Revenue Flow and Making Money out of Film
Author: Malcolm Ritchie Co-Managing Director, Qwerty Films
Some Background Facts and Statistics
Worldwide spend on filmed entertainment is around $65 billion a year, of which the distributors' share is about $35 billion. Total revenues are split almost equally between the Domestic (North American) market and the Rest of the World. The industry has doubled in size in the last 8 years - an annual growth rate of almost 10%. Few, if any, major businesses can boast such continued growth over this period. Video and DVD have contributed significantly to the growth levels. DVD has itself seen a tenfold rise in the last 3 years.
Theatrical (ie. cinema) revenues only account for about 25% of the total revenues, with video (including DVD) taking about 40%; television accounting for 28% and ancillary revenues the final 7%.
The average negative cost for an American studio film is now more than $50m with a further $30m spent on marketing (up from c. $8m and $3m respectively in 1980).
How Revenue Flows Through the Marketplace
The main revenue streams for filmed entertainment are:
The industry has created windows of exploitation to maximise revenues at each stage of the value chain and avoid any clashes in the marketplace. These windows are starting to close up as the non-theatrical streams start to eclipse the original release in terms of revenue generation (although the cinematic shop window still remains the main driver of revenues throughout the chain in most cases) but are roughly as indicated below:
Theatric: 0 - 6 Months
Video/DVD: 6 - 15 Months
Pay Per View: 15 - 18 Months
Pay TV: 18 - 30 Months
Free TV: 30 + Months
(NB. In practice there may be "dark" months between windows to enable greater differentiation between them.)
The spectacular success of the home DVD market has led to increased pressure on the video/DVD rental window with some of the major distributors keen to put their product into the retail market place as soon as possible. In the immediate future more films will be released simultaneously into the rental and sell-through DVD/video windows. The rental window, which currently lasts for about six months before titles go into retail outlets, may be closed altogether before too long. This may also lead to the Pay per View window moving forwards with titles reaching television screens within 9 to 12 months of their theatrical release.
Theatrical Distribution Deals
The share of Box Office paid over to distributors varies between territories. The typical exhibitor's share in the US is 45 to 55% and in the Rest of the World 55 to 65%. The UK has some of the highest retentions by the exhibitor, averaging around 65 to 70%. The balance remitted to the distributor is termed the "Net Theatrical Rentals".
With regard to how much might actually flow back for the purposes of producers or financiers or agents below the distributor, there are three main types of theatrical distribution deal :
i. "Costs off the Top Deal": the distributor recoups their prints and advertising (P & A) spend from the net theatrical rentals. From the balance, the distributor retains a distribution fee of up to 50% and from the remaining balance recoups any advance plus interest before paying the final balance into the pot;
ii. "Net Deal": the distributor retains a distribution fee of up to 50% of the net theatrical rentals. From the balance, the distributor recoups P & A expenditure and any advances plus interest. The net receipts after these have been recouped are put into the pot;
iii. "Gross Deal": the producer / financier / agent receives an agreed percentage from the net theatrical rentals before any P & A spend or advances have been recouped by the distributor. Out of the balance, the distributor retains their distribution fee and recoups P & A spend, advances and interest. After recoupment, any remaining receipts are paid into the pot.
Of these three models, the net deal is the one most commonly used. Under any of these structures, however, and because of the high cost of P&A coupled with distributor fees and other costs, it is unusual for independent producers to receive any back-end profits from the theatrical release since the other parties further up the chain will still be unrecouped. The independent producers will have to look towards the other revenue streams to see if they can get some "profits" back from their project.
Video/DVD Distribution Deals
Film distributors take an average of 75% of consumer spend from retail video/DVD activity compared to about 25 - 33% from rental activity (hence their keenness to get titles into the sell-through market as quickly as possible). There are various kinds of video/DVD distribution deal for the independent producer to be aware of
Rental:
Retail:
- royalty deal: distributor pays royalty to the producer / financier of 12.5 to 20%.
- Off the Top deal: distributor takes fee of between 25 and 35%, deducts their costs (typically up to 50%) and remits the balance to the producer/financier/agent.
Royalty deals, under which the distributor usually keeps more of the revenues, tend to be more common.
Television Deals
Pay per View: the Pay TV service retains about 40 to 50% of the viewer's fee, recoups the distributor's advance and pays any balance to the distributor. The distributor usually retains around 25 to 35% in commission and remits the balance to the producer / financier / agent.
Subscription TV: The TV operator pays a fixed fee to the distributor (of $50k to $1.2m) which usually depends on the film's performance at the Box Office. Deals may be structured so that the fee increases in line with the number of subscribers to the film. The distributor takes between 25 and 35% commission with the balance to the producer / financier / agent.
Free TV: the license fee paid by the broadcaster usually depends on the film's Box Office performance. The distributor takes percentage fees of between 25 and 50% in the US and 20 - 40% in the Rest of the World, with the balance to the producer / financier / agent .
Top Tips
- As in most businesses, it is the distributors (such as the major studios) who make the real margin.
- The major studios also have the benefits of slates of production to spread their risk and catalogues of old films to help finance new development and production.
- Independent producers access lower shares of revenues, later in the value chain and incur the added costs of financiers, agents and other fees.
- Successful UK independent producers have found a way to access a greater share of distributor's dollar - this may include having output deals in place with major distributors to help ensure that their product gets out into the market.
