IT DEPENDS: What are Film Profits?

Film profits are complex to determine and require attention to the details most specific to your use. Will you be able to find a definition that works for you? As with all the topics Entertainment Attorney Christopher Schiller covers in his column, it depends.

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Some in our industry may think it’d be easier to find a unicorn grazing in a field than discover an actual profit made by a film, at least when it comes to a profit that gets shared. Noting how believable a 3D creature, unicorn or whatever, can be made nowadays, they may be onto something. The problem lies in the fact that the elusive creature “profit” is often difficult to spot because very few of us know what it looks like or how to spot it in the wild. It seems like something that would fall under the, “I’d know it when I see it,” category, but for many, they don’t know how to describe what they’re looking for in enough detail to spot it. As with so many topics covered in this column, the crux all depends on the definitions.

Notice how the plural form of the word is used in this section title above. That is intentional. You would think the line that is crossed between losing money and making money with a film would be a simple one to determine and see when looking at the books. It’s the point in an accountant’s ledger where they stop using red ink and start using black, right? It’s just a number that should be simple to calculate by just totaling up the income brought in and comparing it to the outflow that’s gone out.

But just like everything else in Hollywood, things are much more complicated than would first appear because, like nearly everything else in Hollywood, the details depend on the definitions being used and the reasons for the calculations. What is considered a cost against the film? What is considered income? How much of an individual film’s income and costs are dependent or intertwined with other productions or investments along the way? How many parties are involved and to what purpose does each calculation of profits apply to their needs and demands? There are more variations than you could shake a stick at. (And you’d have to determine which department bought or rented the stick and who pays the stick shaker and how to amortize the cost of the stick for the duration of the shaking, etc.)

IT DEPENDS: Where's My Money? Part 1

Many assume that the impression that no film every goes into profit is attributable to some mysterious “creative accounting” specifically devised to screw the little people trying to get their share of what was promised them. In fact, it is quite a rare thing for there to be “cooked books” where nefarious goings on are attempted to swindle and defraud. But there are an awful lot of legitimate ways of looking at the numbers and going in without an understanding of that would make it very frustrating indeed to find a calculation that is in your favor.

Before we even look into the complexities of all the elements that go into calculating profits it might be beneficial to look back to the reason we even entertain the discussion of sharing in the profits of a film.

From the dawn of the film age there were a lot of variations of how people were paid for their participation in a film project. Once the studio system got established most of those variations died down to a common path for most Hollywood fare. You had contract players – actors, writers, directors and the like – who worked under an exclusive studio contract for a studio paycheck and the studio dictated which projects the player would work on when. Their weekly salary would come from the studio, not the film. These contracts were exclusive for a period of years at a set salary per week whether they worked on a film or not. So it behooved the studios to keep their contract players busy. The studios owned the players and the films and mixed and matched as they saw fit.

Eventually, the studio system broke down as the star system rose and the high demand actors, directors and the like were able to break free of their studio contracts and gain more control over their own careers, choosing which projects they wanted to work on next. Producers found they had to court the interests of top talent to get them to be in their pictures and so creative ways of alluring them were tried.

Looking back on that tumultuous time, though he wasn’t technically the first to try it, many have surmised that we can blame (thank?) Jimmy Stewart for the profit sharing idea that has evolved into what we use today. Mister Stewart broke away from the studio contract system and was a highly sought after commodity for producers seeking top talent for their films in the late 40s and early 50s. And because the locked in studio contracts were no longer applicable, every role had to be negotiated for each film for stars of his caliber.

The producers behind the non-standard western Winchester ‘73 (1950) thought Jimmy Stewart would be perfect to play against type for the lead in their film. Problem was, his asking price was way too high for the budget available. The story is Stewart was intrigued enough by the script that he was wiling to try something somewhat unique, waive his salary in exchange for a piece of the profits. You can tell it was early days because the definition of profits used was less than a page long with simple to understand language. Stewart ended up with somewhere around a quarter of all the money the film brought in. This earned him an unheard of sum of $500,000 in 1950 dollars (over $5 Million in today’s money) when the film became a hit.

The studios could see the writing on the wall with simple definitions of profit so they started to get creative. (Read as “complicated.”)

The Challenge of Attaching Actors to Scripts

If you want to convolute a process an effective first step is allowing the same word to mean many different things. That’s what has happened to the word “Profit”. What should be a simple concept – namely, any funds brought in at a greater amount than funds spent – has split into variations that make it meaningless to discuss profit as a term of art alone. You have to know which definition is being applied and in which context.

Let’s start with the big ones, gross versus net. Ask an accounting student what a gross profit is and they’ll tell you gross profits are the income left after accounting for the cost of the product produced. Even that textbook definition is simplified because it doesn’t address what needs to be considered as costs of production or what qualifies as income derived from the project. Those can vary dependent on many factors for every film. Still, we can glean that there is a direct correlation to the project and the gross income and costs.

We contrast this with net profit which widens the net of what needs to be considered in the mix. Net profits are what’s left over from the gross income after taking into account the additional costs related to the project. These can be things such as operating expenses of the company that created the production during that production, interest in loans related to that production, taxes, marketing and distribution costs, prints and advertising (P&A) and a whole selection of other indirect costs incurred by the company doing business creating the product. Because net profit deductions are broader than just the the spent budget of the film and can continue to eat up profits long after the cameras stop rolling with ongoing costs, it is not at all rare to find that a production that has been bringing in money for some time still has yet to reach a net profit.

What gets considered as a cost against profit can – and nearly always does – vary with each film and each definition of profit used in contractual agreements for each participant in the film. And which definitions are used matters especially if you are invited to share a piece of the profits in whatever form.

Getting a “piece of the action” goes by many names. So you’ll see many references used to address nearly the same ideas. The concept has been called at times by rather descriptive nomenclature, profit participation, profit share, revenue share and the like. Sometimes these monickers have fallen out of favor because use of the word “profit” might indicate an expectancy that there is going to be one. So other, less specific terms have been adopted. You’ll see points used (most likely derived from percentage points) or back end to differentiate from money you get up front in salary or the like. There are lots of other terms bandied about and probably new ones will prevail in the future. The concept remains, an additional windfall based on the income stream derived from the project’s financial success.

Because there are so many ways of defining profits, costs and the like, it is imperative for you to know what is in and what’s out of the particular definition used to determine your share. For example, some share are calculated from only the theatrical return, leaving out everything after the run of the film in the theaters, so no television or streaming profits considered. This can be a real drag when you participate in a film that doesn’t play in the theaters but has a long and successful life in VOD and on premium cable and online outlets. You may not be able to alter what calculations are being offered, depending on your negotiating position at the table, but you should be able to understand that a larger percentage of a unlikely profit stream doesn’t add much value to the deal for your consideration.

Also you need to know that the term profit might be split into different segments as well. Nearly always producers have to split their share of the income stream with the financiers. A typical arrangement is that the financiers will first recoup their investment plus an agreed percentage, say 120% of what they invested (this is considered a cost against the gross income in most cases until paid out) and after that they split the profits with the producer 50/50. Producers can’t touch the financier’s part of the profits so if they are offering points in a negotiation it is coming out of the producer’s share. Producer points are a percentage of the whole, usually half or less.

So, a deal for 4 producer points is actually only 2% of the total net profit income. It is possible for the producer to have an even smaller share so it pays to pay attention to the denominator in the calculation being used.

Demystifying Contracts

There are ways of participating in the income downstream outside of the shares concept. For example, unions have negotiated residuals or payments reflecting their member’s contributions that are mandated to be paid at each stage of the project’s future iterations that are covered by the contracts. These are set percentages of the original salaries paid, not strictly based on the profits made.

The very rare first dollar gross participation is the holy grail piece of the pie. If offered, it starts paying out as money comes in before all other costs against the production are calculated. Sweet deal, if you have the bargaining power to get it. By the way, both of these pay schemes are looked at as an additional cost against the film which are subtracted from net profit in calculations.

If you are offered participation in a project, first congratulations. But be forewarned, you need to pay attention to the details in order to know what to expect, determine the realistic value of what is offered and know when you have a right to demand what is owed. Here are some prudent things to keep in mind when your contract gets drafted.

1) Have the profit definition that affects you explicitly stated in your contracts. This seems like a no brainer, but, you’ll likely get resistance. Stand firm. If they offer a definition given in another document, make sure you have access to that other document so that you can calculate for yourself what your payments should be.

2) Make sure you have accounting review allowances and procedures stipulated. Knowing you are owed money based on a profit calculation is impossible to verify if you can’t see the numbers necessary to calculate what should be owed you. If it matters to your definition of profit, then you should have access to it. You will meet resistance to this too, but, some reasonable accommodation should be available.

3) Have stipulated an explicit payment schedule for if/when your shares are paid out. This seems straight forward but you’d be surprised that if someone isn’t held to pay you at a specific time they may not find it a high priority to get to it.

4) This one is something that isn’t yet common practice, but I feel addresses a lot of the issues of changing definitions of profit and not being left behind as the project moves forward. Request that theyApply the concept offavored nations(as defined before in these columns) to the profits share. It could be language such as “use the definition of profit most favorable to the Artist available in relation to the project.” This allows whichever definition of profit is used in any contract relating to the film to become the de facto definition for everyone with a similar clause. It levels the playing field and makes all the shares similarly based.

Profits are complex and require attention to the details most specific to your use. Will you be able to find a definition that works for you? As with all the topics we cover in this column, it depends.

More articles by Christopher Schiller