The Film Business

Rent-a-Distributor: When a Producer Rises to Studio-Like Clout

The rent-a-distributor model is rarely used and limited to producers with enough of a checkbook and a track record that they can pay for production costs and bargain for reduced distribution fees.

The most famous example of this model is Lucasfilm’s deal with 20th Century Fox for the three Star Wars prequels, The Phantom Menace, Attack of the Clones, and Revenge of the Sith. Due to the success of the original Star Wars trilogy, George Lucas had the financing and leverage to pay for the three prequels himself. Fox was reputedly investing no direct production costs, receiving a negotiated fee for distributing the Star Wars films. This arrangement of only earning fees without taking any risk, while the producer, in essence, utilizes the studio’s distribution operations (e.g., theatrical, video) and maintains the upside for having financed production, is often unfairly characterized as risk-free to the studio. By unfairly characterized, I mean that this premise tends to ignore the opportunity costs; Fox took on the responsibility and management of releasing these films, which was significant because they were destined to become the event titles of their respective years and require appropriate associated management and overhead time.

Presumably, the only reason a studio would agree to take on this level of time commitment is if: (1) it was important to have a relationship with the talent and/or property; and (2) if it believed, even with no or minimal upside ownership stake, it could earn significant distribution fees. This latter point underscores that the films in question need to be of mega box office stature, which leads to the corollary benefit of the studio leveraging one of the most desired films in its portfolio. While packaging is theoretically illegal under antitrust laws prohibiting tying arrangements, if Studio X comes to a client with a slate of pictures and one of those pictures is a must-have picture, the wheels are greased for the other releases. All of these elements were satisfied: Fox had been the home/distributor of the original Star Wars films, clearly wanted to maintain a relationship with George Lucas, believed each film had the potential to generate hundreds of millions of dollars, from which it could generate significant fees, and was ensured of multiple tent pole releases anchoring its summer slate over a number of years (from which it could directly or indirectly leverage other films).

The reason a producer would want this type of deal is to maintain the upside and keep control over the property both creatively and economically. Talking about the arrangement, Business Week noted of Lucas’s control of the prequels: “He retains the rights to dictate marketing, distribution, and just about everything else about how they’ll be seen in theaters.” The deal was the envy of every producer that could afford to bankroll his production, and before Disney acquired Pixar the distribution deal being negotiated was publicly referred to as a “Lucas-type distribution deal,” where Pixar would pay Disney a modest fee and retain the upside profit.

Applying the above test, Disney was in a similar position with Pixar as Fox was with Lucasfilm: Disney wanted to continue its collaboration with Pixar (one of the most successful in studio history), believed it would earn significant fees from distribution (even with a significantly discounted distribution fee), and with the track record of past Pixar films knew it would have a series of must-have hits that would help leverage its other films and businesses. The one significant difference, however, was that while Fox and Lucasfilm had been successful partners, Fox was not a brand inextricably tied with Lucasfilm. In the case of Disney–Pixar, the fact that Disney is a consumer brand heralded as synonymous with successful animation and that Pixar, for years, had been upstaging them and could have become a competitor was clearly a factor. One could argue that the deal took on overtones beyond pure current economics, and that more than a distribution relationship was needed to restore Disney to its glory and market leadership in the animation space. To the extent that Disney may not have been willing to take a sliver of the pie on a successful animated film as opposed to holding the full upside (including character/franchise rights to cycle through theme parks and other vertically integrated divisions), the scales were simply tipped in favor of a purchase (ironically, after Disney spurned a rent-a-distributor deal with Pixar and acquired the animation powerhouse, a few years later it acquired Lusasfilm).

Finally, even with all the clout in the world, a producer still needs the product distributed and cannot afford the massive overhead of a worldwide theatrical and video distribution team. Despite whatever Hollywood-hugging one may witness, this is a relationship driven by necessity, not love. It is this remaining underlying tension that fuels the passion for new distribution mediums, now enabled by digital technology, and holds the ace card of a producer bypassing the studio distribution system and going directly to the consumer. It is only the theatrical/video/TV infrastructure, marketing expertise and clout, and associated overhead costs that pose obstacles and require a partnership between production and distribution. What those who want to bypass the traditional studio system and distribute directly often fail to recognize is that the studios are quite good at what they do. Studios have become adept at efficiently creating brands overnight and repeating this feat on a regular basis. The infrastructure is not something to be dismissed lightly, for it is to the success of a film what an efficient supply pipeline is to a manufacturing endeavor; moreover, the efficiency is created by scale and cannot be repeated easily, if at all, on a one-off basis.

Reduced Distribution Fees are Key to the Deal

While the relative advantages detailed above are all important, it is key to remember that the heart of a pure distribution arrangement is the producer’s ability to lock in a below-market distribution fee. For this to work economically for both parties, it needs to be primarily a financially driven relationship and not a competitive one.

While market rate fees can be 30 percent and higher, a rent-a-distributor deal where the producer is providing all the financing can drive down fees to single-digit levels. DreamWorks Animation, in its SEC filing, noted that it had an 8 percent distribution fee with DreamWorks studio.

While this could be perceived as a sweetheart deal between affiliated entities, it apparently set a benchmark for Steven Spielberg. When DreamWorks announced its split from Paramount in October 2008, backed by a reported $1.3 billion in financing from India’s Reliance Communications and debt raised by J.P. Morgan, it lined up a distribution deal with Universal, the studio where Spielberg made Jaws and began his career. Commenting on the deal, the New York Times noted: “Under the terms of the seven-year deal, Universal will distribute up to six films a year, according to a statement by the studio and the film executives. Universal will receive an 8 percent distribution fee, according to a person briefed on the negotiations.” Shortly after this deal was announced, however, the Universal relationship fell apart and DreamWorks instead teamed with Disney, where the studio announced it would release 30 films over five years under its Touchstone Pictures label. Evidencing the difficult climate of raising financing at the time (even for Spielberg, the ultimate luminary in Hollywood), as well as the sensitivity of how low studios were willing to reduce their distribution fees, the New York Times later reported that DreamWorks would instead be paying a 10 percent distribution fee: “The percentage is more onerous than the company had expected at Universal.”

Funding Ensures Tapping into 100 Percent of Revenue Streams

As briefly discussed above, one of the principal advantages to funding all or a percentage of costs is that it tends to eliminate “Hollywood accounting” and allows the backers to look to all revenue streams for recoupment and profits. Net profits definitions and participations are structured to define only a certain pot of revenues, such as video only being accounted for at a royalty percentage rate, rather than 100 percent of revenues. By partnering with a studio, a co-financier, if smart, stands in the same shoes as the studio; namely, they will recoup out of the same revenue streams and at the same time.

Excerpt from The Business of Media Distribution: Monetizing Film, TV, and Video Content in an Online World, 2nd Edition by Jeff Ulin, © 2014 Taylor & Francis Group.  All rights reserved.

Image via Flickr: Quinn Dombrowski , License: CC (commercial reuse with modification )

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