From investors and producers to distributors and talent, the making of motion pictures (“Films”) involves the investment of time and money by several parties who hope to recoup it and even turn a profit. As such, contracts in the industry generally provide for a breakdown of the revenue generated by the Films to which its contributors are entitled to, referred to as a “recoupment schedule” or a “waterfall.” Understanding how waterfalls work in the film industry is useful for parties involved to ensure their right to a share of the revenue is safeguarded.
Distribution agreements
Film producers usually enter into agreements with distributors for their Films in order for them to find their way into theatres, television channels and streaming networks across jurisdictions. When these exhibitors purchase the rights to show the Films to the public, they pay the distributor. As the first entity collecting the revenues, the distributor will generally allocate a portion of it in priority to itself.
The handling of this exhibition revenue is governed by the distribution agreement between the producer and the distributor. These agreements often allow for the distributor to retain revenues for three justifications:
1. Recoupment of distribution fees
The distributor expends great sums to plan the theatrical release of Films including the advertising campaigns, publicity and physical distribution of the product. Revenues are first used to recoup these amounts.
2. Recoupment of minimum guarantees
Prior to, or during the production of Films, distributors often pay producers a specified amount, regardless of the future revenue generation derived from the Films. They therefore guarantee a minimum amount of revenue to the producers, hence why this payment is called a “minimum guarantee.” Minimum guarantees are used by producers to finance their production. In exchange, distributors ask to recoup the minimum guarantee before payments are made to other parties. Only when the minimum guarantee is fully recouped by the distributor will the additional amounts, or overages, flow down the revenue waterfall.
3. Payment of commission
Generally, distribution agreements will also allocate a certain amount for the distributors to keep above the minimum guarantee. This amount represents a commission or premium for selling the Films. This commission is where distributors can earn a profit on their services, as recoupment of distribution fees and minimum guarantees only ensure they do not lose money on their endeavour.
Collection account management agreements
When Films are distributed in multiple jurisdictions, revenue is handled through a collection account manager under a collection account management agreement (“CAMA”). In these cases, the collection account manager, rather than the distributor, is the first entity collecting revenues. The CAMA provides that a bank account is opened specifically for the collection of revenues, that a manager who is a neutral third party is appointed, and that the manager distributes the revenues according to the agreed-upon waterfall.
1. Distribution fees
In cases where a CAMA is in place, the collection account manager is responsible for the payment of the distribution fees, minimum guarantees and commissions established in a distribution agreement. When obligations under the distribution agreement are fully satisfied, the overages are paid out in the manner detailed below.
2. Management fees
The CAMA generally provides that the manager can pay itself a set fee to account for the work it performs.
3. Royalties
Guilds and societies, such as the Alliance of Canadian Cinema, Television and Radio Artists or SAG-AFTRA, act as unions for different professions in the industry. They represent them in negotiations with studios, advocate for their rights and provide them with support and resources.
CAMAs provide for the payment of fees to these guilds and societies based on the work performed by their members during production. These fees are then distributed to individual members by the guild and societies in the form of royalties or residuals.
4. Loan repayments
Producers may finance the making of their Films by taking out loans with specialty lenders or large banks. The collateral for this debt financing often takes the form of the future receivables generated by the Films. Contrary to the equity investors discussed below who are entitled to premiums, lenders are only repaid the loaned capital together with the accrued interest as they do not have an ownership stake in the Films. However, this also means that they must be repaid irrespective of whether the Films generate sufficient revenue to do so.
5. Deferred fees and equity investments
Thereafter, producers and other equity investors in the project who funded the production will usually ensure that their investment is fully recouped. Depending on the amounts invested and the dates at which they provided the capital, the order in which they are paid will vary. Individual agreements between producers and other investors will generally govern the recoupment order between these parties, the amounts recouped and the profit split. These agreements typically provide for a premium to be paid to equity investors once their investment is fully recouped.
6. Profits
Finally, additional revenue that is generated once all parties described above are fully paid out will be considered net profits. As mentioned above, the investment agreements typically allocate a share of the profits to individual investors while the bulk of the net profits accrues to the producers. In some cases, talent (actors, writers and directors) are even granted a share of the net profits as a form of compensation often known as a “back end.”
In sum, when getting involved in the production or distribution of Films, it is important to be aware of the revenue waterfall. Having a good grasp of the distribution agreement, CAMA and individual investment agreements can help one gauge the likeliness of their investment being recouped and generating a profit.
Our Entertainment & Media lawyers (an industry-focused team within our Corporate Law group) have extensive experience in drafting, reviewing, and negotiating film production and distribution agreements, including revenue waterfalls and collection account management structures. Whether you are a producer, investor, distributor, or talent, we can help safeguard your rights, maximize recovery, and structure agreements that protect your long-term interests. Contact any member of our team to discuss how we can support your next project.
