Revenue, Royalties, Residuals, Recoupment in Indie Film - Oh My!

I'd like to talk about some of the R words that float around indie filmmaking. I deal with them a lot and they are a cause of great joy and also great stress. The four words that I often throw around are: Revenue, Royalties, Residuals and Recoupment.

These are good words as they mean your film is earning money. They can also be bad words as they are a ton of work to manage and as a producer,  it's your job to oversee them.

Revenue is the amount of money your film has made. Gross revenue is the total amount of money your film has made all around the world. Then there is the amount of revenue that your distributor(s) receives and the amount of revenue they pass down to you, which are called royalties. There are usually lots of hands in your film's till before money reach's a film's bank account. Oftentimes, your film will earn money and you will never see any of it. Scary, right? And definitely a major problem in indie filmmaking. How can an industry exist whereby the filmmakers who made the actual film see no money from the sales? It happens and it's wrong. The system needs fixing. That discussion is for another blog entry!

Royalties are payments made to the right's owner of the film by companies who license the film in order to earn revenue from it. For example, when you sign a deal with a distributor, it's usually for a certain timeframe. During that timeframe, said distributor may sell your film and earn revenue from it. They will then take their distribution fee, recoup their expenses, and write you a royalty check for what is left over. Basically, royalties are a percentage of the revenue earned by a distributor for your film.

Residuals are payments made to union hires on a film on sales to additional distribution avenues not covered in your original union contract. For example, when you hire a SAG actor, you are agreeing to a contract with SAG that states you are paying for an actor's service for a certain distribution avenue, i.e. theatrical, television or internet. Residuals come into play when you sell your film outside of that original distribution avenue. So if you tell SAG you are making this film for a theatrical release, you will not have to pay residuals on the money you earn from playing the film in theaters. The actor's salary covers that airing. But you will have to pay residuals on digital distribution on the internet as well as television and DVD sales.

Typical scenario on handling residuals: Residuals are calculated by the residual departments of the unions from the royalty statements sent to the production company (or the entity that is beholden to pay the residuals) by the distributor. The residual calculations are then reviewed by the production company and sent to a payroll company who calculates how much is owed to each union member. An invoice from the payroll company is sent back to the production company with the total residual amount owed. A check is then cut to the payroll company for the amount owed and the payroll company sends the checks for the union members to the union. If the union member is current on dues, he or she will receive the residual check. Bada bing bada boom.

Recoupment is what every producer and investor hopes for when making and/or investing in a film. Recoupment is when an investor starts getting his or her money back from the royalties earned on a film. This happens after the production company pays off all debt and deferrals. It doesn't typically happen right away or at once. The investor agreement usually states that royalty reports shall be sent to the investors along with any recoupment owed at that time a couple of times per year.

So let's look back over this procedure. You sign a contract with a distributor who sells your film. Revenue is earned and given to the distributor. The distributor takes a fee and recoups expenses and sends you any leftover money called royalties. From the royalties, you need to pay union residuals and then any debt or deferrals. Monies left over after all these commitments (minus some padding in your bank) is sent to investors for recoupment. Whew! That's a lot of work right? And it's multiple times per year.

That said, fellow indie producers, let's take a moment to pat ourselves on the back for overseeing union residuals, royalty statements, and royalty and deferral payments throughout each year on our films. This behind-the-scenes work lasts the life of the film (which we hope is the rest of our lives) and is a huge time commitment and most people have no clue we head this all up. They marvel at how checks end up in their mailbox.

Personally, I just wrapped payment of SAG residuals after 34 emails, dealing with invoices from SAG and the payroll company and providing proof of payment to our foreign sales agent so we could get reimbursed and a trip to the bank with the reimbursement. This took a couple of months and now I have to turn around and do it all over again.

This aforementioned work doesn't include royalty tracking and creating royalty statements and cutting checks to investors and crew for deferrals. That's a whole other set of reporting and check writing and overseeing.

While it makes me super happy to even be earning revenue, there are those days when managing all the Rs is overwhelming. This work is ongoing (happens throughout the year according to contractual terms), and no, I don't get paid to do this, and I handle it on three of my films at the moment. Yes, I'm wallowing. Some days I need to. #deepbreath #dayinlifeofindieproducer

Where Does the Revenue Come from in Indie Film?

Oh where, oh where does the revenue come from in indie film? Unless you have a film in the marketplace, it's hard to know exactly where the revenue comes from. There are so many avenues to think about - domestic and foreign sales in theatrical, television/cable, Video-on-Demand (VOD), DVD, and nontheatrical/educational.

What I have found through the sales of my own titles is that most of the revenue from an independent film is generated from VOD. This means I have seen most of the sales of my films through On Demand via cable and digital distribution online through sites like iTunes, Amazon, Vudu, Netflix, and Hulu.

Theatrical releases for independent films are very hard to justify. They're costly and time-consuming and more often than not - a bust. It's very hard to fill theaters in cities where you have no friends or family to rally people to see your film on the big screen. When was the last time you went to see a random indie flick at your local theater? If you're like me, it takes publicity for me to even know about the film (and strong publicity usually takes time and money to generate) or a colleague/friend to push me to go. So unless you have a very niche audience to which you can market and have the time and money to build a strong grassroots campaign, doing a theatrical usually doesn't make sense for a small indie film.

So what's the solution to seeing your film on the big screen? Film festivals. Use film festivals as your theatrical release. Lean on the festivals to help you fill the theater and use the publicity from the screenings to build buzz that can help you sell the film once it hits the VOD platforms. And some festivals do pay screening fees so you can even earn some revenue from your screenings. Or you can use the festival circuit to travel the world, meet your audience, gather their email addresses, and get help building a fan base.

What about DVD? Unfortunately, DVD deals are mainly dead at this point unless you have a genre flick or a very popular indie film that Redbox cares about. In that case, you can strike a DVD deal. In other cases, a DVD manufacturer will either ask for a piece of your VOD or you will need to figure out how to create and sell DVDs on your own. We sell our film The Diary of Preston Plummer through Amazon's CreateSpace. It's not a huge moneymaker but every sale helps so it's worth doing.

Television sales of indie films are hard to come by these days. The networks have gotten to the point of only considering films with big-name actors. If you are lucky to break through this prerequisite (it's definitely possible - I've done it) and snag one, good for you! The sale of a small indie film to a TV network probably won't make a significant dent in your budget - unless your budget was teeny-tiny - but television sales certainly help with visibility of your film, which can help translate to more VOD revenue.

Foreign sales. Oy. Just oy. First, foreign buyers love to see big-name actors in the films they buy. And foreign countries don't have strong streaming solutions yet so most of the sales are for television, which means there are less markets in which to sell. To reach foreign buyers, you usually have to go through foreign sales agents because they have all the relationships to the buyers and these agents will have high expenses and take about 20% to 25% of your revenue from your foreign sales. There's definitely revenue to be had in the foreign market but the question is how to get most of it coming back to the filmmakers instead of it just lining the pockets of the foreign sales agents. It's a conundrum and trust me, I'm working on figuring out a solution.

Nontheatrical avenues like airlines and museums are viable arenas for sales but not every film will make sense for these buyers. Definitely go after them because again, every sale helps!

And, one of the biggest lessons I have learned is to forego all-rights deals, unless the distributor is paying off the debt, deferrals and investors. All-rights deals allow distributors to steal from Peter to pay Paul. For example, let's say your DVD sales tanked and you actually owe money in expenses for making the DVDs. The distributor will take revenue from your VOD sales and apply it towards their losses in the DVD deal. If you had sold the rights separately then you would have received all of your VOD revenue and the DVD distributor would have been in the red that quarter (something you don't want but it's even worse if your hard-earned revenue is sucked up by losses in another market).

Additionally, all-rights deals often come with a high sales fee, like 20%, and their expense caps are typically high with no oversight on how much they're spending on fulfilling each deal. It can cost $1500 to deliver to iTunes alone and the distributor may be tacking on additional fees to process the sale. How do you really know?

The best thing you can do is hold on to as many rights as you can and sell them individually. How do you do this? Hire a sales agent who has successfully sold the rights to their titles individually and agrees that selling the rights to your title separately is the best strategy for your film.

The money trail in indie film can be hard to follow. That's why there's a big push right now for more transparency from filmmakers about the kinds of deals they're getting. And filmmakers are speaking out. You can see case studies in the books by the Film Collaborative here. They offer free copies online.

Transparency will only increase our chances of successfully budgeting and paying off our films. Knowledge is power!