Six Things To Look Out For In a Distribution Deal

16:38 17 October in Musings, Rants and Raves

It’s been a while. But I’m back and ready with some serious knowledge bombs for y’all today.

While writing my lesson plan for my NYU class on distribution I came up with a list of the most important things to look out for in negotiating with a distributor. There are tons of other points of contention that you should be aware of (and the list could be endless) but these are the six that are currently at the front of my mind. There was a 7th which I added while I was writing this post, but I decided to cut it for a later, longer post. But without further ado, here is my list (in no particular order) of the six things to look out for in a distribution deal.

1) Uncross the Revenue Streams
I said these are in no particular order but this is by far the most important thing to ask from your distribution partner. Uncrossing the revenue streams means all the revenue from one distribution pipeline cannot go towards recoupment of a different distribution pipeline. For example, let’s say a distribution company spends $300K on theatrical distribution expenses and $20K on VOD distribution expenses. The film grosses $150K to the distributors in theaters and $150K on VOD (after their distribution fee to make things easier). The net split between the distributor and production is 20/80 respectively. If the revenue streams were crossed the distributor will have a negative spend of $320K with revenue of $300K. The distributor will keep all the revenue and still need another $20K to be made whole. If the streams were uncrossed the $150K from theatrical will go towards paying the $300K cost and the $150K from VOD will go towards paying the $20K cost. With a 20/80 split on net the distributor will have made $196K against $320K of cost and the production will have made an extra $104K from their 80% of the VOD net. This money is CRUCIAL because the average indie film does not sell for above their budget and, even if you do, most filmmakers rely on the backend for their salaries. If you enter into an agreement with a distributor unwilling to uncross the revenue streams keep this example in the back of your mind and decide if it’s worth it to partner with them or not. Uncrossing revenue streams also means that no form of distribution will be treated as a loss leader (which theatrical often is treated that way) and your distributor will strive for every revenue stream to be as cost efficient as possible.

2) Ask For All the Deal Terms
I’ve seen it happen far too often where sales agents or producers agree whether or not to do the dance with a distributor based solely on the price point of the minimum guarantee alone. Do not go chasing the largest MG, go chasing the best overall deal. When you focus just on the MG you might ignore offers that actually would have given you far more revenue with a smaller amount upfront. For example, would you rather take a $1M MG with crossed revenue streams, a 30% distribution fee, and no cap on P&A or a $500K MG with uncrossed revenue streams, a 15% distribution fee, and a cap on P&A? The $500K deal, while cheaper upfront, is actually setting you up for the fat, long-tailed revenue stream that will get you checks from your film for years to come. If you or your sales agent focused just on the MG first and deal points second you’d have ran for a deal that will leave you with nothing but a big novelty check you can only cash once.

3) Cap P&A
If you don’t ask for a P&A cap you are setting yourself up for the creative accounting arbitrage situation that film is infamous for. This is what is meant by the famous distributor quote “I don’t pay overages, I spend them.” If you don’t have a cap on P&A your distributor can keep spending money knowing they’ll make enough money back to cover their spend after they take their distribution fee. For example, they spend $1 knowing they’ll make $1.40 back. When they take their 30% distribution fee off the top of the $1.40 they’re left with $0.98. They then report a $0.02 loss when in reality they’re at a $0.40 gain. This is arbitrage. Cap your P&A to prevent this from happening.

4) Keep the Distribution Fee Low
Some of the more filmmaker friendly and more digitally focused distributors will take a 10-15% distribution fee vs the industry standard of 25-30%. And the distributors willing to do this are not no-name, low profile shops. Some of them are some of the most talked about distributors today. Also know that if the prospects for a wildly successful theatrical are low you can approach a digital aggregator directly, forego a theatrical release, and not have to face any distribution fee at all.

5) Retain the Right To Sell From Your Own Site
People ask me all the time if retaining the right to sell copies of your film yourself (digitally, streaming, or DVD) would anger your distributor and/or kill your deal. My response: if your distributor thinks you setting up a dinky little website to sell to your friends and family will totally disrupt their own distribution efforts then you should not work with them. The distributor pretty much just admitted that you can do as good a job as they can with your existing network of fans.

6) Don’t Be Swayed By Number of Markets
Distributors will use number of markets as a major bargaining chip in contract negotiations and the production team will fight hard to get as many markets as possible. This is foolish. Unless you have done significant market research prior to the negotiation specifically for how your unique film will play in certain markets then you could be digging your own grave. Comps will not work in this situation as no two fingerprints are alike. The reason why this is important is because your film might not be strong enough to play well in all of those markets. Lets say you fight tooth and nail to get 20 of the top 35 markets guaranteed by your distributor. However, when the film screens yout opening weekend in just NY and LA the numbers can come back terribly. Now your distributor HAS to spend the time, energy, and money (emphasis on the money) to put this film in 18 more markets even though you now know theatrical will be a bust. I would rather work with a distributor that will make calculated, data orientated decisions in real time for our theatrical distribution than one that will guarantee the widest release. This will keep P&A costs low and will allow the distributor to be nimble in their overall distribution and marketing strategy. Plus by sacrificing number of markets as a point of negotiation you can start to push the conversation towards more important points like uncrossing revenue streams and capping P&A.

  • Joe@wrongbrainfilms

    Great points. I dealt with similar legacy issues in the hotel industry dealing with Brands and Third-Party sales sites like Expedia (the distributors of the hotel world). It’s hard to turn around a cruiseliner but I had some success there by showing mutual benefit and aligning interests. Not sure if you can show mutual benefit in this case but worth figuring out that hurdle. Also, when dealing with P&A Cap, would it be easier to ask for approval rights on any spend over x which puts the onus on the distributor to justify cost? In this instance, you may see value to some extra spend that benefits both sides while also having veto rights.

  • Jon@igottadowhat

    Uncross the Revenue Streams? The term on every agreement is “Cross Collateralization.” As you stated: every distributor wants it, you don’t, but you need to tell them what to look for on the agreement. Also, more important than “ask for the deal terms” you need to get the initial agreement to say that you get to approve all deal terms… otherwise it doesn’t matter that you ask for them, they will make the deals without you. I doubt you’ll find a sales agent or distributor that will want to wait on you to approve a deal this clause in the terms of your agreement will instead be full of ALOT of criteria like: What they can sign without your approval; how long they can wait for your approval; etc. 3, 4, and 5 should be your 1, 2, and 3 as they are the easiest to get. And #6? I guess if you are negotiating for a theatrical deal this is a nice note to keep in mind. That said, theatrical is almost always a bust, but is used for negotiating of the other distribution windows. The wider the release the more enticing it is to some buyers… regardless of the box office numbers. Do the math on the loss of one vs the gain in the others.

  • Filmbrock

    This only works with distributors if you have more than one distributor interested in the film. Also most sales agents won’t allow their clients to approve sales terms as long as they meet a certain minimum.

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James founded Dogfish in 2009 to produce and invest in independent film (in which he made 6 films). He was named by Deadline Hollywood as one of 2012′s 10 Producers to Keep Watching. In 2013 he launched the Dogfish Accelerator program after an inspiring experience working for TechStars in Boulder, Colorado. He’s a Northwestern University graduate and received his MBA from NYU Stern in 2013. He currently is an Adjunct Professor at NYU Tisch School of the Arts where he teaches Strategies For Independent Producing. James aspires to be one of the world’s most renowned hermits. He tends to spend most of his free time in South Williamsburg watching cartoons and googling “best Texas BBQ in NYC.” He also runs a monthly meetup called A Presentation of the Deplorable, Bizarre, and Terrible in which he binge watches 10 films in a row that most of the world has never seen (most of the time for glaringly obvious reasons). As of July 2014 only 3 people have attended.