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The principle source of revenue
in the motion picture industry is the licensing of a motion picture’s
distribution rights for exhibition throughout the world. Distribution
rights include theatrical, DVD and video rental (i.e. home entertainment), pay
per view television, pay cable television and network television. The
business of film distribution consists of negotiating terms with exhibitors
(i.e. the movie theater chains), making physical copies of a film, delivering
these copies to exhibitors, and advertising and promoting a film to the
public. Independent producers generally lack the necessary financial resources,
personnel and exhibitor relationships to self distribute a film and therefore
enter into negotiated agreements to have their films distributed by established
distribution companies. A typical distribution agreement grants the distributor the exclusive right to distribute the movie either worldwide or within particular regions from which the distributor is able to retain as a distribution fee a certain pre-negotiated percentage of the revenues generated by the movie. In certain instances a distributor will pay an upfront amount to the producer as an advance payment against future revenues. An independent producer will usually grant North American distribution rights — covering the United States and Canada — to a single distributor. The producer may grant international distribution rights to the same distributor, or may divide such rights among various international distributors. A distributor will attempt to generate revenues by exhibiting a film in various channels or media within a specified territory. These various distribution channels, known as release windows, are timed sequentially beginning with a film’s initial theatrical release. In addition, the economics and associated distribution fees are different for each release window. Generally, a distributor seeks to release a film in the following window sequence:
Domestic and international markets
generally follow a similar window sequence, although the international
theatrical release may be up to nine months after the initial domestic release.
Distributors employ different theatrical release strategies depending upon a film’s genre, expected box office performance and the general competitive landscape. If a distributor believes a film has mass appeal and significant advance audience interest, they are likely to pursue a wide release strategy in which a film is initially shown on more than 1,500 screens. If a distributor believes public awareness should be built gradually or by word-of-mouth in order to achieve box office success, they may adopt a “limited” or “platform” release strategy. In a platform release a distributor initially exhibits the film on a limited number of screens and later expands to a greater number of screens. Exhibitors retain a portion of the gross box office receipts generated by a film at a given theater. This portion includes a fixed amount per week to help cover the exhibitor’s operating costs plus a percentage of receipts that escalates during a film’s exhibition in the theater. These percentages may vary from film to film, but the exhibitor generally retains approximately 50% of a film’s box office returns. The box office performance of prior releases of a distributor or producer is an important factor in negotiating these percentages. For the home video market, the distributor sells video copies of a film in the form of video cassettes or DVDs to retailers. Retailers then rent these units to consumers. Traditionally, retailers retained all of the rental revenue a film generated. Recently some distributors have adopted a strategy known as revenue sharing, where they sell video units of a film to retailers at reduced prices in exchange for the right to receive a portion of the rental revenues. Regardless of which approach a distributor adopts, the amount of revenue generated in a film’s video release generally correlates to a film’s domestic box office performance. Television rights include pay-per-view, pay cable, network, syndication and basic cable. The value of television rights is generally based on the success of a film at the box office, as well as a film’s cast and genre. Network television rights are typically licensed only in the event of a highly successful theatrical release. Pay-per-view and cable rights may be licensed even in the event of an unsuccessful theatrical release or no theatrical release at all. Typically, a direct to cable or direct to video release is undesirable unless a film is produced on a very low budget, as these release strategies often return substantially reduced revenues. A distributor may also license a film for other forms of non-theatrical exhibition such as airlines, ships, military installations, prisons and hotels. Over the last decade, the importance of various distribution avenues has changed dramatically. Although revenues from U.S. theatrical distribution have increased in recent years, most overall growth in the industry has come from international distribution, home video and pay television. For instance, foreign theatrical box office currently amounts to approximately 40% of the total box office for independent distributors. Revenues from these various distribution channels shift substantially from year to year. Distribution costs are primarily incurred by duplicating the prints of a film to be exhibited on the required number of screens (based on the distributor’s release strategy), and advertising and promoting a film. These combined costs are typically known within the industry as “prints and advertising”. Advertising costs include promoting a film through theatrical trailers, magazine ads, television ads, radio ads, billboards, websites, press releases, film festivals, interviews, celebrity appearances and premieres. For a major theatrical release, advertising costs are the most significant distribution expense because wide-release strategies usually include expensive television advertisements and large-scale media campaigns. The size of the marketing and advertising budget is typically associated with the expected number of screens on which a film is debuted. If, for example, a film is considered a specialty film and the distributor elects to follow a limited release strategy in which a film is shown on less than 500 screens, the marketing and advertising budget would be commensurate. After a film’s initial release, the distributor will continue to promote a film and spend certain advertising costs as it is released into other media windows. A distributor is usually responsible for a film’s print and advertising costs within its exclusive territory. These costs are typically recouped by the distributor before a producer is paid revenues that exceed any negotiated cash advance the producer may have received. Distribution agreements will often specify a minimum and maximum amount of print and advertising costs that the distributor will incur in distributing and promoting a film. Revenues received by independent producers are impacted dramatically by fees that distributors charge for releasing a film in various territories. These fees are negotiated on a film-by-film basis and vary greatly depending upon a variety of factors, including the market in which a film is being released, the overall demand for a film, and the previous track record of the producers and talent involved in a film. Most films generate the vast majority of their revenues within two years of initial release and nearly all of their revenues within five years of release. If a film has viable franchise elements, such as potential sequel, merchandising or video game marketability, it may continue to generate significant additional revenues for many years after its initial release. It is impossible to predict the value of these additional revenue streams, and in many specialty movies, such as some of the films on our slate, these additional revenues may be quite small. Music from a film may be licensed for soundtrack releases, for public performances and for sheet music publications. Additional rights may be licensed to merchandisers for the manufacture of products related to a film, such as video games, toys, posters, apparel and other merchandise. Rights may also be licensed for sequels to a film, for television programming based on a film or for related book publications. Regardless of the various distribution licenses a producer obtains to exhibit a film, the actual ownership of a motion picture’s copyright often remains with the production company. Copyright protection in a motion picture continues for 95 years from publication or 120 years from creation, whichever is shorter. Ordinarily, a number of individuals contribute authorship to a motion picture, including the writer, director, producer, camera operator, editor and others. These individuals are not always considered the “authors,” however, because a motion picture is frequently a “work made for hire.” In the case of a work made for hire, the employer, not the individuals who actually created the work, is considered the author for copyright purposes. Distribution rights are typically licensed for a specified number of years, which may range from less than ten years to “in perpetuity”. These rights often revert back to the holder of a film’s copyright after the specified period of time elapses. Although no one can be certain of the value of these residual rights, some older films retain considerable popularity and may be re-licensed for theatrical or television exhibition years after their initial release. In addition, new technologies brought about by the continuing improvements in technology, such as the Internet, occasionally create new exhibition opportunities for licensing by entities that own motion picture copyrights. Various companies, primarily film distributors and film production companies acquire and manage long-term residual interests in movies through the maintenance of “film libraries”. Producers often choose to sell their long-term rights or otherwise assign a film’s copyrights and trademarks to companies that maintain film libraries. This may be done as part of a comprehensive initial licensing or distribution deal, or a production company may retain these rights to be exploited separately from an initial distribution deal.
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