Tuesday, August 01, 2006

The perils of profit sharing

Today, let's talk about complexities involved in profit sharing (or revenue sharing) as a way to compensate partners involved in a venture. For the principal partners, such sharing is a way to reduce upfront risk. For other participants, it's a way to make more if the venture turns out to be a success.

In the US film industry, compensating people based on "points" of the "back end" (in other words, a percentage of profit) is standard practice. Almost as standard are disputes related to the calculation of that profit. The current dispute between the director, screenwriter and stars of the Academy Award-winning best picture "Crash" and the producer of the film offers a stark example of profit-sharing dysfunction. The Times had a recent article on the dispute, and its lead paragraphs would send chills through anyone contemplating a profit-sharing deal:

When a movie costs $7.5 million to make and takes in $180 million around the world, it seems logical to think that the people who created the film would have become very rich.

With “Crash,” this year’s Oscar winner for best picture and last year’s sleeper hit at the box office, that has not been the case.

Despite the film's well-documented revenues, the profit picture is much muddier, and what is owed the participants even less so. Paul Haggis, the director; the screenwriter; several line producers; and the stars (Don Cheadle, Matt Dillon, etc.) are all awaiting their due compensation, despite the film concluding its theatrical run and DVD release months ago. Several of the participants recently received checks for $19,000, according to the Times.

Bob Yari, the producer, blames Lionsgate, the distributor, for not being up to date with payments to him. Foreign revenues have also been slow to arrive, in his view. Lionsgate insists a pay-television deal with Showtime will bring in revenues to fund payments to all.

Making money for certain are the attorneys and accountants everyone has hired to negotiate payments and audit the books.

In short, this case illustrates everyone's worst fears about Hollywood accounting--no film ever makes a profit, yet somehow the studios and financiers keep operating.

By comparison, web site operators who host Google ads on their sites can check moment to moment on their traffic, click-throughs and earnings. The terms are standard for everyone. Payment is remitted monthly.

The lesson: in revenue and profit sharing, transparency is everything. And: when big money is at stake, there's lots of incentive to fudge the numbers, impede the process or use similar tactics to take more than your share.

Can a company gain competitive advantage by offering Google-like transparency and timeliness on big-money revenue-sharing deals? The optimist in me thinks so. The pessimist isn't so sure.

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