table of contents - sfu.ca text.section/backend money... · peter biskind, the former executive...

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1. Introduction .............................................................................................................................................................. 3

2. Methodology & Focus ............................................................................................................................................ 4

3. Defi ning the Back End ............................................................................................................................................ 5

4. Traditional Markets .................................................................................................................................................6 4.1 Domestic Market ............................................................................................................................... 6 4.2 Domestic Theatrical Market ........................................................................................................... 6 4.3 Domestic Home Entertainment Market ................................................................................... 10 4.4 Domestic Television Market ......................................................................................................... 12 4.5 Summary of the Domestic Market .............................................................................................. 14 4.6 International Market ...................................................................................................................... 14 4.7 Academy Awards©, Golden Globes, BAFTAs and Other Honours ........................................ 18 4.8 Related Market Strategies ............................................................................................................. 18 4.9 Television Commercials ................................................................................................................. 20

5. Who Shares In or Infl uences the Back End? .................................................................................................... 21 5.1 Underlying Rights ............................................................................................................................. 21 5.2 Key Talent ........................................................................................................................................... 21 5.3 Guiding Principles: Talent Union & Guild Requirements ...................................................... 24 5.4 Talent Management: Agents, Business Managers & Related Players ............................... 27 5.5 Other Shareholders: Financing and/or Investors .................................................................... 28 5.6 Other Factors that Impact on Net Returns & Profi t ............................................................... 29 5.7 Producer Rights and Obligations .................................................................................................. 31

6. Scenarios: The Hypothetical Who Wins & Who Doesn’t ............................................................................ 32 6.1 Movie titled ‘A – An Independent’: $3m budget ...................................................................... 32 6.2 Movie titled ‘B – Bigger Indie”: $10m budget .......................................................................... 32 6.3 Movie titled ‘C-Caught Between Rock & Hard Place”: $25m budget .................................. 33 6.4 Movie titled ‘D-Dark Horse’: $100m budget ............................................................................ 34 6.5 What These Hypothetical Scenarios Signify ............................................................................ 36

7. Back End Money Into the Future: Overview of Global Trends .................................................................... 37 7.1 Re-licensing ......................................................................................................................................... 37 7.2 Spin-Offs ............................................................................................................................................. 37 7.3 Re-issuing .......................................................................................................................................... 38 7.4 Home Entertainment & Collectors’ DVD .................................................................................. 38 7.5 On-Demand Movies ........................................................................................................................ 39 7.6 Formats & Franchising ................................................................................................................... 39 7.7 Video Games & Other Merchandising ....................................................................................... 39 7.8 Related Potential Exploitation Avenues ................................................................................... 40 7.9 Increasing Value of Back End & Reality Check ........................................................................ 40 7.10 The Future ....................................................................................................................................... 40

8. Concluding Observations ................................................................................................................................... 43

Appendix 1: American Film Marketing Association Defi nitions ..................................................................... 44

Appendix 2: Scenario A - $3m Production Budget .............................................................................................. 45

Appendix 3: Scenario B - $10m Production Budget ............................................................................................ 46

Appendix 4: Scenario C - $25m Production Budget ........................................................................................... 47

Appendix 5: Scenario D - $100m Production Budget ........................................................................................ 48

Appendix 6: About the Authors .............................................................................................................................. 49

Table of Contents

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1. Introduction

This report was commissioned by Investment New Zealand to illustrate how money fl ows from a movie or television program back to those involved in its production. The media are constantly reporting multi-million dollar box offi ce successes, million dollar-an-episode fees for cast members on US series like Friends or an A-list star’s valuable piece of the ‘back end’. The dollars being generated by fi lm and television, especially large studio productions, appear to be making a lot of people very rich. But what do these fi gures really mean? What exactly is the ‘back end’ and who gets a share of it?

The screen entertainment industry is complex. Any one production, from the initial generation of the idea through to its delivery to domestic and overseas markets, will involve many players: writers; producers; directors; actors; technicians; agents; distributors; cinema chains; and television networks. Add to these the players involved in the exploitation of the fi lm and/or characters through novels, comic books, soundtrack CDs, toys, collectables, online or computer games, and other emerging formats and one begins to understand why this global industry is a major economic generator for many countries. Filmed entertainment spending globally reached US$75.3 billion in 2003 and is projected to rise to US$108 billion by 2008.1

This report, written from the perspective of industry knowledge of both industry members and policy makers in New Zealand, is designed to guide the reader through this maze of players and shed light on the roles they play and the way their involvement infl uences the ‘back end.’ The report does not offer a defi nitive description of how the global industry works. Nor does it purport to represent all the permutations and combinations of the commercial deals and legal arrangements existing within the industry that can improve a ‘back end’ deal.

So a word of advice before we begin: For industry members with specifi c projects – consult your legal advisor! For policymakers considering measures to enhance sustainable growth of the screen production sector – consult the industry.

1 PricewaterhouseCoopers Global Entertainment and Media Outlook: 2004-2008 (released in June 2004). The

economic importance of intellectual property is evident in the measures and efforts beingtaken to combat piracy.

The annual cost of piracy within the movie industry is estimated at US$3.5billion according to a presentation

to the US Senate Committee on Governmental Affairs (Permanent Subcommittee on Investigations) on

September 30, 2003, by the President of the Motion Picture Association of America (MPAA), Jack Valenti.

2. Methodology & Focus Some words about what you will fi nd here.

The box offi ce performance of movies can be tracked through the industry ‘trade’ papers such as Variety, Hollywood Reporter and Screen International, and through weekly domestic box offi ce reports from the Motion Picture Association of America (MPAA) that appear in ‘trade’ publications in other countries.2 However, the ‘profi tability’ or actual fi nancial performance of the intellectual property that is the movie is a closely held secret. Like production budgets, a production’s fi nancial performance is commercially sensitive information. As a result, reliable information about a fi lm’s real profi t/loss performance is diffi cult, if not impossible, to obtain.

Because actual production costs and performance are commercially sensitive, this report relies on information and data available from published sources. Reference is also made to overseas agreements governing the rights of writers, directors and other creative participants as examples of the fi nancial rewards that fl ow to individuals from the commercial exploitation of the fi lm or TV program on which they have worked.

The report also uses, from time to time, anecdotal information drawn from the authors’ own experience. This information is employed with discretion to illustrate points.

Note: Like any industry, screen production involves terminology that may be unfamiliar to those outside business. In this report, the commonly used terms ‘independent’ production and ‘studio’ production have the following meaning:

• Independent – most fi lms and TV programs made in New Zealand

are produced by privately owned companies that raise the necessary fi nancing from a multiplicity of arms-length sources and then rely on third-party businesses to market and distribute the fi nished fi lm. In this regard, New Zealand is not different to Australia, Canada, the UK and even a signifi cant portion of the US production.

• Studio – there are several well-known Hollywood-based

studios that, by virtue of their vertically integrated media entertainment business interests, have the fi nancial resources to produce themselves, or to fully-fi nance movies through subsidiary or fi rst-look deals with other companies.3 These businesses also have the resources to acquire all rights to independent productions through negative pick-up deals and to control the exploitation of these products. According to Variety, the ‘major’ studios are Disney, MGM/UA, Universal, Paramount, 20th C Fox, Sony, Warner Brothers and DreamWorks SKG.4 The ‘mini-majors’ are Miramax (a subsidiary of Disney) and New Line (a subsidiary of Warner’s). Most of these studios have their own distribution arms in the lucrative US market, as well as branches or subsidiaries operating in overseas markets. Their control of all aspects of a production is undiminished by third-party involvement.

The commercial risks and the money that fl ows to the back end can be signifi cantly different for an independent production as compared to a studio production.

Other industry specifi c terms are explained in footnotes wherever possible.

2 In New Zealand, Onfi lm circulates the weekly box offi ce data for the top 20 movies in current theatrical release in New Zealand

via email to its subscribers.

3 “Facts on Pacts” (Variety, May 10-16, 2004) lists 240 such deals among the 10 US-based ‘major’ and ‘mini-major’ studios.

4 The studios’ corporate interests extend into all facets of the entertainment media. For example: Disney owns the ABC Television

network in the US and the widely-franchised Disney Channel; Paramount’s parent company Viacom also owns CBS and MTV, the

USA and Sci Fi networks and Simon & Schuster publishing; Fox parent company News Corporation owns the Fox network as well

as extensive satellite services in Asia and elsewhere; Warners is part of AOL Time Warner with HBO, Turner Broadcasting and Time

Warner Book publishers; Universal in 2003 was bought by NBC (owned by General Electric).

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3. Defi ning the Back End To begin: What exactly is the ‘back end’?

The common description of the ‘back end’ is that it represents the profi t that a successful fi lm or TV program generates and that is available to share among those who contributed to its creation, either along side or in advance of the other players with rights to the income generated, including the right to recoup costs or investments. This defi nition, however, ignores the various players that step in at key points in the value chain5 and partake in the revenue stream.

Peter Biskind, the former executive editor of Premiere and former editor in chief of American Film, defi nes the ‘back end’ as both “a percentage of the profi ts, if any, due after a fi lm’s release”, and “participation in the revenues generated by the distribution of the fi lm.” 6 However, the term ‘back end’ usually refers to the rights of talent – actors, directors, and writers – to share in profi ts or distribution revenues.

It is important to understand that players who may not share in the fi lm’s profi ts per se share in its revenues. Their share of the revenues is one of the factors that determine whether a production ever reaches a clear profi t – the point where the fi lm has made back all its costs and the fi nal ‘back end’ appears. In practice then, there are a number ‘back ends’ that must be considered when examining the fi nancial performance of specifi c productions, or the fi lm and television industry more generally.

To understand how these various back ends operate, the report looks fi rst at the players involved in the fi lm and TV production value chains. It then looks at the roles played by the key talent and others who, along with the producer, stand to benefi t from the ultimate ‘back end.’

Remember! In the various transactions described in this next chapter, it is the intellectual property that the fi lm or TV program represents that is being exploited to generate revenues.

5 The term ‘value chain’ refers to chain of activities and/or entities that transform creative content, the raw materials of the fi lm

and television industries, into something that can be purchased by a fi nal consumer.

6 Peter Biskind: Down and Dirty Pictures: Miramax, Sundance, and the Rise of Independent Film. The two defi nitions are provided in

footnotes on page 60 and 225 respectively.

4. Traditional Markets Traditionally, a movie or TV program has had two markets: its domestic market and the international or overseas market. The net returns from these two geographically defi ned markets effectively dictated the value chain, its scope and operation and ultimately, the production’s profi tability and back end outfl ows. However, there is a seismic shift occurring, particularly for ‘tent pole’ Hollywood movies7, that is redefi ning this value chain from geographic to specifi c media. TV productions are linked to their domestic market in the fi rst instance, driven by network ratings. However, their profi tability is also magnifi ed by international sales, especially for globally popular series.

In this chapter, the report looks at how the traditional markets operate, the players involved and how revenue generated in these markets is split among those players.

Keep in mind when reading the section on the domestic market that once a fi lm or TV program is sold to a distributor in an overseas market that particular territory will then operate effectively as a ‘domestic’ market for the company that has bought the rights.

4.1 Domestic Market

The domestic market is the ’home’ market where the fi lm or TV program is produced, which in the case of fi lm may or may not be the international boundaries of the country concerned. For example, in Australia an independent feature fi lm will sometimes include New Zealand in its ‘domestic’ market. Similarly, the domestic market for US studio movies is defi ned as ‘North America’, that is the USA and Canada.8

Offi cial co-productions between two or more countries can have several ‘domestic markets’ in which each national co-producer retains the rights.

Television productions – unless these are also co-productions – enjoy a simpler identifi cation of the domestic market – their national home territory. The domestic television market is dominated by the TV network that drives the production by commissioning the program or issuing a license through which it

acquires the fi rst right of broadcast.9 Most TV programs are fi nanced from within, and directed to, their domestic market, with international sales being a bonus. The exceptions to this include co-productions and/or major mini-series and some large budget documentaries that involve multiple ‘domestic’ broadcasters.

Movies possess or aspire to a much more global market. Nonetheless, it is usually the domestic market that fi nances the development, generates a signifi cant portion of the fi nancing and, most frequently in the case of independent fi lms, represents the site of initial theatrical release in cinemas. Success at the domestic box offi ce can often generate interest in independent movies from overseas buyers.

4.2 Domestic Theatrical Market

Movies are usually made for fi rst release in cinemas in the theatrical market, followed by release on video and DVD for the home entertainment market, and then on television. There are two key players involved in this market: the distributor and the exhibitor.

The distributor acquires the right to distribute the movie for theatrical, home entertainment, television and non-theatrical (educational, etc.) release in the domestic market and pays for marketing campaigns, prints and other costs. The distributor can be a locally owned company or a local branch of one of the multinationals associated with or owned by the Hollywood studios.10

In many cases, the distributor will pay an advance to the producer for the right to distribute the movie. This advance represents the estimated minimum producer’s share that the distributor estimates the fi lm will earn from exploitation through the theatrical release and subsequent home entertainment and television sales in the domestic market. At times, the advance may be the only revenue the producer sees from the domestic market.11

The distributor is the primary link between the producer (who has licensed the distributor to release the fi lm) and the consumers, i.e. the cinema-going public.

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For independent fi lms in particular, the distributor’s fi rst responsibility is to decide on a date for the fi rst release of each feature – preferably one that will not clash with other new titles appealing to a similar audience. A related decision is whether the fi lm would be best suited for opening on a few screens, aiming to expand as word of mouth spreads, or whether to open on a large number of screens, with the related need for a higher initial expenditure on prints and advertising.

The exhibitor, the owner of the chain of multiplexes, independently-owned art-house or repertory cinema venue, enters into an agreement with the distributor to release the movie. The distributor and the exhibitor negotiate dates and terms of release. The percentage share of revenue that is negotiated in each deal with each cinema will have direct impact on revenue earned for the producer, if the fi lm succeeds with local audiences.

Many cinemas in the domestic market are locally owned and operated, with the larger chains frequently having some cross-ownership with national or foreign owned specialist entertainment companies.12

7 ‘Tent pole’ refers to large budget Hollywood studio movies that are released simultaneously on thousands of screens. Variety’s

‘Slanguage’ defi nition is: “Movie expected by a studio to be its biggest grossing blockbuster of the season, usually summer. Often

the pic is the start of, or an instalment in, a franchise; “Armageddon” was a successful tent pole in 1998.” Other tent pole movies

are Spider-Man and Marvel comics’ X-Men.

8 For Canadian feature fi lms, however, the ‘domestic market’ is represented exclusively by Canada. Further, in Canada, the French

language market in Quebec, in addition to the English language market in Quebec and throughout the rest of Canada, complicate

the Canadian reality generating in effect two distinct ‘domestic’ markets.

9 In Canada and in the US, independent producers of TV programming can take advantage of free-to-air licenses, supplemented by

2nd and 3rd window licenses to specialty &/or digital services to extend the reach of the domestic market.

10 NZ theatrical distributors: There are a variety of theatrical distributors currently operating in New Zealand. They range from

branch offi ces of Hollywood studios (UIP, Columbia TriStar, Buena Vista International) to offi ces of Australian companies which

represent Hollywood studios (Roadshow Film Distributors) to local offi ces representing Hollywood studios (20th Century Fox) to

the distribution arms of exhibitors (Hoyts and Essential/Rialto) and fi nally independent distributors acquiring titles on a title by

title basis (Metropolis Film, Arkles Entertainment). In past years, distributors would release titles exclusively through one cinema

chain. Such arrangements no longer apply. Titles will be booked as widely as possible.

11 Biskind. Down and Dirty Pictures Pg 66. Many in the industry viewed the high advances being paid by Miramax for US domestic

distribution rights in the late 1980s as a refl ection that, as described by a former Miramax lawyer, “they [Miramax] wouldn’t pay

you the back end.”

12 NZ theatrical exhibitors: There are three main cinema chains, and numerous smaller independent exhibitors. The biggest

chain of cinemas, which also earns the biggest share of the local box offi ce, is Village Sky City, owned 50 percent by Sky City

Leisure of New Zealand and 50 percent by Village Roadshow of Australia. It has 69 screens, plus a half ownership of the 17 Rialto

art-house screens. The second biggest chain is now Reading, which controls a total of 44 screens (including a new complex soon

to be opened at Botany in Auckland), a majority of which are joint ventures with Berkeley Cinemas. The third biggest chain, with

41 screens, is Hoyts, which is 100 percent owned by Australian Kerry Packer, who also has 368 screens in Australia. Hoyts’ market

share in New Zealand fell to third position, because of the growing success of Reading, a relative newcomer from the United

States. The independent sector includes the Rialto group, an enterprising art-house chain (part owned by Village Sky City) with 17

screens in Rialto cinemas in six centers. Rialto also acquires exclusive titles through its distribution arm Essential Films.

4.2.1 How the Theatrical Market Works

The revenue generated by a movie’s release in the theatrical market is known as the ‘box offi ce gross’: the total amount of money spent by audiences buying tickets to see the movie. The exhibitor and the distributor share in that box offi ce gross according to the terms of the agreement they have negotiated. When the movie is a success with audiences, both parties will recover their costs and make a profi t; when the movie fails to attract audiences, they lose money.

To better understand how this works, Figure 1 illustrates how a fi lm’s performance in the cinema can impact on the commercial success for those involved in the release.

First, some basic observations!

The exhibitor’s operating costs include wages for the staff that, among other things, sell tickets and popcorn and operate the projector, sound system and lights, property maintenance expenses and other overheads. These basic operating costs are constant whether two people buy tickets or the 200-seat cinema is sold out. These fi xed operating costs are sometimes referred to as the house ‘nut’.13

As already noted, the distributor negotiates a deal with the exhibitor on how the box offi ce ‘gross’ will be divided. Such deals establish a minimum share for the distributor with provision for that share to increase once the exhibitor’s house ‘nut’ is covered. The distributor’s share can start high at say 90% of the box offi ce revenue net of the exhibitor’s ‘nut’ and reduce on a weekly basis in favour of the exhibitor if the fi lm sustains a long run through popularity with audiences.14 Alternately, the distributor may agree to a lower initial share to encourage the exhibitor to screen a higher risk fi lm.

As can be seen from Figure 1, the number of cinema tickets sold determines ‘success’ and also infl uences the commercial viability of companies operating at this stage of the value chain. This highly simplifi ed example illustrates the commercial attraction of both multi-print releases and multiplex cinemas where one print can be relayed through several screens. In such arrangements, the exhibitor’s house nut and distributor’s P&A15 costs can be amortized ... assuming the ticket-buying audience comes.

So, multiply the numbers by multiple screenings over a week in several cinemas in a multiplex and the weekly box offi ce fi gures published in the trades start to make sense. The published fi gures detail number of screens, the per screen average (indicating plus or minus from previous week) to arrive at a running total of what the movie has earned at the box offi ce.

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The distributor’s share of the net box offi ce revenue is called gross rentals; this amount will be divided among several cost items:

• Distributor’s fee – a percentage of the net that represents the

income for the distribution company. As this is an item negotiated with the producer, the distributor’s fee varies, but is often around 20%.

• P&A – the distributor’s costs to supply prints (copies

of the fi lm to be screened in the cinema) and advertising through newspapers, magazines, billboards, radio and/or television.

• Distribution advance – the amount, if any, paid by the distributor to the

producer to acquire the rights to distribute the fi lm.

The balance – usually referred to as net rentals – then becomes producer’s revenue. New Zealand distributors expect to receive average gross rentals of about 45 percent of the gross box offi ce for any big fi lm, and around 35 percent from the gross box offi ce of art-house fi lms. However, there are always variables and all results depend on the unique aspects of each fi lm’s deal and each fi lm’s box offi ce success.

A higher percentage share of the net box offi ce revenues will enable the distributor to cover upfront

P&A costs. Still the opposite can also work where the distributor has chosen a small release, allowing ‘word of mouth’ to build audiences while keeping costs low. My Big Fat Greek Wedding is one example of the small release approach.

4.2.2 Trends in Theatrical Releases

Increasingly, major movies distributed by Hollywood studios, including The Lord of the Rings, are released globally in coordinated ‘day-and-date’ patterns. 16 As a result, the domestic market for these movies, and their international release campaigns, are controlled by the studios’ distribution arm.

In such cases, the distributor can readily negotiate terms that will give them 90 percent of net revenue with provision for a minimum percentage of the gross box offi ce in case the box offi ce fails to reach its expected levels. These deals frequently work on a sliding scale with the distributor’s share of net earnings reducing by fi ve percent a week, but never falling below agreed minimum. The distributor will contribute the costs of display advertising and other promotion and marketing costs including star media junkets that will have to be recouped from rental income; in addition, the distributor may provide a marketing deal with a third party (i.e. Macdonalds, etc.). A minimum number of weeks is also negotiated before the release begins.

13 The exhibitor also has revenue from concession (traditionally beverages, candy and popcorn) sales. In many cases, especially for

small independent cinemas with only one or two screens, this revenue can represent the exhibitor’s most consistent source of

‘profi t.’ Obviously, even this source of revenue will be weak if no one is paying to see a movie. In some wide-release campaigns,

distributors may negotiate separate agreements for promotional advertising, such as having a star’s image on popcorn containers.

In such cases, a share of each unit sold would go to the distributor, if the distribution company negotiated the deal with the

popcorn supplier.

14 Studios in the US market traditionally have taken 70% of box offi ce gross as their distributor’s share in the fi rst week, dropping

in favour of the exhibitor in subsequent weeks. US cinema chains are now battling for ‘aggregate’ or fl at 50%/50% split. ‘H’W’D’

Vexed by Plex Success’, Jill Goldsmith in Variety, March 17-23, 2004.

15 The term ‘P&A’ stands for prints and advertising and is explained further on page 9. As the distributor must pay these costs in

advance of the release of the movie, there is a signifi cant fi nancial outlay that represents a risk if the movie fails. This risk can be

amortized or spread by screening the movie in multiple cinemas within a multiplex.

16 ‘Day & Date’ releases refer to wide theatrical launches where a movie opens in cinemas of the same day in North America and in

overseas territories.

‘Day-and-date’ releases generate enormous anticipation among audiences throughout the world via heavy media coverage, trailers and the Internet. While this release pattern offers economies of scale in promotional campaigns, it also increases print, distribution and marketing costs that need to be recovered from the movie’s exploitation.17

For lesser studio fi lms, a lower percentage18 of the net box offi ce (with a minimum based on gross receipts) could be accepted for the fi rst theatrical release, again with a sliding scale.19

Some domestic distribution deals involve box offi ce performance triggers that result in additional advances or increased television license fees to the producer. For example, the independent US movie In The Bedroom was acquired for US distribution by Miramax for US$1.5 million in a deal with the producers that included ‘bumps’ – increases in the amount paid to the producers by Miramax – that kicked in at various thresholds if the movie grossed more than US$10 million.20 In Australia, free-to-air license fees being paid for domestic features frequently include provision for an increase if the movie performs strongly at the box offi ce. New Zealand broadcasters have discussed similar deals.

4.3 Domestic Home Entertainment Market

The home entertainment market refers to the release of a movie21 on video and/or DVD for sale or rental to individuals for private viewing.

In most domestic distribution arrangements, the same company that releases the movie in cinemas is licensed to handle the video/DVD release. These rights to the home entertainment market can be sublicensed to another company if the distribution company does not have its own home entertainment division. The producer’s rights to DVD/video revenues represent a royalty arrangement in which the producer’s share is based on a percentage of what the distributor earns from units sold or rented.

This market operates within a classic wholesaler to retailer structure.22 There has traditionally been a fi rst window when only rental was available, followed by

a subsequent second window where the movie was made available for actual purchase. This distinction is rapidly disappearing. Titles are now released for the home entertainment market in New Zealand 150 days after the theatrical release, and sometimes as early as 45 days.

In the home entertainment market the DVD format has rapidly gained dominance. The video format – VHS tapes – is declining in popularity with consumers, who have been quick to seize the advantages of DVDs which include better sound, and picture, smaller size, less cost, and more content. The growth in this market segment is massive. In New Zealand, for example, 2.5 million units were sold last year, generating $30M from sales for rental and $100M from sales for retail.

4.3.1 How the Home Entertainment Market Revenue is Split

Typically, the distributor operates as the wholesaler in the home entertainment market. The producer’s share of home entertainment market revenues depends on whether the video/DVD units are rented or sold: around 25 percent of the wholesale price of each rental unit and 12.5-20% percent for retail units. In these deals, the wholesaler bears the costs of manufacturing, packaging, etc. (about $4 per unit) which can represent a signifi cant up-front commitment.

In some instances, the deal can be reversed with the wholesaler taking 25 percent as a risk-free distribution fee, with the producer’s company covering all costs. There’s a risk for the production company in this approach but if the fi lm is popular then the results can be benefi cial. Everything is negotiable.

In New Zealand, the wholesale price for rental units is now around $58. The wholesale price for sell thru (retail) units is $26, with a retail price of $39, but predicted to go down to $29. Retailers, however, often discount video/DVD fi lms to generate increased business - so there are lots of loss leaders around. With the exclusive rental window rapidly disappearing, video/DVD rental outlets can often buy units at the lower sell thru/retail wholesale price and use them for rental.

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Wholesalers/distributors are willing to forego rental sales in favour of higher volume sell-thru sales that generate larger returns.

Figure 2 below illustrates in simplifi ed form how the price paid by the consumer translates into revenue for the distributor/wholesaler and royalties for the producer.

This example illustrates the potential advantage to the producer of being able to fulfi ll the role of wholesaler (either directly or through sub-contract) and therefore generate a much higher return.

With popular domestic movies such as Lord of the Rings and Whale Rider selling 100,000 to 200,000 units, the home entertainment market – particularly the DVD – represents potentially signifi cant source of revenue. Multiply the movie’s domestic market income by sales in overseas markets and the revenue begins to add up.

17 In 2003, the average production costs in the US rose to US $63.6 million with an average marketing cost increasing by 28% to

US$39 million. According to Jack Valenti, President of the Motion Picture Association of America (MPAA), the average cost of

making and marketing a movie by the MPAA member companies in 2003 was US$102.8 million, 15% more than in 2002. MPAA

member companies distributed 198 of the 473 movies released in the US in 2003. (Statement made by Valenti at ShoWest

Convention, March 23, 2004.)

18 First week distribution rentals for these types of releases vary from 50% up to 80%. This wide range suggests that everything is

negotiable if the exhibitor believes the movie will generate strong business.

19 For bookings of art house fi lms, a signifi cantly lower percentage can be accepted in order to persuade an exhibitor to book a

screen – 40 percent is often accepted for a small theatrical release.

20 Biskind. Down and Dirty Pictures The movie went on to gross, according to Variety US$ 36 million.

21 The movie could have been released previously in cinemas or be made specifi cally for fi rst release the home entertainment

market.

22 NZ video distributors: Retailers who are also wholesalers include Video Ezy, locally owned, which operates a big chain of video

stores, and Blockbuster International, branch of the Viacom-owned US company, which also operates a chain of retail stores.

Wholesalers include Paramount Home Entertainment, Universal Home Video, Columbia-TriStar, Roadshow Entertainment, and

Magna Pacifi c, independent wholesaler.

4.3.2 Home Entertainment Market for TV Programming

The home entertainment market is a growing secondary market for television programs, especially long-running series with the DVD/video release of the fi rst seasons of Sex In The City, Sopranos and West Wing. Classic older series are also fi nding new life on DVD.

As with movies, the market arrangements involve contractual terms covering manufacturing costs and royalties for the producer. In this case, as the producer has already exploited the domestic television market, there is usually no distributor involved and the producer/production company will negotiate the royalty arrangement directly with the wholesaler. Wholesale prices for a 13-episode ‘season of ..’ set are usually much higher than for a single movie, ranging from $50 to $70. Royalty arrangements can also be higher where there is no distributor involved.

4.4 Domestic Television Market

The television market covers free-to-air broadcasts, pay TV and pay-per-view (PPV) services.23 This section looks at how this market operates for both movies released initially in the cinemas and TV programming.

4.4.1 Movies on Television

Television rights for independent fi lms are frequently licensed before the fi lm goes into production, with the license fee contributing to production fi nancing rather than accruing to the producer as income. Studio movies, on the other hand, can be fi nanced without television pre-sales. For this reason, successful studio fi lms stand to generate more from domestic television licensing through well-established output deals.24

In either case, the negotiation and content of television licensing arrangements tend to be complex. For example, the license fee can be negotiated on a sliding scale, where the TV network (PPV, pay TV and free-to-air individually) may be required to increase the fee based on box offi ce performance. In addition, each TV network license will specify a holdback to allow adequate time for exploitation of theatrical and video/DVD rights. As with the home entertainment market, the television market is rapidly changing. While the holdback for

free-to-air television can be up to two years from fi rst theatrical release, PPV availability is moving closer to the timing associates with DVD retail releases, often within 3-4 months of the fi lm’s theatrical release.

Though television networks acquiring a movie do not share in profi ts from its theatrical or DVD/video releases (unless the network is also an investor in the movie), they may be persuaded to assist with promotion in terms of programming or advertising. The benefi t for the network is clear: the better the profi le of the movie during its theatrical release, the more identifi able the title will be when it becomes available on PPV or pay TV or telecast on free-to-air.

4.4.2 Domestic Television Market for TV Programming

The domestic television markets for TV programming covers a range of genres and players. Given its focus, this report is limited to dramas, both series and telemovies/MOWs (movies of the week). As noted earlier, TV networks drive production for the domestic market by commissioning programs or issuing licenses through which it acquires the fi rst right of broadcast.

There are two broad categories within the domestic television market: fi rst run programs and syndication. The domestic television market is further complicated by the growth of ‘windows.’

• First Run TV License: The TV network or specialty/pay TV service pays a fee to the producer to acquire a license or right to broadcast the program on an exclusive basis a specifi ed number of times during the period of the license. For example, the network can acquire the program for a period of 5 years during which it has the exclusive right to broadcast the program three times – that is once as a new program then twice in re-runs. In the case of TV series, the network will also acquire the rights to license further episodes thereby continuing to provide its audiences with exclusive access to the program. In return, the producer is paid a license fee that is negotiated on the basis of the program’s intended time slot on the network’s schedule. That time slot is usually valued by the network on the basis of the potential ratings or popularity of the program with audiences in that

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time slot – factors that determine the advertising revenues it can generate.

Typically, the producer uses the revenue from the license fee to fi nance the production of the TV program. In the USA, given the size of the domestic market, the license fee can cover the full production cost. In countries such as New Zealand, Australia and Canada, with much smaller domestic markets, the license fee only covers a portion of the production costs and producers must seek the balance of their fi nancing from public funding sources designed to promote local content. In both cases, producers may also use advances from pre-sales to fi nance production costs.

The dollar value of license fees obviously varies depending on the size of the potential audience and the revenue that the TV network can expect to generate from advertisers and/or annual funding from government in the case of public broadcasters. For a series, success with audiences in the designated time slot will determine whether the network exercises its rights to re-new the series for a second or subsequent season. Telemovies are normally one-off productions, although there may be some opportunities for sequels.

• Syndication: Syndication refers to the subsequent use of long-

running series that are ‘stripped’ or broadcast fi ve days a week in a set time slot by networks or services other then the holder of the fi rst run licence. Syndication rights are also licensed for a specifi ed period and number of broadcasts, but with normally a longer duration and frequency. In the US, popular long-running series such as The Simpsons and Fraser are already available in syndication even though recent seasons are still in ‘fi rst run’.

For any drama series, the producer’s objective is to produce several seasons so that there are around 65 episodes that can be syndicated.

Syndication of popular US TV programs has proven effective in the US market and in overseas markets. TV series, such as Hercules and Xena, fi nanced out of the US and produced in New Zealand, are now in syndication. However, even in the US, where syndication revenue continues to grow, Variety reports a very high failure rate (around 80%) for fi rst-run syndications. 25

• Windows: The term ‘windows’ refers to the negotiation of

several sequential TV licenses with two or more TV networks or specialty services. For example, the producer may license a telemovie fi rst to a domestic pay TV or PVV service, then to a free-to-air network broadcast after the fi rst run rights have been exercised.

The license fee paid by the pay service will be based on its subscriber base (i.e. potential audience). This additional license fee can also be used in the production fi nancing.

In Canada, for example, where there are multiple specialty services as well as subscription-based digital services and pay TV, producers can stack up four or fi ve license fees from Pay TV (1st window), free-to-air network (2nd window), specialty services such as Women’s Network (3rd window), educational services (4th window) and even digital genre service (5th window). However, after the fi rst two windows, the license fees generate minimal revenues.26

23 In New Zealand, the television markets are sometimes referred to as Standard TV (free-to-air transmission by terrestrial or

satellite), non-standard TV (.i.e cable and ‘over-the-air’ subscription, including closed circuit TV in hotels, etc.,) and Narrowcast

(transmitting encrypted signals to viewers with decoders).

24 In New Zealand, the major Hollywood studios have output deals with Sky and with the free-to-air channels run by TVNZ and

TV3/CanWest. The recently arrived Prime network acquires titles through its Australian owners.

25 Advertiser spending on syndicated programs drives this segment of the market: revenue from syndication in the USA in 2004-05

is estimated by the Syndicated Network TV Association to reach US$3.8 billion, up from US$2.9 billion in 2001/02. ‘Trio Tapped As

Syndie Saviors’ by John Dempsey. Variety May 24-30, 2004

26 In Canada, some specialty services acquiring 3rd window license will pay only $5,000 for 3 runs with educational services paying

only $500.

4.5 Summary of the Domestic Market

As can be seen from the preceding sections, there are several key players involved in the domestic market for feature fi lms:

1. Producer – copyright owner

2. Distributor – rights to theatrical, home entertainment & possibly television27

3. Exhibitor – cinema or theatrical release

4. Wholesaler & Retailer – DVD/video release for home entertainment

5. Television – Pay-per-view, pay TV &/or free-to-air

In terms of the back end potential, the independent producer shares in net rentals from the box offi ce, receives royalties from video/DVD sales and, unless the producer has licensed TV rights directly, television license fees. However, the producer must wait until the other key players have taken their share and reported on the fi lm’s commercial success. For feature fi lms, the distributor is the key, especially in relation to the theatrical release and the home entertainment market.

In these circumstances, the independent producer is at a signifi cant disadvantage visà-vis the studios, which have integrated theatrical and home entertainment distribution capacities and, in some cases, their own subsidiary TV networks.28 Given their slate of product, the studios have greater clout in negotiating with exhibitors that want access to blockbuster movies that draw large audiences. The same principle holds for package movie sales to television networks and services.29

By comparison, most independent producers – unless they have an output deal with a studio – cannot offer a distributor, and therefore an exhibitor or television network, an ongoing supply of productions for release in the domestic market. As a result, their negotiating position is comparatively weak and must rely on the marketing skills of the distributor they have selected and the distributors diligence in accurately reporting returns.

For television programs in the domestic market, the relationship between the producer and the network is more direct, with the dollars generated from the

licencing fees normally used to fi nance production of the program. Subsequent exploitation of the home entertainment market or, in the case of series, renewals and syndication, may improve the producer’s revenue stream.

There are also ancillary markets such as airlines, hotel in-room services, and nontheatrical (e.g. educational institutions, libraries, community or armed forces). These generate relatively minor amounts of revenues and therefore do not signifi cantly infl uence the back end.

4.6 International Market

The international market includes all territories outside of the domestic market. It is sometimes termed the ‘rest of the world’ or ROW to distinguish it from the domestic market. For both independent producers, and increasingly for the US studios, the international market offers the prospect of a return on the cost of production and potential profi t for both feature fi lms and television productions.

The interaction between the producer and the international market is signifi cantly more complex for independent fi lm producers than it is for studios. Studios have a global reach through branches, subsidiaries or exclusive relationships in most overseas territories that act as ‘domestic distributors’ for their productions.30 Independent producers, however, must work with and through a sales agent or international distributor.

4.6.1 The Sales Agent

The lives of most independently produced feature fi lms in the international marketplace begin with a launch at a fi lm market by a sales agent licensed by the producer to make territory-by-territory sales. This section looks at the role of the sales agent in the international marketplace from completion through the market launch, negotiations with potential distributors, contracting as a result of the negotiations, delivery, payments, reporting and ongoing supervision.

The term ‘sales agent’ refers to the companies that handle sales and marketing of the rights to exhibit movies in different media outside of the domestic

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market. The term ‘distributor’ is used to identify the companies in each territory that license the rights and arrange the commercial release of the fi lms in cinemas, on DVD/video and then television. In brief, the sales agent sells the fi lm to a distributor in each overseas territory.

The sales agent must be convinced that the fi lm will appeal to overseas audiences and that sales will be possible before taking on the risk of acquisition. That risk can run from payment of an advance against future sales – a ‘minimum guarantee’31 – to a no-advance deal, plus the sales agent’s costs for marketing the fi lm. In return, the sales agent takes a commission or fee ranging from a low of 10-15% of sales revenue for a no-advance deal up to 25-30% for other arrangements, plus the right to recover its marketing costs up to an agreed maximum amount.

The sales agent may operate from a base within the producer’s home market or elsewhere.32 Also, more than one sales agent can be involved in a fi lm through a split of overseas territories. Specifi c territories, such as North America or the United Kingdom, can be excluded from the sales agent’s deal where the producer is negotiating a separate pre-sale directly with a domestic distributor or TV network in that territory.

4.6.2 Appointment of Sales Agent

The sales agent, like the domestic market distributor, is appointed by the producer, usually in consultation with the investors in the fi lm. All expectations of back end revenue from overseas markets depend on the effectiveness and diligence of the sales agent.33

Institutional investors, including public funding bodies, usually require that the sales agent be appointed before the fi lm begins production. Where the sales agent provides a minimum guarantee, independent producers frequently use the money as part of the production fi nancing, either by the sales agent providing a cash fl ow during production or by the producer arranging a loan from a bank or other fi nancial facility secured against the guarantee.

The producer’s contract with the sales agent grants the agent authority to license distribution of the completed fi lm in specifi c territories and other specifi c rights for a specifi ed term, usually 15-20 years.34 In return, as noted, the sales agent collects sales revenue, deducts its commission, agreed expenses and any minimum guarantee paid to the producer, before returning the net income to the producer.

27 In New Zealand, the NZFC as sales agent usually negotiates the domestic distribution arrangements; elsewhere it is usually the producer who undertakes these negotiations.

28 In the USA, most major studios either own or are affi liated with major TV networks. Disney owns ABC TV in the US; Universal is owned by NBC; CBS and Paramount are owned by Viacom; Fox Network & 20th C Fox are owned by News Corp; HBO, Turner Broadcasting (CNN) & Warner Bros.are owned by AOL Time Warner.

29 Variety fi gures for US network licenses for blockbuster movies underline this reality: NBC paid US$30 million for Titanic and US$50 million for Men in Black, Fox paid US$80 million for Lost World, and CBS paid US$20 million for Tomorrow Never Dies with an escalator clause triggered when the box offi ce exceeded $100 million.

30 Note: In some cases, large budget movies can be jointly fi nanced by two studios with one taking the domestic market (i.e. USA & Canada) and another taking the international rights. The holder of the international rights becomes a sales agent of sort, working through its overseas subsidiaries.

31 This type of advance may also be called a DG or ‘distribution guarantee’. Such guarantees are payable by the sales agent irrespective of whether the completed fi lm achieves that level of sales.

32 In New Zealand, the New Zealand Film Commission has been a sales agent for New Zealand fi lms for over 25 years. However, sales for some current New Zealand feature fi lms are being shared between the NZ Film Commission (which is also an investor) and an overseas sales agent (representing an offshore investor) with the territories for each seller clearly defi ned at all times.

33 For independent producers, the choice of sales agent – like that of the domestic distributor - is crucial to ensuring that a fi lm is properly and relevantly and persuasively and professionally handled in the international marketplace. Does the sales agent have a good track record? Does the sales agent handle fi lms that are similar in quality and/or content to the new fi lm?

34 The duration of any sales agreement is important. If for example the term is 20 years from 2004, it means that the sales agent can license the fi lm in 2005 for distribution in an overseas territory for a term not exceeding 19 years. At the end of the overseas distribution license and the sales agent’s own agreement, the producer is able to re-license the fi lm.

The commercial business terms usually included in the sales agreement are:

• Sales agent approval rights: The sales company may require approval rights

over the production budget, script and, in some instances, above-the line lead cast. Such approvals are frequently tied to a signifi cant minimum guarantee. The sales agent may also acquire right of approval of fi ne cut or lock off at sound mix and undertakings by the producer relating to classifi cation and running time.

• Delivery items: The producer will be obligated to deliver specifi c

physical components to specifi ed standards. These are included in the production cost of the fi lm or television program.

• Sales estimates: The minimum and maximum prices, on a territory-

by territory basis, within which the sales agent is authorized to sell the distribution rights for the fi lm. The producer’s approval is needed for distribution arrangements that fall below the specifi ed minimum.

• Holdbacks: Holdback clauses in the producer-sales agents

agreement set out the earliest dates when the fi lm can be released in each medium (theatrical, home entertainment, television, etc.) to take the greatest possible advantage of the revenue potential of each overseas market. For example, a contract can include a requirement that the distributor release a feature in cinemas before moving to video/DVD, then television releases.

• Excluded rights: Some rights, such as merchandising, novelisation,

and soundtrack albums, may not be licensed to the sales agent contracted. Instead, the producer will contract with agents specializing in these ancillary rights. When different agents are involved in marketing the production, the various agreements will ensure coordination of the advertising, product launches and the fi lm’s release.

• Defi nition of gross income and agreed deductions: A defi nition of gross income (often described as gross receipts) is included in the sales agent contract, along with the requirements that the

defi nition be included in each distribution contract with a distributor. (See Appendix 1.) The contract also sets out what costs can be deducted from gross receipts and how the deductions are to be made (usually, but not necessarily, after deduction of the sales commission but before any monies are remitted to the producer).35

• Financial reporting and payment: The sales agent contract specifi es scheduled reporting periods and dates for payment of net revenue due to the producer and/or investors. Increasingly, a specialized collection agency, operating at arm’s length from both the sales agent and the producer, is retained to collect revenue from sales, deduct sales agent’s advance, expenses and commissions, and make payments directly to the producer.

The sales agency agreement sets the crucial foundation for potential back end returns from overseas sales.36 If the fi lm is successful in overseas markets, the producer is reliant on the sales agent to collect ‘overages’ or income generated from the fi lm’s release in cinemas, in the home entertainment market, television and other markets that exceed the original license fee paid by the distributor to the sales agent.

Sales agency agreements for television productions follow the same principles as for feature fi lm, with the obvious caveat that there is no theatrical release. Further, it is unlikely that DVD/video rights will be included. The primary rights granted to the sales agent in this instance will be television broadcast rights including where appropriate pay TV as well as free-to-air. The growing issue of satellite ‘footprints’ that stretch beyond territorial limits is a complicating factor in sales agency arrangements for television licensing of both fi lm and television in overseas territories.

4.6.3 Sales Agent Marketing Techniques

The sales agent has a role in promoting the fi lm, usually alongside the production’s publicity campaign. The agent’s role in an independent feature fi lm is no different than it would be for a studio production, except that in the latter case the studio’s representative will have a larger budget and will work through the

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studio’s overseas branch offi ces or subsidiaries. With much more limited resources, the sales agent for an independent fi lm from New Zealand, Australia or Canada needs to work more ingeniously.

Sales agents usually start marketing a fi lm overseas while it is still in pre-production, even before casting is complete. Sales made at this early stage can offset the risk the sales company may have incurred by agreeing to pay a minimum guarantee.37 However, more frequently for independent fi lms, the sales agent’s initial goal is to generate awareness among buyers, with actual sales commencing once the fi lm is completed and available for market screenings.

Two of the key venues for sales agents of independent fi lms are markets and festivals:

• Markets: The annual markets for fi lm and television products

offer important venues for sales agents to meet distributors and TV network buyers from around the world and to negotiate deals. The largest markets devoted to sales are the American Film Market (AFM), MIFED, MIPTV, and MIPCOM.

• Festivals: Because the screenings are attended by journalists

and critics, an ‘offi cial’ festival selection can

help increase the visibility and reputation of fi lms, especially for those aspiring to art-house distribution. Positive reviews create optimism among buyers that the fi lm will attract audiences. Awards for the fi lm or its key talent are even more effective. Cannes, Berlin, and unoffi cially Toronto and Venice combine markets with festivals.

Traditionally, producers and sales agents of culturally important independent fi lms have sought offi cial selection at a fi lm festival to coincide with or precede the market premiere.38

Some festivals, like Sundance and Toronto, have generated strong market interest for Australian and New Zealand movies. Sundance gave rise to two legendary acquisitions for Australian features in the late 1990s. Scott Hicks’ Shine provoked a bidding war between Miramax and Fine Line in 1996 that Fine Line won for a reported US$2 million. The movie earned US$36 million at the box offi ce in North America. In 1999, Miramax paid an impressive US$6-7 million for The Castle. Unfortunately, the fi lm earned a disappointing US$878,000 at the box offi ce. New Zealand’s Whale Rider won audience awards at both Toronto and Sundance and went on to generate US$20 million in its North American release.39

35 These deductible costs conventionally include the cost of creating and printing publicity materials, the cost of creating advertising

and placing it in trade papers, the cost of paying a publicist to place stories in trade papers and to organize events and invitation

lists, the cost of special events specifi cally promoting the fi lm, the cost of renting theatres for market screenings, the cost of

freight for carrying prints and publicity materials to and from markets, and sometimes (subject to negotiation) a share of the

costs of market offi ce overheads pari passu with all titles being marketed at the event. If the sales agent has paid a minimum

guarantee, provision may also be included for deduction of fi nancing costs.

36 The agreement with the sales agent sets exactly what is to be included in each report covering a line by line description of each

fi nalized contract, specifying territories, licensed rights, term, and advance, with a summary of the percentage shares of income

and recoupment structure. Without this information, the producer and investors will be unable to monitor the performance of

their fi lm. In turn, the sales agent is required to include such reporting obligations in each contract with each distributor, who is

also be required to provide regular information on release dates, reviews etc.

37 Sales made prior to delivery of the completed fi lm/TV program are based on a deposit from the distributor licensing the product

for their overseas territory, with the balance due on delivery. There is always the risk that, on screening the completed fi lm, the

distributor may decide against risking the balance due on delivery.

38 The ‘cultural’ versus ‘commercial’ dichotomy is rapidly diminishing. One only has to look at the offi cial selection line up at Cannes

in 2004 to see that studio movies fi gured prominently with Shrek 2 (DreamWorks SKG) in competition and Troy (Warner Bros)

screening ‘out of competition’. In addition, two Miramax productions were in offi cial selection: Kill Bill Vol 2 out of competition and

Fahrenheit 911 in competition where it won the Palme d’Or.

39 Variety Box Offi ce fi gures.

4.6.4 Back End Impact of International Sales for Independent Productions

If the sales agent succeeds in persuading potential distributors that a fi lm or television production will be popular with audiences and critics, then distribution deals in overseas territories will be executed and the agent, producer and other back end participants can look forward to revenue from the international market.

If a fi lm fails to get the expected sales, the sales agent may be left with unrecoupable marketing expenditures. Such a loss is conventionally covered by fi nding a television seller who is willing to include the fi lm in a package of titles being licensed to broadcasters. The income from this market is small. Where the sales agent has paid a minimum guarantee in advance of sales, the producer runs the risk that the sales agent may refuse to pay any portion of that guarantee due after delivery.40

There is also a risk that the sales agent or the overseas distributor may fail to reliably report revenues. If reporting from distributors is inadequate, at least for major territories where large amounts of money may be in dispute, an audit of the distributor’s books is the conventional means of pursuing revenues due to the producer. The fi nal resort may be legal action.

If either the overseas distributor or the sales agent goes out of business, the situation for the independent producer is more complex. Tracing sales documentation or collecting revenues due can involve extensive accounting research and legal action.

‘Worst case’ scenarios aside, success in the international market through initial sales and collection of overages can represent signifi cant revenue that can translate into back end revenues and indeed profi t.

4.7 Academy Awards©, Golden Globes, BAFTAs and Other Honours

In the lead up to the awards season, the entertainment industry trades are replete with full page/full colour ‘For your consideration ...’ads. Once the nominations are announced, there will be another round of expensive ads urging members to vote for a particular

nominee. The costs of these campaigns, which are deducted from revenue, obviously vary. In 1999, during the Oscar© race, it was estimated that Miramax spent US$5 million on its Shakespeare In Love campaign, well in excess of the norm of US$2 million for the studios and a modest US$250,000 for the true independents.41 Costs for more recent campaigns, such as New Line’s for The Lord of the Rings: The Return of the King, will have been considerably higher.

The benefi ts of nominations and awards, especially at the Oscars©, can signifi cantly boost a movie’s box offi ce performance and home entertainment sales. In 2004, the emerging US distribution powerhouse Newmarket had both Monster still in cinemas and Whale Rider out on DVD. Newmarket’s president, Bob Berney, forecast that Monster would bring in an addition US$4-5 million at box offi ce due its star’s best actor award.42 He also reported the Whale Rider DVD revenues had reached US$13 million as a result of the consumer interest generated by Keisha Castle-Hughes’ nomination.

The cost of awards campaigns is usually covered by the domestic distributor; however, with the growing international appeal of the Oscars© and increasingly the Golden Globes nominations and awards increase box offi ce grosses in overseas territories well beyond North America. As a result, awards campaigns may also involve the international sales agent or other distributors.

4.8 Related Market Strategies

This section looks at some of the ancillary markets that are being tapped for feature fi lm and television productions. The successful exploitation of these markets may generate additional revenues while increasing audience or consumer interest in the production.

4.8.1 Literary Rights

The literary rights associated with a production provide a range of additional revenue opportunities for some back end participants. These opportunities include re-issues of the novel, short story, comic or other publication on which the fi lm is based, publication of the screenplay and novelisation of the movie.

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• New Editions: J.R.R. Tolkien’s The Lord of the Rings is possibly the

most obvious recent example of how the re-issue of established literary works can be tied into a major movie release. New Zealand has its own examples. The theatrical success of An Angel at My Table resulted in the fi rst foreign language editions – in German and Italian – of Janet Frame’s autobiography. More recently, Whale Rider illustrates how a successful fi lm can spur interest in and increase sales of the novel on which the fi lm is based.

Of course, the fi lm’s producer and investors will not, ordinarily, share in the additional revenues from increased book sales. An exception may be when the copyright to the source work is in the public domain and the fi lm’s production company enters into a commercial relationship with a publishing company that publishes of a new “movie-specifi c” edition.

The popularity of comic characters such as Batman, Spiderman and The Hulk as blockbuster movie subjects is well known. As with novels, comics can be reissued and new editions published featuring the characters that resemble more closely the actors and visual design of the fi lm itself.

Copyright considerations apply here also. If the comic strip and characters are still under copyright, then the producer will at best negotiate a share of royalties that relate to the tie-in with the movie.

• Novelisation & Spin-offs: Novelisations (literary works based on the script

of a movie or television drama) and spin off novels and other publications have been signifi cant

revenue sources for some studios and production companies. The George Lucas/Star Wars ‘empire’ began exploiting novelisation rights with the fi rst fi lm in 1977. Today, the Star Wars publications list includes more than 80 novelisations and spin-offs, plus a variety of “the making of ...” and similar non-fi ction books.43 Disney is the best known practitioner of this strategy and has a long history of commercially exploiting animated and live action characters through everything from colouring books and children’s books to coffee table publications targeting adult fans of its classic animations.

In New Zealand, Ian Brodie’s The Lord of the Rings Location Guidebook has proven an internationally popular addition to the numerous publications that have capitalized on the trilogy’s success. Having already gone through two paperback editions, there is now a coffee table hard cover edition available.

Novelisation and spin-offs have also been profi table for television dramas and other series. Examples of series that have looked to the novelisation and/or other publication spin-offs are dramas such Star Trek and X-Files, comedies such as The Red Green Show, and children’s programming like Sesame Street and The Wiggles. Life style, nature and other informational programming have also extended their revenue sources through publication of cookbooks, decorating guides, coffee tables books, travel guides and the like.

The production company, as owner of the copyright in the fi lm or program, collects a share of royalties from all such publications.

40 Failure on the part of the sales agent to make payment on contracted minimum guarantees represents a breach of contract and

can involve the producer in lengthy and costly legal action to terminate the agreement. When this occurs, the fi lm is placed in

limbo until the producer has successfully recovered the sales rights, thereby delaying the fi lm’s exploitation in the international

market and possibly also its prospects for domestic release, where this too may be reliant on international acclaim through

festivals. Sales agents that are members of the American Film Marketing Association (AFMA) are bound by AFMA arbitration

regulations; this can offer some comfort to independent producers though the costs can be substantial.

41 Biskind. Down and Dirty Pictures. Author cites these estimates from fi lm journalist Nikki Finke in a March 15, 1999 New York

magazine column on that year’s Academy Awards. Pg 369

42 ‘Newmarket’s Monster Day’ by David Rooney. Variety February 29, 2004. At the time of the article, Berney’s domestic box offi ce

estimate for Monster was US$30 million; it went on to do nearly US$35 million.

43 Patricia Odell, “Random House Debuts “Star Wars” Continuity”, Direct, May 1, 2002. From http://articles.fi ndarticles.com/p/articles/

mi_m3815/is_2002_May_1/ai_87392985 (Accessed 15 June 2004)

• Screenplays: The publication of the screenplay is usually not released until well after the fi lm has enjoyed its cinema release.44 These publications are intended for a niche market comprised primarily of students of cinema, other screenwriters and afi cionados of the fi lm or the scriptwriter. Published screenplays will involve a split of royalties between the scriptwriter and the producer. Revenues from this source are limited given the small size of print runs that target a niche market. It is doubtful that sales of published screenplays have a signifi cant impact on future DVD/video sales or rentals.

4.8.2 Merchandising

Disney and LucasFilms demonstrate how lucrative merchandising rights for toys, prop replications and memorabilia can be. Disney’s theme parks, stores and global merchandising of its characters represent a major portion of the corporate revenue stream. As an independent production company, LucasFilms’ Star Wars with its sequels and prequels may represent the ultimate benchmark for success in merchandising a fi lm: by 1997, with the re-release of the Star Wars trilogy, licensing fees were reported to have generated over US$3 billion.45

In New Zealand, The Lord of the Rings collectables and other merchandizing has proven to be a thriving business, adding revenue streams to numerous companies from WETA to elfi n scarf manufacturer Stansborough..

Merchandising is not limited to the movies. Television series, especially children’s and lifestyle programming, frequently merchandise through licensing arrangements toys, books, memorabilia and consumer goods such as lunch boxes.

4.9 Television Commercials

The traditional market for television commercials is another beast entirely. These are commissioned works where the produce manufacturer or the corporation promoting its services commissions an advertising fi rm to design the campaign. In turn, the advertising fi rm hires the fi lm/TV production company to produce the commercial. The advertising fi rm then books ‘spots’ or ad time on the TV network, often in tandem with billboard and/or print advertisements.

Commercials can be made exclusively for the domestic market or for wider use – sometime dubbed – in other major markets. The production company though well paid is in fact a producer-for-hire. The copyright in the commercial itself remains with the product manufacturer commissioning the ad campaign.

Commercials produced for television do offer some ‘back end’ potential for talent involved in the production, such as residuals for directors and actors and royalties for music composers and performers, under standard performers or licensing agreements. This is addressed in the next chapter under Talent.

At the top end, even A-list directors and actors take advantage of prestigious advertising campaigns to make signifi cant amounts of money through TV commercials. Stars appear in commercials in Japan – famously portrayed in Lost In Translation – that are never seen outside that market. Directors such as Woody Allen have made commercials in Italy; Australia’s Scott Hicks has directed commercials for American companies to be shown in the US during the Super Bowl; New Zealand’s Vincent Ward has also directed commercials for major international companies.

44 New Zealand screenplays that have been published include The Navigator and An Angel at My Table.

45 Biskind. Easy Riders, Raging Bulls. Lucas himself describes the franchise he has created as “my destiny”, and his former wife has

said that he’s reconciled to spending the rest of his life churning out Star Wars prequels, tending the pea at the bottom of the

inverted LucasFilm pyramid where merchandising sits at the top.

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Having looked at how the markets operate and the players that are involved in, and benefi t from, the revenue stream for a movie or TV series, this chapter examines the rights of the producer to the money fl owing from the market, and how that may be shared with others involved in the actual production.

The term producer, as used here, refers to the production company that holds the copyright in and controls the intellectual property that is the fi nished fi lm or TV production. As noted previously, the producer could be a major studio or an independent production company.

5.1 Underlying RightsA fi lm or TV production is comprised of multiple underlying rights. These rights can be seen as a bundle of sticks, where each stick represents a different copyright that the producer brings together to create a new copyright for the production. The script, and the right to make a fi lm/TV production based on that script, is the most important stick in the bundle. If the script is based on a published literary work, then the right to base a screenplay on that original work must also be obtained.46 Similarly, the production’s music score may include existing music, with a license fee paid for its use in the fi lm, and/or original music composed specifi cally for the project. The producer may also have to obtain the rights to some of the visual elements that will be on screen, including billboards such as Coca Cola signs.

The following section of the report will focus on those individuals or groups who, by virtue of their contribution to the creation of intellectual property may have a right to share in the revenues earned by the producer.

5.2 Key TalentWe are all familiar with the credits that roll by at the beginning of the fi lm and the end of a fi lm. If we stay in the cinema to watch the credits, it is easy to understand just how labour-intensive fi lm production is. This also

applies to television productions where the end credits roll by so quickly it is hard to genuinely appreciate the number and variety of individuals and companies involved.

Although many people and companies contribute to the making of a fi lm or television production, only a small number of key talents carry suffi cient weight to negotiate access to the back end through royalty entitlements, residuals47 that are payable for re-runs of television series and/or a share of the producer’s entitlements to profi t: ‘profi t points.’ Broadly speaking, all such payments represent access to the back end.

The talent who typically share in the back end are:• The Writer

- the author(s) of the screenplay and, where relevant, the author of the underlying literary work. For example, the estate of Tolkein will be entitled to royalties from The Lord of the Rings, as will the credited writers of the screenplay: Fran Walsh, Philippa Boyens and Peter Jackson. The writers can also negotiate profi t points with the producer. In TV series, where teams of writers may be working on a season, there is frequently an additional credit for ‘Created by’ - the individual who conceived of the basic concept for the series and who will be entitled to royalties and, mostly likely a share of profi ts.

• The Director – the individual credited with directing the fi lm/TV

production. In many cases, audiences are attracted to the cinema by the director’s name. Who now would ever want to miss a “Peter Jackson fi lm.’ Directors can negotiate profi t points with the producer; under guild agreements they may also be entitled to residuals. A-list directors, like actors, can share in box offi ce gross through profi t points.

• Lead Actors – the actors with above-title credits or leading roles. Like the director, the names of the lead actors can also draw audiences. Hollywood A list actors like

46 The US mini-major Miramax had optioned the fi lm rights for The Lord of the Rings and, though these were licensed by and the

trilogy was produced for New Line, Miramax has an ongoing right to a share of revenues. See also reference to Saul Zaentz’s

underlying rights in section 5.6.5 below.

47 Residuals refers to additional contracted payments due to key talent, usually the actors, when a TV dramatic program is re-licensed

for further use either by the original network or other broadcasters within the domestic market or in overseas territories.

5. Who Shares In or Infl uences the Back End?

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Tom Cruise have the box offi ce clout to negotiate a share of the box offi ce gross. More often, the lead actors will negotiate a share of profi ts with the fi lm’s producer, or in the case of TV productions, rights to residual payments over and above those due under union or guild agreements.

• Music Composer/Original Artists – the composer of original music for the fi lm or TV series may have a share of profi ts if the producer acquires exclusive rights to the music sound track. However, it is more likely that there will be a royalty arrangement with the composer and the musicians involved in the recording of the music score. Similarly, the original artists (songwriter/lyrics) also receive royalties for music that is included in the soundtrack.

Depending on the producer, there may be other key talent who are given a share of the back end. Each production is unique and the producer has latitude to give away profi t points as an enticement to talent to work on the fi lm and, in the case of popular American TV series, keep lead actors in the series. In addition, in many countries there are some guiding principles that producers must adhere to in engaging key talent that provide the talent with added income over and above the fee paid for their participation in the actual production itself.

5.3 Guiding Principles: Talent Union & Guild Requirements

In New Zealand and Australia, just as in Canada, the US and in Europe, there are unions or guilds that may set minimum terms for engagement of their members’ services. For example, in Canada the Alliance of Cinema, Television & Radio Artists (ACTRA) negotiates a multi-year agreement with the Canadian Film and Television Production Association (CFTPA) that sets out terms under which Canadian actors can be engaged on feature fi lms and TV productions. These agreements vary from one country to the next, especially where there is a strong presence of unions/guilds.48 The New Zealand agreements are considerably more fl exible than those of other countries.

The following information illustrates how such agreements grant entitlement to a share of the back

end. The agreements cited are examples only and are not intended as benchmarks for any ‘best practice’ measure of back end entitlements.

It goes without saying that such agreements tend to serve as guiding principles for independent productions. Studio productions with their vastly higher budgets will be paying A-list key talent substantially more than union or guild minimums.

5.3.1 WritersIn Canada, the CFTPA’s agreement with the Writers Guild (WGC)49 sets out the minimum fees paid to writers for original treatment, script, rewrites etc. These fees are payable whether or not the script is ever produced. In addition to the minimum fee, writers are also entitled to a ‘production fee’ when the fi lm or TV production commences. Again these fees are set at a minimum, and include a specifi c amount plus a percentage of the production budget.50 Finally, the agreement also guarantees the writer a share in the back end in the form of a distribution royalty of 3.2% of the distributor’s gross revenue. The distributor’s gross revenue is defi ned as all revenues without deductions of any kind, less 100% of the production budget.51 This provision covers most television production in Canada, including MOWs, drama series, documentaries and daily dramatic series or serials.

The Writers Guild of America (WGA) residual compensation provisions for screenwriters on movies date back to 1985 when it agreed to accept only one-quarter of the traditional revenue streams for television in what was then a relatively new media – video – as the basis of calculation.52 Residuals earned by WGA members writing for television are more complex. Re-runs can be as high as 100% of the applicable minimum for prime time re-runs on the main networks, to a sliding and diminishing scale for re-runs on non-prime time in the US and Canada. For US TV programs being broadcast overseas, there is a minimum 15% of the original fee earned by the writer, with escalators if the foreign gross license fee paid overseas exceeds certain levels.53 The formula has numerous variations for TV production that is ‘made for pay’ or ‘made for basic cable’.

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Such agreements represent the basic standard for writers. However, the back end deals available to writers on large budget movies – along with their upfront fees – are infi nitely more generous. A case in point is that of the original writer Marc Norman on Shakespeare In Love who negotiated a reported 7.5% profi t share even though Tom Stoppard rewrote his script. 54

5.3.2 ActorsCommencing again with Canada, the current ACTRA-CFTPA agreement uses a system of minimum fees combined with ‘intended use’ provisions through which the producer designates whether the production is intended as a theatrical feature fi lm, TV production or other release. In the case of a feature fi lm, the actor’s fee covers worldwide theatrical rights for the period of the fi lm’s copyright. For a TV production, the intended use provision covers a single run on network with provisions for residuals such as 30% for each run on Canadian television or 35% for a run on US television. The producer has the option of pre-paying to obtain

unrestricted use for up to four years at rates that vary from 130% of the theatrical minimum or 105% for television minimums. If the producer cannot afford to pre-pay the full amount, then there is the option of paying a percentage of the distribution gross.55

Australia’s Media Entertainment Arts Alliance (MEAA) operates a system of ‘loadings’56 under which the producer can acquire worldwide theatrical or television, excluding US network, rights for a 25% loading in addition to each actor’s minimum fees for theatrical feature fi lms. Actors in movies also receive 3.6% of gross revenue for a US television network sale.57

Generally, actors’ fees for television commercials, while subject to standard contract terms, are negotiated. However, in Australia for example, the MEAA does offer guidance on the level of loadings for use of the commercial outside of Australia that range from 200% for each of the US, UK or Europe, 100% for New Zealand and 50% for Singapore, Hong Kong and others. Worldwide is 300%.

48 The applicability of these types of agreements is also infl uenced by the labour practices and regulations in each country as these relate to treatment of talent working in production as employees or freelance contractors.

49 Independent Production Agreement covering Freelance Writers of Theatrical Films, Television Programs and Other Production between the Writers Guild of Canada and the Canadian Film and Television Association February 17, 2003 to December 31, 2005.

50 Production budget is defi ned as budget per episode for TV series where a writer may work on one or more episodes but not the entire series.

51 Distribution advances paid to the producer prior to production are excluded from the Agreement’s defi nition of distribution gross revenues; however, recovery of such advances by the distributor is also excluded.

52 Residual rate for screenwriters when a movie is broadcast on television was 1.2%. This rate applies also to video-on-demand, cable and Internet rentals. Writers Guild of America Theatrical and Television Basic Agreement expired on April 1, 2004 and negotiations of a new agreement are underway. Current theatrical motion picture residuals limit writers to a 0.3% rate on DVDs that is the same as the 1985 rate for videos; WGA is seeking to double this to 0.6%.

53 For a commercial hour drama, WGA foreign telecast compensation rates are: 15% of applicable minimum for initial telecast, additional 10% when foreign gross exceeds US$13,000, plus an additional 10% when it exceeds US$18,000 and a further 1.2% of the distributors’ foreign gross in perpetuity after it reaches US$715,000.

54 Biskind. Down and Dirty Pictures Norman’s net profi t share was larger than other net participants; however, he never saw a penny. He is quoted as saying: “ All I know is, a picture that makes $300 million worldwide does not provide money for people with net points. I’m going to put that on my tombstone.”

55 Independent Production Agreement between the Alliance of Canadian Cinema Television & Radio Artists (ACTRA) and the CFTPA and l’Association des Producteurs de Films et de la Television du Quebec (APFTQ) covering Performers in Independent Production January 1, 2004 to December 31, 2006.

56 The term ‘loading’ refers to additional fees payable for wider use of the fi lm or TV product in which the actor has performed. The wider use can cover other media beyond its original release in cinemas or sales to other territories beyond the original domestic market. In effect, a loading replaces residual entitlements.

57 Media Entertainment Arts Alliance 2003 Actors Feature Film Agreement: producers can also choose from 2 options for additional payments for ongoing further use being (A) 8.33% of net profi ts including co-producer’s share or 3.6% of distributor’s gross.

MEAA also employs the agreement terms set by the US Screen Actors’ Guild (SAG) for its members who are engaged on foreign productions fi lming on location under SAG rules. The SAG agreement, adjusted for Australian exchange rates, includes residual payments that are collected by the MEAA and then paid out to members. 58

Residual payments eliminate loadings, though involve more ongoing administration and reporting by the production company.

In the US, the American Federation of Television & Radio Artists (AFTRA) is about to commence negotiations on a new contract with the networks that will cover its 80,000 members working on primetime non-dramatic and syndicated shows, including daytime soaps such as The Days of Our Lives as well as news magazine programmes and game shows. AFTRA is seeking new benefi ts, inlcuding a 3.6% of distributor’s gross as a pool for residuals and a fi xed residual rate of 37.5% for all artists.59

5.3.3 Directors

In addition to basic rates and back end deals, A-list directors earn A-list fees, but can also share in an A-list fi nancial risk if the movie they are directing runs over budget. On Gangs of New York, Martin Scorsese’s fee as director was US$ 6 million, but half of that was deferred.60

Most directors of independent movies only dream of such fees and back end deals. However, if they are members of a guild or union, they do have rights to fees related to both the production budget and the eventual marketing of the movie.

The Director’s Guild of America (DGA) sets the ground rules for minimum fees and entitlements for feature fi lm and television directors in the US.61 The minimum fees are based on production budgets. Freelance directors working on low budget theatrical feature fi lms under US$500,000 are provided with a guaranteed number of weeks of employment covering the shoot plus preparation and cutting. The same principles apply for television directors.

Entitlements to residuals, royalties and payments are also spelled out in detail. For example, the Basic Agreement specifi es that 1.5% of the “employer’s gross” from video/DVD rights (and 1.8% after that gross reaches US$1 million) will be paid according to a formula under which the director receives 1%, the DGA pension plan 0.3%, with the balance of 0.2% prorated among the Unit Production Manager, 1st Assistant Director and key 2nd Assistant Director.62

Under guild agreements in Canada, directors are entitled to additional fees for DVD/video and for television sales over and above the minimum fee payable for a theatrical feature fi lm.63 For example, if the director’s minimum fee for the movie is C$100,000, there would be another C$50,000 for DVD/video rights and C$40,000 for television rights. These payments are loadings and effectively buyout the director’s rights in perpetuity. However, directors can negotiate a share of profi ts with the producer.

5.3.4 Music Composers/ Performers

Music rights are complex involving soundtrack licenses, payments for composition and payments for performers and music publishing rights.64 If existing music is used in the fi lm, the recording company is paid a license fee in addition to the license fees paid to the composer/songwriter. The latter are also paid for music not yet recorded but not composed specifi cally for the fi lm. Where music is composed specifi cally for the fi lm, the production company can own the copyright (unless the composed negotiates to retain the copyright); however, the production company must still pay for a license or release to use the music and for the performers’ rights. Within that license fee the composer/performer may also be entitled to royalties from CD sales and television.65 In addition to these basic licenses, there are synchronization and performers rights to exploit the music in all forms of technology such as DVD/video, television and soundtracks released on CDs.

Music soundtracks on CD are potentially a signifi cant source of supplementary income for the fi lm when the music registers with audiences and gets additional radio play, and where the production company has

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retained rights to royalties from the soundtrack. Popular songs from the movies have a long tradition – just think of Shirley Bassey’s Goldfi nger from early James Bond. But even classical music associated with a fi lm can generate sales: the soundtrack from Shine featuring Rachmaninoff’s music and compositions by David Hirschfelder made it to the top of US music charts.

With music being a crucial emotive component of cinema and television drama, and with sales of signature songs climbing the charts, composers and performers can obtain signifi cant revenues from licensing their compositions, from performance/synchronization rights and from royalties negotiated with the producer. Many US studios have recognised the value of music: New Line has its own records division, as do Universal, Sony (which has also acquired BMG Distribution) and Warner Bros. Disney has one of the strongest track records in successfully marketing soundtracks: major hits like Lion King were high on the sales charts in the US for over a year and even lesser box offi ces successes like The Princess Diaries 2: Royal Engagement can break through to the top 50.66

CD sales generally appear to be recovering from the recent massive slump due to the new ‘down-loading’ phenomenon.67 The involvement of artists such as Howard Shore and Enya and opera singer Renee Fleming in various parts of The Lord of the Rings trilogy, Randy Newman in Seabiscuit (and cousin Thomas in Finding Nemo) and perennial Hollywood favourites such as James Horner (Titanic and House of Sand and Fog) underlines the ‘star’ power of composers and performers.

5.4 Talent Management: Agents, Business Managers & Related Players

Most of the key talent will have an agent who manages their business negotiations and protects their interests. Talent agents, well known as ‘ten percenters’, receive 10% or more of the fees and other compensation that the writer, actor or director earn. As the reputation and ‘star’ power of actors, writers and directors based outside of the US rise, most will acquire a US agent in addition to their local agent. Producers can also have agents and, during the conduct of their business of producing, will bring on board lawyers to assist with the negotiations of production fi nancing.

58 By contrast, the SAG terms do not generally apply to non-members elsewhere in the world. For example, foreign productions

shooting in Canada employ the ACTRA agreement for Canadian actors. In New Zealand, local terms also apply.

59 ‘AFTRA talks get stat date’, Variety September 2, 2004. A major push in these negotiations will be increasing producer contributions

as employers to health plans.

60 Biskind. Down and Dirty Pictures Producer Harvey Weinstein of Miramax was at risk for a reported US$32 million and, along with

Scorsese also persuaded actor Leonardo di Caprio to assign part of his $18 million fee to cover any overages. Variety puts the

movie’s North American gross box offi ce at just under US$78 million.

61 The DA’s Basic Agreement also covers Assistant Directors and Unit Production Managers. The full text of the agreement is

available on www.dga.org.

62 The term ‘employer’s gross’ makes it clear that, under the DGA Agreement, the director is engaged as an employee of the

production company. There are similar formulas for dividing a percentage of this gross from supplemental markets including

foreign revenues.

63 Standard Agreement between the Directors’ Guild of Canada and the Canadian Film & Television Association 2003-2005.

64 There are two sets of rights that are usually involved with composing a fi lm soundtrack: mechanical rights cover recording a song

onto a CD and synchronization rights covers the music’s use with the visuals on screen. In addition, there are performing rights

for screening the fi lm with the composer’s music.

65 Music and other collectives exist in many countries that receive payments from radio and/or TV broadcasters for music rights and

divide these up among copyright owners – including those of the original composer/lyricist – on an annual basis. For example, New

Zealand has AMCOS New Zealand Limited, a wholly owned subsidiary of Australasian Mechanical Copyright Owners Society Ltd.

that collects fees on the licensing of the reproduction in recorded form of music that covers fi lm, video cassette &/or DVD, etc.

66 Billboard reports Lion King was at #1 after 88 weeks on the charts. Princess Diaries 2 reached #22. www.billboard.com

67 Sales rose in the US during the fi rst half of 2004 for the fi rst time in four years according to Rolling Stone “CD Sales Up in 2004’,

July 30, 2004) The slump in sales from 2000 to 2003 had seen CD sales drop from 785 million to 656 million, or 16.5%.

Agents or business managers are increasingly involved in putting together ‘packages’ involving their talent, a script, fi nancing production or in arranging distribution for independent fi lms. For example, ICM worked with Mel Gibson on the domestic distribution deal with Newmarket for The Passion of the Christ, and Sophia Coppola on putting together production fi nancing through overseas pre-sales for Lost In Translation.68 In both fi lms, the agents’ clients took salary reductions but benefi ted from enhanced ownership and revenue participation. With the success of both movies, ICM would have benefi ted also from their respective client’s deal.

5.5 Other Shareholders: Financing and/or Investors

It costs money to fi nance a feature fi lm production. The independent producer in particular may rely on public sources of fi nancing or speculative and probably costly private sources. Each has its own demands.

5.5.1 Public Financing – Your Domestic Funding Agencies

In many countries including New Zealand, public funding is available for fi nancing the development and production of feature fi lms and television productions that meet specifi ed criteria for ‘domestic’ production or local content. As a rule of thumb, production fi nancing from public agencies takes the form of equity investment; depending on criteria, that investment may carry an acquisition of a proportional share of the fi lm’s copyright.69 Irrespective of actual copyright interest, the public investment carries a right to recoupment and profi t participation pro rata/pari passu70 from revenues generated in the commercial exploitation of the fi nished fi lm.

In some cases, the public investor may step back and allow the producer to access the revenue stream as an ‘advance’ against future profi t. For many independent producers, the eventual share of profi t is will pay key talent their profi t points, as well as the producer’s own share of profi t. By giving accelerated access to the income, public investors help build a more stable domestic production base.71

There are a myriad of other means by which public funds may be channelled to the production of fi lms and television, both domestic and those attracted into the country to shoot on location. These range from tax credits in Canada and tax rebates for feature fi lms in Australia to New Zealand’s Large Budget Screen Production Grant Scheme. In these examples, the institution that provides the monetary benefi t does not acquire a right to the revenues generated by the fi lm’s exploitation. Rather, they provide a straight subsidy designed to enhance the economic and employment benefi ts that fl ow from screen production activity.

The participation of public sector fi nancial partners can add a level of comfort for both the independent producer and the talent with back end deals for profi t participation. As statutory entities administering public money, these partners’ accounts are subject to audit and report to ministers or parliaments. So it is likely that an independent producer can obtain more satisfaction from questioning the fi nancial reporting provided by a public investor and at less cost than would be the case with a major or mini-major studio.

5.5.2 Non-Public FinancingWhere movies are fi nanced outside of the public sector subsidy system that predominates for domestic production in Canada, Australia and New Zealand, the fi nancing itself brings carrying costs that must be borne either through the production budget or offset from the revenues that fl ow to the producer. Banks such as Comerica, JP Morgan and new player Bank of Ireland are in the business of making a return through the provision of loans ranging from cash fl ow loans secured against pre-sales72 to discounted loans (principal less interest and fees) for gap fi nancing.

The cost of private fi nancing can mount, adding signifi cantly to the budget of independent productions. In the United Kingdom until recently, the tax-based schemes often came with Executive Producer fees of 10-15%, adding to the budget.73

Most independent productions also appoint a collections agency with responsibility for collecting net receipts from sales agents. These agencies act in essence as the police, ensuring performance on reporting obligations and

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payment of revenues due. They too charge a fee, but a relatively modest one usually under 2%.

In the US even independent movies that are fortunate enough to fi nd full fi nancing and a guaranteed theatrical release can leave a frustrated producer and the key talent waiting for their net profi t shares. Kevin Smith’s Miramax production Dogma encountered this. With production costs reported at around US$10 million, the fi lm was released by Lion’s Gate and went on to gross nearly US$31 million at the box offi ce and sold one million DVDs. Smith and others received their fees, but no back end profi t fl owed. According to Miramax, production costs including overheads and interest were actually US$20 million, with its distribution costs adding an additional US$16 million. 74

5.6 Other Factors that Impact on Net Returns & Profi t

There are other elements within the complexity of production fi nancing that can have an impact on the fl ow of revenues and the eventual income from profi t points that the producer and key talent may fi nally see for their work on the fi lm or television program.

What follows is a list of some of these elements that may be factored in to the equation.

5.6.1 Deferrals

Most frequently, deferrals can be a factor for lower budget productions where the fi nancing available is insuffi cient to cover all the costs. Deferrals occur when the producer(s), along with others such as actors and crew and even equipment suppliers and post-production facilities, agree in writing to defer payment of fees during the production to allow more of the budget to ‘go on screen’.

Deferrals must be negotiated with other cash investors or fi nancial participants, as the eventual payment of the deferred fees must be agreed as either a separate parallel revenue stream along side equity investment or, in rare cases, paid out from fi rst receipts.

There are some recent prominent cases where stars have deferred fees: Charlize Theron did so as lead actress in Monster in order to help the relatively unknown Patty Jenkins as writer/director/producer get the fi lm made75. In return she became Executive Producer and won an Oscar© and no doubt benefi ted from a signifi cant portion of the movie’s back end.

More often than not in independent feature fi lms, deferred fees are lost fees.

68 “Hollywood’s indie matchmakers’ (Mike Goodridge in Screen International May 7, 2004): Jimmy Barber, an agent with UTA, is quoted on the agent’s role in production fi nancing: “It has become about creating jobs for actors and directors”.

69 Acquisition of copyright ownership is often driven by national tax regulation such as in Australia where the Film Finance Corporation (FFC) is required to invest only in fi lms that meet the defi nition of 10BA. As co-investors with the FFC (though not necessarily required by statute), state agencies will also acquire an interest in the copyright. A similar requirement governs investment by Telefi lm Canada in feature fi lms and through its equity investment under the Canadian Television Fund. In other cases such as with the New Zealand Film Commission and New Zealand On Air, the public agency investing may only take an assignment of the copyright from the producer as copyright holder until the fi lm is completed.

70 Term that describes the investors’ right to revenue share based on being equal to and in proportion to other equity investors. Once these investors have recouped their investment, they continue to share in profi ts on the same basis but usually from only 50% of revenues with the balance going to the producer.

71 At the same time, public funding agencies can be rigorous in the ‘deal’ terms they demand of producers. For example, Canada’s Television Fund sets a maximum of 30% on distributor’s fees including merchandising and music publishing plus a maximum of 10% on distributor’s expenses excluding standard royalties and residuals. (Canadian Television Fund 2004-2005 Guidelines www.telefi lm.gc.ca.) The net effect is to create a level playing fi eld for producers in Canada seeking public fi nancing, but at the same time reduces the producer’s ability to negotiate and adapt to new realities within the highly competitive market.

72 In Australia, several state fi lm agencies also operate loan facilities for domestic productions.73 “The gravy train is over’. Adam Minns, Screen International, April 23, 2004.74 Biskind. Down and Dirty Pictures Note: Dogma was one of the Miramax movies that Disney, its parent company, refused to allow

it to distribute. Miramax bought back the production from Disney and released it in 1999 through Lions Gate. Most recently, Miramax has again been forced to buy back the US$ 6 million Michael Moore’s documentary Fahrenheit 9/11 that is being released in 2004 through a new consortium established by Miramax principals the Weinstein brothers.

75 Monster was Patty Jenkin’s fi rst feature fi lm, though she had made two short fi lms in 2001 that won acclaim, Just Drive and Velocity Rules.

5.6.2 Treatment of IncentivesIncentives through public funding via tax credits or rebates can enhance the independent producer’s position. For example, in Canada the tax credit on Canadian certifi ed productions becomes the producer’s equity in the fi lm. However, until recently, inclusion of Canadian tax credits in the production fi nancing resulted in a calculation of total public fi nancing that reduced the level of equity investment available from Telefi lm Canada.76 The producer therefore faced yet another shortfall in fi nancing.

A further complicating factor with these incentives is that they are paid only after the production is completed, requiring the producer to cover their value through other means.77 The time delay between when these funds are needed for the actual production and when the credit or rebate is eventually paid may be up to 18 to 24 months.

Assuming that the production does qualify and is awarded the estimated amount, the producer’s entitlement to the equivalent equity share will generate a return if the movie is a commercial success.

5.6.3 Distributors/Sales Agents/Marketing Costs

Unless clearly agreed maximum distributor P&A costs or sales agent’s marketing expenditures are established, cost overruns in these areas can have a signifi cant impact on net returns to the producer and/or investors.

There are industry standards regarding acceptable marketing costs for sales agents. These would include screening prints and cassettes, freight and customs, design and print of promotional material (fl yers, posters and trade press advertising), advertising placement, mail outs to buyers, creation and duping of trailers and promo reels, fee for publicist and, though subject to negotiation, a pro rata share of offi ce space and travel to markets. (See Appendix 1: Recoupable Distribution Costs.)

Without belabouring the point, the examples are legion where sales agents have charged unexpected or unauthorised costs incurred at a market. Investors attending a market can fi nd themselves invited to a

lavish dinner hosted by the sales agent and feel proud that the production in which they are associated is being so wellhonoured, only to receive a cost report that exceeds the agreed maximum by several zeros. The ensuing argument involving the producer can be embarrassing.78

5.6.4 The Ever-Hopeful: Unexpected Claimants

Success brings out claimants who feel they too deserve a piece of the reported action. Some may have a valid claim as a result of the producer’s failure to thoroughly clear underlying rights in the chain of title. Others may assert a right by association, however far removed, to share in the proceeds. In many cases, these claims end up in court involving the producer and investors in a costly legal defence. Even if they win – as did the producers of Shine against the grand-nephew of Rachmaninoff – the unsuccessful claimant may not have the resources to pay court costs and any damages awarded to the producer.

The potential for such claims underlines the value to the producer of obtaining expert legal advice in chain of title clearance and music publishing expertise; the cost involved upfront may well eliminate the need to pay other lawyers later.

5.6.5 Creative AccountingThe fundamental issue for many producers who have negotiated a share of back end revenues with distributors, rights holders and talent is ‘creative’ accounting practices that see costs added with interest in an ever-spiralling way the precludes the movie ever reaching net profi t.

One of the classic examples is the case of Art Buchwald, the American humorist, who took Paramount to court over the studio’s failure to pay him royalties for his concept titled ‘King For A Day’ when the Eddie Murphy comedy Coming to America grossed over US$350 million but never made a profi t. Among the accounting practices identifi ed in this case was Paramount’s charging of a fl at overhead expense of 15% against every dollar spent on production, continually enlarging the production cost and increasing the defi cit to be recovered to reach net profi t. The case was fi nally settled

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in 1992 with Buchwald being awarded compensation of US$150,000. 79

The holders of underlying rights can also be frustrated and forced to resort to legal action. The descendants of Lucy Maud Montgomery, author of Anne of Green Gables, won at least some comfort in a long running dispute with Canadian production company Sullivan Entertainment when the judge described the company’s accounting as “creative accounting at its very best and very worst – depending on your perspective”.80

More recently, Saul Zaentz fi led a lawsuit against New Line for 11 million pounds sterling claiming that as original holder of the fi lm rights to The Lord of the Rings he was due a share of gross receipts but had only been paid a share of net profi ts by New Line.81

5.7 Producer Rights and Obligations

As copyright holder in the fi lm or television production – solely or in conjunction with other partners – the producer has ongoing contractual rights and obligations. The rights can deliver income when the fi lm is a success. At the same time, the producer’s obligations to both investors and talent profi t participants can be time

consuming and possibly onerous if there are no receipts to disburse as residuals, royalties or profi t points when sending out the regular reports.

Independent producers have the biggest challenge in meeting these obligations. Without a continuity of production, many cannot afford to maintain businesses with adequate accounting staff along side development assistants. Thus, the growth in collection agencies that can also disburse receipts according the investment recoupment schedules and profi t participation.82

Producers who combine business acumen with creative vision as writers and directors have proven that taking both control and calculated risks can be highly profi table and rewarding in terms of future business growth.

One of the best examples of producer control over rights is George Lucas with his Star Wars franchise. Lucas is writer and director as well as producer. With his original script in 1973, he negotiated with 20th Century Fox a 40% share of the net profi t. With The Empire Strikes Back he was seeking to fi nance the production himself, with 50% of the net and a 77% share of the gross after a specifi ed threshold, plus ownership of the negative, TV rights and merchandising.83

76 There is no prohibition in Canada on so called ‘double-dipping’ among public funding schemes and producers can therefore access both federal and provincial tax credits as well as other programs such as the license fee top up provided by the Canadian Television Fund and equity investment from Telefi lm Canada and provincial agencies where available. However, as Telefi lm Canada’s equity ceiling is set as a percentage of budget, the tax credit was treated as proportionately reducing the budget on which its percentage was based.

77 Canadian tax credits, like the Australian tax rebate and New Zealand’s Large Budget Production Grant, are paid only after the production is completed and the production cost report is audited. This requires the producer to either arrange cash fl ow of the anticipated amount through commercial loans or provide the cash fl ow through deferring payment from within the production budget of the producer’s fee and production company overheads. In both alternatives, there is a cost to the producer.

78 Based on authors’ experiences. The dinner featured Akubra hats shipped from Australia for all the guests that had not been forecast in the marketing budget.

79 Pierce O’Donnell & Dennis McDougall. Fatal Subtraction: The Inside Story of Buchwald vs. Paramount. Doubleday 1992. Among the charges that were included within the production costs of Coming to America is the now infamous ‘Big Mac attack’ involving a $235.33 charge for Egg McMuffi ns ordered by star Eddie Murphy for breakfast for him and his entourage. Murphy’s fee for the movie was US $8 million plus 15 percent of gross (reported to have reached US$10 million, plus a $1 million expense account and eventually another $1.7 million ‘bonus’.

80 The Globe & Mail, January 17, 2004. In this case the legal action had been initiated by the production company in a Cdn $55 million libel suit, alleging that a press conference held by the Montgomery Estate in 1999 caused Sullivan Entertainment to cancel a planned $25 million initial public offering. The Montgomery Estate successfully defended the libel suit with the judge’s decision in January this year. Sullivan fi led notice of appeal but withdrew that in June. The Montgomery Estate is still negotiating unpaid royalties.

81 ‘Film rights-holder chases his share’. Weekend Herald, August 21-22, 200482 In New Zealand for feature fi lms in which the New Zealand Film Commission is the sales agent, the Film Commission manages

the burden of accounting for income and disbursements.83 Biskind. Easy Riders, Raging Bulls

6. Scenarios: The Hypothetical Who Wins & Who Doesn’t

So, having identifi ed the various players in the marketplace and most of those who may be entitled to share in the revenues, we now offer some scenarios on how the back end might look based on the commercial performance of several hypothetical movies of varying budget size.

The scenarios are illustrative only and highly simplifi ed.84 None should be taken as precedents for future deals or expectations of any concrete project’s potential back end. As pointed out earlier, the industry’s business structures are constantly evolving and so commercially sensitive that “real-life” examples are rare. Nevertheless, we highlight the key elements that can impact on net returns and how those fl ow through in the back end.

6.1 Movie titled ‘A – An Independent’: $3m budget

‘A’ could be any independent feature fi lm produced in New Zealand, Canada or Australia ... or even the US. Its only differentiating characteristic would be the size of its domestic market. However, let’s assume that it is a solid success in its home market.

The other assumptions here are:• The domestic distributor does not put up an

advance against producer’s share of box offi ce, but spends modestly on P&A and has negotiated an equitable split with exhibitors.

• First run free TV rights have been pre-sold and are included in the production fi nancing; the theatrical box offi ce encourages a reasonable pay TV sale made by the producer.

• Foreign rights are being handled by a sales agency that agrees to a lower commission but no advance. The fi lm’s performance in its domestic release, plus festival acclaim, encourages relatively strong foreign sales.

• The producer raised the production fi nancing from local investors (public and/or private) that hold equity positions and a right to recoup that investment, plus the free TV broadcast license. Two lead actors have been persuaded to take on roles for modest fees in return for profi t points. The writer

and director also have profi t points.

• The producer has commissioned a well-known musician to compose new works for the fi lm, thereby retaining copyright in the specially-composed music but offering a profi t point and soundtrack royalties in return for a small license fee.

So here is how the commercial performance of this movie could translate into a back end:• Domestic box offi ce of $6.0m results in the

distributor receiving $3.0m in gross rentals. After P&A costs and distributions are taken into account, the producer receives $2.0m. Revenues from DVD/video of $0.9m are split 80%/20% between the distributor and the producer, so the producer receives another $0.18m in addition to a small amount from the ancillary market and the TV rights though these have been cash fl owed already into the production of the fi lm.

• Foreign sales generate $5.5m from which the sales agent deducts costs and commission, leaving $4.4m as producer’s revenue.

• Producer’s revenue in total amounts to $6.64m against the $3.0m cost of the movie.

• The investors’ risk was $2.95m equity plus a $50,000 cash fl ow loan for the TV rights pre-sold; both amounts are repaid in full from the producer’s revenue leaving the producer net revenues of $3.64m which represents profi t.

• Profi t is shared among the investors (50%), with the balance allocated to the profi t participation talent and the producer.

This hypothetical scenario is a success story for all those entitled to a piece of the fi lm’s back end. Calculations for this scenario are in Appendix 2.

6.2 Movie titled ‘B – Bigger Indie”: $10m budget

This movie too could be from anywhere, but its budget and commercial ambitions require a signifi cant sales advance and a lead actor with some clout not only at the box offi ce but also in terms of back end profi t points.

The main assumptions in this scenario are:• The domestic distributor does put up an advance

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against all rights including the producer’s share of box offi ce and TV, and then spends lavishly on P&A.

• Box offi ce performance in its domestic release is only modest given that ‘star’ power of the lead actor, but the distributor recovers the advance and P&A costs plus fee, though leaving very little overage85 for the producer from theatrical release. Revenues from DVD/video (home entertainment) and TV sales are also disappointing.

• A sales agent that has put up a signifi cant sales advance is handling foreign rights, excluding North America. The fi lm’s lacklustre performance in its domestic release may be counterbalanced by some minor festival acclaim; however the sales agent obtains only modest prices from distributors in overseas territories based on expected TV and DVD/video potential. In North America, the producer and investors fi nally agree to a very modest sale with a small limited theatrical release with minimum P&A, banking on video/DVD and TV revenue, with relatively low distributor commissions86.

• The producer has raised the production fi nancing from a combination of sources: local investors (public and/or private) that hold an equity position for 50% of the budget and a right to recoup that investment, plus the domestic and foreign advances for which cash fl ow fi nancing has arranged, and has gap-fi nanced the balance.

• The lead actor has demanded and won a hefty 10% in profi t points. The director has a reputation and is also entitled to signifi cant profi t points. Profi t points for the script are being shared between the author of the original work on which the script is based and two screenwriters – the one who tackled transforming the novel into a screenplay and the second who succeeded. The producer has limited

further exposure by licensing existing music paid for from the production budget.

In this hypothetical movie, only the marketplace players are covering their costs and making some money. With net revenues of only $882,500 (excluding the domestic and foreign advances already cash fl owed into the production) against $8.0m at risk fi nancing, the producer and the gap-fi nanciers and the investors who put up 50% of the total budget see very little return. And the ambitious profi t point participants see none at all.

So while the market players – the exhibitor, distributor and sales agent – all were able to cover their costs, the producer and those persuaded to help fi nance the production are out of pocket. There is no back end for any one involved.

Calculations for this scenario are in Appendix 3.

6.3 Movie titled ‘C-Caught Between Rock & Hard Place”: $25m budget

This is still an independently produced movie but it would be generally in a budget range beyond the capacity of most producers in any of our referenced countries that did not have a studio output deal.

So let’s assume that the producer does have the good fortune to have a director and/or actor attached who are close to if not on the A-list, and a US pre-sale of some magnitude (possibly the domestic market for this hypothetical movie). Plus the producer has brought on board a very signifi cant foreign pre-sale (possibly even a co-producer) and has been smart about DVD market potential especially in the very strong North American market.

84 The basic calculations are provided in Appendices 2 through 5 of this report. Though each of the scenarios represents a hypothetical

rather than actual identifi able movie, all incorporate elements of reported performance to some degree.

85 ‘Overages’ refers to revenue due to the producer after the distributor has recouped its advance, all costs (P&A and other marketing),

and interest incurred on the advance and costs.

86 Screen International reports in ‘The Art of Survival’ (by Len Klady, August 27, 2004) that ‘art house’ theatrical releases in North

America access no more than 1,000 screens with a “perceived” commercial ceiling at the box offi ce for indie movies of US$40

million. However, a ‘decent’ gross is US$2 – 3 million. Among the reported 2003 top indie movies in North America were Bend It Like Beckham at US$32m, followed Whale Rider at US$20.8m and selectively but in order US indie fi lms 21 Grams at US$ 16.3m, The

Cooler at US$8.5m and The Station Agent at $5.7m. All were in the ‘top 20’ with a total North American box offi ce for the top 20 of

just over US$200m.

And best of all, the movie is a success.

So the assumptions in this scenario are:• The domestic distributor has put up an advance

against all rights including the producer’s share of box offi ce, TV and ancillary rights, and spends on P&A a respectable average amount (based on MPAA rates for North America 87).

• Box offi ce performance in its domestic release builds and achieves a respectable success. DVD/video revenues are commensurately strong with a split in favour of the producer who has made provision to cover the costs of manufacturing within the production budget and therefore this revenue stream is not crossed with theatrical. This means that, if the distributor loses money on the theatrical release, that loss cannot be offset from home entertainment revenues, though the distributor is still entitled to commissions.

• Sales advances for one or two overseas territories (possible co-producers) are solid and the movie’s box offi ce performance endorses that confi dence. Foreign sales revenues due to the producer almost double domestic grosses.

• Production fi nancing comes from a combination of sources: the sales advances, producer’s own equity (25% based on incentives and/or reinvestment of fees) along with an investment fund holding an equity position for another 25% of the budget and, once again, the producer has gap fi nanced the balance.

• The lead actor has obtained, in return for lower-than-normal upfront fee, a small percentage of the distributor’s gross in the domestic market plus profi t points. The director has settled for his fee plus signifi cant profi t points. However, the director is also co-writer of the script and is also sharing the writer’s entitlement to profi t points. Finally, for simplicity’s sake, music licensing arrangements have limited back end benefi t to the producer or investors; however, there are some merchandising prospects that the producer has licensed with royalty payment fl owing into the movie’s revenues.

Based on the numbers run on this scenario, the domestic distributor loses money, having spent $15.0m on P&A in addition to the $5.0m advanced against domestic rights

excluding home entertainment. Distribution receipts from theatrical, TV and ancillary total only $16.0m, plus the distributor is entitled to collect the commission or share of home video representing another $2.75m. It’s a loss for the distributor of some magnitude given that costs have not been fully recovered, nor has the distributor been able to collect commissions or interest.

But all is not lost for the producer who, despite receiving no revenue from the domestic box offi ce release or licensing of TV rights, is still doing well from foreign sales revenue and from the advantageous deal negotiated for domestic home entertainment with relatively strong DVD/video rentals and sell-thru.

However, from these income streams he still owes the lead actor 2% of the distributor’s gross from the domestic box offi ce or $250,000, plus guild entitlements for the director, writer and cast. Luckily, the producer is in a position to cover these liabilities, in addition to repaying the gap fi nancing, the equity fund and his own investment, with profi t to share.

This hypothetical scenario could be described as a fortuitous outcome for the producer: it is rare that a domestic distributor would risk such a large advance for domestic theatrical without ensuring that risk was offset by rights to the home entertainment market as well as television. However, it illustrates that there are risk points throughout the value chain, and also that producer’s obligations to pay lead actors a share of domestic gross box offi ce are not eliminated even if the producer receives no revenue from that source. Calculations are in Appendix 4.

6.4 Movie titled ‘D-Dark Horse’: $100m budget

This scenario could represent a classic ‘studio’ production. It is not likely to be a movie emanating from smaller markets like Australia, New Zealand or Canada. So let’s assume it is a US studio ‘negative pick up’88 that is being produced with participation by some well-fi nanced player(s) in the North American or European or Asian markets.

At this budget level, the movie has a lead actor with entitlements to a percentage of the domestic gross

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box offi ce. In addition the director is in a comparable position though for a slightly lower amount.

The main assumptions in this last scenario are:• The studio’s subsidiary as domestic distributor has

put up an advance against all rights including the producer’s share of box offi ce and TV, and spends lavishly on P&A and is rewarded at the box offi ce.

• The sales agency arm of the studio has pre-sold most major overseas territories and provided an advance representing 50% of the production costs. The fi lm’s performance at the overseas box offi ce delivers substantial overages and maximum prices for TV licenses.89

• The producer has obtained a negative pick up deal with the studio that through advances and cashfl ow fi nancing effectively covers the budget. There is no equity participant other than the producer; however, the producer’s IP and copyright interest is now subservient to the studio recovering all its costs plus interest.

• The lead actor and the director are entitled to a share of gross box offi ce from North America, plus profi t points. Merchandising is a substantial revenue stream, as is music. The writers have signifi cant profi t participation. Plus there are four other actors with profi t participation. The producer is responsible for the talent’s guild entitlements to a share of foreign and home entertainment.

This scenario has all the trappings of a commercial success. It grosses $120.0m in its domestic box offi ce release with almost the same through DVD and television sales in the domestic market. Plus it performs well internationally adding another $250.0m into the kitty.

So let’s take a closer look at how the players benefi t. First, the studio through its negative pick up has acquired North American domestic and foreign rights,distributes the movie domestically and through its subsidiaries controls the foreign sales. Given the movie’s commercial success, the studio makes its money back plus, through its distribution and sales arms, substantial commissions from both domestic (almost $98.0m) and from foreign ($75.0m).90

Now the producer’s company is under contract to pay the lead actor and the director a percentage of the domestic box offi ce gross: 5% to the actor and 2% to the director. This amounts to $8.4m, in addition to their respective profi t point participation. In addition, there are guild obligations for other payments to key talent. For example, under the DGA agreement, the production company owes the DGA 1.8% of domestic home entertainment receipts, plus foreign sales.

All of these obligations on the part of the producer reduce his/her own back end. However, the lead actor, director (along with fellow DGA members the 1st and 2nd Assistant Directors and the Unit Production Manager), writers and original rights holders see a signifi cant back end from both their profi t point shares and from other entitlements (guild, union and/or individual negotiations).

Ultimately, the movie’s commercial performance generates returns and profi t so that all players participate in what is a signifi cant back end.91

Calculations for this scenario are in Appendix 5.

87 Reference footnote 17: MPAA members are spending on average 60% of a production budget on marketing; assumption is therefore $15,000,000 is spent on P&A.

88 ‘Negative pick-up’ is a term used to describe a fi nancing deal where the fi lm’s production costs are fi nanced by investors with an agreement in place that the distributor or studio will buy all rights, including copyright, to the completed fi lm. The distributor/studio does not have to advance fi nancing for the production and gets a completed movie that it owns in perpetuity delivered to its satisfaction; the investors fi nancing the production have assurances that their risk will be fully covered once the completed fi lm is delivered.

89 Variety annually publishes a ‘Global price list’ for average prices paid in key territories for selected US programming. The chart lists prices for feature fi lms, noting that these prices fl uctuate “dramatically’ according to theatrical gross in North America &/or the territory in question. The calculation employed in this scenario takes into account the current chart in Variety (March 20-April 4, 2004) that gives total average price for US movies as US$11 million.

90 The studio would also be entitled to recover interest costs incurred in the distribution and sales.91 Gross entitlements have been estimated separately based on the amounts identifi ed in the calculations in Appendix 5; payment

of these entitlements would reduce what is termed producer’s revenue. Guild entitlements for actors and director, Assistant Directors et al have been group under a generic ‘equity in IP’ category.

6.5 What These Hypothetical Scenarios Signify

It is possible to run the numbers on any of these scenarios through an infi nite variety of ‘what ifs’. The reality is that every fi lm is unique; every deal from the fi nancing and marketplace arrangements through to the participation in the back end is unique. Moreover, the timeline from theatrical release through home entertainment to television, as described in Section 4, does involve a delay of many months if not years.

Compound this by the time frame between the development of a feature fi lm script, many of which are developed over multiple years, through production which can take up to 12 to 18 months, and then potential delays in releasing the movie in cinemas and in the foreign territories, and one begins to understand that this business involves patience, determination, commitment and a deep breath.

That cautionary note being registered here, what we hope these scenarios illustrate, is that there is a potential back end in most cases where:

• the intellectual property that the fi lm represents connects with its intended audiences;

• the producer has retained at least a share in the copyright or an ongoing right to share in the profi ts;

• the producer has negotiated, or abided by enforceable guild/union or music licensing agreements; and fi nally

• the distributor in the domestic market and sales agents responsible for overseas markets know their business, are honest and do not overspend.

Producers – especially independent producers in smaller or highly competitive markets – take enormous risks. They are responsible for developing the concept, engaging the writers, raising the fi nancing and doing the deals with the market.92 They carry the can in dealing with the complex business and creative elements that

bring the movie to the screen. Frequently, especially in independent productions, this risk is borne initially by the writer or director/writer who often initiates projects and shares credit with the producer.

New Zealand’s John Barnett has been quoted about the realities of balancing the box offi ce fi gures with the actual returns to the production company on Whale Rider. With a worldwide theatrical gross of $US45 million, approximately US$35 million was retained by the exhibitors, with upwards of US$24 million being attributed to release costs. In addition, distributor’s commissions of around 25% had to be paid. With a German co-investor, the New Zealand producer of Whale Rider was, as of February 2004, anticipating that the movie would make its costs back over four or fi ve years from DVD and television sales.93

Hope springs eternal in every producer’s heart, as it does in the hearts of the writers, directors, actors, other cast, crew and investors/fi nanciers that make it all happen. The same hope motivates the distributors, foreign sales agents and the distributors in overseas territories to whom they sell the movie. and ultimately too the ticket buyers, video/DVD renters and buyers and television audiences to decide the movie is of interest.

This same principle applies to the Hollywood studios where the old adage about only one in ten movies makes a profi t looms very large in corporate suites as production costs and marketing costs continue to rise. The fear of failure goes a long way to explain why the studios are favouring sequels of previously successful blockbusters and movie versions of popular comic strips.

There is a risk. And the risk applies to every player involved. But when that risk is taken and the results prove successful, there is money to be made by the players along the value chain and by those entitled to a piece of the back end.

92 Frequently within independent productions industries in New Zealand, Australia, Canada and the USA, the risk involved in

developing a feature fi lm is initially borne by the writer or the director/writer who initiates the project and takes a shared credit

as producer.

93 Excerpts from two articles in The Independent. October 15, 2003 and February 4, 2004.

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7. Back End Money Into the Future: Overview of Global Trends As the report illustrates in the fi rst section, the global market is evolving with new technology, such as digital distribution/exhibition, and emerging markets, such as pay-per-view (PPV), DVD, VOD and Internet, that are expanding consumer access and adding to back end sources of net returns. The theatrical, or initial, release of a movie is not the sole or, necessarily, primary revenue source that contributes to the producer’s net returns on the IP created in a movie. Movies that connect with audiences have a long revenue-generating life. And the spin-offs can be signifi cant. The same can apply to TV series.

7.1 Re-licensing

The value of older movies where the original distribution license has expired can still be signifi cant. This rule of thumb applies in the domestic, as well as overseas, markets. When the initial agreed term with the distributor expires, the producer – in conjunction with the sales agent if that arrangement remains in place – is then able to negotiate a new license with either the original distributor or with a new one. While a theatrical release of a re-licensed movie may be unlikely, re-licensing of TV rights can continue to generate revenue indefi nitely.

Aside from the classics, even movies that were not initially successful can generate additional revenue through sales of what is often referred to as ‘back catalogue’ or library of fi lms that are handled by a sales agent or a producer.

The value of libraries can be seen throughout the world on the movie channels available on television: in New Zealand, there are for example two such channels, TCM (Turner Classic Movies 94) and the MGM channel. Older movies also screen on other pay TV services.

The value of re-licensing is also evident from the interest generated by MGM Studios’ potential sale where its most attractive asset is the 4,000 movie titles in its library, along with the James Bond franchise95.

The global expansion of television services from specialty channels to pay TV demands product to fi ll the time slots, and the expanding DVD market also offers increasing market value especially for movies that may have had only a limited release on video.

Re-licensing of rights to TV series and MOWs can follow the same principle, including programming for children where the audience is constantly being replenished with a younger generation.

7.2 Spin-Offs

Spin-offs can emerge from a character in a popular series: probably the best-known example is Fraser featuring the character Fraser Crane from the earlier series Cheers. However, there are also spin-off TV programmes that have emerged from videogames like Pokemon.

Rights holders to the original TV series or videogame will be paid royalties for the use the character(s) and concepts they have already developed and are now being recast in the spin-off.

94 Ted Turner’s Turner Broadcasting in the US was a pioneer not only in establishing CNN as a major news channel, but also in

realizing the money to be made from acquiring rights to older movies. TCM is one of the fi rst classic movie services available on

subscription television. TCM as part of its move into supplying movies for cable TV also pioneered over a decade ago the much-

maligned ‘colorization’ of classic black and white movies. That ‘innovation’ is now considered to be a marketing failure.

95 Though the least profi table of all the US studios, speculation abounds on who is likely to bid for the independently owned MGM

(majority owned by Kirk Kerkorian) if and when it is offi cially placed on the market once again. Studios on the list include Sony,

Warner Bros and NBC Universal. Sony proved to be the eventual winner. (Variety numerous reports, 2004)

7.3 Re-issuing

There are various ways in which re-issuing a movie can be used to increase consumer interest and generate more revenue. A well-known technique is the ‘director’s cut’ that is released theatrically and then as collectors’ videos/DVDs. These appeal to the fans as much as to the curious as is evident from Blade Runner to Amadeus. Even Apocalypse Redux, Francis Ford Coppola’s re-cut of Apocalypse Now, won him another offi cial selection invitation to Cannes.

Closer to home, the extended versions of each of the three fi lms in The Lord of the Rings trilogy could be termed a re-issue following on within months of the video/DVD release of the original theatrical cut.

Disney is a master at releasing classics such as Fantasia, then announcing that it will be returned to the ‘vault’ and will not be available again for another 15-20 years. This limited availability is guaranteed to whet the appetites of parents and open their wallets in the interests of sharing their enjoyment with their own children or grandchildren.

The value of re-issues is discussed further in the next section on home entertainment.

7.4 Home Entertainment & Collectors’ DVD

The DVD market is emerging as the profi t centre of the future with sales in the US in 2003 reaching US$11.9 billion, outpacing by 30% the box offi ce of US$9.26 billion.96

Recent market surveys report that half of the consumers buying a new DVD release have not seen the movie before. Universal’s research indicates that 22% of consumers are delaying buying new titles as they wait for bargain bin sales. As consumers become more canny and as revenues from DVDs outstrip those being generated at the box offi ce, marketing becomes more important: strategies like ‘day & date’ releases are being considered, along side corridors or windows, that can capture and maximize audiences and their buying power.

The DVD market is also generating ‘stars’ from Vin Diesel in The Fast and the Furious (US$132m in DVD sales vs. US$144m at the box offi ce) to directors like Kevin Smith with Jay and Silent Bob Strike Back (US$36 m on DVD vs. US$30m at the box offi ce).

In addition to the impact of DVD on increased revenues and potential profi t margins for movies released in cinemas, there are the collectors’ DVD editions. These are the high-end premium priced packed sets such as:

• A ‘director’s cut,’ a re-issue, an original and/or subsequent ‘extended’ version with accompanying associated ‘behind the scenes’ material;

• A packaged full season of a popular TV series or mini series that has long life revenue generating potential;97

• Internet rental services such as Fatso in Auckland and Netfl ix in the US that operate postal based rental services to subscribers.98

Mass-market retailers are seizing on the growth of home entertainment market to take a dominant position in the DVD/video sales; in the US the Wal-Mart chain accounted in 2003 for 37% of all US DVD purchases99 and has begun expanding into Internet rentals.

The impact on the ‘back end’ of the DVD explosion currently works in favour of the studios or distributor: in the US residuals or gross participation is calculated on 20% of DVD revenues under what is termed the ‘video-to-gross’ ratio. Even the highest A-list directors or stars participate in no more than 50% video-to-gross ratios.100 Producers are now looking at covering DVD manufacturing and release costs, thereby reversing the percentage splits of the lucrative DVD market in their own favour.

The value of the international DVD market for New Zealand movies is not insignifi cant. Once Were Warriors was the fi rst to generate signifi cant DVD income, especially from the Australian market. Netfl ix in the US reported that Whale Rider did better business on its Internet rental service than many blockbusters because technology allowed it to target subscribers most likely to enjoy the fi lm.101

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7.5 On-Demand Movies

The market for on-demand access via television to movies and sports currently exists primarily through pay-per-view services delivered into TV households via digital cable and satellite. Increasingly, this market is gaining in signifi cance as a revenue source. In 2003 a reported 100 million homes worldwide were buying the service, generating US$3.7 billion in movie revenues.102 With the introduction of newer delivery systems including powerline TV, the forecast is for a tripling of subscribers to some 327 million homes worldwide by 2010 with projected revenues of US$12 billion.

The near on-demand services now widely available in New Zealand and Canada through digital subscriber services offer staggered movie screenings as an alternative to DVD rental or purchase as well as special sports events.

7.6 Formats & Franchising

Formats are primarily employed in television for shows, such as Popstars and Idol, that are now delivering an opportunity for a producer to expand net returns from the intellectual property created in the format through licensing arrangements in overseas markets. New Zealand’s Touchdown has emerged as a format powerhouse; other companies such as Ninox are following suit.

Successful formats that have a track record in another market give comfort to broadcasters elsewhere in highly volatile television markets, where the broadcaster cannot accommodate the development costs of new concepts with fl uctuating advertising revenues refl ecting audience fragmentation.

Similarly, franchising popular TV concepts into new series can also reduce the risk for both producers and broadcasters buying the product. Law and Order is but one example where both the concept – police work and prosecutors - and the location – New York City – has generated a long running and expanded audience. CSI is another example where the original series has extended into other cities.103

7.7 Video Games & Other Merchandising

The popularity of video games is seeing more cross over with movies, not only through games based on the James Bond franchise, The Matrix, Harry Potter or Lord of the Rings (created in New Zealand), but with the increasing use of Hollywood talent as voices, writers, and designers. Like the blockbuster movies, production and marketing costs of video games are rising, but without the ancillary markets like DVD and pay-per-view TV to offset the risks. Video game production costs in the US rose from US$5m in 2001 to US$15m in 2004, with marketing costs rising from US$2m to $10m over the same period. 104

96 Variety fi gures reported May 31-June 6, 2004.

97 TV on DVD is projected to top US$26 billion, according to a June 2004 report in The Globe and Mail, with mini-series like HBO’s

Band of Brothers generating US$100m since its release on DVD in November 2002.

98 Fatso.co.nz is New Zealand’s largest Internet rental service with 6,500 titles (Sunday Star Times July 25, 2004). Netfl ix has 24,000

titles and 2 million subscribers with projected revenue of US$1 billion by 2006 (Variety May 20, 2004).

99 Screen International April 2004 reports that Wal-Mart’s buying power allows it to sell top 20 DVDs at close to if not below cost

and to acquire catalogue DVDs and videos at rock bottom prices from studios.

100 “DVDs spawn a new star system’, Gabriel Snyder. Variety May 31 – June 6, 2004.

101 Netfl ix observation made during the Variety Conference Series in Cannes this year. (Variety May 20, 2004)

102 ‘Market for On-Demand Film Surges Worldwide’ Screen International June 8, 2004. Screen staff writers quote current data and

estimates provided in Informa Media Group’s On-Demand TV – Third Edition .

103 TNN/SPIKE TV paid US$1.6m per episode for a 2nd window on CSI: A & E paid US$1.2m for the same on CSI Miami. (‘Building a

broadcast empire’, Michelle DaCruz. Financial Post June 4, 2004). This franchise contributed 82% of co-producer Alliance Atlantis

Communication’s reported gross profi ts in the 1st quarter in 2003/04.

104 ‘Is the Game Getting Lame?’ Ben Fritz and Marc Graser. Variety, May 10-16, 2004.

However, the revenues for the copyright holder of the movie on which a video game is based can be signifi cant with license fees up to US$10m. And at US$50 a game, with 1.1 million units sold in the US in 2003, Enter the Matrix’s generated signifi cant revenues for the video game publisher.

7.8 Related Potential Exploitation Avenues

Merchandising has been covered previously, and the report has identifi ed the back end revenue streams that can fl ow to musicians involved in the creation of a movie or TV program score.

The impact of a music score in building audience awareness is being explored in innovative ways with varying success. Earlier in 2004, The Terminator producer Gale Anne Hurd’s production of the Marvel Comics’ top-selling comic book The Punisher combined its theatrical release with an promotion by its partner on the soundtrack Wind-Up and featured artists Winterfresh Snocore, a multi-act tour that included the Canadian group Nickelback, through a 50-date North American tour. 105

The crossover between the screens and music is not new – in New Zealand, the soundtrack of Once Were Warriors registered strong sales featuring new popular music groups. Now with CD sales regaining ground, the potential for soundtracks to generate a back end for the musicians is building new synergies.

7.9 Increasing Value of Back End & Reality Check

The media can create stars, especially when the publicity is generated by the studios where cross-ownership in media exists, such as 20th Century Fox, Fox television networks, Sky pay TV services, and News Corporation. More than ever, consumer interest is being spurred on by details of generous fees for stars, plus paparazzi and weekly magazine coverage of their daily lives.

When an ‘indie’ production scores a star, consumer interest can quickly mount. It may not guarantee box offi ce success, but it does create awareness and recognition among the public for the movie/TV programme’s eventual launch.

The ‘stars’ increasingly drive the marketing. But the galaxy is also now increasingly broad.

7.9.1 Talent as Rising Stars

The star power of A-list actors and directors has been acknowledged. Popular music recording artists who lend their talent to soundtracks also generate audience interest. However, with media coverage and Internet fan sites, other talent that was formerly more ‘behind’ the camera than ‘in front’ is gaining audience interest. In many cases, this interest is driven by Oscars © that give international recognition to the skills that contribute to the cinematic and emotional power of the movie.

Directors of photography (DOPs), visual effects, production design and costume, along with editing and sound are all essential components in a movie or television drama.106 They too are becoming stars in their own right, if not directly with the cinema-going audience, with independent and studio producers who recognise the value their creative and technical skills bring to a project.

To the general benefi t of screen production industries outside of the US, talent no longer fi nds it necessary to move permanently to Hollywood. They may work there or in Europe or the UK or in Asia, and maintain their residence at home – in Australia, New Zealand, Canada or Hong Kong. Their success brings a benefi t to their home country assuming of course that the international network of bilateral reciprocal tax treaties extends that distance.

7.10 The Future

Globally, the fi lm entertainment industry is gaining value. Market outlets and consumer demand are both expanding. Accessibility of entertainment via screens in cinemas, at home on TV sets or the very mobile computer is becoming much easier. Audience tastes are also becoming more cosmopolitan as choices multiply.107 This ultimately means that an independent producer has even greater opportunities to exploit the IP created in the movie. And, the producer and the others who are entitled to a share of the IP’s back end will benefi t.

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The DVD boom itself appears to be encouraging more people to go to the movies. According to recent 2oth Century Fox research covering 13 territories, the average number of visits to the cinema over a six month period was three, but those who were heavy DVD users averaged 4.5 visits.108

Television programming largely remains a challenge for independent producers, especially in drama and comedy series. If the concept appeals strongly enough to domestic networks to license a series, it may be too culturally specifi c to attract signifi cant sales in major overseas territories. Only the US, and to a lesser extent the UK, has maintained a strong export market for their culturally specifi c drama. That said, the expansion of television subscription services and speciality networks throughout the world offer opportunities. For most independent producers of TV programming, tapping into this will require fi nding, either directly or in partnership with an overseas co-producer, an aggressive sales agent with a proven track record and a package of similar product that has room for one more.

105 ‘Snocore sings ‘Punisher’ praises’, by Phil Gallo. Variety March 21, 2004. The Snocore tour featured kiosks testing the Punisher

videogame and built on Nickleback’s popularity from its hit song ‘Hero’ on the soundtrack of Spiderman.

106 In addition to the record Oscar © wins for New Zealand creative and craft talent on The Lord of the Rings: The Return of the King in

2004, New Zealand craft talent were also nominated for Emmys in production design and art department for the TV movie of the

week Ike that was shot in New Zealand by a US production company.

107 One example of this is the now strong theatrical audience for documentaries or factual/topical feature length fi lms such as

Fahrenheit 911 that has now generated US$ 117 million at the North American box offi ce with a further US$55 million overseas. New

Zealand’s own examples of documentaries winning theatrical releases at home and in some overseas markets include Punitive Damage.

108 The Fox research found that 69% of those surveyed had visited the cinema. Of those who buy, rent or see movies in cinemas, 41%

enjoyed all three ways, in stark comparison to the 9% that only rent and the 5% that only go to the cinemas. ‘Impact of DVD boom

on Cinema Measured’ by Sandy George, Screen Daily.com August 12, 2004.

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8. Concluding Observations There is a theoretical back end to every fi lm or TV program.

The back end can be structured in many ways. Talents who have the star power to negotiate a piece of the box offi ce may sit ahead of equity or other participants, including the producer. Still others, as a result of union or guild agreements or royalty entitlements, may also have the right to receive income before the production has fully recovered its costs and started making a profi t.

However, all of this is dependent on two crucial factors:

• Success in the marketplace: As we have seen, the marketplace for movies,

both independent feature fi lms and studio blockbusters, is increasingly global with home entertainment growing faster than the theatrical box offi ce. In contrast the international market for TV productions, outside of the popular US series, is increasingly narrowing as networks vie for a fragmented audience share by focussing on cheaper programs with local appeal.

• Solid business relationships: For the independent producer without access to the

US studios’ global distribution reach, the domestic distributor and the international sales agent are crucial for maximizing the opportunities to connect the fi lm with paying audiences. In television, the relationship in the domestic market is direct between the producer and the broadcaster itself.

There are, however, layers upon layers of players between the producer and the audiences who pay. All of those players are looking to maximize their share of income. At the back end, those waiting to participate can wait for a long time ...possibly an eternity.

A healthy screen production industry represents a powerful and far-reaching asset for any country. Production generates employment within the industry itself and into the wider community where the work is based. Movies and TV programming that refl ect the cultural and/or geographical makeup of a country can generate national pride through domestic and international success, with spin-off benefi ts in tourism and in consumer interest in other products.

Most important of all, domestic production – that is, movies and TV programming produced locally in which the copyright is held by local producers – represents intellectual property with long term value. Where such productions succeed in the global marketplace there is a potential back end for all those participating in the production, and ultimately for the nation itself.

Appendix 1: American Film Marketing Association109 Defi nitions Gross Revenue or Gross Receipts

The following is an excerpt from an AFMA standard multiple rights distribution agreement. The sales agent is the Licensee:

Gross receipts means the sum on a continuous basis of the following amounts derived with respect to each and every Licensed Right:

(a) All monies or other consideration of any kind (including all advances, guarantees, security deposits, awards, subsidies, and other allowances) received by, used by or credited to Licensee, any Licensee Affi liates or any approved sub-licensees or agents from the license, sale, lease, rental, lending, barter, distribution, diffusion, exhibition, performance, exercise or other exploitation of each Licensed Right in the Film, all without any deductions, and

(b) All monies or other consideration of any kind received by, used by or credited to Licensee or any Licensee Affi liates or any approved sub-licensees or agents as recoveries for the infringement of any Licensed Right in the Film; and

(c) All monies or other consideration of any kind received by, used by or credited to Licensee or any Licensee Affi liates or any approved sub-licensees or agents from any authorized dealing in trailers, posters, copies, stills, excerpts, advertising accessories or other materials used in connection with the exploitation of any Licensed right in the Film or contained on videograms embodying the Film.

No Licensee Affi liate, sub-licensees or agents may deduct any fee or cost from Gross Receipts in calculating all amounts due Licensor. For the purpose of determining Licensor’s share of Gross Receipts, all Gross Receipts must be calculated “at source.”

Recoupable Distribution Costs

The sales agent or Licensee in turn agrees that specifi ed costs, incurred by the distributor in the territory for which the fi lm is being sold, may also be recouped from gross revenues the fi lm earns in that territory. These include:

• Customs duties, import taxes etc

• Notarisation, translation, registration and similar costs relating to copyright registration, title registration, import clearances etc for the exploitation and protection of the fi lm

• Sales, use, GST or VAT admission and turnover taxes and related charges assessable against Gross Receipts realized from exploitation of the licensed rights

• Remittance taxes, withholding taxes and other deductions as allowed in the contract

• Shipping and insurance charges for delivery of the delivery items to distributor

• Manufacture of inter-negatives, CRIs, pre-print materials, positive prints, masters, tapes, trailers and other copies of the fi lm

• Costs of allowed subtitling or dubbing in the authorized languages

• Costs of allowed theatrical advertising, promotion and publicity

• Legal costs and charges paid to obtain recoveries for infringement by a third part of the licensed rights

• Actual and normal expenses in recovering debts from defaulting exhibitors

• Censorship fees and costs of editing to meet censorship requirements if required by law

109 The American Film Marketing Association recently changed its offi cial name to the Independent Film and Television Association.

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Appendix 2: Scenario A - $3m Production Budget

FACTORS

PRODUCTION COST $3,000,000

REVENUE SHARES PERCENTAGE

Distributor’s Average Box Offi ce Share 50.0%

Distributor’s Fee -Theatrical 20.0%

Distributor’s Share -Television 0.0%

Sales Agent’s Commission 15.0%

Producer’s Royalty -DVDs 20.0%

Distributor’s Share - Ancillary Revenue 20.0%

Profi t Participation - Writer 3.0%

Profi t Participation - Director 2.0%

Profi t Participation - Lead Actor 2.0%

Profi t Participation - Other 0.0%

Equity in IP 50.0%

FACTORS # of Units Unit Value TOTAL

DVD Rentals (Wholesale) 6,000 $50 $300,000

DVD Retail Sell-Thru (Wholesale) 20,000 $30 $600,000

Television Licence Fees - PPV,Pay TV & Free TV $50,000

Merchandising Licence Fee $0

Advance to producer (Domestic) $0

P & A (Domestic) $400,000

Advance to producer - Foreign $0

Music Licence Fee $10,000

Sales Agent Costs $275,000

Ancillary Revenues - Airlines, Hotels, etc. (Domestic) $5,000

Production Financing - Investors/Financial Partners $2,950,000

DOMESTIC BOX OFFICE $6,000,000 FOREIGN SALES $5,500,000

PRODUCTION COSTS & INVESTMENTS

PRODUCTION COST ($3,000,000) Investment $2,950,000

Distributor’s Advance $0

Foreign Sales Advance $0

TOTAL INVESTMENT $2,950,000

PRODUCTION SURPLUS (DEFICIT) ($50,000)

REVENUE FLOWS

THEATRICAL RELEASE (DOMESTIC) REVENUE (COST)

Box Offi ce - Gross $6,000,000

Exhibitor’s Share of Box Offi ce ($3,000,000)

Distributor’s Rental (Box Offi ce Share) $3,000,000

TELEVISION (DOMESTIC) REVENUE (COST)

PPV, Pay & Free TV Licences $50,000

Distributor’s Fee $0

Producer’s Share $50,000

DISTRIBUTOR (DOMESTIC) REVENUE (COST)

Distributor’s Gross Rental (Box Offi ce) $3,000,000

Advance to Producer $0

P&A ($400,000)

Distributor’s Fee -Theatrical ($600,000)

Producer’s Share $2,000,000

HOME ENTERTAINMENT (DOMESTIC) REVENUE (COST)

Sell-Thru $600,000

Rental $300,000

Home Entertainment Gross $900,000

Distributor’s Share ($720,000)

FOREIGN SALES REVENUE (COST)

Foreign Sales - Gross $5,500,000

Sales Agent Costs ($275,000)

Advance to producer - Foreign $0

Sales Agent’s Commission ($825,000)

ANCILLARY REVENUE (COST)

Ancillary Revenue $5,000

Distributor’s Fee ($1000)

MUSIC RIGHTS REVENUE (COST)

Producer’s Licence Fee $10,000

MERCHANDISING (DOMESTIC) REVENUE (COST)

Producer’s Licence Fee $0

DISBURSEMENT OF PRODUCER’S SHARES

PRODUCER’S REVENUES

Share of Box Offi ce - Domestic $2,000,000

Share of Foreign Sales $4,400,000

Television $50,000

Home Entertainment $180,000

Ancillary $4,000

Merchandising Revenue $0

Music Rights $10,000

TOTAL $6,644,000

PRODUCER’S REVENUES $6,644,000

FINANCING RECOUPMENT ($2,950,000)

PRODUCTION SURPLUS (DEFICIT) ($50,000)

PRODUCER’S NET $3,644,000

PROFITS SHARE

Producer’s Net $3,644,000

Equity in IP ($1,822,000)

Writer ($109,320)

Director ($72,880)

Lead Actors ($72,880)

Other $0

PRODUCER’S PROFIT $1,566,920

Appendix 3: Scenario B - $10m Production Budget

FACTORS

Equity in IP 50.0%

DVD Rentals (Wholesale) 4,000 $50 $200,000

DVD Retail Sell-Thru (Wholesale) 10,000 $30 $300,000

Television Licence Fees - PPV,Pay TV & Free TV $50,000

Merchandising Licence Fee $0

Advance to producer (Domestic) $500,000

P & A (Domestic) $850,000

Advance to producer - Foreign $1,500,000

Music Licence Fee $0

Sales Agent Costs $500,000

Distributor’s Advance $500,000

Foreign Sales Advance $1,500,000

PRODUCTION SURPLUS (DEFICIT) $0

REVENUE FLOWS

PPV, Pay & Free TV Licences $50,000

Distributor’s Fee ($12,500)

Advance to Producer ($500,000)

P&A ($850,000)

Distributor’s Fee -Theatrical ($562,500)

Sell-Thru $300,000

Rental $200,000

Home Entertainment Gross $500,000

Distributor’s Share ($400,000)

Sales Agent Costs ($500,000)

Advance to producer - Foreign ($1,500,000)

Sales Agent’s Commission ($600,000)

Share of Box Offi ce - Domestic $337,500

Share of Foreign Sales $400,000

Television $37,500

Home Entertainment $100,000

Ancillary $7,500

Merchandising Revenue $0

Music Rights $0

TOTAL $882,500

PRODUCER’S REVENUES $882,500

FINANCING RECOUPMENT ($882,500)

PRODUCER’S NET $0

PROFITS SHARE

Producer’s Net $0

Equity in IP $0

Writer $0

Director $0

Lead Actors $0

Other $0

PRODUCER’S PROFIT $0

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Appendix 4: Scenario C - $25m Production Budget

FACTORS

Equity in IP 0.5%

DVD Rentals (Wholesale) 20,000 $50 $1,000,000

DVD Retail Sell-Thru (Wholesale) 150,000 $20 $3,000,000

Television Licence Fees - PPV,Pay TV & Free TV $1,000,000

Merchandising Licence Fee $500,000

Advance to producer (Domestic) $5,000,000

P & A (Domestic) $15,000,000

Music Licence Fee $25,000

Sales Agent Costs $1,000,000

Distributor’s Advance $5,000,000

REVENUE FLOWS

PPV, Pay & Free TV Licences $1,000,000

Distributor’s Fee ($1,000,000)

Producer’s Share $0

Advance to Producer ($5,000,000)

P&A ($15,000,000)

Distributor’s Fee -Theatrical ($2,500,000)

Sell-Thru $3,000,000

Rental $1,000,000

Home Entertainment Gross $4,000,000

Distributor’s Share ($2,000,000)

Sales Agent Costs ($1,000,000)

Sales Agent’s Commission ($12,000,000)

Share of Box Offi ce - Domestic $0

Television $0

Home Entertainment $2,000,000

Ancillary $0

Merchandising Revenue $500,000

Music Rights $25,000

TOTAL $44,525,000

PROFITS SHARE

Equity in IP ($147,625)

Writer ($1,476,250)

Director ($1,476,250)

Lead Actors ($1,476,250)

Other ($1,476,250)

Appendix 5: Scenario D - $100m Production Budget

FACTORS

Equity in IP 10.0%

DVD Rentals (Wholesale) 200,000 $50 $10,000,000

DVD Retail Sell-Thru (Wholesale) 3,000,000 $30 $90,000,000

Television Licence Fees - PPV,Pay TV & Free TV $10,000,000

Merchandising Licence Fee $2,000,000

Advance to producer (Domestic) $10,000,000

P & A (Domestic) $40,000,000

Music Licence Fee $1,000,000

Sales Agent Costs $1,500,000

Ancillary Revenues - Airlines, Hotels, etc. (Domestic) $7,500,000

Distributor’s Advance $10,000,000

PRODUCTION SURPLUS (DEFICIT) ($15,000,000)

REVENUE FLOWS

PPV, Pay & Free TV Licences $10,000,000

Advance to Producer ($10,000,000)

P&A ($40,000,000)

Distributor’s Fee -Theatrical ($13,500,000)

Sell-Thru $90,000,000

Rental $10,000,000

Home Entertainment Gross $100,000,000

Distributor’s Share ($80,000,000)

Sales Agent Costs ($1,500,000)

Sales Agent’s Commission ($75,000,000)

Ancillary Revenue $7,500,000

Producer’s Licence Fee $1,000,000

Producer’s Licence Fee $2,000,000

Share of Box Offi ce - Domestic $0

Television $7,500,000

Home Entertainment $20,000,000

Ancillary $5,625,000

Merchandising Revenue $2,000,000

Music Rights $1,000,000

TOTAL $189,625,000

PRODUCTION SURPLUS (DEFICIT) ($15,000,000)

PROFITS SHARE

Equity in IP ($11,962,500)

Writer ($3,588,750)

Director ($11,962,500)

Lead Actors ($11,962,500)

Other ($5,981,250)

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Appendix 6: About the Authors mPICS Group is a Canada-based international consulting fi rm with partners in New Zealand and Australia and associates in Europe.

Since its establishment in 2001, the Group has provided consultancy services to the Canadian Film & Television Association, Ottawa Film/TV Caucus and the City of Ottawa, Ontario Media Development Corporation, Ubiqui-T Media and CTV, New Zealand Film Commission, NZ Trade & Enterprise and Investment New Zealand, Australian Film Commission, PricewaterhouseCoopers/Nordicity Global, National Screen Institute-Canada and many more.

This report has been prepared by the Group under the direction of President & CEO Judith McCann, who has over 20 years senior executive experience in the screen production industries in Canada, New Zealand and Australia, as Deputy Director of Telefi lm Canada and as CEO of both the New Zealand Film Commission and the South Australian Film Corporation. As Executive Producer on an independent Australian movie, Judith has also deferred fees.... and is still waiting!

The other members of the team are:

• Lindsay Shelton, former Marketing Director at the New Zealand Film Commission. Lindsay has spent many years overseeing payment of sales income, including deferrals and overages to profi t participants in New Zealand fi lms.

• Craig Raneberg, former Business Affairs Director at the South Australian Film Corporation. His business affairs responsibilities included management of the collection and disbursement service that the South Australian Film Corporation provided to a wide range of Australian producers.

• James Cofl in, consultant to the Ottawa Gatineau Film & Television Development Corporation and other clients.

Collectively, the team has been involved in independent productions of feature fi lms and television programming as investors or sales agent, many of which have generated ‘back end’ for the investors.

This information is for general guidance only and has not been prepared by taking into account the particular objectives, situation or needs of any individual users. Accordingly, it is not a substitute for specialist advice. Use of information contained in this publication is at your own risk and NZTE is not responsible for any adverse consequences arising out of such use. While every effort is made to ensure the accuracy of the information contained herein, New Zealand Trade and Enterprise, it offi cers, employees and agents accept no liability for any errors or omissions or any opinion expressed, and no responsibility is accepted with respect to any advice or strategies offered, or with respect to the standing of any fi rms,

companies or individuals mentioned. The contents of this publication are the copyright of New Zealand Trade and Enterprise or suppliers to it. No part of the publication may be distributed or copied for any commercial purpose and you are not permitted to incorporate the material or any part of it in any other work or publication (whether in hard copy, electronic or any other form) without the prior written consent of NZTE. No part of the publication may be reproduced, transmitted or stored (including in electronic form) except that you may copy extracts only for your own

personal or internal business use.

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