There are two ways for a theater to lease a movie:
Bidding requires that the theater agree to pay a fixed amount for the right to show the movie. For example, a theater might bid $100,000 for a four-week engagement of a new movie. During that time, it could make $125,000 for a profit of $25,000. Or it might take in only $75,000, which means the theater has a loss of $25,000. Few distribution companies use bidding anymore. Most agreements are for a percentage of the box office (ticket sales).
In this sort of deal, the distributor and the theater agree to several terms:
- The theater negotiates the amount of the house allowance, or nut, with the distributor. This is a set figure to cover basic expenses each week.
- The percentage split for the net box office is set. This is the amount of box office left after the deduction of the house allowance.
- The percentage split for the gross box office is set.
- The length of engagement is set (typically four weeks).
The distributor will get the vast majority of the money made by the movie. The agreement gives the distributor the agreed-upon percentage of the net box office or gross box office, whichever is greater. The way this works is amazing!
Consider this example. Theater A is negotiating with Distributor B over a new movie. The theater has figured that expenses, the nut, are about $4,500 per week. The net percentage to go to the distributor is set at 95 percent for the first two weeks, 90 percent for week three and 85 percent for the final week. The gross percentage to go to the distributor is set at 70 percent for the first two weeks, 60 percent for week three and 50 percent for the final week.
You can see that during weeks one, two and three, the gross percentage is higher. The net percentage is higher for week four. So the distributor would take gross percentage on one through three then net for week four. The theater breaks even the first week, loses money the second and makes a profit on weeks three and four.
The movie itself is considered a loss leader by the theater owner: It is meant to get people into the theater. The theater makes its money selling refreshments to the movie audience. That's why concessions are so expensive -- without the profits generated by things like popcorn and soda, most theaters could not afford to stay in business.
At the end of the negotiated engagement, the theater pays the distributor its share of the box office earnings and returns the print. If a movie is very popular and can continue to draw a steady crowd, the theater may renegotiate to extend the lease agreement. Any time you see the phrase "Held over," you know that the theater has extended the movie lease.
While first run movies that have just been released are loss leaders, movies that have been out for a while can be profitable for the theaters that show them. Second run theaters often get very attractive leasing terms from the distributor. These theaters are facing increasing competition though, as first run theaters continue to show more movies past the traditional four to six week time frame.