Distribution of Investment and Compensation in Film ProductionWhile production may require the smallest amount of time relative to the other parts of the filmmaking process, it is often where the majority of the investment goes.  Exactly where the investment goes can vary greatly from film to film, and similarly for the process of recoupment (payment).

The value chain concept, designed by Michael Porter, can be a useful way to get an overview of this highly variable process.  The film value chain model breaks both the investment and recoupment processes down into the individual components.  For investment, you get an overview of the major components of a film production and distribution budget.  For recoupment, you see an overview of the major fees and payments that must be made, both before and after net profit.

The process of recoupment in the film industry can be somewhat more complex than a standard, modern industrial model for recoupment.  Here we’ll explore this concept, and take a look at a simple example of the process of investment and recoupment in terms of the film value chain.

A General Example of Film Value Chain Investment and Recoupment

Recoupment is made in different ways for different roles  in the filmmaking process (different places in the film value chain).  Some individuals will be paid in more than one way.  For example, the production crew are usually paid a flat fee before production is completed from the production budget.  Equity financiers earn income from sales revenue from the finished product.  Distributors, exhibitors, and sales agents take their commissions and expenses from the sales revenue, as well.

Producers, select actors, writers, and directors will often be paid a flat fee during production, and then also partake in some portion of the revenue once a certain ceiling is reached and other parts of the value chain are paid out.  Sales agents may receive a commission from sales of the film, as well as repayment of expenses incurred during the marketing process.  Note that this is a significant departure from traditional industry value systems.

Generally, a supplier company could not expect to be paid both a flat fee and receive a portion of the manufacturing company’s profits.  The fact that some roles do recoup in both ways in the film value chain, complicates the accounting process for a film.  It can also muddle the log-term profitability of the production company and/or film financier, as well as the profitability, or return-on-investment (ROI) for any one film.

An example from The Film Finance Handbook, by Davies and Wistreich, depicts the breakdown of an independent budget and a recoupment schedule in terms of percentages of the total funds.  Picture an empty bucket for the potential budget at the point of getting the film off the ground.  The first 20% (perhaps about $2 million) gets filled by the bank gap.

Then you reach 30% by way of actor and producer deferrals ($1 million).  To get to 60% of the budget, you drop equity into your bucket ($3 million),  keeping in mind the bank gap coverage, which covers up to 55% of the budget.  Then, presales of $3 million will fill the bucket to 90%.  And finally, soft money ($1 million) rings  you to 100% of the budget.

The second bucket represents the recoupment schedule and gets quite a bit more complicated.  You fill the first 20% of the bucket to repay the bank gap ($2 million), which includes the actor corridor.  Then bank interest of $0.5 million brings the bucket to 30%.  Next, fill in the producer deferral, another $0.5 million, to bring the bucket to 35% full.  Then, equity recoupment ($3 million) and equity premium  ($0.6 million) fill the level to 71%.  Again, you have bank gap coverage of 55%.  Any remaining budget money and profits may be divided as follows:  10% to main actors, 20% to other actors and crew, 50% to the producer, and 20% to equity investors.

Limitations of the Film Value Chain Model

The film value chain is a useful method for depicting the process of investment and recoupment in the filmmaking process.  However, every film is different, and the flow of money in your film project will depend on your own circumstances.  What does the film value chain model not show?  Well,  it is absolutely limited in terms of depicting personal relationships.

An incredibly important part of the filmmaking process is the role played by reputation and relationships cultivated across multiple projects.  Branding, people skills, specialist knowledge and contacts are especially important in the film and TV industry, and can have a major impact on your film project.

Additionally, this model does not capture the full time scale of the project,  nor how the financial picture shifts across time.  The amount of time accorded to each step in the process of filmmaking and distributing, varies widely throughout the project, and also across multiple projects. Furthermore, the model is limited with respect to the exact levels of investment and recoupment at each stage.  No two projects are the same, and no two aspects of any given project are the same.