Profit Definitions & Deals

(a) Profit Definitions

In Hollywood, terms such as "gross profits" or "net profits" are commonly used and carefully defined. Studios and major distributors have definitions of "net profits" which go on for pages. The definitions will vary from studio to studio. The terms only have meaning in connection with the specific definition. These are essentially contract definitions, not any standard accounting term, and do not by any means indicate that the "profit participant" will indeed see a profit, even if it appears to the public that the film is very successful, and even if the studio appears to have made significant sums of money on the film.

The arrangements between distributor and exhibitors tends to be a percentage arrangement, with floors and ceilings. These arrangements cushion the blow of a film that does not do well and allows for advantages for the exhibitors if it does well.

Typically, the split between distributor and exhibitor may be up to 90% to the distributor after the exhibitor has taken care of its overhead figure ("nut"). The percentage may initially be much lower. The popcorn and snack concession is the profit center for the theater.⁶⁰

(b) Deals

Predominantly, there are two kinds of arrangements in practice for the sharing of revenues in Hollywood:

(i) Gross deals
Usually the first sums earned by a film are from box office receipts. The distributor and exhibitor of the film enter into an agreement which makes reference to the 'Exhibitor's Gross,' i.e. 100% of all the sums received at the box office. From the Exhibitor's Gross, a deduction, which is the 'Exhibitor's Percentage' (usually an amount subject to negotiation between the exhibitor and the distributor) is made. The sum, which is then paid by the exhibitor to the distributor, is the 'Distributor's Gross'. The eventual division of the Distributor's Gross between the distributor and producer depends on the deal between them.

In a gross deal, the distributor deducts a commission based on the Distributor's Gross, out of which the distributor also deducts all his expenses. A gross deal guarantees a flow of income from the first receipts but the percentage due back to the producer is relatively low.

(ii) Net Deals
In a net deal, the distributor deducts his expenses from the Distributor's Gross and usually splits the remaining in a 50:50 ratio with the producer. Sometimes, the distributor deducts the distribution commission based on the Distributor's Gross and deducts its expenses from the producer's share of the Distributor's Gross before sending the balance to the producer.

(c) Illustration
Today, as a practice, when one buys a film ticket at a box office, around for example, US $8, the theater (the Exhibitor) immediately takes about 60% of this amount ("Box Office Gross") and turns over the remaining US $3.20 to the studio/distributor who released the film. The theater is fully or partially, directly or indirectly, owned by the studio/distributor. The studio/distributor charges its "distribution fee" of about 33% against this US $3.20 leaving US $2.14 from the US$8 ticket sale.

The studio/distributor then reimburses itself out of this US $2.14 for anything it spent on P&A, and all other expenses relating to distribution of the film. If the said expenses amount to 20%, which is charged against this US $2.14, a mere US $1.71 would be all that's left. This means that from the US $8 ticket sale, US $1.71 is now available to turn over to the producer, provided the studio/distributor does not also have participation rights in this sum as well, reducing such cash flow to zero.

This US $0.00 to US $1.71 is what is known as "points" or, in certain circumstances, known as "producer's net." The producer now has to split the US $1.71 with its film production investors, usually 50-50 leaving US $.86 for all the producers/ writers/ directors talent/ development investors and a mere US $.86 for all the production investors, from that original US $8.00 ticket!⁶¹