The Dark Arts of Distribution and Marketing

A while ago I wrote an article about investing in film, as I have noticed an increase in the number of film industry companies putting their own money into the production budgets of NZ films. Usually this is tied to a services agreement where the producer commits to a minimum spend in respect of the investing company’s services, but not always.

As I mentioned in my last article, these types of investments are called ‘equity investments’ and they entitle you to a share of the film’s proceeds. Usually, you will get two bites at the proceeds; the first is where you have the opportunity to recoup your cash investment (often plus a premium of 10% to 20%), and the second, once all the investors and funders have been repaid, is where you get a share of the profits of the film.

So given that all of the revenue flows from the film will be generated by, and are in the hands of, the distributors and sales agent for the film, I figured it might be useful to delve a little into the murky world of film distribution.

From our point of view in NZ we usually look at the world in two categories; Australia and NZ on the one hand (including Pacific Island countries and territories that Australia and NZ have close contact with) and the rest of the world on the other hand.

For Aus/NZ the production company that you paid your investment to will usually enter into a direct relationship with an Australasian distributor. This deal involves the distributor obtaining the rights to the film in the NZ and Australian territories, in exchange (hopefully) for an upfront payment to the film’s producer. These deals are usually done before the film is made, and the money that is paid by the distributor (which is actually an advance against sales proceeds) will form part of the production budget for the film.

When it comes to the rest of the world (or ‘ROW’ as it’s surprisingly called in distribution agreements), depending on the project, there may or may not be a sales agent attached to the film prior to production. (Just so we are clear on the difference between a sales agent and a distributor, a sales agent obtains rights to multiple territories and then sells the film to individual distributors in each different territory. A distributor is the company that sells the film within a territory).

Let’s look at what happens in our home market first. The distributor that has bought the rights to the film will take delivery of it once the film is completed. (That is a very simple summary of a complex process. The actual materials that are delivered (and how and when), are always hotly negotiated with the distributor. A lot of distributors will initially demand things like Dolby Atmos, which are beyond the reach of most NZ production budgets, and given that bulk of the distributor’s payments is contingent on delivery being achieved it is very important to negotiate these types of items from the delivery schedule).

Once the film is delivered to the distributor it then (typically) licenses the film to cinemas and commences spending money on the marketing of the film (this spend is called the P&A). As the P&A is recouped by the distributor from the gross proceeds of the film it important to try and keep the spend at a reasonable level. The producer will have tried to negotiate approvals on this expenditure, or at the very least, caps, but there are limits as to what can be achieved. This is always a point of tension between distributors and producers. A good producer will want to be engaged in the decisions about how to market the film and how much to spend; most distributors however, will regard that as their area of expertise and will want to be free to make their own decisions without having to consult with anyone else (let alone seek approvals).

The main point of tension at this point is always how much money the distributor spends, as that has a direct impact on when, and how much, money the film’s investors (including you) will receive. There is the potential for distributors to soak up costs in the film to their benefit (by incurring the costs with their own staff, agents, and affiliated companies). There is a perception amongst a lot of producers that this happens all the time. I have no idea how much it goes on, but the way to prevent it is to ensure the appropriate language is in the agreement, including language requiring all costs to be arms-length, direct, and verifiable. The producer will always have an audit right which can be used if there is concern about how costs and revenue are allocated, but this is an expensive process and hardly ever used.

For the rest of the world it’s a bit simpler. Because the sales agent is selling the film to distributors, and not incurring P&A expenditure itself, there is less risk for costs to inflate. Sales agents do have the right to incur recoupable costs though and the same principles do apply of restricting the types of costs that can be claimed and attempting to assert some control over amounts that can be spent. Usually a cap on sales expenses can be agreed to.

An area where producers will want a say is in the price that the sales agency sells the film to a distributor (this ‘price’ actually being an advance on sales paid by the distributor). Sales agents put together estimates for what the film will sell for in different territories. These estimates are usually provided to the producer, and usually form the basis for the MG (MG stands for minimum guarantee and is the advance that the sales agent pays to the producer to secure the rights to the film). The most common way sales agents obtain estimates is simply by talking to their distributors in the different territories and asking what they would pay for the film. The estimates usually provide a range of prices for each territory. The lowest of these is called the ‘take price’ and represents the lowest prices that the sales agent would accept to sell the film. So as a producer one thing you would usually look at doing is putting wording into the sales agreement preventing sales at below the take price without approval of the producer. Usually a producer will try and get blanket approval of a US sale, the US being such an important territory for most films.

So there you have it, a primer on the often murky world of film distribution.