In its most basic definition, net profits is the money which remains after the costs of making, marketing, advertising, financing, and distributing the film have been repaid. In other words, net profits are what are left over after everything else has been deducted. When people refer to "points on the back end" they are referring to a percentage of a film's net profits.
No contract clause strikes as much terror into the hearts of profit participants as does the clause which lays out the definition of "net profits." In fact, this "clause" can run 40 or more pages and is often longer than the actual contract itself.
In broad terms, movie studios often arrive at net profits through some variation of the following formula:
1. The movie's gross proceeds are first calculated. These are monies received from showing the film in theaters, on television, income from video, soundtrack albums, merchandising, and so forth.
2. Fees are then paid to the distribution companies and other entities that have put the film in the theaters, license it to television companies, or put it in the hands of other distributors for further licensing.
3. Distribution costs are then deducted. These include marketing and advertising costs, costs of promotional materials, costs of showing the film at festivals, and so forth.
4. Film production costs are then recouped. This is the cost of making the film itself.
5. Deferrals are then paid. These are the deferred portions of the salaries that were promised to actors, producers, directors, and so forth.
6. Finally, net profits are paid—if anything is left over. Remember, the studio usually retains a portion of the net profits as does the producer. The money that the producer receives after the studio has taken its cut is called the "producer's share."
Although this may look like a simple formula, studios often sweeten the deal for themselves by adding an overhead charge at steps 2, 3, and 4. Overhead is the cost associated with running a business. For example, a studio may have spent $10,000 creating a poster for your film, but may add an additional 10% on to this expense for its overhead costs. This means that the studio is entitled to receive $11,000 for the cost of making your poster.
In addition to charging overhead at various stages, studios routinely charge interest on the money they loan to the film project, either in actual cash or in the cost of the services they provide.
Producers often face a real problem when it comes to net profits. Many of the contracts that a producer uses to offer net profits to actors, directors, and other net profit participants obligate the producer to pay those participants out of "the producer's share" of the net profits.
Example: Peter Producer is ecstatic. His film "The Tepid Temptress" has grossed so much money that he will actually see net profits! Unfortunately for Peter, he has agreed to pay net profits from his producer's share to a number of participants: his two lead actors, his director, and his writer. This wasn't a bad move on Peter's part, none of these players would agree to do Peter's movie if they hadn't received some net profit participation. However, when you add up all of these net profit participants' percentages, Peter is only left with 10% of the producer's share.
To help soften the blow to his pocketbook, Peter might try to negotiate with the studio for a "hard floor" of 20% of the producer's net profit.What that means is this: if the total percentage of all of the net profit participants to the producer's share is greater than 80%, then the studio would be obligated to kick in some money to pay these net profit participants so that Peter's share would not be reduced below the hard floor of 20% of the producer's net profits. (See The Money Pipeline, p. 229.)
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