Distribution Fees/Royalties
The distributor will take into consideration the type of picture it is distributing and distribution fees will reflect that. Distribution fees are generally calculated as a percentage of gross revenues. “Gross revenues” means the money earned by the picture from first dollar, without deductions for distribution fees, marketing expenses, taxes, residuals to any union, etc.
Distribution fees are structured in a variety of ways. A “First Dollar Gross Deal” allows the production company to be paid a percentage of “distributor’s gross,” which means that the producer is paid off the top from first dollar prior to the distributor deducting fees, expenses, and other costs. In other words, if you were able to negotiate a 25% First Dollar Gross Deal, your production company is paid 25% up front prior to the distributor backing out its fees, the advance/guarantee and expenses. The production company will be paid $12,000 from $48,000 in total revenues, even though the distributor is due a 20% commission and the picture owes it more than $70,000 in expenses. This is a great deal for the production company, but not for the distributor, who is taking a huge risk with its fees and your picture’s expenses. This arrangement is one not considered by distributors unless it is a picture with an “A” level package.
There is no advance in the “50/50 First Dollar Split.”This structure puts the production company and distributor on equal footing. The production company financed the picture, the distributor is financing the picture’s distribution. Each is responsible for their own expenses and each is paid 50% of the picture’s gross revenues. This is a very uncommon arrangement, since distributors are loathe to take financial risk.
In the “Modified Gross Deal,” the distributor pays the production company an advance/guarantee. It gets to recoup a multiple of the advance/guarantee and expenses before the production company is paid any revenues. Quite honestly, there is nothing “gross” about this deal.
The “70/30 Deal,” is a cross between a gross and net distribution deal. The distributor gets to recoup some specific expenses, then splits revenues 70/30 in its favor.
The “Sliding Scale” arrangement is like the “70/30 Deal,” except that the distributor’s share of the revenues declines as the picture hits certain financial benchmarks. The 70% may reduce to 60% once the picture has earned $1 million, then to 50% when it earns another $1 million.
In the “50/50 Net Deal,” the production company and distributor share revenues on a 50/50 basis after the distribution fees are backed out. The distributor costs are deducted and what remains is split 50/50.
The most common of the distribution structures is the “Net Deal.” The distributor deducts the advance/guarantee and the picture’s expenses from revenues after it has paid itself the agreed upon distribution fee. The production company does not share in the proceeds generated by its picture until the distributor has been paid and recouped all of its expenses on behalf of the picture. The range for distribution fees in a “Net Deal” is between 20%-40%. My clients have never paid in excess of 25%.
Home Video/DVD
As far as DVD sales go, the production company will be paid according to the “Net Deal” formula, the “50/50 Net Deal,” or under a “Royalty Deal,” which pays the production company a 20-25% royalty based on the wholesale price of the DVDs. Determining which one of the aforementioned is most beneficial is going to depend on the circumstances. Notwithstanding, when a client is offered a “Royalty Deal,” I ask whether the distributor has a financial interest in the home video company.
Reserves
The distributor may hold back up to 25% of the revenues earned by DVD sales in case the DVDs are returned by vendors. Generally, these reserves are liquidated no later than nine (9) months following the calendar quarter in which a reserve was established.
Delivery of the Picture/Deliverables
The distributor will include a list of the “deliverables” it will require of you, along with a Delivery Schedule. “Deliverables” are the elements of the picture which the distributor needs in order to distribute the picture. Do not count on the distributor providing an advance large enough to cover the cost of creating the deliverables, including the copyright and title reports. Distributors tend to ask for more than they sometimes need, so I try to pare down the list whenever possible.
Errors and Omissions Insurance
You will have to purchase E&O insurance if you have not already done so. You have to budget for this expense. Again, do not count on a distributor’s advance sufficient to pay for this cost.
Distributor Expenses
I expect the distributor to commit to a minimum amount of money it is going to invest in your picture for promotion, advertising, marketing materials, film markets, etc. If there is going to be a theatrical release, I want to have a commitment regarding the number of theaters and/or cities where the picture will be released and how much money the distributor is going to spend to promote and advertise the theatrical release. I want the distributor to spend enough to increase your picture’s likelihood of success, keeping in mind that the distributor will recoup these expenses from your picture’s revenues.
Market Expenses
Distributors attend film and television markets, such as the American Film Market, Cannes, Berlin, Mip, and Mipcom, in order to secure licenses for the pictures they are distributing. A pro rata share of the distributor’s “market expenses” will be charged against your picture’s revenues. These expenses should be capped not to exceed $25,000-$35,000.
Union Residuals
You have to pay residuals to SAG, WGA and DGA if you employed members of either or all of them on your picture. These unions want the distributors to execute a distributor’s Assumption Agreement, which obligates the distributor to pay the residuals directly to them. I have yet to encounter a single non-studio distributor willing to undertake this obligation. What I have done instead is arrange for a Collection Account Management (“CAM”). The CAM receives all of the revenues and then pays them out to the union, distributor, producer, profit participants, sales agent, etc. This is the only way that the residuals are ever going to be paid directly to the unions. The production company may end up owing thousands of dollars in residuals if the distributors send all the monies to the production company directly and it neglects to remit the residuals to the unions prior to disbursing the monies received.
