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.

 

For the Minister for Arts etc. If Funding is the solution then what’s the problem?

Lenny Abrahamson tweeted recently, referring to the  range of stimulus measures for the media, tourism, arts, culture, sport and Gaeltacht sectors announced by the Minister as part of the July Stimulus package :

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I agree that it is good news, but I think the numbers involved are too small and aspects of the delivery reveal a deep misunderstanding of how the sector works. So this blog is for the minister and bureaucrats.  I share Lenny’s caution, and “hope” it bodes well for future engagement. However, unless the Minister and the bureaucrats understand the underlying trends shaping the sector their policies will fail and conditions for artists can only get worse. Here’s why….

Continue reading For the Minister for Arts etc. If Funding is the solution then what’s the problem?

This is how it is – A Map of the Arts and Culture Sector for Visiting Politicians

Elaine O’Connor and David Mongey of the Event Industry Association, Angela Dorgan and Aideen Howard of the NCFA,  Shane Dunne and Sophie Ridley of EPIC, together made a strong  and compelling case at the  Oireachtas Committee Meeting – Arts and Entertainment Sector 30/6/20 ,   and massive congratulations are due to them.

The members of the committee were sympathetic to the arguments they put forward. The  questions asked by the committee members, however,  left two distinct impressions on me:

First:   the committee did not appear to have a complete picture in their head of the workings of the arts and culture sector, or at best had a very incomplete picture. Their questions lacked a sense of what was going on, of what life is like in here, of the complexity of how it works, of how the money flows, of the role and extent of state funding, etc.

The second impression  – and this is purely subjective – is that unless the committee gets a really clear picture of the sector then sympathy may mark the end of its response.  Complexity does not sit well in a  political culture that favours the simple, clear deliverable action that doesn’t have a big up front cost, the quick fix and the short term result.

So this post is for the committee – its a map of the Culture and Creative Sector in Ireland, based on the figures in the Indecon 2010 report and in the EY report for the Arts Council’s Expert Advisory committee.  If you click on the drawing below it gets bigger.

 

 

The widest circle  – the blue one – represents the “Creative Industries”.  It has a GVA of €4.7 billion,  and directly employs about 50,000 people.  It is heavily subsidised through Enterprise Ireland,  Screen Ireland, the TV License Fee and an array of tax breaks and corporate tax loopholes. The “industries” in this circle include (according to the Indecon report) Software, Literature and Publishing, Radio and Television, Advertising , Film and Video  – however, International definitions of Creative Industries include a lot more, such as architecture,  craft industries, music recording and distribution etc.

The green circle is the “Wider Arts Sector”. It has a Gross Value Added of €715 million, a direct expenditure of a €1.2 billion, and direct employment of 13,330 people. The wider arts sector includes everything from major concerts, commercial galleries,  spoken word in pubs, stand up comedy, pub gigs, buskers, non funded theatre, etc,  It’s a big sector, and carries the burden of taxation (its collective tax bill of €306.8 million is almost equal to the department of culture’s total expenditure). The wider arts sector receives almost NO funding directly and is pretty much entirely dependent on sales.

The red circle is the “Arts Council Funded Sector”. It has a direct expenditure of €151.5 million, and 1700 jobs. This sector includes all the clients of the Arts Council. Its important to understand that the Funded Arts Sector is only partially funded and is heavily reliant on sales which account for almost 50% of its turnover.

The artists and the crew – the people who actually make the stuff that we associate with the arts or the “Culture and Creative Sector” do not have jobs in any of these sectors.

And it’s really important we have that clear in our heads, so here it is again: The artists and the crew – the people who actually make the stuff that we associate with the arts or the “Culture and Creative Sector” do not have jobs in any of these sectors.

They survive on short term contracts, bursaries, sales and – in very rare cases – copyright. If you look back at the picture you can see that these people move between the different circles, picking up contracts and making sales wherever they can – sometimes in the Arts Council Funded sector, but mostly in the unfunded Wider Arts Sector, and occasionally in the big blue of the Creative Industries.

There are no full time jobs for artists and crew, and this point cannot be stressed enough –  so when we say that the wider arts sector has 13,000 jobs the majority of that is full time equivalents – so there are way more people eking out a living than 13,000! And when we say there are 1700 jobs in the Funded Arts Sector, less than 50% of those jobs represent occasional contracts and bursaries for artists.

Like all diagrams this one is incomplete,  and there are a few more important elements to consider.

First the role of local authorities: collectively the local authorities spend about the same as the Arts Council through their arts office budgets (but with huge disparities from county to county). Their spend is felt across the Arts Council Funded sector and the Wider Arts Sector.  For example an awful lot of individual artists and companies not funded by the Arts Council use the network of local authority Arts Centres (about 5-10% of the programme in the arts centers is Arts Council Funded Clients, so the rest of the programme comes from the Wider Arts Sector).

Second, all three sectors depend – to a lesser or greater extent – on sales.  Arts Council funded clients need to find approximately 46% of their collective turnover from sources other than the Arts Council.  In the Wider Arts Sector they are almost entirely dependent on sales with some debt finance (and some equity) , while the creative industry sector has the double advantage of significant state aid and significant sales (although not for all companies in the sector).

What’s important for the committee to understand is that the  Arts Sector in total  is substantial, and the current channels of direct state funding are directly supporting only a very small part of it, but all government policy and debate is focused on that small part as if it were the whole.

When we understand the complexity of this picture we begin to understand why so many artists feel excluded, disrespected, undervalued etc. The state money that goes into the red circle benefits a very small number of artists in an infrequent fashion, leaving the rest to chase and make work in the green circle.

And that’s the map of the culture and creative sector that is currently facing an extreme crisis.  As this crisis unfolds books will still be written and published, paintings sold, music and films streamed and released in cinemas and on TV etc.  However, events requiring audiences to gather in confined spaces have stopped and cannot resume in any cost effective way.

Also, remember that we are looking at spiralling unemployment throughout the wider economy combined with the collapse of the tourist sector. In this context the harsh reality of EY’s assessment, that people will reduce their ‘non-essential expenditure, such as on the Arts, in anticipation of job insecurity” starts to make sense.

Large parts of the funded, wider and creative industries are experiencing the collapse of their sales. If that continues for much longer the wider arts sector will collapse and its tax revenue will vanish and loans will default. The funded sector cannot support the 13,000+ people working in the wider sector, therefore  the potential for widespread unemployment is huge and with it the collapse of demand in the economy, defaulting on mortgage repayments, personal loans, credit card debt etc., and further demands on the welfare budget.

The €20 million additional funding to the Arts Council this year  (and the €30 million ask for next year) will only partially replace the lost sales revenue, so that sector will continue to feel the strain. The greatest negative impact will be felt in the Wider Arts Sector so the questions of how to support that, and how to support the artists and crew who can no longer sell their skills and talents in any of the sectors, become paramount.

How can the government effectively respond to this crisis? The proposals put forward by the NCFA and Epic are all necessary, but more is needed, so are there additional solutions that can be added to the mix of additional grants and funding?

The first thing to realise is that the Wider Arts Sector is rich in assets: lighting rigs, scaffolding, stages, paintings, manuscripts, playscripts, recordings, songs etc. One possible way forward is to transfer all assets to government. (They can borrow at close to 0% from the ECB, or request funding from the EU rescue package.  Because the government take ownership of the assets in exchange for the cash their balance sheet is unaffected. They could then agree a storage fee with the owners of the assets. This releases a significant amount of cash into the sector directly into the hands of the owners of the assets (writers, visual artists, composers, event companies etc) and wipes  the debt in the wider arts sector clean.  A cultural NAMA if you will.

As the sector returns to health it can “buy back the assets” on a rental model, so that each rental payment is set against the original cost. There are many creative ways that the assets can be returned to their original owners over time.

Performers – musicians, actors, dancers etc. – will not benefit from this scheme, so we need to find an additional solution.  Piloting a UBI for performers and crew is one possible way forward (as suggested by the NCFA and EPIC), but this is fraught with political problems. Why should this group of workers receive this kind of support and not others?

Performance in socially distanced spaces is not cost effective under the current funding model, so some method of monetised online delivery is required. Either the state builds its own delivery platform (job creation right there) that can live broadcast performances, or it mandates an arts specific payment method with the existing social media platforms to ensure equitable remuneration for creative content.

The government could also take the green jersey “we’re all in this together” approach and bring the major multi-nationals, domestic businesses, and financial players into a room and ask them to do their bit in acknowledgement of the favourable corporate tax rate. Each of these players could employ embedded artists, or simply agree to buy all work produced.

Finding the right mix of solutions means that we have to be crystal clear on the problem that we’re facing. I would suggest that”the arts” are not in any danger. Writers will write, painters will paint, performers will find ways to perform. If only the bare minimum is done people will exit the industry, but others will come in, some organisations will close but others will eventually emerge. What is at risk now is not “The Arts” but a generation of people who currently work in the arts. Do we want to preserve their careers, their skills, their talents, do we want to keep a generation’s worth of knowledge or are we happy to see all that decline? Are people disposable or are they not? That is the principal policy question.

 

 

If I were the Minister for Culture….This is what I’d Do…

This second stage of the analysis looked at the answers to  the second question : “If you could change three things about the conditions under which you work tomorrow, what would they be? ”

94 people responded to the questionnaire, which should give 282 separate comments. However, some people made less than three comments/suggestions and there were three comments that did not seem to relate to the question. So in total I identified 260 discrete comments.

I identified recurring ideas and experiences, and then grouped them under thematic headings.  At the most basic level we can now see the number of times each idea occurred, and that gives a sense of the relative importance of each theme.  So we can now say what area of policy action is of most importance to people actually working in the arts/culture sector.

To be honest – I was really surprised!

Continue reading If I were the Minister for Culture….This is what I’d Do…

Copyright – Its time to start issuing invoices

Copyright is one of the defining economic elements of creative activities. You could almost say that if you can’t copyright something then it probably isn’t a creative practice.  Actors, dancers, visual artists, writers, composers, musicians all have copyright. (So do architects and games designers and a host of creative industries workers). Artists copyright is protected by national and international law.  It’s potentially one of the most powerful earning tools in an artists career. And yet, here in Ireland, for the majority of Irish Artists it’s almost impossible to collect. So here’s what could happen. Continue reading Copyright – Its time to start issuing invoices

Stop looking for more arts funding – its never going to come.

I said on social media when this lock-in started that I would post some big picture ideas on arts and culture practice, policy and economics, so here’s the first in a series of what I hope will be useful provocations.

Direct government funding to the arts in this country cannot – and most probably never will – meet the EU average of 0.6% of GDP (regardless of whatever remarkable “changes” are expected after the Great Lock-In)  We need to accept that and stop making it the central ask of lobbying efforts. Here’s why Continue reading Stop looking for more arts funding – its never going to come.

Copyright – How much are we really talking about here?

To follow up on my previous article about copyright, and as a contribution to the recently published Arts Council Policy, Paying The Artist, I thought I’d ask the question how much is copyright worth? Because nobody has ever given me a satisfactory answer (an actual number), and every politician and bureaucrat I’ve raised it with has dismissed it as either too insignificant to worry about or an irritating obstacle to foreign investment and job creation. So, I did a bit of digging and I came up with a number….

Continue reading Copyright – How much are we really talking about here?

Playing golf with a football

football golf clubWhy are artists poor? And, according to reports in Ireland, getting poorer? According to the official narratives artists and their art are a core component of the Irish economy and society. According to that narrative art is good for everybody’s wellbeing and is a cornerstone of tourism and soft diplomacy. Every time an award is won or a film starts principal photography there’s a politician standing by for a photograph like a proud parent at a graduation. Despite all this the income goes down and the cost of being an artist goes up.

Even as funding creeps up year on year it fails to alleviate the problem. The Dutch artist and sociologist Hans Abbing argued convincingly that as funding goes up more people are attracted into the funding market, so increases in funding – below a certain level – make the problem worse.

What is the root cause of this funding problem, the ongoing poverty of artists?

Its a mismatch.

Continue reading Playing golf with a football