Chapter 288: Revenue Sharing

In Hollywood, the DVD industry has become increasingly important, even to the point where it's said that DVDs have saved some film companies.

Most Hollywood movies can't recoup their costs from box office earnings alone, and profitable ones are few and far between. Even a failed movie like "Catwoman" could still generate income through merchandise, action figures, and licensing deals, but this is a privilege of adapted movies or big-budget productions, not applicable to films with investments of only a few million or even hundreds of thousands of dollars.

Video tapes, DVDs, and television broadcasts have become ways for these films to turn a profit, and are the primary sources of income for the majority of Hollywood movies.

DVDs, being cheaper to produce and easier to distribute than videotapes, have even saved some of Hollywood's major studios to some extent.

Sony Columbia Pictures is a prime example. After "Spider-Man" was pulled from theaters, Sony Entertainment immediately released the DVD, with the standard edition priced at $19 and the deluxe edition at $39. In the first week alone, over 5 million copies were sold, generating over $120 million in revenue, with the year's total DVD sales reaching $215.3 million!

This was just the sales in North America.

High box office films in this era almost always translate to high DVD sales.

For instance, last year's hit animated film "Finding Nemo" sold over $150 million in DVD sales in its first week, far exceeding its North American opening weekend box office.

Murphy clearly remembers that these years are the golden age for DVDs. Soon, with the rapid development of online video streaming and downloads, DVDs will quickly decline.

"Deadpool" has indeed hit a good era.

By the end of July, Twentieth Century Fox officially launched "Deadpool's" DVD in the North American market, with major outlets like Walmart, Target, Amazon, and others as the primary sales channels, as well as online retailers like eBay and Amazon.

The sales can only be described as explosive.

Although "Deadpool's" scale means its DVD sales can't match those of "Spider-Man" or "Finding Nemo," its first week's sales figures are still impressive, easily breaking the $100 million mark with $112 million in revenue.

Compared to the box office numbers, which are divided at several levels, the profit from DVD sales is actually higher.

Twentieth Century Fox stands to gain the most profit, as the wholesale price of a DVD to retailers is not low, ranging from $10 to $20 depending on the film. "Deadpool" was priced at $15 for the standard edition and $25 for the deluxe edition, while the cost of pressing a DVD is minimal, often only 1% of the retail price.

This money goes almost entirely back to the studio, though typically, studios provide retailers with a marketing and promotion budget of about 5% to no more than 10%.

This is just the short-term revenue from sales, with long-term rental revenue also playing a significant role, a process Hollywood has perfected.

DVD rental revenue sharing is more complicated than sales.

Initially, rental stores pay the studio a minimum guarantee, meaning the studio earns a sum regardless of rental activity, ranging from $3 to $10 per DVD depending on the film's box office, with higher box office earnings commanding a higher guarantee.

Rental revenue comes mainly from rental fees, membership fees, and late returns, which are treated as sales, with the studio taking $0.5 to $2 from each rental, depending on the film's box office performance. For sales, the studio takes a higher cut, around $5 to $10 per DVD.

Rental agreements have a fixed term, usually 25 to 80 weeks, with higher-grossing films enjoying longer terms. After the term expires, rental stores must destroy a percentage of DVDs, return them to the studio, or purchase them at a fixed price per DVD.

Revenue shares deduct bad debts, promotional and mailing costs.

A single film like "Deadpool," a blockbuster, can earn a studio $5 to $8 million from rentals alone, with sales revenue even higher, meaning a blockbuster can bring in tens of millions of dollars in almost pure profit from DVD rentals.

Simultaneously, Twentieth Century Fox finalized the first round of TV broadcast rights for "Deadpool" for $25 million for five years.

All these revenues are closely tied to Murphy, whose director's contract stipulates a share of these profits.

After negotiating the TV rights fee, Twentieth Century Fox paid Murphy the final $1 million of his $3 million director's base salary.

Then, Murphy's lawyer, Robert, and accountant, David, began urging Twentieth Century Fox to fulfill their revenue-sharing agreement per the contract.

Murphy's contract included a tiered incentive clause, based on a $60 million production cost. If "Deadpool's" North American box office reached the cost line, Murphy would receive 1% of the box office as a reward. This percentage increases with higher earnings, culminating in a 5% share if the box office exceeds $300 million.

No one initially thought "Deadpool" would break the $300 million mark in North America.

Twentieth Century Fox's agreement wasn't a bet against Murphy but an incentive for the creative team to give their all. Although Hollywood films have many revenue streams, box office is the foundation, much like DVD sales and rentals, which rely on strong box office numbers to negotiate higher prices.

Murphy's 5% share from the North American box office, $15 million, plus his $3 million base salary, means his total directorial income from "Deadpool" is $18 million, a figure only top directors can command.

Moreover, he also receives 2% from all of "Deadpool's" North American rights, a long-term income source.

After Twentieth Century Fox received "Deadpool's" North American box office share, Murphy not only demanded timely personal compensation but also, per the contract, the return on investment for Stanton Studios within two months after the film left theaters.

"Deadpool's" production cost was $60 million, with Stanton Studios investing $15 million, entitling them to a quarter of the film's profits after costs.

Twentieth Century Fox, eager to continue working with Murphy and facilitated by Kara Faith, didn't face much resistance from Stanton Studios. Hollywood studios generally don't engage in blatant financial manipulations with industry investors.

Now, with Murphy seen as a major potential asset, continuing collaboration could bring even more profits.

After deducting taxes and other fees, Twentieth Century Fox's share from the theatrical revenue was $150 million.

This amount is not pure profit.

First, Twentieth Century Fox took its distribution commission, 10% of the North American box office, or over $30.7 million, then the marketing and promotional expenses, nearly $40 million, and the copy production costs, $15 million. Copy production costs remain high as digital projection technology has not yet fully proliferated.

Thus, Twentieth Century Fox initially took $85 million.

Murphy and the creative team's box office shares also had to be accounted for, with agreements typically including base salaries plus revenue sharing. Although others didn't have shares as high as Murphy's, their collective shares exceeded $10 million.

Additional costs like storage, travel, insurance, legal, and accounting fees also factored into the costs, as well as union fees for registered projects. Though these aren't substantial,

 they cannot be delayed without causing significant trouble.

These miscellaneous costs added up to nearly $5 million.

The total cost of a film is significantly higher than just the production cost, with Twentieth Century Fox's $85 million and other expenses amounting to an additional $30 million.

The remaining $35 million was shared between Stanton Studios and Twentieth Century Fox according to their investment ratio.

Even for a blockbuster like "Deadpool," Stanton Studios couldn't recoup its investment from the North American box office alone, but the box office is just one of many revenue sources.

Currently, "Deadpool's" global box office is nearing $560 million, with overseas earnings exceeding $250 million.

Though revenue sharing policies and tax situations vary by country, Twentieth Century Fox roughly takes a quarter of the overseas box office, with Stanton Studios participating in this revenue sharing.

Box office is only part of a film's income; there's also merchandising revenue. In North America alone, "Deadpool's" DVD and TV rights sales have reached staggering figures, and after deducting costs, Stanton Studios also takes a quarter of these profits.

In early August, Twentieth Century Fox paid Stanton Studios the first installment of the investment share according to the contract.

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