Wednesday, August 27, 2008


Chapter #48

“Negotiate The Deal””

You are nothing without a distributor! And, every chapter up until now has been involved with taking the idea-dream that is in your head, making it into a real 90-minute narrative film and getting some awards at film festivals. But, you are still nothing without a distributor.

WARNING: This chapter will be a “Bummer”. All the positive energy I created, by demystifying Hollywood, will be instantly forgotten once you realize how distributors screw first-time filmmakers. However, don’t be depressed. For once I give you the realistic information, then I’ll show you how to obtain a distributor with a deal that allows you a profit. But first, let me depress you.

I’m sure you’ve heard that distributors are sharks who prey on naïve first-timers. It’s true! But, I don’t like this analogy for it reeks of the pity-pot and the poor-me syndrome. To me distributors are more comparable to attorneys. Everyone hates them. Everyone has an attorney joke. But, like it or not, we needs attorneys. And, like it or not, you need a distributor.

There are two reasons why you need a distributor: First, they have the P&A money to make your film into a movie. YOU DON’T! Second, they have the ability to collect from theater owners. YOU DON’T!

Distributors, middlemen between filmmakers and exhibitors, take your product, create an advertising campaign, place newspaper ads, set up interviews, strike prints, book theaters, freight prints, make your film into a movie and oversee the collection and distribution of revenues.

A distributor, with three to thirty films/year, has the power to collect from theater owners because they want the distributor’s next film. You only have one film. Attempt self-distribution and you’ll spend your entire life in small claims court trying to collect from each and every theater owner. Therefore, it is imperative to have a distributor who can collect --Your problem then becomes collecting from the distributor.

Remember, marketing a film most times costs more than making the film. Thus, the P&A money is imperative. Without it your film is only a film. And, remember, no one buys films. You ain’t got any P&A money, you barely had enough money to make the film and attend a festival. But the distributor does. And, (SECRET) He who has the P&A money has the power…and distributors have P&A money.”

Let’s assume you’ve done everything right. You got a great script. Picked the right actors. Shot on-budget. Entered the proper festival. Audiences came. You won an award and are talking with distributors.

The deal you’ll be offered 19 out of 20 times is called “The Standard Distribution Deal” which, on the surface sounds fair. This is what distributors claim everyone gets for his first film. Don’t believe them! The deal will appear equitable, but it isn’t. The distributor will offer it by saying: "I love your film. Let's partner. I'll distribute, take my standard distribution fee, recoup expenses, and split 50-50 with you.”

It is technically called the “50-50 Net Deal” (aka: Standard Distribution Deal) and you’ll never see a penny. Let’s take a deeper look at what the distributor is really saying with, “Let’s partner, I’ll distribute, take my standard fee, recoup my expenses and split profits 50-50 with you”.
A. LET’S PARTNER: “You pay for the film. We collect the revenues.”
B. I’LL DISTRIBUTE: “We make all decisions and stay in control”
C. STANDARD FEE: “Our standard fee is as much as we can get”
D. RECOUP EXPENSES: “That pied-a-terre in NY, Condo in Gastaad, hooker in LA, etc.”
E. PROFIT SPLIT: “50% of nothing is nothing.”
Assume you pitch an idea to a distributor and get $1,000,000 to make the film. Once it’s done the distributor agrees to put $3,000,000 into a P&A campaign and on the opening weekend the film grosses $10,000,000. Wow! Don’t count your chickens. Thirty days after the $10,000,000 weekend you get an accounting statement showing that your film is losing $3,000,000. Your jaws drop. You’re astonished. You ponder, “How can this be?”

Simple, here’s how: Assuming you accepted a Standard (50-50 Net) Distribution Deal with the production money. The good news is that on its first weekend of release your film grossed $10,000,000. It’s a hit. This is great, but remember that the word gross is not the word profit and you split profits not grosses. And the accounting statement you receive will look like this…

BOX OFFICE GROSS $10,000,000
(Less) Exhibitor’s Fees (50%) ($5,00,000)

(Less) Distributor’s Fee (35%) ($1,750,000)

(Less) Production Expense ($1,000,000)
Production Interest ($250,000)
Prints & Advertising ($3,000,000)
Overhead ($2,000,000)

($3,000,000) NET LOSS

Gross, specifically box office gross, refers to the money theater owners collect from audiences. Now, distributors, being the marketing geniuses they are, know that many people didn’t see your film this weekend. So how do they get them to see your film on Monday, Tuesday, Wednesday, etc? The answer is, they market what the film grossed. Not what the film profited or lost. This is because the gross dollar amount is always a large number. Ask yourself. What would you rather see, a film that grossed $10,000,000 or a film that lost $3,000,000?

Let’s follow the money trail and discover how a $10,000,000 grosser becomes a $3,000,000 loser. First, the theater owner collects the $10,000,000 (not the distributor) and takes his cut (usually 50%) of the Box Office Gross and sends the remaining money, now called Distributors Gross, to the distributor who has paid for all the prints and ads. Your $10,000,000 Box Office Gross has just become a $5,000,000 Distributor’s Gross.

The distributor now deducts 35% ($1,750,000) for his distribution fee from the $5,000,000 leaving a $3,250,000 Producer’s Gross.

Next, remember, if the distributor gave you $1,000,000 to make the film. They want that money back. Actually distributors don’t give you money, they loan it to you and want their loan back --with interest that is usually at 25%. Now, deducting the loan ($1,000,000), typically called a Production Expense and interest ($250,000), from the Producers Gross leaves $2,000,000. The number is getting smaller and smaller and…

Next, the distributor recoups his $3,000,000 P&A costs. Subtract a $3,000,000 expense, from a $2,000,000 gross and there is no form of new math that will show a profit. Your film is now at $1,000,000 in losses. Add to the $1,000,000 in losses $2,000,000 in distributor’s overhead and your film is now at $3,000,000 in losses. I told you this chapter would be a bummer.

Directors and/or producers are like architects in the real estate world. Builders option a property (idea/story), hire an architect (writer), get the blueprints (scripts) and construct (direct/produce) the building. When the building is done, the builder (distributor) sells and if there’s a profit do you think an architect expects to split 50-50 with the builder? No way! Not even IM Pei or Frank Gehry, world famous architects, expect to participate in profits. They are happy to be well paid employees.

If you get funding from a distributor to make a film, be happy. Stop being naïve. Don’t expect profits. Be happy with the funding, the excellent salary, the celebrity exposure and the ability to launch your career. But don’t expect profits – you never took any financial gambles.

Distributors rationalize, behind closed doors (I lean towards agreeing with them), that since they take all the financial gambles, pay you well and make you into a celebrity, that that is enough. “Forest Gump" has grossed almost $250,000,000, and director Bob Zemeckis hasn’t seen profits yet. Is Zemeckis bitching? Probably a little but he knows that he is an extremely well paid, is treated like an artist, and is happy.

There will be no profits. And if there are, the distributor will probably do creative bookkeeping (they just make the overhead number larger) to hide them. Then your only recourse is to hire an attorney, sue and spend the next 9-11 years in court. Once again, I promised that this chapter will initially be a “Bummer”. Did I deliver? Now let’s get it upbeat.

What I’ve just described is the scenario where a distributor finances you. That is called “studio deal making”. This book is not about studio deal making. It is about “independent filmmaking”. You get your own money, not distributor’s money, and you with your investors take the financial gamble. You make the film outside the system and then bring it in by attending a festival or two.

Now, if your film hits at a popular film festival, in front of a paying audience, do you deserve a distribution deal that will garner you profits? Absolutely!

When you only have one distributor offering you one distribution deal, nothing is negotiable. Don’t try to play the “I’m talking to other distributors” game. (SECRET) To get a good deal you must have more than one distributor making offers…then you can negotiate.

Deals vary from distributor to distributor. Further, within a distribution company, deals vary from producer to producer. Even further, with each producer, deals vary from film to film. Nothing is standard. Except that there are three basic types of distribution deals. They are:
By far the simplest deal. Technically it’s called a “Buyout”. The distributor agrees to give you X dollars for either "World", or “Foreign”, or “North American” rights, plus "Non-Theatrical" and “Internet” rights --One check and you walk away.

With the Flat Fee deal, you simply negotiate the buyout amount, who becomes the copyright owner and some minor marketing and promotion points.

IMPORTANT POINT: Never expect to see another penny from the distributor, after you receive the buyout amount, even if a percentage of profits put in as an alleged bonus. Therefore, be sure that the buyout amount is enough to pay back your investors and give them a small profit – and two tickets to the opening night premiere in LA and NY.

When negotiating, if you don’t get any money up front with a Flat Deal, then make absolutely sure you get a small percentage of gross (Box Office, Distributor or Producer) rather than a large percentage of profits. For with respect to profits, the distributor’s creative bookkeeping system ensures that there probably won't be any profits and 50%, 70% or 90% of nothing is still nothing.

The types of Gross or Net Deals are:
1. FIRST DOLLAR GROSS DEAL: Very unusual to get, unless you’re Spielberg or Lucas or Cruise and they only get a percentage of Box Office Gross with a proven sequel like “Jurassic Park” or “Star Wars” or “Mission Impossible”.
2. FIRST DOLLAR SPLIT DEAL: If you accept no advance payment or guarantee, then it is fair to negotiate a 50-50 split of the Distributor’s Gross (dollars received from theater owners), but not Box Office Gross.
3. ADJUSTED GROSS DEAL: Although called a Gross Deal, it invariably is a Net Deal. The Producer receives an advance and then allows the distributor to recoup expenses before splitting.
4. 70/30 MAJOR DEAL: A combination Net-Gross Deal. Distributor recoups specific expenses first and everything remaining is split 70% Distributor and 30% Producer.
5. SLIDING SCALE DEAL: Similar to the 70/30 Deal with split ratio changing to 65/45 after first million, then 60/40 after fifth million, 55/45 after tenth million, etc. The dollar amounts and split ratios vary from film to film.
6. 50/50 NET DEAL: As previously discussed, the distributor gets a fee, recoups expenses and then splits any remaining dollars 50-50 (Yuk. Yuk.) with the filmmaker.

When negotiating, (SECRET) distributors always want a simple deal. You, the filmmaker, want a complicated deal. I know this seems weird. But the simpler the (2-3 pages) contract, the more vague the language. The more vague the language, the easier it is for a distributor to do creative bookkeeping and legally steal from you.

You, on the other hand, want a very specific (40-60 pages) contract with all T’s crossed and I’s dotted. Problem is you don’t know what the Ts & Is are. To help you here’s an outline of 29 points to define and negotiate. Each one should take up a page or two in the final contract. These points are known as the “DEAL MEMO” Points.

1. PAYMENT: Cash amount the distributor is paying, and when the payment is due.
2. GUARANTEES: Minimum amount of money the distributor promises to deliver to you over a period of time, usually 1-10 years
3. DISTRIBUTION FEES: Percentage of Distributor’s Gross the distributor receives as his fee (not his expenses). It could be between 15%-40% but is usually 35%.
4. CREDITS: Define all opening title credit(s), specifying the size of the print and length of time on screen (aim for a 3-second beat).
5. P&A BUDGET: Dollar amount to be used for promoting (newspaper ads, radio and tv spots, posters, billboards, web site, etc.). Specify the number of prints and the cost charged per print.
6. ADVERTISING APPROVAL: The right to approve "the hook" and the look of the marketing campaign.
7. TRAILERS: A commitment to exhibit a specified number of trailers in theaters prior to the film's actual play date.
8. PLAY DATES: Secure a guaranteed number of theatrical play dates (a play date is one print playing in one theater for one week) within a specific number of cities.
9. RELEASE EXCLUSIVITY: A promissory statement (affidavit) stating they won’t release a competitive film during the period they’re releasing your film.
10. DEFINITIONS: Clearly define all the terms (Gross, Box Office Gross, Producer's Gross, Adjusted Gross, Film Rentals, Distribution Revenues, Net Receipts, Profits, Net Profits, Producer’s Net Profits, etc.) in the contract.
11. DISTRIBUTION EXPENSES: Clearly define what is and what isn’t allowed as a distributor’s expense.
12. CAPPING EXPENSE: Do not allow the distributor carte blanche on expenses. State a specific cap with the distributor needing written approval before spending additional funds.
13. CROSS-COLLATERALIZING: Never allow distributors to place expenses related to your film in a "pool" of films they're distributing. Otherwise all their other films’ expenses will be charged to you.
14. OVERHEAD: This is a killer word. Make sure you clearly define what is and what isn’t overhead.
15. DEFERRALS: Clearly define at what point deferrals, if there are any, are to be remitted and to what account they are to be charged.
16. INVESTOR RECOUPMENT: Specify when investors commence to recoup their investment, when (if) they receive interest on their investment, and finally when they receive their share of profits (if any).
17. OWNERSHIP: Clearly establish who owns the copyrights and the negative.
18. LICENSING PERIOD: State the years the distributor has the right to sell and/or distribute your film to each territory or ancillary market.
19. PACKAGING: Establish that the distributor cannot "package" your film with others without your written consent.
20. BREAK EVEN POINT: Stipulate at what Box Office Gross dollar the distributor declares that the film has broken even, and state how revenues are to be split with the producer and investors.
21. GROSS FLOOR: Specify a fixed amount, after which the filmmaker/investor group must commence to receive revenues also.
22. INTEREST RATES: State the exact interest rate charged if the distributor funds (loans money for) the film, and when it is recouped. Do not permit the distributor to keep the interest growing and growing. This will kill any chance of reaching a Break Even Point and Profits.
23. SUB-DISTRIBUTORS: If the distributor subcontracts out distribution in certain territories, define the terms that these sub-distributors can charge the distributor, who in turn, will charge you.
24. WINDOWS: Specify the period of time for which companies in each ancillary market (PPV, VOD, video/DVD, cable, broadcasting, etc) can market the licensing rights to your film.
a. Home Video/DVD
b. Cable: basic, Pay, PPV
c. Broadcasting: Network, Syndication & public
d. Foreign Theatrical
e. Foreign Ancillary
f. Music: Albums, Songs
g. Literary: Novelization, Serialization
h. Merchandise & Toys
i. Satellite:
j. Internet
k. Airline, Cruise Ships, etc
l. Military: Army, Navy, etc
m. Educational: Schools, Libraries, etc
n. Future Technologies
26. INSURANCE CARRIERS: Specify whom the distributor insurers are, and make sure you have a copy of each policy.
27. LABORATORY ACCESS: Never give the distributor access to your negative at the lab. This allows you to monitor him whenever he needs a print.
28. AUDITING & ENFORCEMENT: Verify bookkeeping statements. You need access to the distributor's books and should there be a dispute, clearly define how the audit will be handled.
29. BINDING ARBITRATION: If the audit is in your favor, you will discover you lack the power to enforce it, and you can’t afford litigation. A quicker way is to circumvent suing and arbitrate.

There is a lot of ground to cover in your negotiations. And you can only negotiate if you have leverage. And you will only get leverage by having more than one distributor at a film festival wanting your film. But if this occurs what you basically want is:
1. MONEY: An upfront payment or guarantee
2. PERCENTAGE: Remittance from Gross not Net
3. CONTRACT: Detailed rather than simple
4. AUDIT: Ability to verify everything in #1,2,3.
5. ARBITRATION: Ability to enforce the contract.

You are not educated enough to know all the games a distributor can play. Although I’ve given you 29 deal memo points to start, it is imperative to conduct all negotiations with an entertainment attorney who, besides knowing (1) how to negotiate, understands (2) how to combat creative accounting and (3) has practiced law long enough to know how to enforce contracts with audits and “binding arbitration”, without spending a decade in court.

Maybe you want to try self-distribution?

1. Find an entertainment attorney to be your Producer’s Representative.