Below are terms referring to how a producer is paid; important information that every producer should understand.
Total Distributor’s Net: This is the sum of all income, after expenses, from the all the major earnings categories.
Production Financing Expenses: This is the producer’s cost of interest and fees for production funding. The financing is 3 – 5 % more expensive over LIBOR (London Inter-Bank Offer Rate) when financed through a studio, which is considered a commercial lender and not a bank. In addition, financing terms will start on the first day of the relationship.
The borrowed funds are also subject to a 1 – 3% additional charge depending on different variables such as the credit history of the producer with the bank, the ratio between the collateral pledged and the loan amount,.. Usually these loans are a line of credit that the producer uses as needed. The financing expenses are typically only assessed on the actual amount the producer draws, not the entire line of credit amount.
Negative Cost: This refers to the actual total cost of creating the picture. This includes contingency, delivery items, and completion bond. Negative costs exclude production-financing expenses.
Studio Burden: A common expense for studio pictures, the studio burden represents a portion of the distribution arena overhead, including direct distribution expenses. The formula for calculating these expenses is set forth in the agreement and can be a percentage of the studio’s earnings for a year. For example, if the studio earned $750 million during the year and your picture earned $25 million, your studio burden expense would be 3.3% of the total earnings of your picture.
Producer’s Gross: This is the distributor’s net less the production financing expense and the picture’s negative cost.
Talent Participation: These are the points that are owed to the director and one of more key cast member. Talent participation comes from the Producer’s gross.
Producer’s Net: This is the producer’s gross amount minus any other distribution, production, or profit participant expenses.
Studio Share: This is the amount of the Producer’s Net in which the studio takes as a result of it’s making the production and distribution of the picture a reality. The amount depends on the relationship the producer has with the studio. For example, an in-house producer would pay 90% of his net. The negative pickup producer would pay 50% and the distribution-only producer would pay 0%.
Producer’s Share: This is what remains after all production, distribution, financing expenses, and participant payouts have been subtracted. These shares depend on the type of relationship the producer has with the studio. For example, the ratio for the in-house producer is 0.1:1, the negative pickup producer’s shares are 0.7:1 and the distribution-only share is 1.6:1.
The greater profit share for distribution-only producer relationships demonstrate why producers employing the balanced profile are able to establish businesses with greater creative and financial freedom than their counterparts.
The Critical Effect of U.S. Distribution
For the U.S. producer, the theatrical commitment is the most important element in determining the picture’s pre-production sales, financing, and international earnings power. It is often the first question asked by international licensee and major brand tie-in partners. They are attracted to or wary of a picture based on who is distributing the picture in the U.S. territories.
A strong U.S. distributor is therefore mandatory, as most independent pictures make little or no money because they lack distribution and marketing power. Making a movie means little if no one sees it and it generates no income. In order to ensure success, producers should ally each of their projects with a distribution entity as early as possible.