During the last 10 to 20 years, “A-List” actors such as Arnold Schwarzenegger, who made famous the quote “Hasta La Vista Baby,” were consistently receiving “first dollar gross” (FDG) deals from most major studios.  A FDG deal can be defined as all Revenues (with home video at the industry standard 20-percent royalty) less only “Off-The-Top” Expenses, which typically consist of Taxes, Dues, Residuals and Checking and Collections. As such, regardless of whether the picture was a “blockbuster” or a “bomb,” the A-List actor was guaranteed a back-end payday, subject only to the reduction of their fixed salary.

By attempting to create Tent-pole pictures, such as the Fast & Furious, Transformers, Avengers and Hunger Games (just to name a few), studios are spending enormous amounts of cash on P&A (Prints and Advertising) and Production Costs. However, due to various unforeseen marketplace trends and timing some films fail to reach Tent-pole status and instead become blockbuster bombs. Recent examples include Fantastic Four, Pan, Blackhat and Jupiter Ascending.  The massive losses studios are taking on their “bombs” are eating into and destroying their profits on their “blockbusters.”

As a mathematical example, let’s suppose an A-List actor had a $5M salary and a 10 percent FDG deal and was working on Studio X’s new blockbuster film. The picture had large P&A (prints and advertising) and production costs of $250M each, totaling half a billion dollars. Unfortunately, the Picture performed horribly in the box-office and subsequently in other markets such as home video and television, as well, achieving only $200M of total revenues. At first glance, the studio is already at a loss of $300M. However, due to their structured FDG deal, they now owe an additional $15M ($200M x 10 percent less $5M) to their A-List actor. Using the same example, if the Picture had done significantly better and achieved $500M, they would still be at a net loss of $45M ($500M x 10 percent less $5M) due to the payout of the FDG deal.

To leverage their risk, studios have recently begun incorporating “Studio or Cash Breakeven” (SBE) deals. Such deals are designed to find the point in which the studio has recouped all their actual, out-of-pocket expenses prior to paying out backend participations. While many typical deals include distribution fees, home video royalties, and 10 to 15 percent overheads on advertising and production costs, the SBE deal eliminates all of these elements. They remove all studio “override” and “built-in profit” and effectively create a partnership between the studio and the participant. As noted, home video revenues are generally reported at the industry standard 20 percent royalty; however, in reaching SBE, this new structure implements a home video net arrangement (i.e. the participant receives 100 percent of the home video revenues and bears 100 percent of the home video costs).

While some major A-list talent may simply turn down the offer in attempt to find another FDG deal, the SBE deals typically have large potential upsides. Often times FDG share percentages range from 2.5 to 15 percent while many of the SBE deals can range from 20 to 40 percent share after achievement of SBE. Thus, if P&A and Production Costs are kept at a reasonable level and the picture is a success, the participant now stands to make significantly more than their old FDG deal arrangements. Conversely, the studios benefit when the picture does not do well, as they owe absolutely nothing to SBE participants who do not achieve SBE.

As a result, show business is saying “hasta la vista” to First Dollar Gross and “hello” to Cash Breakevens.

Michael Sippel
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Michael Sippel

CATEGORIES Media Clips,

Michael Sippel, CPA, CFE, ABV, has more than 10 years of entertainment accounting experience. He specializes in royalty auditing with a focus on performing audits of the production and distribution of motion picture and television programs on behalf of third-party participants, including actors,…Learn More