling away at the gross receipts. The practice of adding an 8-12 percent advertising overhead charge is particularly problematic and, as will be described below, has been successfully challenged in U.S. courts. The charge originates from a time when distributors developed large advertising campaigns in-house and justifiably deducted the charge to cover the costs of maintaining an advertising department Today, the vast majority of ad campaigns are contracted to independent third parties. As a result, there is no economic justification for continuing to impose the overhead charge. If a distributor spends \$10 million on advertising a motion picture (a modest amount), the overhead charge adds up to \$1,200,000 to that amount, which is stripped from the gross receipts(and ultimately from the net profits). Another difficulty with calculation of distribution expenses concerns inclusion of the average cost (as opposed to the actual cost) of release prints. Distributors usually have longstanding relationships with print laboratories and use them consistently for their films. While the average cost of a release print hovers around the \$2,000 mark, multiplied by, for instance, 2,500 (for the number of domestic exhibitors on a widely released film), the cost rises to \$5 million. However, most distributors, as a result of the volume of business they provide these labs with, have negotiated considerable discount packages.24 Unfortunately, the savings are seldom passed on to the participants.25 (c) Interest on negative cost - Next, the distributor will deduct interest on the negative cost of the film. ?Negative Cost? simply refers to the actual cost of producing the picture (such as technical crew, set building, catering, equipment rentals, etc.). The standard interest rate is prime plus 2 percent. Distributors will always collect interest on the negative cost before recouping the actual negative cost because as long as the latter remains outstanding, it continues to bear interest! Thus, the distributor will deduct an interest charge of 2 percent above the current prime lending rate on the cost of producing the film. (d) Negative cost - The distributor will then deduct whatever it cost to actually produce the film, plus an inexplicable overhead charge of about 15 percent of the negative cost. It should be noted that the extra 15 percent over-head charge has been successfully challenged in U.S. courts. In some instances, the distributor may even deduct an interest charge on the over-head charge. Distributors will systematically attempt to categorize as many costs and expenses as possible under the rubric of negative cost. Producers beware: Many such items are actually distribution expenses that do not bear interest. Another problem with the calculation of negative cost is that many motion pictures are shot, at least in part, on sound stages and using equipment belonging to the distributor. Thus, the distributor does not truly incur the full cost of such items, but nonetheless charges the full cost to the motion picture. (e) Overbudget penalty - A film producer is also responsible (which both the distributor and the completion bond company will emphasize throughout the production) for ensuring that the film gets produced on time and within the allocated budget. Distributors will normally include an overbudget penalty clause to their agreement with the producer (sometimes referred to as an ?overbudget add-back penalty?). If the production goes over budget due to a fault of the producer (which excludes, for instance, force majeure, raises in guild payments and any approved budget increases), the distributor will raise the negative cost of the film by the overbudget amount. Occasionally, the distributor may permit an overbudget buffer or ?cushion?, whereby it agrees to turn a blind eye to overbudget expenses as long as these do not exceed a predetermined amount (usually 10 percent). Sometimes, depending on its relationship with the producer, a distributor may charge interest on the overbudget penalty. The overbudget penalties are particularly unfair to those profit participants who do not exercise any control over the budget. Moreover, it should be irrelevant that a production has gone over budget for the purposes of calculating profitability. That is, if a film were budgeted at \$30 million but goes over budget by \$5 million, it will simply achieve profitability once \$35 million has been earned. Why should the over-budget penalty be deducted from the gross? (f) Deferments and gross participations - A deferment is simply a lump sum payable to a profit participant at a pre-determined date (for example, two weeks after the first domestic theatrical release of the film) or when revenues (gross or net) have attained a predetermined amount. Distributors are rarely inclined to grant deferments payable on a certain date regardless of the film's box-office success. Instead, the bulk of deferments will be contingent on gross receipts or net profits attaining a certain dollar amount. Once the predetermined dollar amount is attained, the deferment will be payable out of the subsequent receipts as they are earned (not out of the receipts already earned to date). If the distributor has agreed to pay any deferments or any gross receipt participations, these amounts will be deducted from the gross. Again, a producer should vehemently resist the inclusion of any such participations as a negative cost as the interest charges alone would be enormous. Often, gross participants will join in after a net participant has already signed on. The net participant should therefore attempt to negotiate a commitment on the part of the distributor that no subsequent gross participants will join in. If the distributor refuses to commit and gross participants are allowed to join, a prior net participant may argue that the distributor is in breach of its obligation of good faith (particularly under California law) by doing something that it knew or should have known would interfere with the net profit participant's rights under their agreement.26 Moreover, distributors have occasionally engaged in the practice of charging interest on the payments made to gross participants - a practice that has been successfully challenged in U.S. courts. (g) Note on hard and soft floors - These notions are welcome developments for producers. Essentially, with fewer gross participants dipping into the distributor's pot, a producer can expect to collect more profit. For example, a producer may be entitled to a 25 percent net profit participation, which may be reduced by the distributor's payments to gross participants, up to a soft floor of 10 percent, which can, in turn, be reduced to a hard floor (and no lower) of 5 percent. Whatever is left, once all of the above deductions have been made from the gross receipts, constitutes net profits. Producers collect the bulk of profit participations. The more powerful the producer, the higher up the participation scale. Producers such as George Lucas and Brian Grazer are reputed to have made contingent compensation deals in the realm of 30 percent of first dollar gross receipts. Talent will generally begin their acting and directorial careers being paid a fixed salary and a small net profit participation (meaning none at all). Greater income-generating star power will allow talent to negotiate better contingent compensation packages. Megastars the likes of Tom Hanks, Tom Cruise, Arnold Schwarzenegger and director Steven Spielberg are said to have secured spectacular profit participations in excess of \$20 million against first dollar gross receipts of up to 20 percent. Writers will typically never get anything more than 2-5 percent net profit participations and perhaps a small cash bonus if a film is a boxoffice smash." As to when a film is actually turning a profit: Break-even participation in adjusted gross- The ?break-even? is the point at which receipts equal the amount of money that has been paid (or will be paid) by the studio. That is, the studio has disbursed, for example, \$30 million and receipts have reached \$30 million. ?Initial break-even? refers to the moment the studio first begins to achieve a profit on a film. ?Adjusted gross receipts? is the money that remains after the distributor has made a limited, pre-determined number of deductions from the initial gross receipts. These limited deductions are referred to as ?off-the-tops? and will usually include items such as taxes, trade dues, checking costs, collections, residuals and certain advertising expenses. The idea behind this form of participation is that the participant is not required to wait until the distributor has recouped all of its expenses before collecting a share of the profits. It is sometimes referred to as a ?nice net? participation.18 While this form of gross receipt participation is more common than a first-dollar gross participation, it remains very rare. Pre-break gross participation - In this scenario, one would participate in the adjusted gross receipts after the studio begins earning a profit on the film. The studio will deduct a distribution fee from the gross at this point, albeit a much smaller one (about 15-25 percent) than one would expect to see in subsequent accounting phases. Initial (or actual) break-even gross participation - The only difference between initial break-even participation and the simple break-even discussed above, is that the distributor is considered to have actually broken even only after it has deducted full distribution fees (about 30-40 percent) from the gross receipts. Rolling (or moving) break-even gross participation - In this scenario, the profit participant is entitled to a cut of the adjusted gross receipts once the film breaks even. However, the distributor reserves the right to cut off the flow of profit to the participant in order to recoup any additional distribution expenses (plus a fee) that it incurs at a later date. The distributor will deduct from the gross receipts the amount of the new expenses (and fee). The method (called ?grossing up?) used by distributors to calculate their fee under this arrangement is enough to boggle the mind. Suffice it to say that the rolling break-even is not a particularly valuable proposition for the profit participant because instead of collecting a distribution fee on all further gross receipts, it charges a fee on its new distribution expenses after initial break-even. Thus, break-even points continuously change (they roll) and studios will miraculously incur additional distribution expenses as long as gross receipts keep rolling in. " Clearly, it would be very difficult to tell (for anyone ouside of the studio's management) when a film has broken even based simply on the gross ticket sales. Different movies are obviously more expensive than others, and this factors into the question of how much money is invested in a certain film, as well as when it will break even, if at all. I trust this information has shed light on your questions, but if you require a clarification, please request one, especially before rating this answer. Thank you for bringing this question to Google Answers! Regards, Andrewxmp Search terms used: movie gross value money actually actors producers studio```
 ```Here is some information that you might find interesting: Box Office Mojo SPIDER-MAN 2 http://www.boxofficemojo.com/movies/?id=spiderman2.htm```