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Writers, Producers, Directors — The DEAL

Expert Witness: Kathryn Arnold
In addition to film financing, the writer, producer and director deals are a major factor in getting films produced − each deal differs depending on the experience and clout of the players involved. These deals will in turn have a huge impact on back end money that may or may not be available for the producer.

One thing to keep in mind is that profits are truly hard to come by in TV and film, as the cost of making and releasing films has exponentially increased over the years. If you are a "net profit" participant on a film, you are pushed way back in the process, and it is an extremely rare event when a net profit partner realizes money from the deal.

Consider the following Hollywood lingo:

The Wall Street Journal reported that, "In order to sign actress Cameron Diaz and director Nancy Meyers, the [Sony] studio had planned to offer both women a share of the movie's gross box-office revenue from its first
day of release on. It is a practice known as 'first-dollar gross' and its standard fare for top-tier talent." Variety reported that "20 percent of the gross [of King Kong] is going to [Peter] Jackson." Wired reported that, "A deal worth $20 million against 20 percent of the box office gross [is] the kind of contract Tom Cruise or Tom Hanks generally get."

However, as one top Viacom executive explained, the first truism of Hollywood is "Nobody gets gross — not even a top first-dollar gross player" This can be due in part to some creative accounting by the major studios and the way that the deals are structured. What the top gross players do get are two kinds of compensation: fixed and contingent. Fixed compensation is the upfront money that is paid when the film goes into production, regardless of what happens to the movie in the distribution phase. The contingent compensation is the percentage of a pool called the "producer’s adjusted gross." Today, virtually all films produced include some form of contingent compensation.

Contingent compensation deals vary widely in detail, but all have one element in common — a "break-even" point. These are specifically described events for each given participant, and break-even basically occurs when revenues equal costs and/or charges. "Break-even" may be a fixed dollar amount, a "cash break-even," an "actual break-even” or “first net profits." An understanding of the deal-making process requires an understanding of participation structures common in the industry. There are two basic kinds of participants in a film's revenue flows — net and gross. And there are an infinite number of ways to tailor these deals.

First dollar gross is what every actor and producer seeks. With this deal structure, the participant receives a percentage of gross revenue from the first dollar received by the studio and their payment is not entirely tied to the success of the movie. An often heard phrase is "20 against 20" where the director or actor would be guaranteed $20 million dollars in fixed compensation which is considered an advance against 20% overall participation in gross profits of the film. At the point that their 20% equals $20 million is when they realize additional revenue. With first dollar gross certain expenses such as payments to guilds, taxes, and duties are always deducted off the top of gross revenues before profits are considered. Where this becomes key is with DVD sales, and many have 20% included in gross receipts.

There are relatively few producers, directors, and actors in the industry with the level of clout necessary to make this kind of deal. In the beginning of their careers, actors will frequently be able to negotiate either a small percentage of net profits or no contingent compensation at all. As they get more work, are more in demand, or are considered somehow responsible for the success of a movie, the value of their fixed and contingent compensation in most cases increases incrementally as their popularity or Q factor rises.

Stars like Tom Cruise, Tom Hanks, Julia Roberts and Will Smith are the most likely to receive stratospheric deals where fixed compensation can be in excess of $15-$20 million against first dollar grosses of 10%-20%. Often these can escalate into the 25%-35% range. This high-paid world can include directors such as Steven Spielberg and Ron Howard and producers such as George Lucas and Jerry Bruckheimer. With some notable exceptions, however, writers rarely get anything other than net profits. The top writers usually get more money up front in addition to the 5% of net profits that is standard for sole screenplay credit.

In addition to first dollar gross, there is also the adjusted gross receipts/net profits deal. Net profits are defined as profits payable to participants after recouping the cost of production, interest, overhead, advertising, full distribution fees, and fees paid to first gross profit participants. Once these costs are recouped, the participant is then entitled to contingent compensation.

Creative accounting practices at the studios and distribution companies make it hard to realize contingent revenue in these types of deals. Especially if there is a gross profit participant like Will Smith, whose gross participation gets added to film’s costs before adjusted gross and net profits are realized. For example, writers often get 5% of net profits but many times there is no money left on the back end. This is one reason that lawyers have been pushing for the box office bonus. This is a specific amount payable when a film’s gross receipts reach a certain level. Each time a new level of gross receipts is reached, the participant of a "box office bonus" will receive an additional pre-negotiated sum. In this case, the participant will earn additional money if the movie is in fact "successful." This is a clearly defined payment not subject to the whims of studio accounting.

Further, today’s blockbuster movies usually have a number of gross players involved and very costly advertising campaigns. With huge stars and huge budgets, there is less likelihood that the net profits point will be reached. As a rough approximation, net profits are achieved when the studio revenues are about 1.5 times the studio’s costs of production and promotion including the salaries of the stars. According to Robb (1992), net profits of $155 million were paid to 94 participants on Paramount releases between the years 1974 and 1987.

To see how these "gross" participations work in practice, look no further than Arnold Schwarzenegger's 33-page Terminator 3 contract, still considered the gold standard for the super-gross players. Schwarzenegger received $29.25 million in fixed compensation, a record sum at that time. He got the first $3 million upon signing and the balance during the course of principal photography. His "contingent" compensation was 20% of the "adjusted gross receipts" of the distributors — Warner Brothers domestically, with Sony Pictures and Intermedia distributing the film abroad. The "adjusted" part of the equation allowed the studio to deduct the items specified on Page 3 of the contract:

"All industry-standard and customary off-the-top exclusions and deductions — i.e. checking, collection conversion costs, quota costs trade association fees, residuals, and taxes."

Schwarzenegger's lawyer, Jacob Bloom, is one of the top entertainment lawyers in the business, but the most he could do here was to cap some of the collection charges at $250,000; he could not touch the residuals or tax deduction. However, Bloom did manage to negotiate the all-important DVD royalty contribution to the pool raised to 35%. In the end it meant that Schwarzenegger was entitled to only 7% of what the studios received from DVD sales and Schwarzenegger's contingent compensation would not even kick in until the film hit the break-even point as defined in the contract. And despite the film’s $428 million world box-office gross, it barely reached its cash break-even point. When it was all said and done Schwarzenegger earned very little from his gross participation beyond his $29.25 million fixed payday.

Take another creative deal involving a Hollywood heavy-hitter. With Mission: Impossible II, Tom Cruise got a more immediate slice of the pie and his production company got 30% of Paramount's adjusted gross receipts. However, this was in return for his acting, producing, a personal guarantee against cost overruns, and paying other gross players their share — including director John Woo's 7.5%. With the DVD royalty going into the M:I-2 pool negotiated at 40% royalty, Cruise would wind up getting 12% of the DVD revenue. As part of his unique deal, Cruise did not take upfront fixed compensation, other than the minimum required by SAG. In return for all these concessions, his 30% contingent compensation was not paid until a cash break-even threshold was met. Only a top star like Tom Cruise would be able to negotiate this kind of a deal.

There are many facets to understand the industry and knowing how it works will allow one to ask the appropriate questions that one needs in order to ascertain the true economic value to a given project or individual. Particular aspects to consider are what roles people play in the industry and what differentiates a successful writer, director or producer that gives credence to the high salaries they may demand.

Copyright Kathryn Arnold

While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

ABOUT THE AUTHOR: Kathryn Arnold
Award Winning Film Producer and Executive with over 15 years professional experience, including Feature Film Production, International Sales, financing, and fund raising. One of the highlights of my life was directing the Documentary on the iconic band Earth, Wind & Fire - A perfect blend of history, soul and music.

Copyright Kathryn Arnold

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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