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LEGAL EASE: What exactly are “Defined Net Proceeds”?

Q: My writing partner and I sold a script to a studio. We’ll share 5% of the “defined net proceeds.”Our manager says this means we’ll get a shot at making money if the movie is a big success, but he couldn’t explain the details.The contract goes on for twenty pages about it, and we understand none of it. What is “defined net proceeds”?

A: “Defined net proceeds,” for your purposes, means one thing – $0. It’s possible your movie does very well at the box office and makes a lot of money worldwide, but it’s highly unlikely you’ll ever see any “defined net proceeds.”It’s probably more likely that your movie will win the Best Picture Oscar – after all, every year one picture is guaranteed to win it; but there easily could be a year or a couple of years in which no studio picture generates “defined net proceeds.”

“Defined net proceeds” is one of a few terms used to describe what the studios used to call “net profits.”The studios got sued over the years by writers and other
participants in “net profits” on some of the most profitable films which never generated any “net profits.”Since these particular “net profits” have nothing to do with real profits, every studio changed its terminology to avoid using the word “profits.”That’s why it’s now called “defined net proceeds;”it’s sometimes also
called “net proceeds.”“Actual breakeven” is another term, and there are others.A more accurate descriptive term would have been “an artificial mathematical formula designed to produce a negative number in all but a few unusual circumstances.” Here is how the formula works.

First, a studio calculates the gross receipts.The gross receipts is what the studio actually collects*, it’s not what a movie generates at the point of distribution. For example, if a movie takes in $100 million at the domestic box office, it means movie theaters collected $100 million in ticket sales. Theaters don’t pay all of it to studios. Movie theaters have complicated deals with studios, but studios get roughly half of what theaters collect.

(In fact, the term “gross receipts” itself is an artificial formula and does not actually include every dollar collected by a studio, and that’s why an asterisk above.Certain revenues are excluded from the “gross receipts.”The biggest exclusion: 80% of DVD revenues are excluded, in most cases.For example, if a studio actually collects $100 million in DVD sales, only $20 million will be included in the “gross receipts.”)

Second, a studio deducts from the “gross receipts” the following:(1) “distribution fees” (percentages of the “gross receipts” – these could be 30% of the US “gross receipts” and 40% outside the US), (2) distribution costs (costs of distributing a movie, e.g., advertising, prints, etc., and it also includes overhead), (3) other participations (amounts the studio pays to other participants with ‘real’ participations, e.g., big stars, directors, and producers who participate in the “gross receipts” (with some minimal deductions) not in the “defined net proceeds”), and (4) the cost of production (the cost of making the picture, with interest and overhead).

If you’re not starting to see why you should not buy a second yacht in anticipation of your share of 5% of the “defined net proceeds,” allow me to illustrate. Let’s say your movie is an international spy thriller about a handsome secret agent, Josh, who forgets his identity, but a beautiful stranger, Carolyn, with a complicated past herself, helps him re-discover it, all as they escape attempts on Josh’s life in the most exotic locations around the world.

Huge stars and a big time director come on board.They all demand “gross receipts” participations, and let’s say they collectively get 25% of the gross receipts.The budget is $80 million.Thanks to the big stars, choppy editing, and a flawless script half-written by you, Josh and Carolyn spy their way to $100 million at the domestic box office and another $100 million in foreign territories.Here is a rough estimate of the “defined net proceeds” on this picture.

On a $100 million domestic box office film, when it’s all said and done, a studio will probably collect around $250 million worldwide in
all media (theaters, DVD, TV, etc.). But this is not the “gross receipts.”Remember, 80% of DVD revenues are excluded.Estimating that around $100 million of the $250 million is DVD dollars, 80% of the DVD dollars (or $80 million) will be excluded.The resulting “gross receipts” will equal $170 million.

The studio will then deduct the following from $170 million:

  • distribution fees – let’s estimate an across the board distribution fee of 35%, resulting in a $60 million deduction.
  • distribution costs – on a big movie like this with big stars, we can conservatively estimate worldwide distribution costs, with an overhead charge, of $100 million.
  • participations payable to the big stars and the director – remember, these guys participate in the “gross receipts” (and by the way, their “gross receipts” include more DVD dollars than your “gross receipts”).Let’s estimate their “gross receipts” to be $185 million, of which they are paid 25%, or $46 million.
  • cost of production – assuming the picture was actually finished on budget, $80 million.With 15% overhead ($12 million) and interest (roughly another $12 million), the total cost of production:$104 million.

Total deductions from $170 million:$310 million.

Your successful international spy thriller is $140 million away from reaching the “defined net proceeds,” and it will never get
there. This is why Eddie Murphy famously called these kinds of participations “monkey points.”By the way, he coined that term during a trial in which Art Buckwald was suing Paramount because “Coming to America” did not generate any “net profits” in which Art was unfortunate enough to participate. By the way, the
worldwide box office on “Coming to America” was close to $300 million, and the budget was only around $40 million.

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