The ‘Obsession’ Windfall and How Indie Hits Pay Out

0:04Matt Belloni:This episode of The Town is presented by HBO Max. For your awards consideration, HBO Max presents DTF St. Louis. In this darkly comedic series, a love triangle between three adults experiencing middle-aged malaise leads to one of them ending up dead. Don't miss the series TV Guide is calling transcendent and audacious. DTF St. Louis is streaming on HBO Max. Watch now. This episode is brought to you by FX's Love Story, John F. Kennedy Jr. and Carolyn Bissett. The critically acclaimed series explores the undeniable chemistry, whirlwind courtship, and high-profile marriage of one of the most iconic couples of the 20th century.

0:42Matt Belloni:With Sarah Pidgeon and Paul Anthony Kelly leading a cast including Naomi Watts, Constance Zimmer, Alessandro Nivola, and Grace Gummer. Called A Stunning Portrait of Love by Variety, Love Story is Emmy-eligible in all limited series categories. now streaming on Hulu and Hulu on Disney Plus for bundle subscribers. It is Thursday, June 11th. Hollywood movies are a fascinating mix of commerce and art. Sometimes those two things are at odds. Sometimes they enhance each other. I've always found that even people who have worked in Hollywood for years often don't understand how the commerce part actually works, how the money is collected, who gets it, when they get it, and why.

1:25Matt Belloni:That's especially true in the world of independently produced movies. When a big studio or streamer makes a movie, they put up the money and hire people to make the movie. Then they collect about half the box office gross from the theaters and exploit the film in various windows from premium video on demand all the way through to free TV and even YouTube. The talent involved is either paid up front or a mix of up front and a portion of the proceeds from various windows depending on what they've negotiated. It's more complicated than that, but not as complicated as the indie film world, where there can be dozens of financial backers on one film, all with a stake in the outcome, plus a distributor that pays to acquire a film and release it, sometimes globally, sometimes just in a specific territory or a handful of them, or for a specific term.

2:09Matt Belloni:The talent who makes the film often works for little money up front and a share of the proceeds in success, if they can negotiate that, often not. At the center of it all is the so-called waterfall the money that flows in from each window throughout the lifetime of the film that revenue waterfall is especially relevant when a small budget indie movie becomes a big hit something like the current horror thriller obsession which was made by filmmaker curry barker for only about 750 000 and it sold to focus features a division of universal pictures last fall at a festival for about$15 million up front.

2:47Matt Belloni:It's now grossed more than$240 million in worldwide theaters, on its way to what could be a$300 million gross. That's just in theaters, too. So who profits from that? And how does that waterfall flow? There's been a lot of speculation about this topic online, a lot of garbage out there, that an art director on the film has voiced her displeasure at being paid less than$10 ,000 total for her work. So that's our topic today. And to discuss it, we've got Minette Louie on the show. Minette is a professor in the graduate film program at Columbia University and a veteran indie film producer. She's taken projects to Sundance, Toronto, all the big festivals, and she's worked on countless deals.

3:25Matt Belloni:She's not involved in this movie at all. But last week, amid all the chatter about who got paid what on Obsession, she posted her own estimates based on her experience in the industry. Today, we're going to go through those estimates. It's the Obsession, Windfall, and who makes what on a big indie hit. From The Ringer and Puck, I'm Matt Bellany, and this is The Town.

3:49Matt Belloni:Okay, we are here with Minette Louis, who is a veteran independent film producer, as well as an assistant professor of professional practice and co-head of creative producing in the graduate film program at Columbia University. I love that title. Welcome. Thank you. It's a mouthful. All right. So I wanted to have you on because, you know, we have a lot of very sophisticated listeners of the town who know everything we're about to talk about today. And we also have a lot of people who are not and don't. And we also have a lot of people who think they are sophisticated and really don't understand the minutia of this stuff.

4:27Matt Belloni:So when the financials of obsession started to go around the internet and I started to do a bunch of face palms at some of the misinformation that was out there, and then you posted a response to the face palms and said, listen, we got to get some basic facts right here. I said, let's have Minette on the show to just go through and do an explainer episode of how the financials of an independently financed and distributed movie through a studio specialty division makes money. Yeah. So can we do that? Well, first of all, explain briefly just how the waterfall of revenue works on an indie movie. Yeah, I mean, it varies, obviously, from film to film, but there are some basic things.

5:16And I just want to, you know, explain that there's two different types of water. There's two different waterfalls. There's the distributor's waterfall. So that's the, you know, all the accounting statements that Focus put out for Obsession. There's the distributor's waterfall. And then after that, below that is the licensor's waterfall, or some people call it the producer's waterfall.

5:33Matt Belloni:Well, I guess there would be a third, which would be the exhibitor, the theaters. But we're not going into that today. They take half the revenue from the box office, and then they take all the concessions. Exactly. So they make their money that way. Exactly. And that's the one thing that the main thing that people misunderstand is that Focus gets half the money from the theaters, you know, just right off the top. So then once the money comes into Focus, Focus would take a distribution fee. It's usually like, you know, 30 percent, 35 percent, 40 percent of all the gross receipts they collect. And that's their fee for paying themselves to do the work through the hard work of releasing the movie.

6:09Matt Belloni:And that's why they paid a$15 million minimum guarantee to acquire the film at a film festival like Toronto. That's when you see these headlines like Obsession sells for$15 million. That is Focus paying the minimum guarantee of$15 million to acquire and distribute the film. In this case, worldwide? No, it was U.S. plus a couple of international rights. Because Capstone, who is the financier, also, I believe, sold the international rights. so focus took some territories but um but the distribution but the distribution fee is a little it's a separate from the mg the mg or minimum guarantee is basically it's a minimum guarantee or an advance against future sales right so it's recoupable it's recoupable and they recoup that plus interest okay so like on top of the 15 million they're recouping interest plus two percent usually prime plus two percent on the interest plus they have to recoup all the money they spend on marketing and distributing the movie, or the P &A, as we call it, which I don't know what that number is, but, you know.

7:11Matt Belloni:And is the P &A typically recoupable? Yeah, they pay themselves back to create the DCPs, to create the posters, to design them, to cut the trailer, all that stuff, to fly Curry Barker here, there, and everywhere to promote the film. So yes, all that is recoupable. To pay for shadow Twitter accounts to start promoting the movie by posting positive things and then retweeting it? Yes, yes, exactly. Viral is not real. viral is a creation believe nothing you see on the internet exactly exactly um and then also the box office bonuses that they pay out to folks like you know jason plum and you know whoever else is able to negotiate box office bonuses when the box office receipts hit a certain target well let's get we'll get to that but but let's go through the distributor's waterfall here so money comes in the door and where are all the different sources of money so there's you know theatrical There's transactional VOD.

8:03So, you know, when you rent a movie or buy a movie on iTunes or Amazon or whatever, that revenue is shrinking. There's still physical media, you know, a little bit. DVD. Oh, yeah.

8:14Matt Belloni:Sean Fennessey. He's going to hold out to the very end. Yeah. And then there's SVOD, streaming, and television licenses. That's kind of the biggest chunk right now. And then there's non-theatrical, like airlines and film festivals and various things like that. But that revenue comes in later. That's why it's called a waterfall, because it sort of pours over the entirety of the film. And how is that accounted for? You hear that opening weekend or the theatrical distribution will dictate the value put on the movie for other windows. Explain how that works in the indie context. Yeah, sure. Well, basically, with these streaming deals, if the box office hits certain milestones, then the license fee goes up.

9:03So it's sort of a tiered system. So it's like, if you hit$100 million, we're going to pay you$5 million more or something like that for the license fee.

9:10Matt Belloni:That's why it's so important because it dictates the value of the film in all of the windows. You can say, oh, this movie didn't do well in theaters, but it'll probably be a big hit on streaming. The big thing is if it gets to two, three hundred million dollars at the box office, it's treated differently throughout the other windows than a movie that doesn't. Absolutely. And even if they don't hit those, I mean, the milestones is one thing, but just the sheer, you know, if you're doing big numbers at the box office, then a lot of people have seen your movie. a lot of people are aware of it. And so they'll come seek it out on Hulu or Netflix or whatever.

9:43Matt Belloni:Okay. So that's all the incoming money for the distributor. Let's talk about the deductions. You mentioned the distribution fee, which they take themselves. Yes. And let's say, you know, let's assume that this movie obsession gets to$300 million. So a typical distribution fee would be 30%, you're saying, on an indie like this? 30 % to 40%. And it's different for every type of money. Theatrical is different than SVOD, is different than TVOD. So those numbers can vary. So a distribution fee on a$300 million grossing movie. And I know this is not apples to oranges because that's the global number and Focus doesn't have all the territories.

10:23Matt Belloni:But just for the purposes of argument, let's just say that it was global. 30 % of 300, that would be... 90 million. Yeah. Yeah. So 30%. Let's just take the domestic number. If it gets to 150, I think it's a little above that, but let's use 150. That would be$45 million as a distribution fee in theaters for focus. That's not bad. That's triple the price that they paid to acquire the film. Yeah. It's not bad. Um, but it could have gone the other way. I mean, they, they, they put in tons of millions of dollars into this film and if it didn't do well, then they would be at a loss. Yeah. And they eat all the marketing costs, but those are recoupable.

11:03Matt Belloni:So what are the other deductions, you know, distribution and marketing. So yeah, distribution would be the marketing expenses, any kind of bonuses they paid for box officer VOD, um, and the minimum guarantee, the 15 million they paid to the licensor, um, that, that, that gets recouped plus the interest on the minimum guarantee, which is like prime plus 2%. So after all those things are deducted, that's when you get into the net receipts or the net profits. Um, and that gets split between the distributor and the licensor. So it could be 50-50. It could be like 75 % in favor of the licensor. I've gotten a deal once where I got to keep 100 % of that backend.

11:39Matt Belloni:And what caused you to get 100 %? Was that just the leverage you had in demand, all night bidding war? It was an all night bidding war. So yeah. And I heard this was too. So I do think that the producers did have some leverage here to get some good deal terms. Right. And so in that kind of context, you think that the the share of revenue for the producers is going to be very favorable? I think so. I mean, it may not be as high as the 75 percent I put in my waterfall, but it could be like, you know, 60 percent, 70 percent. I do think they probably got a majority. OK, well, so let's use your number.

12:11Matt Belloni:Let's use 75 percent that you put in there. So let's let's continue the analysis here. I feel like we're doing SAT prep course. I know. So first, let's finish out the distributor. So let's get to all of the revenue that they are going to make. Yes. So they're making their distribution fee, which we already talked about. They're making the interest on the 15 million MG they paid. And then they're getting this 25 % share of net. So those are the three different sources that they're getting money from. Okay. Also, Focus has SQL rights. So if there is obsession two through 10, they will participate in those movies.

12:50Matt Belloni:That's nice. They're going to get to do a Halloween Horror Nights maze at Universal Studios. Like there will be other ways for them to profit off this. This kind of a movie could be an anchor in a package of movies that gets licensed to foreign television or others. And there are ways where these, you know, it will forever be in the focus library, which is the universal library, which brings value there. So there's a lot of ways that these studios get value out of these movies. We are just going through the specific P &L on this particular title. Yep. Okay. So you have Total there as being a windfall of, let's say, for the purposes of this argument, this movie gets to 200 million domestic and the territories that Focus controls.

13:41Matt Belloni:on a 200 million grossing movie for a distributor like this in the indie context where they paid 15 million up front what do you estimate the take home from the theatrical window is for focus i mean here let me plug it into my spreadsheet because i'm not going to estimate that off um so basically if they're getting they're getting 100 million dollars right from that 200 and we don't know what their marketing spend was exactly and we there's a lot of variables here yeah we don't know um okay they'd be getting 43 million okay just from the theatrical distribution yeah just you know assuming all my assumptions are yeah correct not bad um and that's just the beginning so but let's flip this because this is what i think most people want to know about let's flip this to the people who made the movie yes because that's where we saw this art director complain that she was paid$3 ,000, sorry,$300 a day, ended up making less than$10 ,000 on the movie.

14:44Matt Belloni:She wanted to get additional payments. That typically doesn't happen. Have you ever seen, in the indie context, bonuses across the board to everybody who worked on the movie? Yeah, Sing Sing did it. Oh, yeah, that's right. Yeah, and there's a great, on YouTube, they did a very detailed case study with Dolby. So if you Google Sing Sing and Dolby, you'll hear the filmmakers talk about how they did that and you know they had 75 people in their cast and crew yeah and they were able to do that and they basically you know just very quickly um they treated everybody equally they gave everyone the same pay the only variable was time like how much time each of them worked on the film um but everybody participated but wasn't that negotiated up front it was negotiated up front yeah and that's what ben and matt ben affleck and matt damon they do that with artist equity where they give everyone a piece right of the bonus if they get to the streaming bonus.

15:34Matt Belloni:But that's all negotiated up front. I mean, when you have a contract and you agree to terms, it's really tough to go in after the fact. It is tough to go in after the fact, but I've been given back in after the fact. I didn't negotiate it. You know, my very first film, Mutual Appreciation, the director, Andrew Budelsky, he made some money from that movie, a little bit of money, not even that much. But as soon as he made some money, since none of us were paid, he gave us money. We didn't ask for it. He gave it to us. You know, that's very nice of him. I don't know if a big corporate studio is going to do that.

16:03They probably won't. They probably won't. But I myself have had like allocated points on my like unallocated points on some of my films. And I'm like, hey, you know, this person is just such a great job. I'm going to give them some points, you know, even though the deal is already closed. But I will say, you know, Sally, I'm really glad that Sally Choi brought it up because this conversation needs to be had. I think it's important. And I think she was brave to do it, you know, especially as a woman of color in this industry, like, or unicorns, you know, we don't get second chances and we have to work 10 times as hard.

16:30So, you know, and it's, it's kind of crazy that these so-called liberal filmmakers are, they're arguing against sharing of wealth. It's a little crazy to me. Their minds have been like thoroughly colonized by, you know, traditional film capitalism or something.

16:44Matt Belloni:Well, it would be nice if they did share. I know they probably don't have any obligation to, and there's companies like Blumhouse that came in after the fact and they could share as well. So we'll see if any of that ends up happening. Yeah, I mean, you know, on the other side, there's a lot of crew who, you know, are saying that producers and directors are selfish for not sharing. And, you know, they're not acknowledging or maybe they don't know that very often we on tiny films like this, we don't even pay ourselves. Like we get zero up front for years of work, for years of development, developing and packaging.

17:15Matt Belloni:Well, and you do 10 of these and nine don't work. Yeah, exactly. I know it's a very complicated issue, but I am glad we're talking about it. So let's get to the licensors waterfall, the producers waterfall. So take us through who put up the money for this movie and how they get paid. Yeah. So they get the minimum guarantee, the 15 million that Focus paid in the first place. And sometimes that's most of the time. That's all the money you'll ever see from a movie. That's why it's so important to get that up front. Exactly. Exactly. And it's an indication of how hard the distributor is going to work to distribute your film.

17:51If they pay you zero, they don't have to work very hard to make that back. Right. So so they're getting$15 million loan guarantee. And in my example, they're getting a share of net, the 75 percent that we talked about earlier. And then they probably negotiated some box office and VOD bonuses as well.

18:07Matt Belloni:That's on top of the share of net. That's on top of the share of net. And, you know, I didn't I didn't put in estimates for those because those can range really widely. They can be all over the place. So I didn't want to guess there. Well, there was a report out there this week that said that Blumhouse had negotiated box office bonuses. So Blumhouse had them. You got to assume the producers had them as well. You would think so. But, you know, Jason Blum is a is a brand. And, you know, he has the leverage to negotiate that kind of stuff. So and he brings a lot of value if it's marketed to be a Blumhouse.

18:38Matt Belloni:They have expertise in how to get these movies to the right audiences. So, yeah, we shouldn't assume you're right. Right. But but it was, you know, a. bidding war at TIFF, right? So when you have a bidding war situation, then you do have leverage. Right. So let's go through the rest of the waterfall. That's the revenue coming into the producer. What are the deductions that are charged against it? Yes, there's a lot of those. There's all the middle people that we have to work with to sell the movie, right? So that includes a sales agent, you know, who's selling the movie. In this case, I believe it was CAA, I think, who did that.

19:17Capstone, I think, was their international sales agent. CAA only did domestic. So domestic sales agents typically charge between 5 % and 10 % right off the top of whatever the producers make. So at TIFF, they took 10 % of$15 million.

19:30Matt Belloni:And that's off the sale price. That's not off of the box office. It's off of the sale price, and it's off of whatever the producer makes. It's off of whatever comes into the producer's waterfall. Oh, so it travels beyond just the sale at the festival. Absolutely. It goes to the net profits as well. Yes. Yes, it does. Oh, interesting. It's so funny because you see the agencies pulling back these days on these independent film divisions. WME, you know, they let their people go. And, you know, I keep hearing that that business is just so challenged for these agencies. If you are not, you know, rogue Sutherland at CAA, it's really tough to make that a real business because so many of these films just don't sell at all.

20:13Yeah. Yeah. Yeah, it's true. It is tough.

20:15Matt Belloni:So when you have a movie like this, that is a 100 percent unequivocal success. I guess you you want to capitalize as much as you can on it. Yeah, no, absolutely. It is a tough business. But it does take away from the producers. Yeah. I mean, just keep in mind, like this is a one in like 10 million, you know, example. Like most indie films don't make money. So, yeah. So 10 percent to CAA. Between five and 10. I don't want to say it's always 10. Between five and ten. Between five and ten. The international sales agent usually makes between like 15 to 25 percent of the international receipts received.

20:54Why is it more there? Because they sort of do more legwork because they have to go. A lot of them go like territory by territory. So they're selling films to like, you know, the Spanish distributor and the Middle Eastern distributor and like the Australian distributors. They kind of have to go knock on these doors. And it's a lot more legwork having to travel to markets.

21:13Matt Belloni:They have to go yacht to yacht at Cannes. I mean, God, who's going to do that work? Exactly. And then those sales agents, those same international sales agents, they have a lot of expenses going yacht to yacht. So they usually charge a bunch of expenses and it's usually like $25 ,000 to$40 ,000. So they take that off the top. That's the rosé bill at whatever Cannes restaurant they do the dinner at. Yes, exactly. And then you need lawyers to negotiate these deals, Right. And so you're usually paying either by the hour or like, you know, sometimes you'll do like two to 2.5 percent of whatever is coming in to the producer with a floor and a ceiling.

21:51And then, of course, there's the collection agent. If you engage one, which you should if you're, you know, making all this money and having to pay all these parties. So collection agent charges like one percent and they basically bring collect the money and make sure it's paid out properly to the right people.

22:06Matt Belloni:OK, so that's a lot of deductions. There's more. There's more. There's more. Okay, keep going. There's the guild residuals, okay? So, like, usually, so, you know, I think this movie only was SAG. It didn't use IATSE crew. And so, usually Focus, a company like Focus, as big as Focus, they'll assume the residuals. So, they'll pay all the SAG residuals. But then these smaller distributors that Capstone is selling to, you know, like the Spanish distributor or whatever, they're not going to deal with paying residuals. So, the producer has to do that. So we have to skim off the top in order to pay SAG so that SAG can then pay out those residuals to the actors.