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
 

PR tips continued

June 2, 2011
posted by sheric

Moving on…finding an angle. What’s an angle? A story idea that is unique. You should be able to come up with at least 5 story angles around your film. Are you distributing in an unique way? Did you use unusual or new equipment? Did you use established equipment in a totally new way? During the SXSW Festival, I pitched a story to Sony for their blog because Trevor Anderson used a Sony Webbie to shoot his film, a film that played Sundance, Toronto, AFI Fest and SXSW festivals. It’s a good testimonial piece for their camera and Sony covered it. You might think “well who cares if Sony enthusiasts read about his film,” but all the coverage counts toward overall interest. Sony equipment enthusiasts are more likely to care about art, photography, films and Trevor’s work encompasses all of that.

Other angles we used were 1)he’s from Edmonton, Canada so local and national publications covered his film’s appearance at Sundance; 2)the film covered a delicate topic sensitive to many Edmontonians and this sparked a  small media debate; 3)his film received a broadcast distribution offer in the lead up to Sundance which is a little bit unusual for short films; 4)Trevor took part in many Canadian film professional labs and courses so we followed up with those organizations to tell them of his Sundance selection and of course they wanted to champion an alum; 5)when Moving Pictures put out a call for filmmakers taking part in Sundance to write about their inspirations, their experiences, their views on filmmaking, we took up the opportunity for more exposure for the film. Trevor wrote an inspirational piece on artist perseverance. It is about keeping your eyes open for story ideas where your film or your work can fit in, but isn’t for purely promotional purposes. Think like a journalist, not a sales person. You will still get what you want (exposure and sales), but the writer will also get what she wants (a good story).

Other story angle ideas:

-Is someone on your cast or crew doing something notable?

-Is there a current event, trending story or popular web meme somehow relevant to your film?

-Is the origin of your film’s story unique? Perhaps based on legend or a historical event.

-Is the topic or style of your film closely related to a better publicized Hollywood film and could you piggyback on those efforts?

It is also a good idea to use real time marketing when crafting any kind of content, whether it is for your own site or for a publication. Setting up Google Alerts helps you keep up with what is being covered so you can find new angles. Is there a court case getting a lot of media attention, has a natural disaster just happened, is there a new law being passed? Could any of this be tied to some part of the story of your film? Contact journalists covering those events and try to get interviewed about it. In this way, you are seen as a trusted source of information and they will mention your film within the context of the story. In the case of a documentary, this could be done years after the film’s release to bring attention back to your work. My friend Dawn Mikkelson had this happen years after her documentary Green, Green Water came out because the issue highlighted in her film came back up again in the media and a journalist contacted her for a quote. You can also use these events for your own blog content.

When you have identified 5 story angles, think of 5 bullet points of material that support that story and then craft your pitch to the journalist. Herold also advised pitching directly to the writer, not the editor and using the telephone to pitch rather than email. For bigger publications, I can see why he recommends that and often there is a listing of telephone numbers on their website, but for online only publications and smaller bloggers, you won’t find these contact details. Since email inboxes can be overflowing for journalists, the chances of your pitch being overlooked is high. This is why he recommended calling instead.

Next post.. understanding how journalists find stories and helping them decide to cover yours

Unfortunately, a great number of key digital platforms must be accessed through the use of an aggregator. Of course there are always exceptions, but the general rule is that to get your films onto Cable VOD, iTunes, Netflix, Hulu, Sony Playstation and other device oriented options and retailer digital platforms , you will have to go through an aggregator or a distributor. We either directly or via partners offer both a commission or a flat fee option (range depends on platforms).

However, you can get onto Amazon directly. Also, you can access DIY oriented ones such as Mubi, Fans of Film and other platforms like them. To the best of our knowledge, more money is made on the key high trafficked platforms, if one can get on them.

Once again we remind you, MARKETING, MARKETING, MARKETING is key to your film’s success no matter what distribution outlet you use.