Think the movie business is a great way to make a quick buck? Think again. Sure, you can make money with the right investment. But this industry certainly isn’t “quick.”
Once you contribute capital to a production company, you’re 24-36 months away from seeing significant cash. Yep, you read that right. It doesn’t matter if you invest thousands or millions of dollars, you won’t receive anything that resembles a return for three years. Sadly, there’s almost nothing you can do to avoid that lag time.
I come across a lot of investors who expect quick returns. Some can’t afford to tie up their money for several years. If you want to invest in film or TV content, I’d like to set some expectations for you about collecting the return on your investment.
Slow Cycle
Why does it take up to three years to get paid for your investment?
1. Content Takes Time
For starters, the production company has to make the content. Prep, principal shooting, and post-production could easily take a year, even if there are no delays. Then once you send the finished product to the distributor, they may want to sit on it for a while to release it at the most advantageous time.
2. Lots of Players
Next we need to consider the number of people involved. Money has a long way to flow. The consumer spends it at the exhibitor (whether that’s a theater, home DVD company, or streaming platform). The exhibitor pays the distributor. The distributor pays the production company. And the production company pays the investor.
That means you – the investor – are the last to get paid. If you like to be “first out” with your money, this is the wrong industry for you.
3. Rigid Complexity
The entertainment industry is exceedingly complex. The players in this business make money when they employ consistent systems and strategies to create and sell content. They aren’t willing to deviate from those systems because that would cost them money, so you’re at the mercy of their process and pace.
4. Delayed Reporting
Reporting cycles are another hold up. Every player in the chain I described above pays out at their own pace. It’s not like you get a check for each ticket sold. They let the balances build up and then pay out in lump sums on a quarterly, semi-annual or annual basis.
Distributors are especially frustrating because they usually pay once every six months. This means your money just sits in their accounts because they aren’t willing to cut a check. When they get around to totaling up what they owe you, it takes another 30 days to actually write the fucking check. It’s maddening, but they have the leverage, so you just have to deal with it.
5. Old Fashioned Agreements
And finally, it takes time to get paid because distribution and exhibition agreements just don’t force them to do it quickly. These agreements are hold-overs from the 1940s and 1950s. Back then, it took 90 days just to count the money that came in. That obviously isn’t the case any more (you can get ticket sale counts in minutes), but they prefer to keep your money as long as they can. You’re basically giving their business a cash flow loan!
In fact, back in the 1980s when interest rates were high, theater chains couldn’t afford to borrow money to build new theaters. They would delay payouts and use the money for expansion. Christmas movies might not see a dime until the next October.
Was it ethical? Absolutely not, but they are the gateway to the consumer, so they have a lot of leverage. That’s just the system.
Income Waves
As the investor, you fund the project by indirectly funding the production company. The company has a simple purpose: Make and deliver a movie. Money goes out through the production company and it flows back to the investment company. When that happens, it comes in three waves.
First Wave: Tax Incentives
Your first wave of income will come from tax incentives. This is a broad category of payouts that includes grants, credits, and rebates from local governments and municipalities.
Tax incentives belong to the financier. They don’t typically go to the producer or distributor. They belong to the people who spent the money – the investors. I’ve seen the Hollywood Con Man try to scam investors by taking their tax incentives, so don’t let it happen to you.
How much you get will depend on the local rules. In some cases, you’ll get back a portion of your local labor spend (so make sure to hire locals). In other cases, you get back a portion of what you spent at local businesses. And in some cases the show can earn a combination of both.
How long it takes to get paid depends on the local government. They are all different. In South Carolina, for example, you can get paid within 60 days of filing your application. Under Canada’s CAVCO program, it could take as long as three years. But the average is 16 to 24 months.
Second Wave: Minimum Guarantees
Your second wave of income comes from the minimum guarantees in your agreements with distributors (or the studio if you’re working with one). Your minimum guarantee often comes in two parts: an early advance and the remainder of the payment.
The advance represents 10% to 15% of the total guarantee. Technically it comes when you sign the agreement, so you’ll receive it before you get your tax incentives. But it’s still part of the total guarantee that you don’t receive in full until you deliver the movie to your distributors.
Personally, I think a title should have a distribution commitment with minimum guarantees before you make an investment. It should be enough to cover 50% to 60% (including tax incentives) of the production costs, but higher is always better. If distributors won’t put some skin in the game, you shouldn’t either.
Third Wave: Waterfall Income
If your movie is successful, this is where you truly get repaid and get a return on your investment. The first two income waves help you recoup a little, but this is where you profit.
Waterfall income comes once the movie starts exhibiting. If the movie makes more money than the minimum guarantee and distribution costs in a particular territory, the production company starts receiving payments every six months. These are called overages.
“Overages” is a contractual term, so it can mean something different to every contract. It can mean different things in regards to different territories (domestic vs. foreign, etc.) or by media – TV vs. streaming, etc.
Your distribution agreement explains what you can earn for each media and territory. It’s extremely complex. There’s no set pattern. So it’s one of the common places your producer might not play with you best interests at heart you and another reason you need an ally who’s looking out for you.
How long can you get waterfall income? It depends on the success of the film. Sometimes it comes for up to 20 years, but that’s rare. Income drops precipitously after seven years. Those numbers can come up a little if a sequel or remake comes out, but the boost isn’t substantial.
Avoiding the Cycle
To be fair, there is a way to avoid this slow cycle. You have to sell work to a studio. They’ll either pay you to make your movie or buy it outright and do it themselves. In either case, the project gains access to a massive stockpile of resources – people, systems, marketing and distribution expertise.
The downside, however, is that you lose control. You aren’t an entrepreneur anymore. You are at the mercy of the studio. Their contracts take complete control. They can change everything about the work at their whim. I’ve seen studios make some drastic changes to a creative’s work to the point where you didn’t recognize the original anymore.
Be Prepared to Wait
I wish I could give you some advice on how to get paid faster, but there’s little you can do. The industry is slow by design due to its complexity. There are just too many players and moving parts to make it happen quickly. So if you choose to invest in film or TV content, be prepared to wait for your payday. Don’t invest any cash you need back quickly.
