August 2, 2012

A SHOWBUZZDAILY Guide To Movie Profitability (Or Not) – Part II: Distribution Fees and Back-End

More articles by »
Written by: Mitch Salem
Tags: , , , , , , , , ,


Yesterday we looked at some of the ways that the costs of producing a feature film are higher and more complicated than they might seem.  Today, some additional obstacles that lie between any movie and profitability.


Distribution Fees.

These may be the most important and least-understood part of profitability calculations.  Every entity that distributes a film in every territory and on any technological platform takes a percentage off the top (sometimes capped) for its services.  As with overhead, the supposed justification for these fees is that they pay for the infrastructure of the distributing organization, its employees, facilities, expenses, etc.–and as with overhead, the charges are really at least as much a source of additional revenue as an actual reimbursement of costs.

Even in an era when most films are co-financed, the big studios typically handle the bulk of their own worldwide distribution, subcontracting out in certain territories where they don’t have local offices.  However, the fees that are charged vary widely, depending on who’s bearing the charge (co-financiers are charged much lower fees than even high-level talent profit participants), the territory and the platform.  On any given dollar of revenue, the amount charged could vary from 8% for US theatrical distribution by a “pure” (non-financing) distributor (such as Paramount’s arrangement with DreamWorks Animation) to 45-50% for overseas digital distribution vis a vis an actor.  The intensely complicated results are calculated with a “blended rate” that has to take into account the proportions of revenue that each participant is entitled to receive and the fees each participant is charged.

There’s an important philosophical and financial question with regard to fees, one that that goes to the heart of whether many films are considered “profitable” or not, namely:  Are Fees Profits?  Some would say that they are, since they provide revenues that flow into the same studio entity that produced and at least co-financed the film, albeit into a different pocket than “profits”.  Those who wish to make a particular film sound profitable will almost always include distribution fees in a calculation of studio income vs. costs.  The studios themselves, though, tend not to consider fees that way.  Those revenues go to the distribution divisions of the companies and not to the production/financing divisions, and even if a film earns large amounts through fees, it isn’t considered “profitable” unless its revenues minus those fees exceed costs.  This is one of the biggest reasons why profit participants in films, particularly talent, rarely see a substantial return (leading to threats of lawsuits that are usually settled out of court), and why such famous titles as the original Batman and at least some of the Harry Potter series were technically not “profitable” years after their release.  It’s also the reason why “successful” movies this summer like Snow White & The Huntsman and Men In Black 3, although they made hundreds of millions of dollars, may not strictly speaking be profitable for a long time to come.

An additional note about distribution revenues:  in the US, it’s more or less set policy that theater-owners hold back 45% of boxoffice for themselves, paying the remaining 55% to the studios.  Overseas, though, those numbers can be very different, with considerably less than 50% going back to the studio.  In China, a huge market for American films (indeed more so than the Chinese government would prefer), the amount returned to Hollywood studios was recently increased to 25% (from 17.5%).  To take one recent example, this year’s 3D re-release of Titanic grossed around $60M in the US ($33M back to the studio), and $165M in China ($41.25M to the studio).  In other words more than $100M in incremental boxoffice gross resulted in just a negligible increase in revenue actually received by the studio.  So when you read about films grossing far more overseas than they did in the US, that doesn’t necessarily translate into the same amount of studio revenue–and thus potential profit–as the US boxoffice provides.


As with distribution fees, the forms and details of back-end participations are intensely negotiated and can vary from participant to participant and from project to project.  Going back to Men In Black 3, it’s almost certain that the participations for Will Smith and executive producer Steven Spielberg are being calculated differently from those for director Barry Sonnenfeld and Tommy Lee Jones.  And co-financiers are in a different league from talent:  on The Dark Knight Rises, Legendary Pictures, which co-financed the film with Warners, will have a different definition than Christopher Nolan and Christian Bale (whose respective definitions may very well be different from one another’s).   Sometimes–much less frequently now, with the decline of star value at the boxoffice, than even 10 years ago–talent has a piece of “first dollar” gross, which means their share kicks in even before the distributor takes its fees.  Very often, the participant has what’s called a “rolling” definition, meaning that it increases in value as the movie makes more money, with a higher share and lower overhead/fee charges.  (Just to make things more complicated, often the entire back-end doesn’t increase, but rather the proportional share of revenues is calculated differently at each advancing step of the movie’s gross.)  Sometimes the talent’s salary is treated (in whole or in part) as an advance against participation revenues, so there’s no additional income until that threshold has been reached–but then again, sometimes the participation is in addition to upfront salary.  And so on.

There are some movies where, as the saying goes, there’s too much money to steal.  This summer, no one can question that The Avengers or the more modestly budgeted Ted were profitable enterprises for everyone concerned.  On the other end of the scale, Abraham Lincoln:  Vampire Hunter and Rock of Ages won’t even pay for their marketing costs.  Most of the summer’s movies, though, like Prometheus, Snow White, and Men in Black 3, rest in an ambiguous middle ground.  One good sign of whether a studio considers its summer “blockbuster” to really be a success is whether it produces a sequel–not, one should note, whether it puts one in development or hires a writer, two things that cost very little by studio standards and are often done for relationship reasons alone, but whether it actually moves forward to produce the sequel.  In other words, we may not know until  2014 just how successful, or not, this summer has been.

About the Author

Mitch Salem
MITCH SALEM has worked on the business side of the entertainment industry for 20 years, as a senior business affairs executive and attorney for such companies as NBC, ABC, USA, Syfy, Bravo, and BermanBraun Productions, and before that, at the NY law firm of Weil, Gotshal & Manges. During all that, he has more or less constantly been going to the movies and watching TV, and writing about both since the 1980s. His film reviews also currently appear on and In addition, he is co-writer of an episode of the television series "Felicity."