The truth behind the Net Profit lie…

May 28, 2012 § 6 Comments

Hollywood’s box office horse race is all about a movie’s weekend gross and ultimately its worldwide gross for bragging rights and marketing.  The “Top Grossing Films of All Time” list seems to change every few months with new placements in the pantheon of biggest moneymakers.  I prefer the old school Top 200 list adjusted for inflation.  Some films like “Titanic” get a re-release years later to add more cash to their coffers ultimately garnering a higher ranking.  The film Harry Potter and the Order of the Phoenix (2007) reportedly grossed $938.2 million worldwide, but the accounting statement conveys that the film is still over $167 million in the red.  Surprise!

Just where does all that “gross” money go?  The studios would like you to believe these top moneymaking films end up with no profits and they can show that no film actually makes money.  How do the studios survive if making films is such horrible business model?  They do just fine.   It’s just Hollywood accounting making sure the “Net Profit” participants who do not see a dime.

Usually a screenwriter working on either a union or non-union film will be “generously” given a “Net Profit” participation clause in their contract.  It’s basically useless, as the producer, studio or distributor will make sure the film never shows a profit on paper.  It’s nothing personal, they just don’t want you or the handful of other profit participants to share in their hard-earned money.  Normally “Net Profits” are: “Defined, accounted for and paid in accordance with Producer’s (or the distributor of the picture) standard Net Profits definition, to be negotiated in good faith within Producer’s (or the distributor of the Picture, as applicable) standard parameters and industry standards.”   Good faith?  Sure.  Now what the clause really states:  “We’re going to cook the books like we always do and show that our big moneymaking blockbuster was a huge financial disappointment.”  It’s better if you understand this now, rather than later when you were looking forward to a share in the overall revenue.  Sure, not every film makes money and the bigger the budget the more risky the investment, but once a “distributor” is mentioned—all bets of sharing profits are gone.

Hollywood’s economic business model would not continue with actors taking $20 million salaries upfront and sharing in the first dollar at the box office—and then the films would flop.  The studios finally got smart and looked for an out.  This happened during the 2007-2008 Writers Guild of America Strike.  It leveled the playing field.  On the verge of a downturn in the global economy, the studios cut the fat and were able to end most of their expensive “housekeeping deals” where talent was under contract and paid hefty salaries to develop projects exclusively for the studios.

It also changed the “gross” participation definition for many of highest paid artisans.  The studios banded together and instead of allowing actors to demand huge salaries upfront and share in back-end profits, they’ve crafted new deals where the actors take less upfront for a piece of the fist dollar gross.  Leonardo DiCaprio’s payday for the blockbuster Inception was north of $50 million as he traded away part of his upfront salary for every dollar made.  A handful of mega talent smartly roll the dice on their deals like Robert Downey, Jr. who recently made $50 million for his profit participation of “The Avengers” worldwide gross.  Johnny Depp is said to have made at least $250 million from the four Pirates of the Caribbean movies, and Forbes reported that director Michael Bay took home $80 million from the first Transformers.

The rest of us poor bastards get “Net Profit” participation.  Again, not every film ends up with theatrical distribution and how a film ultimately ends up is certainly not under the control of the screenwriter.  Hell, we just write the damn things.  During my recent contract negotiations for a screenwriting assignment job, I asked my entertainment attorney if he could negotiate a gross-profit participation for me.  He laughed.  I understood completely.

If you work on a non-union screenwriting job, push for as much money upfront as possible.  Make sure you negotiate a decent production bonus too if the film gets made.  Essentially, that will be the only real money you receive save for any foreign levy payments from overseas distribution.  Much like a non-union contract, under a WGA union contract, a screenwriter receives a minimum payment based upon the size of the budget unless you can negotiate a bigger payday because of your credits.  The contract includes a price for an original script, your successive writing services for an assignment and a production bonus if the film gets made.  The big difference between WGA contracts and non-union contracts is the WGA forces producers to pay into your pension and health plan and pay residuals from the ancillary markets.  The good news for non-union writers is that the WGA has recently been paying them foreign levies from worldwide distribution of movies that you receive writing credit.

When a distributor picks up a film, they will write off all expenses for prints, advertising, loans and interest, even the cost of paperclips against the gross profits.  They adjust the books to make it seem as if the film did not make profits.  Sorry to the “Net Profit” participants because there is nothing left over—better luck next time.

Consider if you wrote the low budgeted, non-union film Saw (2004).  The budget was a reported $1.2 million dollars.  The film went on to gross $103 million worldwide—$55 million from the U.S. box office and $47 million overseas.  You’d want a piece of that backend action, as you probably didn’t receive much for writing it or selling the original script on such a low-budget film.  What if you were given “Net Profits” and the distributor was able to show the film didn’t make any money?  It might be hard to hide that much money, even with such a huge return on investment, but are you going to pay for an audit of the books and look like the asshole?  Another way to possibly see more money is to negotiate “passive payments” into the contract.  If you wrote the original film and don’t get hired to write the sequel, you should participate in payments for any new films in the series.

In recent negotiations, my entertainment attorney crafted a protection clause to protect me from the “Net Profit” lie.  It’s called a Box Office Bonus.  Again, the film must receive a theatrical distribution for this to take effect, but it’s a protection you’ll want in every contract every time.  Basically, it goes like this:

BOX OFFICE BONUS (ES):

“If the Picture is actually produced by Producer and Writer receives Sole Credit, Writer shall be entitled to the following contingent bonus(es) (“Box Office Bonus[es]”) at such time, if ever, that the domestic (i.e., U.S. and Canada, collectively) box office receipts of the Picture (“DBO”); with respect to the initial theatrical release of the Picture, as applicable and as reported by Daily Variety, respectively, (or if Daily Variety ceases publication of such information, then pursuant to such other mutually agreed-upon publication or measure), first equal  or exceed the following:

DBO: $XX,ooo,ooo

BONUS : $XX,000

For each additional $XX,000,00  in DBO:  $XX,000

“The Box Office Bonus(es) will accrue from the applicable DBO level. The Box Office Bonus(es) are payable within 45 days after the close of the calendar quarter in which such DBO receipts are first reported by Daily Variety.”

The clause is full of protections and schedules so it would be difficult for a distributor not to comply with payments owed to you.  If you end up sharing credit, they’ll even try to half the numbers, but if your attorney negotiated exclusively for you, fight to keep one hundred percent of the bonus.

Never believe the “Net Profit” lie, as you will most likely never see any of the shared profits.  These negotiations are crucial for your financial survival as a screenwriter.  Make sure you have a great entertainment attorney in your corner to play the heavy and fight for everything you deserve.   As the screenwriter, you’ll always get screwed in some way, but it’s just a matter of how badly you allow it.  As a wise friend always tells me, “Cut your deal going in.”  Amen, brothers and sisters.

“Some are able and humane men and some are low-grade individuals with the morals of a goat, the artistic integrity of a slot machine, and the manners of a floorwalker with delusions of grandeur.”—Raymond Chandler

“We Americans have always considered Hollywood, at best, a sinkhole of depraved venality. And, of course, it is. It is not a Protective Monastery of Aesthetic Truth. It is a place where everything is incredibly expensive.”—David Mamet

“Hollywood is a place where a man can get stabbed in the back while climbing a ladder.” —William Faulkner
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§ 6 Responses to The truth behind the Net Profit lie…

  • Nick says:

    Excellent article dude – how true !

  • This was worth reading every word. Well said, Mark! I too, work with an Entertainment Attorney, and it is the best insurance I can think of.

  • gaba says:

    salutations from across the world. Great post I will return for more.

  • T. says:

    DBO is what? Domestic Box Office? If so, how does one draft for bonuses with respect to the foreign box office?

  • scriptcat says:

    Yes, it’s “Domestic Box Office.” You could probably have your attorney draft a provision for collective International Box Office receipts (that is of course if the producers/studio are willing to grant that profit participation to you for overseas income). It could end up being a sticking point, one never knows, but we always try. The language would be expanded to include “and International Box Office” with specific payment schedules due to you when IBO hits certain levels.

  • I agree with everything you had to say here Mark! Passing this onto my Husband to take a look at – I’m sure he has a unique perspective coming from the Directors Guild. He’s done several movies and I don’t think the back-end deals have amounted to anything. Will get back to you on this…

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