WHEN DO YOU START EARNING MONEY?
Everyone who works on a project – crews, cast etc. – are paid the fees/wages that were outlined in the budget. This will have happened months (or even years) before a film or television show is released.
So setting those people aside, the order and amount that people start being paid back their investment is outlined in a legal document, called a recoupment schedule or recoupment waterfall, which is negotiated before filming commences. Recoupment is the process of earning back or recouping an investment. [Listen here for more on finance plans and recoupment].
In feature film, Marketplace Contributors (e.g. distributors and sales agents) are paid back before Equity Investors in the waterfall. It’s the same in television, with the notable exception being a broadcaster’s license fee, which is still considered a Marketplace contribution, but they do not get to earn that back.
Example:
Let’s use a fictional $10 million feature film called An Ambitious Adventure. You can consult this sample finance plan to see how it would look.
In this case the fictional distributor, which we’ve called Biggest Aussie Distributor, has put in $750,000 as an advance to secure the rights to represent An Ambitious Adventure in Australia and New Zealand.
This is where exhibitors (think Hoyts, Palace, Event, Dendy etc.) come in. In this instance we’ll call the exhibitor Cinema Chain.
Biggest Aussie Distributor and Cinema Chain have negotiated on an agreed percentage split of the box office revenue. This is based on a revenue sharing model. Usually the cinemas share will increase throughout the theatrical run, to encourage the cinema to keep the film on screens.
In the lead-up to the film’s opening weekend, Biggest Aussie Distributor spent $1 million driving the marketing campaign of An Ambitious Adventure, using advertising and PR strategies to create audience awareness. This spend is called P&A or Prints & Advertising.
So if the $10 million film earns $12 million at the Australian box office, in very simple terms this is what happens:
- 1. Audiences buy tickets to watch the film at Cinema Chain.
- 2. Cinema Chain will report box office takings (less GST) and pay Biggest Aussie Distributor their agreed share on the net amount, which would have been negotiated earlier. In Australia, the exhibitor’s share is often between 60% and 65% of the gross box office.
- 3. Biggest Aussie Distributor sends regular invoices to Cinema Chain over the film’s theatrical release, charging the exhibitor a percentage of the net box office. The percentage rate changes depending how long the film is in cinemas, but the exhibitor will always keep the majority of the box office takings.
- 4. The money Biggest Aussie Distributor receives from box office is called Film Rental. From that, they will then deduct their commission, recover the expenses they spent marketing the film (that $1 million P&A) and their advance – the upfront $750,000 they gave the producer to make the movie, which was in the Marketplace section of the Finance Plan.
- 5. After the Marketplace Contributors are repaid, the Equity Investors will start to earn back their money. That usually also includes the producer. Remember box office is likely to only be one form of income for An Ambitious Adventure – the film may well be earning income for decades to come due to home entertainment e.g. DVDs, electronic sell through), free-to-air broadcast sales, streamer sales, merchandise etc.
It’s worth noting that the above example is for ‘ANZ’ - Australia and New Zealand (which are almost always grouped together). Marketplace Contributors can only earn from the territory they have paid for the rights to represent. So Biggest Aussie Distributor can only earn from Australia and New Zealand, not from the US, or Germany etc.
A Gap Lender (if there is one) normally sit ahead of Equity Investors in the recoupment waterfall and will recover their loan ahead of Equity investors from sales from unsold territories.
Unlike Marketplace Contributors (distributors and sales agents) and Gap Lenders, Equity Investors can see a return from both ANZ and Rest of World (ROW) sales. So typically if the project is selling well internationally (ROW), Equity Investors can start to see a return, potentially before the title is even released in Australia.
This income is all being derived long before the project is deemed to have gone ‘into profit’.
Thinking about the Australian producer in particular, if the Equity Investors are starting to receive revenue, and the project received the Producer Offset, then it is likely that the producer has also already made money on the film. This is because the producer takes an equity position proportional to their total equity finance^.
^This is presuming the producer has retained the Offset (and any grant finance) as equity for themselves – a point which Screen Australia strongly urges producers to follow, even if it means the producer sits lower in the Recoupment Waterfall.
Using the same example, let’s say the finance plan of the $10 million An Ambitious Adventure included $6 million under Equity Investors, and $4 million* of that was from the Producer Offset i.e. the Producer Offset represents nearly 67% of the equity. If the investors had recouped $1 million the producer would have already made $670,000 from the film even though it was far from being considered to be in profit (and that’s presuming the producer didn’t invest extra equity themselves). This is the best chance for a Producer to earn money above their Producer fee.
*since this is a Beginner’s Guide, we’ve presumed all of the budget was Qualifying Australian Production Expenditure for the purposes of the Producer Offset.
SO WHAT’S PROFIT?
For An Ambitious Adventure to be considered to have gone into profit it will need to have paid back:
- The Marketplace Contributions, plus any additional costs e.g. advertising expenses.
- Any Gap Lender
- The Equity Investors.
From that point, Equity Investors typically begin earning money at a much higher percentage rate.
Some other key things to note about profit:
- You don’t necessarily need an eye-popping local box office to go into profit. For instance, 2014 low budget Australian indie The Babadook went into profit in 2017.
- Profit may come well after the cinema run is over e.g. it might happen from home entertainment sales years later.
- It gets complicated. The Adventures of Priscilla, Queen of the Desert was released in 1994. But it has been the source of other potential income streams for the creators e.g. a stage play spin-off.
- It’s not necessarily a measure of ‘quality’. There are many critically-acclaimed commercial flops, and vice versa.
- It can be lucrative. For Screen Australia-funded titles, the producers receive 50% of all net profits as a starting point (this can increase or decrease for various reasons, which are too complex for this beginners guide)
- Producers don’t need to reveal if they’ve gone into profit. The general public may never know how lucrative a title has been for the creators. Producers occasionally do choose to disclose the commercial outcome of their projects – see the interview with powerhouse Australian producer Emile Sherman below.
The Babadook
FAQ
Is there a difference between film and TV finance?
In short, yes.
In the Marketplace section, television finance plans – and therefore recoupment waterfalls – tend to be less complex. This is generally because the local broadcasters contribute a large amount of the finance, through both licence fees and equity investments, into Australian shows. The rest of the finance is typically made up of a significant advance from established international television distributors who will sell the show to broadcasters outside of Australia. Generally, these distributors have a strong network of buyers around the world looking for content and are therefore willing to put up more money. Film is typically less certain, and more risky.
Does Screen Australia recoup its investment?
Screen Australia funding that’s less than $500,000 is generally considered a grant, rather than a recoupable investment.
But for anything over $500,000, Screen Australia considers this a ‘production investment’. As such, the agency is listed as an Equity Investor and would negotiate a place on the recoupment schedule to earn back its investment.
In 2018/19 Screen Australia earned $4.92 million back in net recoupment on its investments. This finance is put back into the agency to fund other projects. (Remember you don’t recoup in the year you invest, so funds Screen Australia receives now may have been for e.g. a TV show released 10+ years ago).
Does Screen Australia retain copyright?
Screen Australia takes 1% of copyright on any supported projects and assigns the rest of its share to the producer.
Copyright has no impact on recoupment.
Producer Emile Sherman (fourth from left) with the cast, creative team, and real people who inspired the film Lion at the Australian premiere (Photo credit: Fiona Sacco).
HEAR FROM A PRODUCER
Academy Award-winning Australian producer Emile Sherman says the tendency to judge a film’s success or failure based solely on net profit is not accurate.
Sherman is the co-founder of See-Saw Films and has produced more than 30 titles, including major hits Lion, The King’s Speech and TV series Top of the Lake.
“Anyone who knows anything about the film and television business knows that net profit is a very malleable term,” he says.
“Judging the success of a particular film or TV show from the outside can be tricky. You need to understand the inner workings to really know what has been successful or not financially.”
“There is a lot of revenue that comes in and flows through to investors and participants before you may technically be in net profit…
“There are wages, there are box office bonuses that are often paid, distributors are getting commissions, there are sometimes revenue corridors to participants and filmmakers, there’s the Producer Offset equity, which has been an incredible generator of film and television businesses in this country.”
See-Saw Films is one of Australia’s most successful production houses. Some of Sherman’s Screen Australia-supported projects that have or are about to go in net profit include the first season of Top of the Lake and 2016 feature film Lion.
“But there are many non-financial measures of success, which are often overlooked.”
He says these include recognition from international festivals and awards; the revenue from international sales; and having films distributed and marketed around the world, because when distribution companies back a film with substantial P&A, they believe in it.
“We’re in an industry which is a creative business and balancing the creative and cultural remit with the commercial remit is delicate,” he says.
“I did a film called Tracks which had very substantial sales all around the world and was released theatrically and a lot of money flowed in. It didn’t reach net profits, but we need to remember that because of the size of our audiences here (in Australia), it’s very rare for a film to actually reach the legal definition of net profits. This is why we have and need some government support to help subsidise a market that doesn’t in and of itself support the size of budgets that films need.
“That said, that doesn’t mean that there’s not a lot of revenue that actually flows through and it doesn’t mean that substantive sales aren’t made. All these things happen, they all just meet in a complex finance plan where distributors and broadcasters can be very happy with the financial performance of a film or television show and want to do more with those filmmakers without technical net profits being hit.”
He says this doesn’t just apply to the Australian industry though.
“Anyone who works in the industry – including in Hollywood where net profits are a notoriously ephemeral result – would know that focusing on net profits as the marker of success is a furphy,” he says.
“There’s some famously massive films in Hollywood where actors are being paid, directors are being paid, and the studio is doing well [but] it hasn’t actually hit net profits. It’s a complex financing arrangement.
“[So] net profit is not a helpful or good marker of success. It’s one marker, but in Australia and all around the world, it’s not the best marker.”
Australian producers also benefit from measures being put in place to protect their share in revenue. For example, Equity Investors (such as the producer) can earn from revenue made both in Australia and across the world, while Marketplace Contributors can only earn from the territories they’ve paid for the rights to represent. And then there’s Australia’s Producer Offset tax rebate, which gives producer’s additional equity in the film or TV series.
“The Producer Offset equity has been a massive driver of revenue and sustainability in the business,” Sherman says.
“It has given producers a seat at the table, empowered them to get the best material, to compete internationally, to secure the best intellectual property and to have a stake in their productions so that even if the films don’t get to net profit, there is still the potential for revenue which can go back into sustaining businesses and building the next production.”
Sherman hopes that conversations around success or failure become more nuanced, and go beyond discussion of box office results and headlines. He also points out the analysis at home of our stories is in stark contrast to perceptions of Australian content overseas.
“When you’re overseas, they say Australian film and television is amazing, because everything they see are the successful Australian shows. And visa versa – we see great UK or French film and television and the many more hours of mediocre content they produce are largely invisible to us. So I think to truly compare us to other countries you need to look at the number of good or successful shows we make as a percentage of total shows made, and compare this to other countries. To say that many of our films and television shows haven’t done well is largely meaningless, as that’s the same in every country,” he says.
“Australia has consistently produced great movies, launched incredible directors and talent across the spectrum and needs to continue to do more of the great cultural work of bringing our storytelling to the world stage. Part of the effect of that can easily be measured economically, but there are so many downstream effects that are hard to capture. That doesn’t make them any less important.
“For example, tourism – people know about Australia from our films and say ‘this is the place where Lion was made’. Knowing about our stories and seeing the beauty of our country brings Australia to the forefront of people’s minds. There are also many cases where a director brings a big movie back to Australia and employs thousands of people (think James Wan with Aquaman). All of this is on top of the cultural significance of telling Australian stories.
“These things are products of the virtuous cycle created by our industry and aren’t captured in the figures.”
FURTHER READING AND LISTENING
What to read next
Screen Australia Project Manager Kelly Vincent walks us through the ins and outs of creating a strong application with an accurate budget.
10 Jul 2019
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