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Q: Measuring the financial success of movies ( Answered,   1 Comment )
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?
Subject: Re: Measuring the financial success of movies
Answered By: andrewxmp-ga on 08 Jul 2004 11:29 PDT
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:


Or in HTML format at:

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
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
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
(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
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

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

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!


Search terms used:
movie gross value money actually actors producers studio
Subject: Re: Measuring the financial success of movies
From: googlenut-ga on 08 Jul 2004 18:37 PDT
Here is some information that you might find interesting:

Box Office Mojo

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