Here's a story problem for the mathematically inclined:
Movie Studio A and Movie Studio B each release one film. Both films gross $200 million in their first four weeks of release. However, Movie Studio A splits the revenue with exhibitors on a settlement basis ? whereby the company divides the revenue with theater owners after the film has completed its run. In contrast, Movie Studio B operates on a firm-term basis, a system by which revenue splits with exhibitors are determined before the film is released using a sliding ratio scale based on the film's budget and its grossing potential.
If Movie Studio A split with exhibitors on a 50/50 basis (an assumption which is not often the case depending on the potential success of the film), then both the studio and the exhibitors would earn $100 million.
If Movie Studio B applied the ratio split of 70/30 distributor/ exhibitor to the first weekend on a gross of $85 million, a 60/40 second weekend on a gross of $50 million, a 50/50 split on a gross of $40 million and a 40/60 split on a $25 million gross, exhibitors would earn $80.5 million for the time frame, and distributors would get $119.5 million.
Now, factor in a release pattern in which a new multimillion-dollar picture makes its way into theaters each weekend, so that the top boxoffice slot becomes a revolving door of blockbusters. When will an alternative to the traditional film terms ? firm vs. settlement ? emerge to take into account exhibition trends like the front-loading of films that happened this summer, when blockbuster after blockbuster has experienced precipitous drops in its second week?
The answer is anyone's guess, but that doesn't mean that exhibitors and distributors aren't trying to conceptualize a better formula. The issue consistently ranks as one of the most debatable year-round, with the two parties each trying to maintain something of an advantage.
As both sides of the releasing coin converge on Orlando, Fla., for the industry's annual ShowEast confab (running Monday-Thursday), exhibitors and distributors are guaranteed to be talking about ways to alter some of the commonly used ratios for determining film splits, with exhibitors lobbying for a departure from the traditional firm-term ratios that reward distributors most generously the first weekend of release.
Says MGM president of distribution Erik Lomis: "Their job is to get it as cheap as possible; our job is to get as much as possible. The best-case scenario is having both parties leave the table feeling they got nicked a little."
What they all agree on, though, is that when six of the top 10 summer films drop more than 50% in their sophomore sessions ? and most exhibitors earn more money the longer a movie plays in theaters ? the current system isn't working.
Some exhibitors and distributors suggest a number of creative ways of approaching the negotiation of film rental: adjusting the percentage ratio; dividing up a "firm-term" deal based on an aggregate of how much the film made, rather then doing it on a weekly declining scale; or, in the case of some distributors set on negotiating deals before the film is released, changing their process to a settlement deal at the end of the film's run.
In fact, according to one unnamed exhibitor, Warner Bros. Pictures, which released the second-top-grossing film of the summer, "The Matrix Reloaded," is one distributor that has adjusted its ratios (at least in this case) to compensate for the extreme grosses earned during a film's opening weekend. The unnamed source says the percentages on "Reloaded" were lowered significantly on some weeks in comparison to Warners' last blockbuster, 2002's "Harry Potter and the Chamber of Secrets," which were lower than the first Harry Potter film, 2001's "Harry Potter and the Sorcerer's Stone."
Warner Bros. declined to comment on the subject.
"It's incumbent upon both parties to come up with ways to maintain our historical film splits," says Mike Campbell, president and CEO of Regal Entertainment Group, the industry's largest theater chain. "The old system does not work in today's environment. We have to arrive at a method that allows us to continue to split it 50/50. We can't afford to pay more than what we've previously paid. We're finally getting healthy, and we can't afford to give that up."
According to one distributor, the way the two sides arrive at splits has changed to reflect the evolving marketplace. "At the end of the day, if you divide the total film rental into the total gross, the exhibitors want a certain percentage, and they are willing to negotiate on how to get there," he says. "Every studio does it differently, and it's different for every film, but it's that final number that matters."
Some argue, though, that nothing has really changed, and that the business of negotiating terms is still a contentious one. "I haven't seen any drastic change," Fox president of distribution Bruce Snyder says. "The money comes in faster, but there's another blockbuster for them to open the following week. It kind of trades off."
That strategy of front-loading movies ? which met with mixed results this past summer ? is turning out to be one of the biggest sticking points. The increasingly competitive marketplace is forcing studios to spend more and more money to market a film to ensure a solid opening.
So, the thinking goes, if the studios absorbed those escalating marketing blitzes, why should they be required to give up more of that juicy first-weekend business?
"We're driving the audiences to the theaters, so they can buy the theaters' $9 popcorn and coke," one distributor says. "If they are unwilling to go up on aggregates, let me in on their concessions. They won't have anything to do with that."
Snacks and sodas aside, exhibitors argue that those expensive marketing campaigns ultimately benefit the studio in the long-run. All those commercials and billboards help consumers remember a title when it's released on home video ? a part of the business from which theater owners are completely excluded.
Additionally, many exhibitors believe that the studios are privy to each others' terms with individual exhibitors ? even though antitrust restrictions dictate that those terms must be kept completely confidential ? knowledge that stems in part from the frequency with which studios engage in co-production deals. Distributors, en masse, reject such a claim.
Further complicating matters, exhibitors argue that when bidding for a new project, studios promise high film terms in order to beat out their competition. although Regardless of the strife, both sides say they are looking forward to what 2004 has to offer, considering that the blockbuster titles now in development or production have the potential to pull in record-shattering grosses that could surpass the ultrasuccessful 2002.
Of course, a release schedule crowded with dozens of high-profile tentpole titles will inevitably lead back to one thing: "Film terms is going to be a huge issue in 2004," one distribution executive says. "With the amount of product in the marketplace, it's going to be a buyer's market, rather than a seller's, which counters what has gone on in the last 10-12 years. Next year is going to be huge for the whole industry, and exhibition will be a lot tougher with the film companies."
Perhaps not surprisingly, dissenting voices can be found in the exhibition community, one of them being Regal's Campbell.
"I don't know that there will be enough quantitatively to force the studios to have to compete anymore than they do today," he says. "The real competition is around prime release dates. The studios have done a good job this year avoiding going head-to-head on those prime release dates, and we see a lot of promising things next year."