Movies( Its distribution, leasing & profit sharing between theater & distributor)

   There are two ways for a theater to lease a movie:

1. Bidding method
2. Percentage method               

 Bidding method

              Bidding requires that the theater agree to pay a fixed amount to distributor for the right to show the movie.

                   For e.g. A theater might bid $100,000 for a four-week engagement of a new movie. If it could make  $125000, then it would have profit of  $25000 and if it could make $80000 only, then it means that theater has occurred a loss of $20000. These days, only few distribution companies are following method of bidding.Most agreements are for a percentage of the boxoffice (ticket sales).

 Percentage method

           These days, only few distribution companies are following method of bidding. Most agreements are for a percentage of the box office (ticket sales}

  In percentage method, the distributor and the theater agree to several terms:-     

1. The theater negotiates the amount of the house allowance, or nut, with the distributor.{Nut or house allowance is the expense that theater spent each week for the movie  and which theater charges from distributor}
2. The percentage for the gross box office is fixed in agreement. {Gross box office is gross value of ticket sold. In business language it can be compared with gross turnover for a company without subtracting any expense.} 
3. Percentage for net box office is fixed in agreement.{ Net box office is  the amount of box office left after the deduction of the house allowance or Nut from Gross box office} 
4.  The length of engagement is fixed (typically four weeks). {Length of engagement means period for which movie will be shown in theater as per agreement.}                                               

Further,The distributor gets the vast majority of the money made by the movie.                                                         The agreement gives the distributor the agreed-upon percentage of the net box office or gross box office, whichever is greater

       Consider this example{Refer fig given below} Theater A is negotiating with Distributor B over a new movie.The theater has figured that expenses, the nut, are about $4,500 per week. The net percentage to go to the distributor is set at 95 percent for the first two weeks, 90 percent for week three and 85 percent for the final week. The gross percentage to go to the distributor is set at 70 percent for the first two weeks, 60 percent for week three and 50 percent for the final week. Distributor will take higher of gross or net as per agreement.   

You can see that during weeks one, two and three, the gross percentage is higher. The net percentage is higher for week four. So the distributor would take gross percentage on one through three then net for week four. The theater makes zero profit the first week, loses money the second and makes a profit on weeks three and four.        At the end of the negotiated engagement, the theater pays the distributor its share of the box office earnings   and returns the print. If a movie is very popular and can continue to draw a steady crowd, the theater may renegotiate to extend the lease agreement. Any time you see the phrase "Held over," you know that the theater   has extended the movie lease.

Table showing distribution of profit between theater and distributor
Illustration for above example

NET= GROSSminusNUT

NET % AND GROSS % RATE ARE GIVEN IN AGREEMENT.

HIGHER IS HIGHER OF NET% OR GROSS$ TO BE GIVEN TO DISTRIBUTOR

THEATER P/L IS NET MINUS HIGHER

   The movie itself is considered a loss leader by the theater owner during first week. Loss leader means tickets  are  sold at concession. It is meant to get people into the theater.The theater makes its money selling  refreshments  to the movie audience.As concessions are so expensive -- without the profits generated by things  like popcorn  and soda, most theaters could not afford to stay in business.