In the spring of 2008, I blogged on the important considerations of independent film distribution in “Disregarding Distribution”. Following are further observations on the subject.
STRATEGIES
The global animation industry is highly competitive, with much of a project’s success being directly related to the skills of the distributor’s marketing strategy, and the filmmaker’s solicitation of early feedback from potential distribution partners.
In the area of broadcast animation, the United States remains the largest and potentially most lucrative television market in the world. The traditional method of selling animation content to U.S. broadcast and cable networks is to license 13 to 26 episodes (a half-year’s or a year’s worth of shows) for a flat fee per episode, which gives the customer the right to air each show twice. Around the world, license fees paid to content creators have shrunk dramatically over the last decade, with networks sometimes demanding that producers cut their budgets as a precondition of acquisition. These fees, ranging from a few hundred USD to a few hundred thousand USD per half-hour episode, vary dramatically by budget, country, population, economic conditions and many other factors. The important point is that a considerable amount of most broadcast animation production budgets remains in deficit, and must be covered through international presales, co-production partnerships, ancillary sales or other means. Partly because of this, networks in the U.S. and around the world commonly become co-producers and co-financers in the productions they air, purchasing part or full ownership of the property, rather than simply licensing the rights to broadcast the show. As stake holders, they also receive revenues from international broadcast sales, home video & DVD, merchandising and other ancillaries. The total number of broadcast networks around the world is on the rise, and the growth in channels provides more points of entry for animated programming.
Of course, the best possible initial release for an animated feature film is release in theaters. In addition to its own potential revenue, theatrical release can generate demand for other media release platforms such as broadcast television and DVD, as well as consumer interest in ancillary products. For a film in initial release, the exhibitor will pay a percentage of the revenues from ticket purchases to the distributor (referred to as the “film rentals”). Film rentals customarily diminish over the length of a film’s theatrical run. Depending on the distribution agreement, the producers and investors are entitled to a percentage of film rentals, after the distributor recovers its distribution fee, marketing expenses and distribution expenses.
Other media releases for the film are calculated in a similar fashion. For instance, in the U.S., a home video company pays an amount to the distributor for the right to stock its video stores with the title. From these fees, the distributor will deduct its distribution fee, advertising costs and other distribution expenses in order to recover costs. The producers and investors then receive their agreed-upon revenues as set out in the distribution agreement. The same goes for television and ancillary rights. The total of the money received by the distributor from the exercise of all rights that it is entitled to is called the “distributor’s gross”. Every distribution agreement is different; however, there are similarities common to all. The distributor receives a distribution fee, which is the percentage of the profits that the distributor will receive from the gross. The distributor is then entitled to recover its marketing costs and distribution expenses. The remaining sum is payable to the producers and investors, and is generally called the “producer’s gross” or the net sum.
Independent animation producers have several ways of distributing feature films. For the widest distribution, they must partner with a major studio, although this means giving up significant rights. Typically, when major studios get involved early in the production, they finance most or all of the animated film’s development and production budget and also handle distribution. In return, they receive all rights (including the copyright) and control all creative, marketing and distribution decisions. While filmmakers can benefit financially from the guaranteed exhibition and broad audience reach provided by such deals, final compensation may be far less than expected once significant studio fees and expenses are deducted.
Fortunately, there are alternatives to this strategy for the independent animation producer to consider. Major studios and independent distributors (such as The Weinstein Company) can simply distribute an animated film, controlling marketing and distribution but not production. The distributor usually gets involved only after it sees the completed film, and production funding comes from elsewhere. In this scenario, the distributor takes approximately 35% of gross distribution revenues returned from the theaters, and then deducts expenses before remitting the remainder to the producer. While the relatively lower distribution take and the retention of creative control and copyright are attractive incentives to the producer, there is the very real risk of creating an animated film that is considered “unmarketable”. Distributors routinely reject films that they suspect will be under-performers at the box office due to lack of audience appeal or a clear market position.
A “middle way” is to negotiate with a major international distributor to distribute the animation production prior to completion. While the distribution cut is higher in this case (at least 50%), the distributor’s early involvement brings valuable market insight to the development and production process, includes an advance against revenues upon delivery of the completed negative, and provides the benefit of helping the producer to gain additional financing. Signed distribution agreements can be used as collateral for bank loans, and as incentives for other investors to join the enterprise. This type of deal is known as a “negative pickup”, in which the distributor receives distribution rights, usually in all media, for a specified length of time. When possible, it is in the producer’s best interest to negotiate options based upon performance milestones, which allow the distribution rights to return to the producer if the distributor fails to actively market the film.
Some studios and distributors may also choose to come on board as co-producers, which creates a level of involvement somewhere between owning all rights and simply distributing the film. The studio provides a degree of production financing, has creative input, oversees marketing and distribution, and shares back-end revenues, but does not take full control. The financial details of such arrangements vary greatly.
As these examples demonstrate, studios and distributors can license animated films at various points during the production process: while the film is being financed, during production, or after completion. The more that existing elements seem to point to box office success, the more likely a distributor is to pick up the film early in the process. However, distributors are generally reluctant to get involved early in the production process of independent animated films. The independent producer usually must finance and produce the film without any distribution presale money, and then try to find distribution through success on the international film festival circuit in venues such as Sundance and Cannes, or at markets where films are sold such as the American Film Market. The hard reality is that only a small percentage of companies pitching their films at festivals succeed in securing distribution deals.
Those independent animation productions that are fortunate enough to find distribution will often sign one deal for their domestic territory, and another for international territories. However, deals with major studios and distributors can encompass the entire world, with the major studios subcontracting to local distributors in countries where they may not have operations. Due to the fact that most animation properties do not turn a profit from theatrical release alone, distributors typically want rights to all media including home video & DVD, soundtracks and merchandising. In response, independent producers will usually license home video & DVD to the distributor, but retain rights to the revenue streams for soundtracks and other ancillaries.
Independent distributors have an advantage in releasing low-budget animated films, since they have the experience and patience necessary to handle the slower “platform” method of release. A platform release strategy involves opening a film in a select few cities, building on the film’s word-of-mouth, and gradually widening the release to add more cities and more screens to the release schedule. Positive buzz, festival success and strong reviews all add to a film’s platform.
RELEASE WINDOWS
The typical method of releasing animated feature films begins with domestic theatrical exhibition, which gives value to the various film “windows” (the period following a domestic release before a film can be released in other markets). Historically in the United States and Europe, the sequencing pattern for feature films has been to license international theatrical exhibition, home video & DVD, cable television distribution, broadcast television rights and other ancillary rights. As the rates of return shift among these different sources, changes are made to the sequencing strategy. It is important to note that the release windows for gaming and publishing ancillaries usually precede the initial theatrical release of a film by one to three months.
Distributors around the world plan their release windows with certain target audiences in mind. Given the high costs of film prints, even a relatively modest theatrical distribution of 1000 screens can exceed $2 million USD in initial expenses. For this reason, and as noted above, low-budget films will often receive platform release windows in selected major cities that feature substantial populations of cosmopolitan filmgoers. In this way, the film is given a build-up to a wider release that may occur several weeks later.
ANCILLARIES
Animated films and television properties generally turn a profit not on the initial theatrical or broadcast release, but through the exploitation of ancillary revenue streams. Animated films and television shows do very well on video and DVD, especially when the properties are well-known or appeal to a devoted niche market. For example, DreamWorks’s “Shrek” sold 2.5 million DVDs and 4.5 million VHS cassettes in its first three days on the market in 2001. Together the sales of these home video products totaled $420 million USD for 20 million units sold within two months. “Shrek’s” U.S. box office gross was almost $268 million USD, while its worldwide gross was over $480 million USD. Animated foreign films can experience similar success, although on a more modest scale. Japan’s Pioneer Entertainment released the anime hit “Akira” on DVD after restoring it at a cost of $1 million USD. The DVD release hit the number-one spot on U.S. home video bestseller lists. DVDs are subject to a high degree of piracy on the Chinese mainland, but as noted previously, this can serve as an ironic form of underground advertising for the animation property and its associated ancillary products.
Interactive gaming software is an increasingly important revenue stream for animation properties. This category can easily amount to 50% or more of all ancillary activity, and can rival the revenue of the core theatrical or broadcast distribution for animated films and television shows. Gaming software is also a good way to increase awareness for an animated property, especially when released prior to the screening or airing of the production. On 3D CGI productions, digital assets can be shared between the producers of the animation and the producers of the games. This is often done simultaneously, and can enhance the development of story and characters for both. Games often introduce new story lines and sometimes new characters that expand the world established in the original entertainment property. Platforms include PC, console, mobile and Internet formats.
While book and comic book publishing is usually not the top ancillary category in the United States, books and comics are still an important revenue stream in the West, and an extremely popular and profitable one in the East. Book and comic ancillaries generate awareness with the target audience, provide a means to extend story lines, backstory and character development beyond the original animation property, and enhance the brand image. Typical formats, depending on the age of the consumer and the nature of the content, include board books, story books, magazines, comic books and graphic novels, film novelizations (adaptations of the animation script) and derivative novels (“prequel” and “sequel” stories).
Many animation producers and executives take soundtrack sales into account when they plan the music for a film. By including musical acts that are popular with children and pre-teens (the primary purchasers of animation sound tracks), the producer can enhance sales of the album even among those consumers who have not seen the film. This marketing synergy can also work in the other direction: having a popular singer or band play an important role in the soundtrack can bring people into the theaters who might not otherwise see the film. Music videos are naturally an important part of this equation, and are often planned in conjunction with animation production to create tie-ins between the live action performers and the animated characters.
Toys are the main ancillary product category for most children’s animation projects, with dolls, action figures and board games among the most popular items. There is also an expanding market for collectible “urban vinyl” toys and cast resin figurines among teenaged and adult animation fans. Toys are often one of the first licenses granted for an animation property due to the long lead times required for product development and manufacturing. Some animation-based toy lines are narrowly focused. A licensor of a new, relatively unknown animation property might choose to self-distribute toys, or to license the sale of a small range of toys over the Internet. This approach allows the producer to test the market and gauge demand. For example, in 2001 the United States’ Cartoon Network chose to test a dozen products based on its “Samurai Jack” series, with sales initially limited to their website.
While home video, interactive games, publishing and toys are the primary ancillary categories for animation properties, the number of possible products is unlimited, depending on the nature of the content and its audience. Clothing, stationery, food and beverages are among the available revenue streams. Tactical considerations for maximum profits include the timing of product introduction in each country where the property is released, the product categories chosen, whether to grant exclusive or non-exclusive rights, and the choice of retail outlets. While under-stocking can reduce revenues, over-stocking can shorten the life of the product licensing program, and even have an adverse impact on the animation property itself by creating a negative consumer reaction.
Product placement within a film, common to American live-action properties, is generally not encouraged within animation properties, as it tends to reduce the “classic” status of the animated film. Threshold Animation Studios’ animated feature “Food Fight” launched a direct assault on this principle by setting a story in an American supermarket filled from top to bottom with name-brand household products, and using the fees charged to fund production. The ultimate results of this approach remain to be seen, but the negative online buzz from animation fans prior to release is noteworthy, as is the film’s difficulty in finding theatrical distribution. A commercial ancillary phenomenon common in mainland China is the inclusion of corporate logos in the end credits of feature films – in many cases from companies having nothing whatsoever to do with the production itself.
As you can see, the world of film distribution is “wild & woolly”, so it pays to familiarize yourself with it BEFORE you start production.
Begin with the end in mind. 
And since personal bests are almost always improved by stiff competition, it doesn’t hurt to run alongside the “big boys” in the marketplace. This means letting more foreign films IN, and getting more Chinese films OUT. Finally, leverage upon China’s incredible population advantage by showing more films on more screens for less money per person, but greater revenue on the whole.
