Split-Rights & Studio

Producers advantages working by split-rights instead of pre-sales

According to split-rights producer would produce motion pictures for the FDCE (foreign distributor contractual enterprise) and Studios in collaboration with the Producer Partnership. Producer would have to accept this risk/control relationship to produce profits for the studio and FD. Producer keeps in mind to help studios to fill their pipeline of put contracts for studio’s numerous distribution windows.

As studios are all public they need to keep the volatility of producing motion pictures and stock market related quarterly reports under control. That means for the studio to lower risks by producing less and distributing more (about 1 to 2 out of 10 pictures). Also, allowing producer to bring in more then 50% of the films production financing from abroad in contracted non-corporate relationship split-rights transactions lowers studio risks. Studio having up to 1-10 line of credit with their bank makes this relationship beneficial, as for example producer bringing in $30 KK USD produces availability for the studio to use (loan from the bank) $300 KK USD. In this situation producer distances the production risks from the studio, being the liaison to work with the studio and with contracted major territory foreign distributors. The key to the split right deal is the FDCE joint sharing of profits and losses, it would not work if these countries would not act as a group, but they share earnings according to their initial separate interest % in each film. It is a virtual partnership, doing business by virtue of the contract, it does not share profits – if they would be registered for doing business it would be considered a partnership for tax purposes, which would mean doing business and being taxed in the US. Thus the FDCE would be double taxed, which would make the split-rights system pointless, the double tax would terminate it. Split rights relationship also eliminates the presale model risk of foreign licensees not paying according to the L.O.C. when the picture is delivered to the prebuyer. That causes problems to the entire industry system as the producer’s bank that has put up the production financing of the picture after studio acceptance and completion bond guaranteeing the delivery the licensee may have a way to back out of paying, or not paying promptly on delivery. For the studio to be interested in the pre-sale system producer needs to give them at least domestic theatrical and partial video rights; in the split–rights pattern producer is part of the studio system by benefiting the studio substantially more. I believe that split-rights model of producing alleviates several major worries of the studio and bank as well as the producer.

Another way to lower risks is packaging, as it would be unthinkable that every movie would produce good income (most pictures lose money), pictures are packaged for the different media windows to make the network television, premium cable firms and video chains to pick up everything. A put deal means that the buyer must accept the package of pictures as presented. No-one would purchase a poor picture alone, but when they get the package with few hit blockbusters the ratings and rental revenues will balance out at the end. These product pipelines need to be filled – studio would delegate this to the outside entity, yet keep certain amount of control. In a put relationship studio also must provide certain amount of production. With the NATO members it is a bidding process, where the exhibitor has to compete for the studio pictures, as they draw most audience due to their excessive craft and skilled marketing. Theater house-nuts differ from chain to chain but are determined usually 50/50 with the exhibitor and studio but still exhibitor ends up with about 10% of admissions and have to accept earning the rest of its income from concessions and miscellaneous areas. It is so because bank has the power, studio represents part of that power and don’t need to negotiate with the exhibitors to accept all their films, to get any studio film for them is good. So the theater owners go low and accept low percentage from the studio. As studio distributes, generates production, advertises and organizes services like film exchanges it is in power to negotiate a put picture package deals with the exhibitors, but only does it with, Video Chains (Blockbuster- biggest easiest to deal with), Premium CBL and Network TV. As the brand presence of a film is established by studio in domestic theatrical distribution the rest of the media windows largely depend on that audience initiation with the film. These 3 previously said media liquidation markets realizing the power of the studios follow industry set-up and are accustomed to the put deals.

The output deals then are the contracts that studios have to make or have made (buy) certain number of pictures that fit with set criteria and budget – specified by dollar amounts spent on advertising and by target audiences. For example in a Premium Cable deal the package is set for 5 years and the license of it lasting for 7 years. In each of the 5 years there needed to be 12 pictures with the budget minimum of 16m USD, as there is a budget gross corollary. For each of these films CBL would pay 5m per film to its production. The other 2 categories that studios have standing contracts are from the Video Chains- Blockbuster and also Network TV. These three categories allow the studio to make or have made known number of films each year. This way studios may be sure that they get paid at least the set amount, if picture performs better there is an escalation clause in the contract with the distributors of these 3 markets that would make the deal refrained to all parties. Blockbuster would provide about 12-20 KK per picture – that is also a standing orderly thing. Network may put out 4-5 KK USD per film. The largest output deal I have heard of was 2,4 billion USD – as there are few competitors to get this contract it is a good day when it results for your good.

The contract is there and pictures need to be plugged in to it. These pictures are selected by calculating their earnings potential most often for output deals using the liquidation breakdown formula – for first estimation and decision to plug a picture in to the pipeline the screenplay is a bit too much detail, and also needs to be considered a raw material. The story is still the thing, but at this point it is mostly pure business interacting with some ‘gut instinct’ about the people and businesses involved, the trailer, the pitch, the premise and synopsis, the essential vital elements for creating an experience for a certain target audience. It would be the executive producer’s job to offer the studios qualifying product for these criteria. When working in a system of split–rights, producer should also help the studio to pick out feasible projects that the Foreign Distributor Contractual Enterprise would feel proud to put the money up for. These would be motion pictures that can do well domestically and also in their local markets by using cover shoots where needed. Producer has a tough job to make the FDCE group behave, to pull it together for the major studio and make the production process enjoyable or at least as smooth as possible. With split rights producer will not need to deal with the sales agent, bank, or bond, he deals with the studio. The FDCE hooking up with the producer creates the producer partnership, which is also a virtual entity. Producer must have the trust of the FDCE, he does not put in any money, gets a fee in the budget, FDCE first recoups their initial interest and after that profits are split 50/50. Producer would fight for a flat buy out, yet the studio would like to retain a percentage in the back end of the film to have more incentive to come to an agreement with the producer on the picture (this would be another virtual partnership). If the producer realizes that the studio would make more money he may want to plug in to studio gross deal, but studios hardly ever report an income so there is usually never incentive for producer to do that. He needs to avoid it and negotiate for a flat buy-out. When there is a deal between the studio and the producer it would be a good deal for both parties, as they would of never got so far without knowing the industry. Producer should have a team of few people: lawyer, UPM (retaining a UPM is relatively less used concept), and some other trust worthy advisors in the industry system who work on retainer bases and are essential part of getting the pictures engine working right from the start.

There is a way to apply the split rights model for smaller countries and companies in sharing opportunity of development financing from their risk-capital funds. You are invited to read more about this subject here.