The Net Power of Being Gross

Somebody asked me recently about the proposed new standard film agreement for Irish actors negotiated by SPI and Equity. They said the contract includes a 3% back-end deal, putting an end to the long , long controversy over the unequal treatment of domestic actors, and the alleged breaches of the Copyright and Related Rights Act in the contracts offered to Irish actors.

However, It appears that the 3% refers to Net Producers Profit. So we had a long discussion about the differences between gross and net, profits and receipts, and my favourite term, “adjusted” (as in adjusted Gross or adjusted net, or pretty much adjusted anything). I’ve been jumpy around the use of the word “net” in relation to income since my very brief sojourn in the world of film finance. So our conversation went back and forth about the value of this 3% of Net Producers Profit. The person I was speaking with was hailing the proposed new contract as a victory for Irish actors after years of being contractually discriminated against and excluded from all profit participation. Still, the word Net makes me uncomfortable so I decided to ask an expert on these things, and they set out the situation pretty clearly.

My industry contact explained the value of 3% of Net Producers Profit very simply, and provided the following simplified tables by way of example. Of course there are subtleties of definition around the terms but the overall model is accurate. The purpose is simply to understand the difference in value between Gross and Net.

Important terms to understand before we start.

  • Gross Box Office Receipts: ALL the money received by ALL the cinemas showing a movie.
  • Gross Distributor Receipts: Gross Box Office Receipts are shared between the cinema (the Exhibitor) and the Distributor. This amount varies but its not unreasonable or uncommon for the cinema (the Exhibitor) to take 60% of the gross receipts and the Distributor to take 40%. This 40% of the Gross Box Office Receipts is called The Gross Distributor Receipts
  • Distribution and Marketing Costs. The Distributor will pay for the cost of distributing and marketing the film (sometimes referred to as Print and Advertising or P&A) from the Gross Distributor Receipts. (Many films spend more on distribution and marketing that on the actual production)
  • Net Distributor Receipts. This is the amount remaining after Distribution and Marketing Costs have been deducted from the Gross Distributor Receipts. It is this amount that will be shared with the producer/production company depending on the nature of their agreement. For the purposes of this calculation we’ll assume the share is 50/50.
  • Gross Producer Receipts This is the total amount the producer/production company receives from the distributor as their share of Net Distributor Receipts. The producer is dependent on this share to reclaim the cost of production.
  • Producers NET RECEIPTS. This is the amount remaining after the producer has deducted the cost of producing the film from their Gross Receipts.

It was explained to me that this is very simplified (we’re ignoring things like sales taxes, tax breaks on film investment, vertical integration, grants and supports etc. all of which vary from territory to territory) but in essence this is the model. Therefore, as my informant pointed out, the real question surrounding actor’s copyright and participation is: at what stage does the artist participation kick in? If participation moves down this list (from Gross Box Office Receipts to Producers Net Receipts) then the value of the participation tends to zero very, very quickly, and means that you have effectively lost the negotiation.

To make the point my informant used Disney’s Star Wars: The Force Awakens and Element Picture’s The Favourite to demonstrate how quickly the cash value of 3% declines depending on when it kicks in. All of the figures used below are publicly available industry sources, and are used to illustrate a general point only.

For The Force Awakens there are various figures available for production costs apparently, so we settled on the lower ($245,000,000) from IMDBs Box Office Mojo. Allegedly Disney spent $50m more on advertising than on production, which gave us a distribution and marketing cost of $295,000,000. Let’s see how it plays out.

ItemBalanceParticipation at 3%
Gross Box Office Receipts$2,068,223,624$62,046,709
Distributors Gross (40%)$827,289,450$24,818,683
Distribution and Marketing-$295,000,000 
Distributors Net$532,289,450$15,968,683
Producers Gross (50%)$266,144,725$7,984,342
Production Costs-$245,000,000 
Producers Net$21,144,725$634,342

So, if your 3% participation kicks in at Gross Box Office Receipts then you get to share in a $62 million royalty pool, and that’s before streaming, DVD and other downstream channels kick in.

If your participation kicks in at Producers Net then you’re sharing in $600,000. That’s a big difference; that’s a 100 times SMALLER difference, because you agreed to NET as opposed to GROSS.

For comparison we looked at The Favourite, and ran the same calculations. Most of the numbers here are taken from thenumbers.com  We couldn’t find figures for distribution and marketing so we estimated it at $7.5 million.

ItemBalanceParticipation at 3%
Gross Box Office$95,872,148$2,876,164
Distributors Gross (40%)$38,348,859$1,150,466
Distribution and Marketing-$7,500,000 
Distributors Net$30,848,859$925,466
Producers Gross (50%)$15,424,430$462,733
Production Costs-$15,000,000 
Producers Net$424,430$12,733

And again you see what happens. If your participation kicks in at Gross Box Office you get to share in a $2.8 million royalty pool. However, if you get kicked down to Producers Net then you get to share in $12,733. That’s over 200 times SMALLER. Even comparing producers net to producers gross the Gross is 36 times larger than the net.

These are just two very simple and simplified examples to demonstrate a fundamental principle: In film the revenues move from Gross to Net across Distributors and then Producers and the royalty participation value drops really really quickly as you move down that value chain.

Therefore, if a royalty participation is to have any real, meaningful value it has to kick in as early in the value chain as possible and it has to be attached to a meaningful gross number, and not a net number. Anybody who tells you anything different is not negotiating on your behalf.

 

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