I recently came across a great paper written by Mark Weinstein in January 1998 in the University of Chicago Journal of Legal Studies, entitled “Profit-Sharing Contracts in Hollywood: Evolution and Analysis.” If you are in the profit participation business, this is a must read!

What caught my eye was the discussion of the history of profit participation. Here are some highlights:

• Gross Deals: According to the paper, the first gross deals were the 1930 John Barrymore and Al Jolson contracts that paid a percentage of the gross revenues from their movies. Jolson’s was for a percentage of the excess over a fixed amount while Barrymore’s was for 10 percent of the gross from the first dollar. The paper also went on to discuss the 1939 James Cagney contract, covering 11 movies for $150,000 per movie plus 10 percent of the gross receipts over $1.5 million.
• Net Deals: According to the paper, the earliest contract that resembles the modern ‘‘net-profits’’ contracts is one between Warner Brothers and David Belasco in 1923. This contract gave Belasco a percentage of the ‘‘net profits.’’ This may be where the “distribution fee” concept may have started, as Warner Brothers was able to subtract the costs of making and distributing the movie, along with a distribution fee of five percent. Evidently, Belasco had audit rights. That’s how the participation audit business was born!

• ‘‘Net-Profits’’ Contracts: Similar to what we see today, the paper explains that this concept dates from 1950 when Jimmy Stewart’s agent, Lew Wasserman, negotiated a deal for the movie Winchester ’73 with Universal. According to the paper, at that time “Universal was in financial difficulty and could not afford Stewart’s normal salary of $250,000. Instead, Stewart got no fixed salary but did get 50 percent of the ‘net profits.’ Net profits were contractually defined as gross receipts in excess of twice the negative cost.” Mel Sattler, who negotiated the contract on behalf of Universal, put it this way: “Universal accepted the proposal because it permitted the company to put substantially less at risk by reducing its immediate production costs.”

• Other Highlights from the paper: In the 1941 Hal Wallis contract with Warner, overhead is specifically included in the negative cost, but it is to be an amount determined by the Warner’s auditor, Price-Waterhouse. I didn’t realize how much power an accounting firm used to have!

While times have changed quite a bit since then, it is interesting to look back and see how it was born.