Wednesday, July 18, 2012

Why net profits can mean no profits: learn how to protect your money

Net profits clauses are almost a dirty word these days, but they didn't start that way and they don't have to be. It really comes down to the way they're written.

Taking net profits used to be something only big names got. One of the first people to take a net profits clause in a contract, if not the first one, was Jimmy Stewart in 1950. His version of the net profits clause would have worked similarly to the way these work today: talent and creators agree to take less money in advance but they get additional funds if the project makes money. The thinking is: if the project is a success then everybody wins, and if not then everyone loses less.

But as time went on that last statement became less and less true. Today there are often clear winners and losers in a net profits situation. And the publishers and studios do their best to make sure they're not the losers.

First, let's look at the basics. There are two types of profits in most contracts: gross and net. (Film contracts can have many more, but I'm going to keep things as simple as possible here.)
  • Gross profits = all the money received.
  • Net profits = all the money that's left over after deducting the things your contract says can be deducted.
An example may help. For a book or a DVD to be sold in a store, certain things have to happen. The book or DVD has to be printed. It needs a cover. Hopefully there will be some marketing. And it has to be shipped to the stores. All of these things cost money, and someone has to pay for them. Depending on how your deal is structured, that could be your publisher paying some or all of them, or (more likely) they might try to push those costs back to you.

Even if you can't see them, these deductions are being taken. In fact these costs are most often buried in a royalty rate. If you're being paid a 10% royalty on your book, that means your publisher is keeping 90% of the proceeds of sale to cover its costs and make a profit. They're just not describing it that way.

All of this is also true for e-publishing, by the way. Just think of it as a situation where the advance is $0. And in e-publishing there are few if any deductions. For example, Amazon doesn't charge any deductions on the 35% royalty rate and only charges a data fee for downloads against the 70% although it's a bit more complicated when they do price matching. But they also do basically no marketing and have no printing costs.

So if you're going to take a portion of net profits, you need to be very alive to the deductions your publisher is taking and push back where appropriate. And publishers, studios, networks, and other content distributors are quite creative in finding ways to take deductions.

Amazon's pricing page for Kindle Direct Publishing:

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