How is a Movie’s Revenue Distributed?

The Setup

Let’s imagine a world where we want to make a movie. We put our law careers on hold and schmooze with some investors. To our surprise, they’re amiable to the idea of investing money in law students with no filmmaking experience. In fact, they’re so enthused that these investors give us 30 million dollars to make a movie.

Fast forward, we actually make the movie and spend the entire $30 million on its production. The movie, to our surprise, has artistic merit and commercial appeal. Word spreads that some no-name law students have created a hit movie.

A well-known film studio contacts us. They heard about our movie and want to release our movie in theaters nationwide. We had no means to release our movie in theaters ourselves (we’re out of money and have no connections to the theater companies), and this is a big well-known film studio, so we’re strongly considering this deal.

This studio really wants our movie. They follow up and say that in addition to releasing our movie nationwide in theaters, they are willing to commit a minimum of $20 million to advertising our movie. We’re sold. With that amount of money, our film will be advertised on television, on billboards, we could even be interviewed in a magazine!

We sign the deal. A year later the movie comes out and is a smash success, it makes 100 million dollars. Seems like a great deal, right? Someone gave us $30 million to make a movie that made $100 million. Our friends, family, and long-lost aunts think we’re rich. Unfortunately, we are not rich. In fact, by modern Hollywood standards, this film is a failure. After all of our hard work, we will be entitled to $0. Why is this?

Definitions

Production Company: Us. The production company consists of the people who oversaw the creation of the movie.

Production Budget: $30 million dollars. This is the money we received from the investors and spent on the creation of the film.

Exhibitor: The theater company. Think AMC, Regal, Cinemark, or your local movie theater.

Distributor: The film studio. A film studio can act as a financier, producer, or distributor, and commonly does for their in-house films. In context of this hypothetical, they are purely acting as a distributor. A distributor is a company that has relationships with exhibitors and has money to spend on advertising. They handle all aspects of making sure people can see a film after a film is made.

P&A: The “prints and advertising” budget. This is the money spent by the distributor on advertising the film. In our case, the P&A spend is $20 million.

Distribution Fee: The distributor takes a “distribution fee” of anywhere from 20% to 30% of the revenue. This is a straightforward service fee. The rationale is that the distributor is taking a risk spending money upfront on P&A and investing time into a project they are not sure will make money. This fee is their repayment for taking this risk. This is an industry standard practice.

Assumptions

1) Our distributor only releases our films theatrically in the United States. There are no Netflix deals, no DVD sales, no VHS rentals, etc. Our only source of income is the money that we have made in theaters. This is an unrealistic assumption, but it is in place for clarity’s sake. After reading how money is allocated between parties, it should be evident just how important alternate means of revenue generation (e.g. services like Amazon Prime or iTunes) are to a film’s revenue generation.

2) The exhibitor (theater company) takes 50% of every dollar made at its theaters (industry standard).

3) The distribution company takes a 25% distribution fee (industry standard).

Breakdown

First: The exhibitor, the theater company, takes approximately 50% of every dollar made at its theaters. This number can vary based on the negotiated contract, but the average fee taken is 50%. After taking half of every ticket sale, the exhibitor sends the other half to the distributor.

What is left of the $100 million? $50 million.

Second: The distributor receives the money from the exhibitor. The distributor takes a “distribution fee” of anywhere from 20% to 30% of the revenue. I assume here a 25% fee is taken of the $50 million received. The distribution company receives 12.5 million dollars as its fee.

What is left of the $100 million? $37.5 million.

Third: From the $37.5 million, the distributor recoups its P&A costs. As originally stated, $20 million was spent by the distributor on advertising this film. The distributor takes the $20 million spent in P&A out of the $37.5 million.

What is left of the $100 million? $17.5 million.

Fourth: The distributor passes the $17.5 million to us, the production company. The financiers are entitled to recoup the amount invested on the initial budget before we receive any money. Recall that the amount spent on the budget was $30 million dollars. We hand over the $17.5 million we received from the distributor. This amounts to a loss of $12.5 million for the financiers. The financiers, the original investors, lost about 41% of their initial investment on this deal. We receive no money because we are only entitled to receive money after the budget has been recouped by the financiers.

What is left of the $100 million? A LOSS of $12.5 million

Takeaways

1) Hollywood consists of many hidden fees.

2) Ancillary revenue sources like toy sales, streaming services, virtual ‘pay-per-view’, or other means of internet-enabled revenue are essential to a profitable film. One cannot depend just on theatrical revenue.

The next time you see a news article about a movie being a success, take a hard look at the numbers reported. Often, an article will declare a film a financial success or failure before all revenue sources are reported. A film’s theater revenue is only a small part of how a film makes money today.

You spent 1,000 words describing a legacy process. You left out the one word that really mattered, which was "Netflix."

The best route to improvement is to boil down the existing description into the 200 words that were all you should have needed in the first place. That should be accompanied by 200 words describing what Netflix has done to the production system, and how that reconfiguration is faring in the ecology. Then there would be 600 words available to make an actual point, have the real idea, that all the running and jumping in this draft prevented you from refining into clear sentences and getting on the page.

The real idea here is the one that follows "So what?" "Hollywood has lots of hidden costs," is not that idea. "Next time you read X in the newspapers" is not that idea. That's exactly the sort of proposition that elicits "So What?" I don't need people to tell me what to think when I read the newspapers; I need ideas that I will myself decide to refine and generalize and reconfigure and apply where in my life as a persona and a lawyer I want to. So a draft that says: (1) here's my idea; (2) here's the way I came to it or the part of life around us that illustrates it; and (3) here are one or two ways that you the reader could take my idea farther on your own, is the sort of draft you should enable yourself to write.

A lawyer does not sell sizzle: he does in fact sell steak. Clients buy judgment, in the end, not cleverness, though if you turn out to be a tax lawyer, as I think you might, cleverness will do. But tax lawyer's cleverness too is steak: the math has to work and the assessment of the Commissioner's probable next moves on the chessboard has to be right too. So you should form your writing style, even when you are writing off-duty, to put substance—from the highest level down—simply and clearly, without promotional decoration. A fine steak well-grilled and timely served will naturally sizzle, but so what?

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