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Deficit financing: a look into producers' wallet.

"If I were you, I wouldn't touch a story about deficit financing with a 10-foot pole," a journalist was warned. "First, you have to touch |prices,' a sensitive issue. Secondly, you have to deal with producers' advances, a touchy subject. Thirdly, you'd cover studios' packaging (i.e. their livelihood), and the effect of the potential repeal of the Fin-Syn rule (now a controversy). Finally, you'd be entangled in a web of complicated financial transactions. Why bother?"

Yes, programs' price lists, now all the rage in various trade magazines, tend to give ranges too wide to be meaningful or, if more targeted, they often become troublesome to some TV sales executives. It is not unusual to hear cases of international sales people being unfairly reprimanded by management over a program sale to a territory with a price that was lower than the published one. Often published prices tend to be wrong. The problem is that there are different sets of rules for each sale. Plus, with the possible elimination of the Financial Syndication limits on U.S. TV networks, these rules will again change, or possibly expand the variables in the distribution game.

Traditionally, the network that commissions the project will pay up to 67 per cent of mini-series production, up to 75 per cent for half-hour comedy and one-hour drama series, and up to 80 per cent for an MOW.

This means that the network will shell out no more than $1 million per hour for a mini-series, $375,000 for a half-hour comedy, $900,000 for a one-hour drama series and $2 million for a two-hour MOW.

Naturally, production costs vary between those from independent producers and from studio production. But, while studios include overheads (a studio's overhead is spread among various projects), independent producers have to factor in the cost of money and whether they pay themselves out of the production funds. In any case, production costs could vary from 500,000 to $600,000 for a half-hour comedy, $1.1 million to $1.2 million per hour drama series, $2.5 million to $3.2 million for an MOW, and $1.5 million to $2.5 million per hour for a mini-series.

These costs leave production companies with large deficits that have to be recouped in the international market.

But here, too, the game changes according to the player. In the case of an independent producer, the deficit can be partly filled by assigning rights to a distributor. At this stage, in the words of one analyst, "pricing is now crazy. There is a bidding war for mini-series and MOWS."

Currently, international distribution rights (minimum guarantees) can go for $150,000 per hour drama, $150,000 to $200, per two-hour MOW $400,000 to $500,000 per two-hour MOW and mini-series per hour.

Independent distributors do not bid for comedies and, according to an executive familiar with this process, bidding is also rare for mini-series, which tend to be produced in-house by the networks. Also, comedies are "vehicles" assigned to stars.

On top of that, producers get up to 65 per cent (often 60 per cent) of the balance after distributors' "recoupment" and fees, minus distribution costs.

The distributor has to first recoup the minimum guarantee and distribution costs (material, promotion, marketing, etc.). Profit is what's left after the producer's share, cost of money and costs of doing business.

On the average, a distributor recoups his investment in two years. "Nevertheless," said a former distributor now an independent producer, "the game is very profitable; otherwise the distributors wouldn't be in it."

For an independent distributor, 70 per cent of his sales are generated in seven countries. Based upon current TV license fees, from those countries a one-hour drama could fetch $220,000 to $345,000, an MOW 390,000 to $525,000, and a mini-series $425,000 to $520,000 per hour.

Usually, Scandinavia, Latin America and Benelux sales add another 10 per cent, with the rest coming, alas unpredictably, from the Far East, This, though, is valid only if all major territories acquire the products, which is not always the case. France, for example, is not too fond of mini-series; Latin America revenues are considered "gravy," and comedies are hard to place.

Ultimately, if the product is widely sold at today's market prices, for an MOW the producer could receive from the international distributor up to $125,000 from his share of license fees, in addition to the $500,000 advance for a total of $625,000 before U.S. syndication and re-run rights.

The distributor first recoups his minimum guarantee (advance) from the international license fees. From the remaining balance, he deducts his distribution fee (35 to 40 per cent) and distribution costs (which, in total, could reach 50 per cent). in the best case scenario, the distributor's share would be $213,000 to $316,000 per hour drama, and $479,000 to $625,000 for an MOW.

Therefore, after the minimum guarantee, the distributor could gross $63,000 to $116,00 per hour drama and $79,000 to $125,000 per MOW. From these have to be deducted costs of money, overhead, distribution costs (since they were entered as income) and agents' fees (if any).

For sure, independent distributors have to work hard at maximizing sales. Studios, on the other hand, work under different rules, but the extent in which they reportedly "take orders" is, at times, exaggerated. First, studios' international sales executives do not "pick" their product. They simply find it "dumped at their feet" with orders to make the best of it. Empathy is felt for the executive who has to deal constantly with studios' development people eager to develop "winning" comedy programs that do not sell internationally.

Fortunately the studios have movies and lots of other desirable programs that allow flexible sales arrangements; "duds" are lumped with desirable products as a "package." In these cases, pricing and deficit financing assume relevance only for the studios' accounting practices, where bookkeeping deficits and cash deficits are difficult to discern.

A somewhat different game is played by co-production partners, with the general partner recouping the deficit from pre-sales or joint ventures with international broadcasters who receive wide distribution rights.

Here is one typical arrangement, in a 50/50, $2.5 million MOW co-production deal: The general partner gets a $2 million U.S. network fee, gives $1 million to a foreign partner who produces the program and keeps worldwide rights, excluding the U.S. and Canada. These rights are then retained by the general partner.

A more radical game, yet to be implemented, is for the U.S. network paying the independent producer for the broadcast rights and, later on, having its own international distribution division make up the deficit in exchange for exploitation rights. The network's distribution division, in turn, will re-sell the program to a syndicator (for U.S. distribution) or, in the most dramatic scenario, syndicate it itself through its networks affiliate division.
COPYRIGHT 1993 TV Trade Media, Inc.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Video Age International
Date:May 1, 1993
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