Distribution agreement: how you earn from your film

A distribution agreement records the terms on which a distributor may exploit your film in one or more countries (territories). Think of showings in cinemas, on VOD platforms such as Netflix or Pathé Thuis, on television and through other channels. It is one of the most important contracts in the film chain, and one of the most complicated. The arrangements you make here determine how much you ultimately earn from your film.

What does a distribution agreement contain?

What do you regulate in a distribution agreement? At the very least the territory (the Netherlands, the Benelux or a wider area, for instance), which forms of exploitation the distributor may carry out (theatrical, VOD, TV, airlines and so on), for how long, and for what remuneration, meaning an advance or minimum guarantee and royalties. Beyond that you record which costs the distributor may deduct from the proceeds, what efforts it makes in the field of marketing and release, and how and when it reports. An audit right belongs in there too.

Something producers do sometimes forget: also make arrangements about how often and in what way accounts are settled, whether cross-collateralisation takes place between territories or forms of exploitation, and, not unimportantly, what happens to the rights if the distributor becomes insolvent.

Minimum guarantee versus advance

The terms minimum guarantee and advance are often used interchangeably in practice. Usually what is meant is simply an advance, but strictly speaking there is a material difference between the two.

The distributor pays an advance to the producer up front, on account of the royalties it will owe later. That advance is set off against those future royalties. Once the advance and the distribution costs (those borne by the producer) have been recouped, you receive royalties on the surplus.

A minimum guarantee arises where a distributor guarantees that the proceeds from exploitation of the film over a given period will amount to at least a set sum. That amount is therefore usually paid not in advance but at a later date. The risk that the film performs less well than expected then rests (in that case too) with the distributor. There is, however, a considerable credit risk here, and we therefore advise against such an arrangement.

Where the film is ‘sold’ on the basis of the script alone, the advance often forms part of the cover for the production costs.

Flat fee versus royalties

With a flat fee the distributor pays a fixed sum up front for the rights. After that it does not have to account to you. A flat fee is usually lower than what you could earn on a successful release. The advantage: you have certainty about the amount and run no exploitation risk. The disadvantage: if it is a hit, you do not share in the upside.

With a royalty structure you receive a percentage of the net proceeds. That sounds attractive, but a great deal depends on how ’net proceeds’ are defined in the contract and which costs are deducted from the gross income first.

Distribution costs (P&A)

Watch the definition of distribution costs, also known as P&A (prints and advertising). Distributors incur these costs for the release and marketing of your film. There are two models:

1. Off the top - The costs incurred are first deducted from the proceeds received, after which the balance is divided in accordance with the arrangements.
   
2. Costs producer’s share - The distributor first deducts its commission or fee from the income received. From the balance, which is then for the producer, the costs are deducted first, then the advance is set off, and then any payment follows.

It is important to check carefully which costs do and do not fall under distribution costs. Think of the costs of dubbing, subtitling, festival costs, marketing materials and cinema prints. The broader the definition, the less is left for you.

Sales agents

For international sales producers often work with a sales agent. The sales agent sells the film territory by territory to local distributors. This produces a patchwork of contracts that requires careful management.

The sales agency agreement contains provisions on the minimum advances the sales agent has to secure, the costs the sales agent may deduct, time limits and, of course, accounting and audit provisions. Watch out here that the sales agent fee and any costs incurred by the sales agent are not deducted twice over from your share.

What should you watch out for?

In our practice we see a number of points in distribution agreements that deserve extra attention:

• Check that the term and the territory are no wider than necessary. A distributor asking for worldwide rights for ten years while operating only in the Benelux deserves a critical look.
• Look closely at holdback provisions. A holdback determines that a particular form of exploitation may only start after an agreed period, VOD only six months after the theatrical release, for instance. That can work in your favour, but it can also hold things up.
• Make sure the reporting obligations are clear. Without clear arrangements on how and when the distributor reports, you have no sight of what your film is earning.
• And do not forget the audit right: the right to inspect the distributor’s books. This is often overlooked, but it can make a considerable difference.

Ready to distribute your film?

Whether you are entering into your first distribution deal or want an existing contract checked, we are happy to review your distribution contracts. Get in contact with one of our film law lawyers, Roland Wigman or Merel Teunissen.