The Five Most Common Film Finance/Distribution Scenarios
By John W. Cones
There are so many different ways to finance one or more feature films, that it is extremely important for independent producers to focus their efforts on those forms of film finance that are most likely to produce favorable results for their current project. Without this focus of time and effort, the film finance campaign is less likely to succeed.
First, it is important to understand that there are three different stages in the life of a feature film, each of which can be financed separately. Considerations regarding the manner in which the three major stages in a film's life: (1) acquisition/development/packaging, (2) production (including pre-production, principal photography and post-production) and (3) distribution, may be separately financed are sometimes difficult to distinguish in many real world transactions. The combinations typically used in the industry today tend to fall into one of the following five distinctive film finance/distribution scenarios (or some variation thereof). Each film finance/distribution scenario will typically require that the independent producer engage in a different set of activities and communicate with a different group of people. In addition each such scenario tends to work best with different levels of film budgets.
1. In-House Production/Distribution--The selected studio/distributor to which the project has been pitched or submitted, provides the acquisition/development financing, develops the project at the studio under some level of supervision of studio creative executives, gives a "green-light" to studio production funding and distributes the completed film with the studio-affiliated distributor using the distributor's funds to cover P&A expenses. An independent producer (or screenwriter, director, actor or actress) may have originally submitted the idea, concept, underlying property, outline, synopsis, treatment or screenplay to the studio, but rights to produce as a motion picture were then acquired by the studio. If the producer or others remain attached, they do so as employees of the studio or project.
2. Production-Financing/Distribution Agreement--The independent producer provides the acquisition/development financing (or raises such funds from investors) and takes the deal to a studio/distributor with a fairly complete package (i.e., significant elements are attached). The studio/distributor's money is then used to produce and distribute the picture. The distribution agreement is entered into (theoretically) prior to the start of production, or at least before the end of production. The distributor will deduct its fee, recoup distributor expenses, collect interest on the production money loan and then reduce the negative cost with remaining gross receipts, if any.
3. Negative Pickups (and other forms of lender production-money financing)--The independent producer provides acquisition/development financing (or raises such funds from investors) and obtains one or more distributor commitments and guarantees to purchase the completed picture (for the worldwide, domestic or international markets, or individual territories) if the finished film meets specified delivery requirements (as set forth in detail in the distribution agreement). The producer takes this or these distributor commitment(s) to an entertainment lender to secure production funds using the distributor's contract(s) as effective collateral. In this instance, the only part of the financing provided by the distributor relates to distribution expenses (i.e., the so-called P&A monies). The negative pickup and other forms of these distribution/finance agreements associated with lender financing are typically entered into prior to the production of the film. Other variations on lender production financing include foreign pre-sales, gap financing, so-called "super-gap" financing and partly- or wholly-insured sales estimates.
4. The Acquisition Distribution Deal--The independent producer raises acquisition/development as well as production monies, often from investors outside the film industry (often using various investor-financing techniques), but distributor funds are used to distribute the movie. The distribution agreement is entered into after the film is produced). Some in the industry still erroneously use the term "negative pickup" to describe this transaction which is clearly different from the true lender financed "negative pickup" described above. This "pure acquisition" approach to film finance and distribution generally provides the producer and creative team with the most creative control (over scenarios 1 - 3), but involves greater financial risk for the producer and/or the producer's investors.
5. Rent-A-Distributor--The independent producer raises acquisition/development, production and some or all of the money needed to distribute the film. This type of distribution agreement is generally entered into after the film is produced. Distributor fees are generally at their lowest with this transaction, (e.g., 15%).
In any given year, these five film finance/distribution scenarios will typically be represented on the film slates of each of the so-called major studio/distributors, although in terms of numbers, the P-F/D, negative pickup and acquisition deal combinations probably generate most of the films appearing on such slates. On the other hand, almost all of the majors will have one or more in-house productions each year (typically, their hoped-for blockbuster/"tentpoles") and the rent-a-distributor scenario is probably the least commonly used. The major studio/distributor sales representatives tend to use their coming blockbusters as leverage to gain favored treatment from exhibitors for the mediocre to poor films on their annual slates, thus partially explaining why many independent features of equal or superior quality get squeezed off theatre screens in favor of major studio product.