Tuesday, October 16, 2012


 The goal for many filmmakers is nothing less than to see their film shown in a theater.   Theatrical distributors typically advance all marketing and distribution costs and, for highly desirable films, may provide the producer with an advance payment or minimum guarantee ("MG"). These payments are recoupable but not refundable. That means the distributor can reimburse itself its advances from revenues before paying the filmmaker his share of revenue, but if the film bombs and there is not enough revenue for the distributor to recoup its advance and expenses, the filmmaker does not have to refund payments received. If the advance is sufficient to repay one's investors, then the filmmaker has effectively transferred all financial risk to the distributor. This is a desirable but increasingly rare occurrence. Nowadays, many distributors will only offer a small advance or no advance when seeking to acquire a title for distribution. The distributor will argue that it is advancing marketing and distribution costs and that is enough, thank you.   

If a domestic distributor is willing to take the plunge and release a film theatrically, it will almost always insist on securing ancillary rights for home video and television media. A theatrical release, even for a hit film, often generates less revenue than its costs because of the substantial expense for prints and advertising (P & A): a 35 mm print costs $1200 to $1500. Thus, a major studio releasing a film on 4,000 screens will spend $6 million dollars. Shipping heavy film canisters has cost major studios up to $450 million a year. On top of that, the price of a single full page advertisement in the New York Times can add another hundred thousand dollars.  

However, print outlays are plummeting as theaters convert to digital projection. 77% of screens in the USA now have systems that can exhibit a digital copy, which costs about $150. The savings are so enormous that the studios have been subsidizing the conversion to digital projectors by paying exhibitors "virtual print fees."  While many theaters have taken advantage of this subsidy, the studios have announced that they will soon phase out this support. Smaller theaters face a terrible dilemma. If 35 mm prints are no longer available, and they cannot afford a digital system, which can cost $150,000, they will go out of business. In a few years, it may be difficult to view a movie on celluloid. Eastman Kodak has filed for bankruptcy, and hundreds of art house cinemas are predicted to go out of business. This can only make it more difficult for independent filmmakers to secure a theatrical release. Screen Digest predicts that almost all screens will be digital by 2015.

Aside from wide releases, even a limited release to a hundred theaters can cost a million dollars or more. If a film is released digitally, the print costs are dramatically reduced, but the advertising outlays remain the same. Consequently, a distributor that bears the financial risk of a theatrical release will insist on securing the rights to home video and television media to offset any theatrical losses. These so-called ancillary media are usually more profitable than the theatrical release. A film that becomes known to the public as a result of its theatrical run does not require much more publicity for its home video release. And, television exhibition is the most profitable of all.

When a distributor licenses a film to a cable channel it does not incur any advertising expenses because the channel promotes its own programming. The seller simply negotiates the deal and delivers a copy of the film, which is often returned after the cable television window expires.  

The sequence of release windows is also changing. Traditionally, films were first exhibited in theaters, followed months later by home video (DVD's), followed by a release to television beginning with Pay TV, VOD, and eventually free television. The order of these windows was intended to maximize revenue. However, a release that generates maximum revenue for a distributor does not necessarily do the same for the exhibitor. Distributors want to capitalize on public awareness arising from the theatrical release by quickly issuing the film into the home video market. A short delay also inhibits piracy because illegal sales are more likely as long as there is no legitimate way to buy a DVD.

Some distributors have gone so far as to experiment with a simultaneous release in theaters and in home video. However, theater owners strongly object to such releases or any shortening of the gap between windows, arguing that moviegoers are less likely to buy box office tickets if they know the film will soon be available on DVD. The gap from the end of the theatrical release to the start of the home video release has been falling and now is in the range of 90 to 120 days.

In 2011, Universal Pictures attempted to release its movie "Tower Heist" on Comcast's Video-on-Demand three weeks after its theatrical debut. The Regal and AMC theater chains objected and the third largest theater chain, Cinemark, refused to book the picture at all if it was available on VOD so soon after its debut. This caused Universal to back down and cancel the VOD release. 

As mentioned earlier, exhibitors and distributors have competing interests. The exhibitor and distributor enter into a lengthy and complex agreement, which sets out how they share revenue. The agreement may require the exhibitor to give certain advances or guarantees to the distributor to secure a film. Additionally, the exhibitor may agree to play the film for a minimum number of weeks. In the past, a distributor releas­ing a major motion picture would split revenues on a sliding scale, with a 90/10 ratio for the first few weeks after the theater owner deducted its overhead costs. The distributor received 90% of the revenue and the exhibitor 10%. In subsequent weeks, the split would become more favorable for the exhibitor, shifting to 70/30, 60/40, or 50/50.

This sliding scale formula gave exhibitors an incentive to retain the picture for a long run. As the weeks pass, the exhibitor's share increases. Of course, for major studio films, revenues tend to drop sharply after the initial few weeks. Giving the exhibitor a larger share of revenue in later weeks makes sense because the distributor wants to encourage the theatre owner to exhibit the film as long as possible.

However, major studios have now adopted a new formula for sharing revenue with exhibitors. The revenues are split according to the magnitude of the overall national box office. The distributor receives 48% to 63% of box office receipts, with more receipts earning the distributor a larger percentage.  On average, a major studio receives 53% of the box office gross. For art house fare, distributors average around 45%. The exhibitor no longer has the same incentive to hold a picture, and pictures tend to be released wider and pay off faster. For major studio films, 80% of the box office revenue is often received in the first two weeks of a picture's release.  
One aspect of exhibition has not changed. The exhibitor retains 100% of all sales at the concession stand. This is a major profit center for theaters; it can be said that theater owners are really in the fast food business. The candy and popcorn they sell have huge profit margins. However, nobody goes to the theater for the food. So, theater owners have an incentive to fill the house with a lot of moviegoers, even if they only earn a relative minor portion of the ticket price. This is why they prefer major studio films designed for mass consumption rather than art house fare that appeals to a niche audience.  

Another ongoing struggle is whether movies should be released on DVD before being offered for digital download. The major studios find digital downloads quite profitable because they avoid all manufacturing and shipping costs. 20th Century Fox released Ridley Scott's sci-fi thriller "Prometheus" for HD download on Sept. 18, 2012, three weeks before its release on DVD. The film was made available through Amazon, iTunes, Vudu, Xbox, and CinemaNow. Sony and the Weinstein Company have also experimented with early digital releases.

The economics of independent films have become increasingly tricky. Due to a flood of independent films, licensing fees have declined, and many specialty distributors have disappeared. Filmmakers can no longer expect to auction their film off to the highest bidder at Sundance or Toronto. This occasionally occurs for a breakout film, but it is hardly the norm, even for films shown at top festivals. Hence, instead of an all-rights deal with one domestic distributor, many filmmakers end up opting for "split rights" deals. Rather than one deal with a domestic distributor that controls all media in North America, the filmmaker enters into a series of deals with different distributors, each of which is granted limited rights. This can benefit the filmmaker, because with several distributors, there is no cross-collateralization of expenses against revenue. So, if the home video release loses money, those losses would not be recouped by the home video distributor from TV sales controlled by a different company.

Although a theatrical release is risky, it is important for building awareness and prestige that filmmakers sometimes book their films directly into theaters. A rent-a-distributor or "service" deal is an arrangement in which the producer bears the marketing costs of releasing a film theatrically. Traditionally, distributors cover these costs, whether the title is one they produced or acquired from an independent producer. With a service deal, the producer is essentially renting the distribution apparatus and bearing all distribution costs. The distributor is willing to receive a reduced distribution fee -- perhaps half of the traditional 35% -- in return for not advancing any expenses. The producer assumes all financial risk. One of my clients recently self-released a documentary on 80 screens at a cost of $600,000. While it did not earn back its distribution costs from the theatrical release alone, the film became a best-selling documentary on Amazon and received substantial license fees from Netflix and other outlets.

For a distributor, such a deal makes sense if there is an open slot in its release schedule. Many distribution and marketing staff are full time permanent employees, and if the distributor does not have a title to release one month, the staff must nevertheless be paid. Why would a producer bear the financial risk of releasing a film theatrically? Often, it is because there is no other alternative as no distributor is willing to bear the costs to release the film in the traditional manner. It bears noting that relatively few independent films nowadays secure a theatrical release. Indeed, many indies are unable to secure distribution in any media.

Another reason a filmmaker may desire a theatrical release is because it will generate more attention than if the picture is released directly to home video and television. Many publications will not review a film unless it opens theatrically in their region. Therefore, a theatrical release, even if unprofitable by itself, can boost television and home video revenues. There have been some spectacular self-release successes including Mel Gibson's "The Passion of the Christ." This picture cost $30 million to produce, $15 million to market, and generated more than $600 million. In its first weekend, the film reportedly earned $83 million in the United States.

Another method used to get films into theaters is known as a "four wall" release. This is an arrangement between the producer and theater owner that bypasses the distributor. Here, the filmmaker rents the theater from the exhibitor and takes the financial risk that is normally borne by the distributor and exhibitor. The filmmaker, in turn, retains all the box office receipts. If a lot of tickets are sold, the filmmaker can do well. However, if ticket sales are meager, the filmmaker can suffer disastrous losses, since the filmmaker is paying for the theater, as well as bearing all print and advertising costs.

Self-distribution not only requires money, but enormous time and effort. Most successful campaigns require the filmmaker to be available for media interviews, develop a rich website, conduct research to find and reach out to their audience, and accompany the film to openings. Some filmmakers earn additional income through speaking fees, websites, and DVD screenings.

The theatrical release, while often difficult to secure and expensive, can significantly help a filmmaker advance their career. The exposure gained from one film can induce investors or a studio to finance their next project.

Emmy Win

Congratulations to our client Jon Stern and his Abominable Pictures for their Emmy Award for Outstanding Special Class Live Action Entertainment.  The show is exhibited on Adult Swim which is part of the Cartoon Network in association with Warner Bros. Television. The shows stars Rob Corddry, Erinn Hayes, Ken Marino, Megan Mullally, Malin Akerman, Lake Bell, Rob Huebel  and others.