You Paid for a Movie Ticket. Do You Know Who Ends Up With the Money?

The story of box-office revenue sharing, starting with My Sunshine and a lawsuit.

Over the 2015 May Day holiday, the hottest film in China was, surprisingly, still Furious 7. Of all the other releases, only one could keep pace: My Sunshine, starring Huang Xiaoming and Yang Mi. Critics mocked its melodramatic plot, mawkish dialogue, stiff acting and muddled storytelling, but none of that stopped it from surviving in the shadow of Furious 7. It took 169 million yuan in three days.

Huang Xiaoming, you would assume, stands to make a fortune from My Sunshine. This time he was not just the lead but also an investor, so he collects more than an actor's fee: he takes a direct cut of the box office.

In the past two years, more and more directors and actors have put their own money into films: Xu Zheng in Lost in Thailand, Fan Bingbing in Buddha Mountain, Jiang Wen in Gone with the Bullets. The point is to share directly in box-office revenue and earn more.

But splitting box-office revenue is not simple. Wherever money is involved, things get tangled.

1. Box-office sharing, starting with a lawsuit

Not long ago, Stephen Chow, the director, screenwriter and investor of Journey to the West: Conquering the Demons, sued the film's other producer, Huayi Brothers.

Chow's side argued that under the two parties' agreement, Huayi Brothers would pay Chow a share of the box office if the film grossed more than 500 million yuan. The film grossed 1.248 billion yuan, so Huayi Brothers owed Chow's side a 170-million-yuan bonus.

Huayi Brothers countered that although the total box office was 1.248 billion yuan, the box-office income that actually reached Huayi Brothers was under 500 million. The condition for the bonus had not been met, so it owed Chow nothing.

Should the box office be counted as 1.248 billion yuan, or as less than 500 million? And why, when the film grossed 1.248 billion, does Huayi Brothers say it received only 500 million? The answer lies in something called box-office revenue sharing.

2. How exactly is a film's money divided?

If you go to the movies often, you will have noticed the list of production and distribution companies at the start of a film, and the long credits at the end.

Making a film is a complicated process. First, investors put up the money. Next, a production company makes the film. The producer then hires a distributor, which negotiates with the theater chains and cinemas to set the release date and the number of screenings. Finally, the chains and cinemas show the film. With so many companies involved, once a film opens and earns money at the box office, they all line up for a share.

The basic rules for box-office sharing in China today were set by two documents issued by the State Administration of Radio, Film and Television in 2008 and 2011. First, 5% of the total box office goes to the special fund for film development, and 3.3% to business tax. Of what remains, the cinema, as the venue, takes 57%, and the producer and distributor take 43%. The producer then pays the distributor a fee agreed in advance. After costs are deducted from what is left, the producer and the investors split the rest according to their agreement.

That may sound abstract, so let's look at how the money from Han Han's The Continent was divided.

The Continent grossed 650 million yuan. First, 32.5 million yuan went to the film development fund and 21.45 million yuan to business tax. Of the remaining 596 million yuan, the theater chains took 340 million. Then the distributor received a 30-million-yuan distribution fee, and 51 million yuan in production costs was deducted, leaving 175 million yuan. Only this money could be divided among the producer and the investors. Under their agreement, Bona Film Group took 40%, and the other 60% was split among the director Han Han, the producer Fang Li and another investor, Lu Jinbo.

3. Why do both the people who make films and the people who show them feel shortchanged?

The example above shows that box-office revenue is mainly split between the film companies that “make films” and the cinemas that “show films.” But the ratio has changed over time.

Before 1994, China Film Group bought films outright from the major studios at 900,000 yuan apiece, then supplied prints to distribution units in each province. China Film Group took 70% of the total box office; 24% went to the provincial distributors to build theater circuits, and the remaining 6% went to provincial governments.

In 1995, the domestic film Red Cherry became the first to share box-office revenue. Of every 100 yuan in ticket sales, 5 yuan went to the national special fund for film development and 3.3 yuan to business tax; the producer and the cinema circuit then split the rest 35% to 65%.

When the director Zhang Yimou burst onto the scene, films such as Hero and House of Flying Daggers gave producers more bargaining power, and they began to renegotiate the split with the theater chains. When Curse of the Golden Flower opened in 2006, the producers' share was raised to 42%.

Finally, in 2008 and 2011, the Film Bureau of the State Administration of Radio, Film and Television issued two documents stating that the producer's share should in principle be no lower than 43%, and the cinema's generally no higher than 50%.

The principles were settled, yet neither film companies nor cinemas are happy with the split.

Start with the cinemas. According to ifeng.com, of the 851 cinemas that opened across China in 2012, 70% were losing money in 2013: the tickets they sold each year could not cover their operating costs.

Even at cinemas that do reasonably well, nearly half of all box-office income goes to the producers. Of the rest, 10%-20% goes on rent and another 12%-19% on fixed costs, so the cinema's profit may be only 3%-10% of total box-office income. Wanda Cinemas, for example, took in 4.1 billion yuan at the box office, but its costs reached 3.3 billion, for a gross margin of just 20%. And that is with Wanda Commercial Properties, its sister company, as landlord. Without that support, Wanda Cinemas' rent would rise by another 200 million yuan, cutting its profit by a further 25% or so.

Shanghai United Circuit is in worse shape still. In 2013, its parent company, Shanghai Film Co., made a profit of 140 million yuan, while Shanghai United Circuit took in 1.88 billion yuan at the box office. By that measure, the circuit's gross margin on box office was under 10%.

For cinemas, the main problem is that they have few sources of income besides tickets. Wanda Cinemas sold 630 million yuan of popcorn at a cost of 190 million, a gross margin of nearly 70%. In the United States, popcorn is where cinemas make most of their money. From 2005 to 2009, American cinemas' popcorn revenue was about half their box-office revenue; in China it was less than a fifth. So Chinese cinemas struggle to survive because they do not sell enough popcorn. That is also why they care so much about the box-office split.

In fact, a cinema should be in the business of selling seats, not films. The way for a cinema to make money is to get the person in each seat to spend more.

Now the film companies' problems. Rising actors' fees and marketing costs have pushed production budgets steadily higher in recent years, making it harder for producers to turn a profit. The Crossing and Gone with the Bullets each cost about 300 million yuan, and Back to 1942 cost 210 million. On a 43% share, earning back that kind of money is a heavy burden.

Chinese film companies are in much the same bind as the cinemas. At root, they depend heavily on their share of the box office, so a single extra percentage point can move a company's full-year results and its share price. That is why, in 2012, the five big distributors, Huayi Brothers, Enlight Media, Bona, Stellar Megamedia and China Film Group, joined forces to pressure the theater chains, demanding that the producers' share be raised to 45%.

Hollywood's big studios, by contrast, have plenty of ways to make money beyond the box office. Frozen's theme song, “Let It Go,” helped Disney sell 3.5 million soundtrack albums, and the film's two princesses displaced Barbie as the Christmas present girls wanted most. Films bring in less than a sixth of Disney's total revenue, and less than a tenth of its profit.

If Chinese film companies could break their dependence on box-office income, the sharing ratio might not matter so much to them.

4. How Hollywood divides the money

Hollywood has three revenue-sharing models to choose from. The first is a fixed-ratio split, as in China. The second resembles China Film Group's old system of centralized buying and selling: the cinema pays the producer a fee to buy the film outright, and keeps the entire box office.

The second model is not popular. The most popular model in Hollywood is the sliding-scale split. In the opening week of some studio blockbusters, the studio takes 80% of the box office and the cinema only 20%. This lets the studio recoup its costs quickly while the film is still hot. The longer the film runs, the smaller the studio's share: around 60% in the second and third weeks, and perhaps only 20% by the fourth.

When Transformers: Age of Extinction took 100 million US dollars in its first week in North America, for example, Paramount could keep 80 million dollars of it, earning back nearly a third of the production cost.

The advantage of this model is that studios recover a blockbuster's production cost as fast as possible, which reduces the risk of big-budget films. For cinemas, if a blockbuster is strong enough to keep drawing fans in its fourth and fifth weeks, they can also do well.

Borrowing from Hollywood, the Chinese film industry tried a sliding-scale split during the 2012 New Year season. For The Last Supper, the producers' share was set at 43% in the first week, 41% in the second and 39% in the third, and so on until the film left theaters.

The split for Back to 1942 was even more unusual: on the first 300 million yuan of box office, the distributor and the theater chains split 43% to 57%; on the portion above 300 million yuan, 45% to 55%; and on the portion above 800 million yuan, 47% to 53%.

But Chinese film companies adopt sliding-scale splits for different reasons than Hollywood studios. They are really “trading revenue for market share”: giving cinemas a bigger cut in exchange for more screenings and a higher box office. For a listed company such as Huayi, a little lost box-office share is nothing next to the buzz a big box office generates and the boost to its share price.

5. Finding new income beyond the box office

Raising its share of the box office is one way for a producer to earn more, but it can also look for money elsewhere.

Product placement is one good source. Yili's Shuhua milk reportedly paid around 10 million yuan just to appear briefly in Transformers: Age of Extinction. Feng Xiaogang's Personal Tailor earned 80 million yuan from product placement alone. China's film product-placement market grew from 230 million yuan in 2010 to 1.02 billion yuan in 2013, and it has room to grow further.

As copyright protection gets more attention, rights sales have become another way for films to make money. In 2013, films earned nearly 2 billion yuan from new-media rights. That is less than a tenth of that year's 21.7 billion yuan in total box office, but the potential is enormous.

The exclusive digital rights to this year's New Year blockbuster Dragon Blade sold for 30 million yuan to Huashi Wangju Media Technology Co., Ltd. The online streaming rights to Gone with the Bullets reportedly also fetched 30 million. Zhang Ming, senior vice president of Huashi Wangju, said that a film expected to gross more than 1 billion yuan commands a rights price of over 30 million yuan; a film grossing between 100 million and 1 billion yuan, 5 million to 25 million; a film grossing between 50 million and 100 million yuan, 2 million to 10 million; and a film grossing under 50 million, anywhere from a few hundred thousand yuan up to 2 million.

The major video sites are spending heavily too: content costs run above 40% of their annual revenue. Part of that money goes to variety shows and TV dramas, but films still get their share.

6. The most direct approach is still to raise the box office

If a film cost 500 million yuan to make but grossed 10 billion yuan, it would make plenty of money even on a 35% share. So raising the box office may be the most direct route.

What affects the box office most is the screening share: how many screenings cinemas give your film in a given period, and on how many screens it appears. Nothing matters more to a film's final gross.

Last year's top-grossing film in China, Transformers: Age of Extinction, had an average screening share of 54%, rising to 71% in prime time. This year Furious 7 at one point approached 80%, which is how it reached its legendary 2.3 billion yuan box office.

Other films meet very different fates. Over this year's May Day holiday, Wang Xiaoshuai's Red Amnesia got a screening share of only about 3%, and grossed a mere few million yuan. Last year Touch of the Light, billed as a film with “zero bad reviews,” opened against Switch, was squeezed out of cinemas, and ended in a dismal run.

But a cinema manager does not set the screening share on a whim. Many factors shape it. The most important is the creative team: the pull of a big-name director and big stars cannot be underestimated.

Next come the film's budget, its marketing spending and how well that marketing works. Marketing matters more and more. The best example is Han Han's The Continent. Han Han, who already had 38 million followers on Weibo, used the platform to turn out a string of catchphrases, such as “I've heard a lot of wisdom, but I still can't live my life well.” The Madagascar dog that appears in the film also became one of his marketing props: its endless cute poses drew many young women to buy tickets just to see how the dog did on screen. Comparisons with Tiny Times and its director Guo Jingming drew plenty of curious onlookers too. In short, a road movie with an unappealing subject, no big stars and quality that was hardly outstanding was sold to a 630 million yuan box office, and Han Han's marketing deserves much of the credit.

Third is genre. Contemporary stories sell better than period dramas, and comedies, romances and youth films are more popular than serious dramas and horror. Youth films have sold especially well in recent years: Left Ear and My Sunshine each passed 200 million yuan over their opening three-day weekends. Comedies do well too: Xu Zheng's Lost in Thailand was the first domestic film to gross more than 1 billion yuan.

Fourth are technical formats such as 3D and IMAX. A 3D ticket costs more than a 2D one, and an IMAX ticket more than a standard one, so the same number of screenings brings in more money. But format depends on the film: there is little point making a youth romance in 3D. It is a lot of effort for no reward.

Beyond the film itself, a well-chosen release date can raise the box office. A film released in the New Year or summer season is more likely to gross well, because more people go to the movies at those times. Domestic films can also open during the domestic film protection month, avoiding competition from Hollywood blockbusters and protecting their box-office income.

There are also less conventional methods. One is to do what The Last Supper and Back to 1942 did: accept a lower share in exchange for more screenings. Another is to have a well-connected company behind you. Bona's From Vegas to Macau, for example, had a nationwide screening share of about 10%, while Bona's own cinemas gave it about 30%.

Graphics: Wang Shiyun