Understanding contract accounting practices for films

February 19, 2014
posted by sheric

Recently, I was introduced to a podcast series on the business of film from the folks over at Craft Truck. While perusing the episodes, I found one covering the creative accounting practices of studios and distributors and thought I would share some of the material here. You may be surprised at what is lurking in your distribution contracts regarding royalties and how payments are reported to you, probably unpleasantly surprised. Steven Sills, co author of Movie Money: Understanding Hollywood’s (Creative) Accounting Practices, reminds us repeatedly in his interview, “Get as much money up front as you can.”

Sills also explains that even though he is a CPA, his work in the industry has nothing to do with the generally accepted accounting principles (GAAP) found in financial statements prepared for companies in other industries. In film, accounting is done according to the language of the contract that was signed and the ones drawing up the contracts are the studios and distributors. Obviously, they are drafting contracts that benefit themselves and their only requirement after the contract is signed is to report to the participant in exactly the way the contract says. Sills simply ensures that reporting and payments are being made in accordance with the signed contract. If you are about  to sign a contract that you expect to see revenues from, you better understand exactly what you are signing!

contract accounting practices for film

If I am a producer about to finalize my distribution contract from a distributor, what are the 2 or 3 things I should do to help insure I am treated fairly as a profit participant?

SS: “Everyone has different reasons for engaging in contracts. If you are a successful producer, you may be looking to make money. If you are a new producer, you may simply be looking for credits for your resume. A lot has to do with what you want to accomplish, but let’s assume you want to get your fair share.

First, get a very good entertainment lawyer and have that lawyer negotiate on your behalf. It is going to cost you money upfront, but it could save you a fortune on the backend. Next, get as much money upfront as you possibly can because you don’t control how you will be reported to in the future. The distributor controls that whole process, how they record information, how they report information, how they interpret the contract. The more money you can get upfront, the better off you will be financially. Then, keep an eye on what happens in the reporting. Review your statements, get good consultation on reading the statements to see if anything inaccurate jumps out. Your lawyer may want to consult with an auditor before any contract is signed to see if any changes could be made that could benefit you in the future.

Certain things can be negotiated if you have good representation. When we sit down for an audit, first we read the contract and see if it differs from what we would normally see from that studio. If the lawyer was able to get certain provisions changed, chances are the studio will screw it up because they are huge multinational corporations who have certain ways of doing things, accounting systems that do the same thing over and over. If you change the language in your contract, chances are it won’t be changed in their system. This is why we audit.”

Do you find there is a habitual practice to misinterpret the contract on the part of studios or distributors? What is the state of practice when it comes to contract accounting?

SS: “Studios and distributors write the contracts to be beneficial for themselves. They interpret things for their own best interests. Unless a participant has a lot of leverage, he has very little ability to negotiate significant changes within those contracts. People in business expect that if you are writing an agreement, you will write it in such a way that it will benefit you. These agreements are written with a certain end result in mind. That result is to give a reasonable amount of money to the profit participant, but also to cover the studio’s or distributor’s own costs and that includes the whole business. However, to a profit participant who believes they are a contributor to the success of a movie, they want their fair share of that success.

There is a very famous litigation out there about the Buchwald case. It has to do with the movie Coming to America, the Eddie Murphy film. In that case, there is testimony from a former studio executive that shed a light on how this process works. He said the reason we [studios] do the practices we do is because the winners have to pay for the losers. For every successful film we make, we have 9 unsuccessful ones and we have to cover the cost of those unsuccessful movies. If we give away all the profits for the successful ones, then we lose money on the unsuccessful ones so we need everyone to participate in that. Well, a profit participant doesn’t feel that way. If they contributed to the successful movie, they want their share of that success and that’s where the tension is. So in your contract, you will need to determine if you are involved in the business of the studio, or whether you are a participant only in the profit of the film in which you were an actor/writer/director/producer.”

Do you see a major shift in where money is coming from in terms of revenues and how that impacts contract terms?

SS: “There’s definitely a major shift. The DVD market is diminishing very rapidly and the VOD market is increasing, but not at the same rate as the decline in DVD sales so there is a definite decline in overall revenue and that has to do with how people get their content.

But to understand this, it requires a little history. Go back to the early 1980s when the home video business first started. It started with the Sony Betamax machine in Japan.

The Sony equipment allowed Japanese businessmen and women to record onto tape TV shows during the day and watch a tape of the programs at night. And then a company called Magnetic Video worked with Sony to market that machine in the United States. At the same time, Magnetic Video negotiated a deal with 20th Century Fox to license their films and put them on tapes and sell them in boxes to consumers, the VHS tape. It was the beginning of the home video industry.

In negotiating with Fox, all parties figured out how much they should get out of this product. They figured that the cost to revenue ratio back in the early 80s was about 60%; 60 cents of every dollar went to buy the tape, design and make the case, market the VHS copy, market the machine just to get this product out to the public. So the 40% that was left over was split. Magnetic got 20% royalty for creating the concept and Fox got a 20% royalty for licensing their films. So that is where the 20% royalty rate comes from and persists to this day. It was the basis for this entire home video industry.

Now the cost to revenue ratio for DVDs is more like 25-30% range for cost, but making a 65% profit, but still only paying a 20% revenue share to the profit participant. That takes us into the VOD realm, which will soon become the dominant source of revenue for distribution. Most studios have decided to classify VOD as home video revenue subject to the 20% royalty even though they don’t have the same cost structure involved as in DVD. In a digital file, there is no cost to manufacture a disc and ship it anywhere, no packaging to make, marketing costs are reduced because much is done by the entity that is selling the product, but they still only pay 20% royalty to the profit participant. Why they are keeping royalties the same? Their response is they need more profits to offset the losses they incur from the decline in DVD sales. They need to maintain their profit margins.

Let’s say the distributor charged the consumer $10 for a download copy of a movie, one the consumer can keep, not just rent. Let’s say the download came from iTunes, so they keep 30% of the transaction or $3 and pass $7 back to the distributor. The distributor will report 20% of that $7 on your statement. That’s $1.40 and if you get a 10% profit participation, you get $.14.

Certain types of downloads will only receive a 20% royalty on the revenues received. When negotiating your deal, you need to find out how they treat downloads; as home video purchases subject to the 20% royalty or as rentals because those are more like the licensing fees received from broadcast deals.

We’re dealing with an oligopoly here. 90% of the films are being distributed by a handful of major distributors and they set the terms. If you don’t like their deal, they will tell you to go down the street, but often you will find the exact same terms everywhere else. You have to hope to get your movie made, it becomes a huge success and you will get something out of it.”

 

To listen to the whole podcast, jump on over to the Craft Truck site HERE  I will be recording a podcast for their Business of Film show next week. I’ll post the link to it here when it is available.

Sheri Candler
 

A self financed film release

January 6, 2014
posted by sheric

It means the production is PAYING to market and release their own film. It doesn’t mean those involved in production are working all by themselves like DIY (Do It Yourself) has come to be understood. And it doesn’t mean DIWO (Do It With Others) because that sounds a bit like everyone is working together for free or back end revenue. Self financing means your production has budgeted money to pay for the marketing and release of the film which could include working with vendors outside of the production or hiring experts to come on board early in the production process to help conceptualize and prepare for the eventual release of the film.

It is the same concept as preparing a production budget to pay all involved in the physical making of the film; the legal help, the post facilities, the equipment rentals, the cast, the crew, permits, location rentals, catering, transportation, accommodation, insurance, music licensing. Most all of these are expected costs to making a film. There is no dispute that these are required line items in a production budget. Making a film is expensive! Even spending $50,000 for production is a lot compared to what most filmmakers have in their personal savings accounts. Please don’t spend your savings account.

self financed budget

It is a costly mistake to think that these are the only line items in a budget for film financing. In fact, there is almost no point in incurring the cost of making a film if there is no budget and concrete plan as to how it will be released. Fewer and fewer films are bought by a distributor for a price that will recoup a higher production budget, even low six figures. This path used to be the tried and true method for release, but it is just not true anymore.  Even if a film does get picked up, it is likely that the marketing costs and fees to distribute the film will eat up any back end revenue due to the production by the series of entities used to release a film (exhibitor, digital platform, online retailer, in store retailer, distributor, sales agent). The whole chain takes their expenses and fees FIRST.

Of course, it should be said that it is especially difficult to fully recoup the cost of making and releasing a film that is self financed. While I have encountered and worked with films that have managed to recoup the cost of their self financed marketing and distribution for a theatrical release (which helped propel their ancillary sales), I have not encountered any that have even come close to recouping the production budget during that phase of distribution, not to mention profited by it. Crowdfunding either the production budget or the marketing and distribution budget, from donors who do not expect recoupment, would go a long way to bringing a production into the black. However, crowdfunding is NOT for everyone.

Let’s dispel the myth that distribution is 1) assumed to be handled by some other entity that will put in their money to do it; 2) assumed to be an endeavor performed with no money by the production on its own; or 3) assumed that “collaborators” will be found who will offer their services, connections and expertise for no money upfront in exchange for back end revenue.

Budget for your self financed film release!

 

 

 

 

 

 

Film producers should seek new business knowledge

December 2, 2013
posted by sheric

In a recent interview I did for the Rebel Seed podcast, I wanted to stress something I am encountering from film producers, especially new ones. For about 4 years now, I have been keeping independent artists informed on developments in film marketing and distribution, mainly through this blog, but also in speaking, teaching, and even co authoring a book. While there are many film marketers and distribution companies in this space, FEW actually share their extensive knowledge or offer resources available for any filmmaker to use. Some don’t feel the need to share what they consider proprietary knowledge and some share only with whom they are directly working.

Still, not a week goes by that  I will consult with a producer who has no idea how to digitally self distribute, little idea of who the audience for their film  is and what tools and money they will need to reach them, and doesn’t participate very much in the social media space. In order to successfully navigate the waters of independent film, you MUST keep informed of the new developments. The greatest asset you can invest in is yourself and gaining new knowledge in order to clarify your thinking, manage your time, remove fear and doubt, and create new habits that will pay off immediately in how you approach your work.

In an effort to help get producers ready for the Spring festival season (including Sundance, Slamdance, Berlin, SXSW etc.), I am partnering with Atlanta Film Festival in conjunction with Slamdance Film Festival to present a 1 hour film marketing webinar. As with the last one we did for distribution, anyone with an internet connection may participate and we have 2 dates to choose from this time, December 8 and December 11.

I’ll cover researching your audience, writing your marketing plan, what items you will need in your marketing budget, feeding the content beast that is the social media channels, using publicity and advertising as part of a well rounded marketing effort, and the importance of an email database. Why would you need this BEFORE your festival premiere? If you can show a potential buyer that you have already started gathering an interested audience for your film, you have web site stats and social media stats to prove it, and you have your own plan in place to release your film IF they can’t come up with an attractive offer, you will be in such a better position to negotiate a great deal than the 95% of other producers that don’t do this. And if you don’t get into the big fests, you will be able to start distributing immediately or use the festival circuit as part of your release to start recouping your production budget. Once you show that your distribution efforts have traction on their own, you’d be surprised at the distribution companies climbing out of the woodwork to get a piece of that action. THAT’S the position you want! Don’t be in the weak position of having nowhere else for your film to go.

To sign up for the webinar on either Sunday, December 8 or Wednesday December 11, GO HERE The great thing about a webinar rather than only researching on your own is you can ask question about your particular project. The webinar will run one hour with 30 minutes for individual questions. I also offer the ability to send one question to me via email if we don’t get to yours in time. Before the New Year starts, spend some time investing in your knowledge base.

Rebel Seed kindly made an infographic out of my podcast. Have a look

Infographic Best Practices for Film Marketing & Distribution for film producers

 

If you would like to hear the podcast, listen here

podcast link

Last week, I talked with Chris Holland on the Film Festival Secrets podcast about what 3 things a producer should consider when choosing a distribution path for a film. I say producer because typically this is a job under their purview…but many times microbudget filmmakers are their own producers (and writer and director and editor). This podcast was recorded in preparation of my upcoming webinar on film distribution hosted by Atlanta Film Festival. I wanted to give everyone a taste of what the hour will cover..it will cover A LOT!

questions about film distribution path

You can listen to the audio of our discussion HERE…or you can read the abbreviation below:

Question #1 Is there a market for this film? What elements does my film need to have in order to get a meaningful release?

There is so much information available online these days that speaks to what is selling. There are a myriad of case studies on various types of films and how they were distributed.  A producer needs to be curious about distribution prospects BEFORE getting into production. As I stated in my last blog piece (point #4), if after speaking to industry representatives, you find the film you are hoping to make doesn’t appeal to the industry, you will most likely encounter challenges in the market.

Question #2 Do I have the means to distribute directly?

Since significant distribution deals are rare compared to the amount of films being produced, have you planned for self distribution? How much does that cost? What avenues will be open to your film? Are there barriers to entry on platforms like iTunes, Amazon, cable VOD, Vimeo? We’ll talk about all of this during the session.

Question #3 How to structure the release?

The mantra “Every film is different” couldn’t be more true in the world of independent film. There is NO ROADMAP to success mainly because success doesn’t look the same to every production. Does a film need  a theatrical release? Is day and date the right strategy? Should a film go straight to digital platforms? What about broadcast and educational markets? What part do film festivals play in a release strategy? I will talk about all of this including companies to vet and  what the repercussions are in deciding on the strategy for your film. Yes, in each choice there are trade-offs and you have to be comfortable with that. But there are also instances where rearranging the release window can actually work in your favor, despite the common opinion that windowing patterns must be closely followed.

From experience, I know that many of you attend markets and panels where a lot of talk happens and you walk away almost more confused than when you went in. I hope to take some of that confusion away with this session. The final half hour will be devoted to answering your specific questions so be prepared.

To sign up for the session, visit this LINK

Sheri Candler

 

These are the most common mistakes/beliefs I regularly come across from filmmakers, whether they are seasoned or newbies. I ask that you carefully consider these scenarios to see if one applies to your situation and possible solutions to either avoid them or turn them around.

film distribution problems

#1 Not setting aside a promotional and/or distribution budget. For at least 4 years now, I have been talking about this one point and for at least 2-3 years every industry event brings up this point, so why are there still people producing films without a promotional budget? Most of you are not getting into Sundance or any other impact festival that will lead to a significant sale., so what’s the plan for getting your film noticed and into the market? Solution: Recognize that the responsibility for promotion and distribution of your film is increasingly on the production. Even sales agents and distributors are now checking out how much work the production has done on this BEFORE the film premieres. Raise and set aside this money to guard against being forced either to take a bad distribution offer or shelve your hard work. If you get a great deal, give the money back to your investors.

#2 Holding back on distribution to wait on the imaginary deal. If your film has been kicking around on the festival circuit for 6-12 months and there are no active negotiations started for a broadcast deal, for example, don’t hold back from at least distributing it from your own site, both digitally and via DVD (if that is relevant to your audience). Films are not like fine wine, they don’t get more valuable with age. The chances for a decent deal start to decay quickly after the film has a premiere and even more so if it does not find some kind of distribution path quickly. The attention you have built up will quickly dissipate with audiences who have heard about the film for a while, but are unable to see it and for industry who have heard about the film, but know that no other company has bothered to pick it up.  Have a contingency plan that within 6 months of premiere, if the film isn’t in active negotiation for some or all rights, you will start to distribute it directly to the fans you are picking up on social sites and on the festival circuit. Solution: Momentum and resources die quickly, stop holding out for a deal that may never come. Sometimes the deals you are waiting for are waiting to see how the film does in the market. If after investigating outside distribution options and nothing seems to be on the near horizon, then start your own efforts. You would be surprised at the entities that will chase after films they perceive are showing success on their own.

#3 Thinking your first film is sellable. That thesis film you made for film school or your first short film may just be practice. So may your second, third and fourth film. The fact that you completed a film does not mean it will sell and you should not have automatic expectations that it will. Films are a commodity, and not a scarce one anymore, so audiences are getting discerning about what they are willing to pay for versus what they will watch for free. While there is certainly nothing wrong with putting your film up on Vimeo Pro or embedding a Distrify player on your website, be realistic about its revenue prospects. Solution: First try to get some pedigree built up on your work before asking for payment. The more distinguished titles earn a right to ask for payment from an audience.

#4 Believing your film has more merit than the market does. There are hints along the way to making a film that indicate that it will be tough to attract financing and reasonable distribution. Usually it starts with the script (you pitch and pitch and executives pass), then with the talent (you fail to attach anyone notable willing to take a pay cut in order to have a juicy, well written role), then in trying to attract a presale or significant distribution deal (the film fails to make it into the impact fests and reputable distributors won’t return your calls). Making the decision to go against all of these judgments because YOU believed the project had merit is very indie, but it doesn’t mean that the film is going to attract a sizable deal in the market or an interested audience. Solution:  If you are committing to the decision that the market doesn’t know what its talking about and you do, then go all the way with the budget to back up a direct distribution plan. You’re going to need it. But it still may not succeed.

#5 Not spending marketing money believing it will make you money. Admittedly, filmmakers are not the only people who do this. I’ve worked in marketing on and off for a while and usually in a sales downturn, management thinks that cutting the marketing spend will somehow increase sales. This doesn’t happen. By refusing to spend money to market your film, you are in effect keeping your project a secret and this will not increase your film sales. Also, spending a lot to launch a film and quickly stifling the spending will not prolong that initial burst of sales. Good word of mouth can only do so much and 4 months into release, that word of mouth is gone if no other marketing/publicity efforts are continuing.  Solution: While you may spend the significant portion of your marketing budget for the initial release and then pull back on the spend, don’t blow the whole budget on the first week of release. There are new films releasing every week. In order to stay top of mind and keep those sales coming in, new marketing initiatives need to happen regularly over time. If you have let efforts fall the ground, recognize in order to raise them again, you are in essence starting all over.

Some of these topics will be covered during my upcoming webinar hosted by Atlanta Film Festival on October 20. Anyone with access to the internet may participate. Visit the Atlanta Film Festival site for details.

 

photo credit: <a href=”http://www.flickr.com/photos/jazbeck/8025692978/”>jazbeck</a> via <a href=”http://photopin.com”>photopin</a> <a href=”http://creativecommons.org/licenses/by/2.0/”>cc</a>

Sheri Candler

 

Is the Long Tail approach good for your film?

September 27, 2013
posted by sheric

This week, a Youtube video featuring Ira Deutchman at the TIFF Filmmaker Bootcamp was pointed out to me. Ira always has some great information to share with filmmakers given his long and illustrious career in independent film distribution.  In this 30 minute talk, he cautions filmmakers about the realities of the independent market and one key point he made about the so called long tail of sales really stood out. In order to see sizable revenue from the long tail, one must have A LOT of things to sell. In indie film circles, I think the long tail concept got confused with sales over time rather than lots of little revenue streams. If you are a filmmaker who doesn’t have a lot of revenue streams apart from selling copies of your film, you’ll want to read on so that you can be clear on this concept.

As Ira explains, in any retail business, 80% of the sales come from just 20% of  the products. This is the 80/20 rule.  When looking at big box stores like Walmart or Target or Barnes and Noble, one might think, “Why don’t they stock a millions titles of DVDs? It’s a really big chain with lots of stores.” But these retail outlets aren’t in the business of stocking everything, they just need to stock the titles they know will actually sell.  The hot titles, with stars and big marketing spends that they know will do business.  With their limited amount of shelf space in the Entertainment section of the store, they only want to stock the 20% of titles that will sell well. It is an efficient and profitable way to manage business when there is a limited amount of shelf space and there is a need to keep up with the multitude of stock in each store across the country.

In theaters, it’s the same deal. There are a limited number of screens, so cinema owners only want to play the films that are perceived to bring in box office sales. They can’t program every film, only the newest and hottest. If the ones they program don’t perform, the screening spot is hurriedly given to another film. No use clogging up screens with nonperforming films when there are plenty of others from which to choose.

Then ecommerce via the internet comes along and there are many virtual outlets selling products. There’s unlimited shelf space and all they need are some warehouses to keep small amounts of product. For a site like Amazon, as long as there is one copy of a DVD in the warehouse, it can be sent out or they pass the order along to the seller who is using Amazon as a storefront for their wares, charging a percentage of course. With Amazon Instant, they don’t even need the warehouse, just the server space.

The 80/20 rule doesn’t apply as strongly to online stores because although 80% of the business will still come from 20% of the products, there is still incentive to include a wide range of products on that infinite shelf and they will sell in the long term. The long tail principal states products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds bestsellers and blockbusters. If there is a film that only a few people know about or are interested, an online retailer can still afford to sell that film because millions of little products add up to a large business FOR THEM.

Although independent filmmakers are told that the long tail of sales is going to be good for them, it is mainly a beneficial way of doing business for the  Amazons, Netflix’s and iTunes’ of the world.  The money is made through selling LOTS of different things, not in selling ONE thing, like a film. Filmmakers who think having a long tail strategy for their film is the way to go will find that long tail means lots of little pennies over time and endless amount of time. While it is possible to sell a low volume of copies of your movie on your own, the major online retailers are selling a few copies of millions of movies.

These new digital opportunities to get your movies out to market, largely on your own, are a good thing. But the job of getting the audience to know it is there and interested in buying it is up to YOU. The sites don’t have to do this work, they have many, many other revenue streams and all they have to do is make sure people visit their site and buy SOMETHING, not your thing.

So, how many things are you selling? And how will you let people know about that? Before you settle into a long tail sales strategy of direct distribution, you need to answer these questions.

The other thing you must consider is the long game. If you do not YET have many things you are selling, how will you keep your work in the minds of those who are slow to act? In other words, if someone were to find out about your work a year after it is released, how will you let them know where to find it? In the film industry, the long game per title isn’t really of concern. They concentrate mainly on the big release moment and hope that splash is big enough to last in the minds of consumers. But with new distractions every day, how likely will someone remember to seek out a film they missed on initial release? Unless it comes up repeatedly by word of mouth for months or years after release, the likelihood is getting smaller and smaller, buried under the new.

Here is Ira’s video explaining the long tail for retailers. The explanation runs until 8:37, but you might like to hear the rest of his talk.

 
Sheri Candler
 

This month, I interviewed music supervisor Liz Gallacher of Velvet Ears for my latest column on MovieMaker Magazine‘s site. Actually, they are only posting an abbreviated version of the interview online. The full article will be in the print edition on newsstands in November.

mixing boardI wanted to cover this topic because I was hearing from indie filmmakers who had overlooked the important aspect of music clearance during post production and thought they could get distribution deals that would pay for it later. It is exceedingly rare in today’s marketplace that a film distributor will pay to clear the music licenses on your film because that process can be so costly.  Distributors are not trying to take on more debt than they have to when they acquire a title. There is debt just to release the film, plus repay the advance if one was paid (and for a hot title, an advance WILL be paid) and make money for themselves (filmmakers aren’t really part of the equation). If you are putting up financial barriers to acquisition, your chances are close to zero in garnering a deal, especially over something as fundamental as music clearance. You are also putting up barriers to getting the film out yourself unless you like being the target of a lawsuit.

Also, some filmmakers are using music tracks in their trailers or online video materials that were only cleared for in context usage. Liz explains in the article why this is an issue and how to rectify it. As she says in the abbreviated piece, “It isn’t a cheap prospect to license music. I think people are misinformed on that because music is affordable to buy and it is plentiful for personal use, so they think they can do what they want with it. They can’t if they are planning to use it commercially.”

Catch the abbreviated version on the MovieMaker site and try to pick up a printed copy of the magazine when it is published.

Sheri Candler