Reader Question: Do screenwriters get a percentage of profit participation?

An reader question via email from tcsp:

Hi Scott, love the site. If I managed to sell my spec script, would I possibly get a percentage on the back end, or are those days over? What can we expect, realistically? Cheers.

It’s standard practice for a screenwriter to get some sort of profit participation arrangement in their contract, either on the sale of original material, such as a spec script, or on a writing assignment. However “realistically,” that translates into zero dollars. Nada. Bupkis.

Why? Because the type of profit participation most screenwriters get is net points. And as everyone in Hwood says, “A percentage of the net is a percentage of nothing.”

Why? Because the studios have elaborate accounting methods, honed and used for decades, that ensure virtually no movie they produce actually makes a profit.

How? By including overhead costs for production, distribution, and marketing. Here’s an example: When a studio agrees to produce a movie, they will set up a legal business entity for that project. They then ‘loan’ money for the production to that entity to pay for the movie. But since it’s a ‘loan,’ they charge interest on it which goes as a cost of overhead for the movie’s production. Do you see how slippery that is? The studio is in effect making interest on a loan it makes to itself, then charging that interest to the production, increasing its cost and reducing the ability of the movie to make a profit.

Perhaps the most famous example is the case of “Buchwald vs. Paramount” in which Paramount claimed that the movie Coming to America, based on a Buchwald story, failed to reach profitability:

Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount’s use of Hollywood accounting. The court found Paramount’s actions “unconscionable,” noting that it was impossible to believe that a movie (1988’s Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

Note the key point: “Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

So a screenwriter will typically get 5% net profit points (that’s what I’ve gotten in all my deals). But unless the movie costs $5M and grosses $240M as My Big Fat Greek Wedding did, there is virtually no way for a movie to make a profit per the studios. [Note: In fact, Gold Circle Films, the original producers of the movie claimed it had lost $20M.]

Now there are established writers with enough clout a la Ron Bass who get gross points. And while there are many different definitions of “gross,” if you can negotiate that in your contract, you do have a chance of seeing additional dollars from a film project.

But don’t take my word for it: Here is something from an actual entertainment lawyer Robert L. Siegel:

A writer also can receive a profit participation anywhere from two to five percent of the producer’s share of the net profits. Sometimes the profit participation is called “net proceeds,” “adjusted gross proceeds,” or “modified gross proceeds.” The label of the profit participation is not as important as how such profit participation is defined, calculated and paid to a writer as a profit participant. The best that most profit participants such as writers can achieve is to tie how the writer’s profit participation is defined, calculated and paid to that of any other person’s or entity’s profit participant’s definition and manner of payment including that of the producer. This provision helps to keep the playing field level concerning profit participation.

A writer’s agreement should state that there shall be accounting statements which shall be received by the writer which are issued on the same basis as any other profit participant in terms of form and frequency (e.g., quarterly for the first two years after the initial commercial exploitation of the film, twice a year for another two years and annually thereafter). A writer’s agreement should include a right to examine or formally audit the producer’s books, records and other documents pertaining to how a motion picture feature’s revenues are calculated and received by a producer. This examination or audit right is usually exercisable by a potential profit participant once per year. In some cases, if the right is not exercised within a certain period of time (usually twenty four months or more from when the potential profit participant receives a statement), the potential profit participant is barred from examining the producer’s books and records pertaining to that statement. Please bear in mind that such examinations and audits can cost from five thousand to ten thousand to more. The potential profit participant has to assume the cost of the examination or audit; however, a provision could be included in an agreement which states that if one is underpaid by a certain percentage (e.g., 5%-10%), then the producer is required to pay the underpayment immediately and to assume the cost of the examination or inspection.

Finally, many distributors and producers do not need to falsify or “cook” the books since the profit definitions are so inclusive that every expense (including interest) is taken before there would be any profits. In addition, there are certain parties such as “star” directors, producers and performers who may receive their contingent compensation earlier in the economic “food chain” than the net profit participants, thereby eliminating or lessening the possibility of net profit participants receiving any monies. That is why such films as “Fatal Attraction” and “Coming To America” can generate large revenues but minimal to no profits and even losses.

There are actually quite a few questions answered by Siegel here, so a good resource to bookmark.

UPDATE: Okay, just to make things completely clear. If you write a spec script and it gets produced into a movie, you get the following forms of income:

* Money for purchase of script
* Money for any rewrites
* Production bonus upon commencement of principal photography
* Residuals for a combination of DVD sales, TV airings, foreign, etc

If the movie gets made into a sequel, depending upon your writing credit (shared or sole), you get money for that.

Plus the studios pay a percentage, based upon your writing fees, into a WGA pension program which if you achieve, I believe, 7 qualifying years, upon retirement you get a monthly payment based upon your total lifetime earnings.

So while net points are essentially meaningless on almost every project, a screenwriter can see some meaningful income from other sources noted above.

UPDATE #2: In comments, itstartedwithawindmill asked:

If you could give a quick answer, what are residuals paid for? and why are they quarterly?

For background, go here for info from WGA.org. But the key definition is this:

What Are Residuals?

Residuals are compensation paid for the reuse of a credited writer’s work. When you receive credit on produced Guild covered material, you are entitled to compensation if the material is reused. It is important to understand that the compensation is for reuse, and not the original use. For example, if you are hired to write an episode of a network prime time television series, the compensation you are paid for writing services includes the episode’s initial broadcast. However, when that episode reruns on a network, in syndication, or in any other market, the Company must pay you for that reuse.

Similarly, for theatrical motion pictures, the compensation you are paid for your script, either as a purchase or employment, covers the exhibition of the film theatrically, including all foreign theatrical releases. However, when your movie is released to other markets, such as videocassette or pay television, you are due residuals.

Residuals are no small matter. I’ve got three movie credits as a writer (K-9, Alaska, Trojan War), and while K-9 was the #1 movie at the box office in the U.S. for one weekend, none of the movies was a huge hit. Yet I’ve received hundreds of thousands of dollars in residual payments. Imagine what Jonathan Nolan, co-writer of The Dark Knight, gets with his little green envelope every quarter!

The importance of residuals was at the center of the most recent work stoppage in 2007–2008. Per the Wikipedia page covering the strike, note this:

Background

In 1985 the Writers Guild went on strike over the home video market, which was then small and primarily consisted of distribution via video tape. At that time, the entertainment companies argued home video was an “unproven” market, with an expensive delivery channel (manufacturing VHS and Betamax tapes, and to a much smaller extent, Laserdisc). Movies were selling in the range of between $40–$100 per tape, and the Guild accepted a formula in which a writer would receive a small percentage (0.3%) of the first million of reportable gross (and 0.36% after) of each tape sold as a residual. As manufacturing costs for video tapes dropped dramatically and the home video market exploded, writers came to feel they had been shortchanged by this deal.[18] DVDs debuted in 1996 and rapidly replaced the more-expensive VHS format, becoming the dominant format around 2001. The previous VHS residual formula continued to apply to DVDs.

At present, the home video market is the major source of revenue for the movie studios. In April 2004, the New York Times reported the companies made $4.8 billion in home video sales versus $1.78 billion at the box office between January and March.[19]

Proposals

WGA members argued that a writer’s residuals are a necessary part of a writer’s income that is typically relied upon during periods of unemployment common in the writing industry. The WGA requested a doubling of the residual rate for DVD sales, which would result in a residual of 0.6% (up from 0.3%) per DVD sold.

The AMPTP maintained that studios’ DVD income was necessary to offset rising production and marketing costs. They further insisted that the current DVD formula (0.3%) be applied to residuals in other digital media — an area which was also contested by the Writers Guild.

The WGA provisionally removed the increased DVD residual request from the table, in an effort to avert a strike and on the understanding of certain concessions by the AMPTP, the night before the strike began. However, after the strike began, WGAW President Patric M. Verrone wrote that the membership exhibited “significant disappointment and even anger” when they learned of the proposed removal of the request; and Verrone also wrote that, since the removal of the increased DVD residual request was contingent on concessions by the AMPTP which did not happen, the writers would and should continue to “fight to get our fair share of the residuals of the future.”

New media

One of the critical issues for the negotiations was residuals for “new media”, or compensation for delivery channels such as Internet downloads, IPTV, streaming, smart phone programming, straight-to-Internet content, and other “on-demand” online distribution methods, along with video on demand on cable and satellite television.

So probably more information than you ever wanted to know about residuals.

As to why we get paid quarterly, probably something to do with corporate quarterly financial. Whatever it is, I’m always damn happy to see those green envelopes in the mail!

[Originally posted February 15, 2010]

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