How Movie Distribution Works
by Jeff Tyson
Introduction
You have probably seen advertisements in your local paper for movies playing at a
theater near you. Sometimes, the ad will say "Held over" or "Special engagement."
What exactly does that mean? And just how do those movies get from the motion
picture studio to the theater?
In this article, you'll see the path of a film from an idea in someone's head to a
movie screen at your local multiplex. You'll learn what the "nut" is, find out the
difference between negotiating and bidding, and finally understand why movie
popcorn is so expensive!
Here's the path a film usually takes to get to your local theater:
The Art of the Deal
It has been said that making a movie is not nearly as difficult as getting it
distributed. Because of the enormous amount of cost in money and time involved
in distributing a movie, a distributor must feel confident that they can make a
sufficient return on their investment. Having the backing of a major studio or a
well known director or star can greatly improve the chances of securing a good
distribution deal. Independent filmmakers often use film festivals as an opportunity
to get the attention of distributors.
Once a distributor is interested in a film, the two parties arrive at a distribution
agreement based on one of two financial models:
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Leasing
Profit sharing
In the leasing model, the distributor agrees to pay a fixed amount for the rights to
distribute the film. If the distributor and the studio have a profit-sharing
relationship, on the other hand, the distributor gets a percentage (typically
anywhere from 10 to 50 percent) of the net profits made from the movie. Both
models can be good or bad, depending on how well a movie does at the box office.
The goal of both the studio and the distribution company is to predict which model
will benefit them the most.
Most of the major studios have their own distribution companies. For example,
Disney owns Buena Vista, a major distributor. The obvious advantages of this are
that it is very simple to set up a distribution deal and the parent company doesn't
have to share the profits with another company. The big problem is when an
expensive movie is a flop -- there's no one else to share the costs. That's the main
reason several studios have partnered on major movies in recent years. For
example, "Star Wars: Episode One" was produced entirely by Lucasfilm but
distributed by Fox.
The next big step occurs once the distribution company has rights to the film. Most
distributors not only provide the movie to theaters, but obtain ancillary rights to
distribute the movie on VHS, DVD, cable and network TV. Other rights can
include soundtrack CDs, posters, games, toys and other merchandising.
When a distributor has leased a movie, they will try to determine the best strategy
for opening the movie. Opening refers to the official debut of a movie. There are
several factors to consider:
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Studio
Target Audience
Star power
Buzz
Season
Obviously, a movie that has everything -- major studio backing, big stars and a
great story -- is probably going to open big and do very well. If it has big stars but
doesn't appear to have legs (meaning that it will not stay popular for long), the
distributor may opt to put the movie in as many theaters as possible during its first
engagement. Fewer theaters will be interested in a movie with an unknown cast or
poor buzz (unofficial information about the movie). Sometimes a movie has gotten
good buzz, but isn't likely to have mass appeal because of the audience it is
directed at. It might also be the wrong time of year for a particular type of movie.
For example, a heartwarming Christmas story is not likely to do well opening on
Memorial Day weekend.
All of these factors help the distributor determine the number of prints to make.
Each print typically costs about $1,500 to $2,000 to make, so the distributor must
consider the number of theaters a movie can successfully open in. Many of the
37,000 screens in the United States are concentrated in urban areas. A popular
movie might fill the seats in several theaters in the same city while another movie
would have a much smaller audience. Since opening a movie on 3,000 screens
could cost $6 million for the prints alone, the distributor must be sure that the
movie can draw enough people to make the costs worthwhile.
Most theaters use buyers to represent them in negotiating with the distribution
companies. Large chains such as AMC Theatres or United Artists employ buyers
while small chains and independent theaters contract with a buyer. The negotiating
process is very political. The buyers often will accept a movie that the theater is
not very interested in to make sure they get a film they really want. Distributors try
to balance the movies they lease to theaters in the same local area to make sure all
of the theaters will continue to work with them. Sometimes a theater will get an
exclusive or special engagement to premiere a movie in its area. Once a buyer is
interested in a movie, the lease terms are discussed.
The Need for Concessions
There are two ways for a theater to lease a movie:
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Bidding
Percentage
Bidding requires that the theater agree to pay a fixed amount for the right to show
the movie. For example, a theater might bid $100,000 for a four-week engagement
of a new movie. During that time, it could make $125,000 for a profit of $25,000.
Or it might take in only $75,000, which means the theater has a loss of $25,000.
Few distribution companies use bidding anymore. Most agreements are for a
percentage of the box office (ticket sales). This is to reduce their risk…Mr. B.
In this sort of deal, the distributor and the theater agree to several terms:
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The theater negotiates the amount of the house allowance, or nut, with the
distributor. This is a set figure to cover basic expenses each week.
The percentage split for the net box office is set. This is the amount of box
office left after the deduction of the house allowance.
The percentage split for the gross box office is set.
The length of engagement is set (typically four weeks).
The distributor will get the vast majority of the money made by the movie. The
agreement gives the distributor the agreed-upon percentage of the net box office or
gross box office, whichever is greater. The way this works is amazing!
Consider this example. Theater A is negotiating with Distributor B over a new
movie. The theater has figured that expenses, the nut, are about $4,500 per week.
The net percentage to go to the distributor is set at 95 percent for the first two
weeks, 90 percent for week three and 85 percent for the final week. The gross
percentage to go to the distributor is set at 70 percent for the first two weeks, 60
percent for week three and 50 percent for the final week.
You can see that during weeks one, two and three, the gross percentage is higher.
The net percentage is higher for week four. So the distributor would take gross
percentage on one through three then net for week four. The theater breaks even
the first week, loses money the second and makes a profit on weeks three and four.
The movie itself is considered a loss leader by the theater owner: It is meant to get
people into the theater. The theater makes its money selling refreshments to the
movie audience. That's why concessions are so expensive -- without the profits
generated by things like popcorn and soda, most theaters could not afford to stay in
business.
At the end of the negotiated engagement, the theater pays the distributor its share
of the box office earnings and returns the print. If a movie is very popular and can
continue to draw a steady crowd, the theater may renegotiate to extend the lease
agreement. Any time you see the phrase "Held over," you know that the theater has
extended the movie lease.
While first run movies that have just been released are loss leaders, movies that
have been out for a while can be profitable for the theaters that show them. Second
run theaters often get very attractive leasing terms from the distributor. These
theaters are facing increasing competition though, as first run theaters continue to
show more movies past the traditional four to six week time frame.
From: http://www.howstuffworks.com/movie-distribution.htm