Download Royalty Pool Explanation

Royalty Pools
Basic Structure
In the theatre, Authors (and other creative personnel who receive royalties) were traditionally paid a
percentage of the Gross Weekly Box Office Receipts (the “Gross” or “GWBOR”) each week. This is
still the case in most smaller theatres, such as not-for-profit theatres and Off-Off-Broadway. However,
the situation has changed on Broadway.
The gross royalty structure became increasingly problematic during the 1980’s. As production costs
for Broadway shows (especially musicals) continued to rise, it became more and more difficult for a
show to recoup its capitalization. Theatrical investors began to question situations in which royalty
participants could make a significant amount of money in royalties before the show had returned it’s
investment.
For example, assume a show has the following people receiving royalties paid on the gross:
Author
Underlying Rights
Director
Choreographer
Designers
LORT Theatre
Producer
TOTAL
6.0%
1.0%
2.0%
0.5%
1.5%
1.0%
3.0%
15.0%
Now assume this show costs $350,000 per week to operate, exclusive of royalty payments, and the
GWBOR for a given week are $400,000:
GWBOR
Running Expenses
Weekly Operating Profit
$400,000.00
($350,000.00)
$50,000.00
Royalties Due (15% of GWBOR) ($60,000.00)
Profit (Loss)
($10,000.00)
The show will lose $10,000 per week at this rate with no money available to repay investors, while the
Author, for example, will make $24,000 per week.
Consequently, a concept of profit-sharing, called a Royalty Pool, was developed. Under this scheme,
royalty participants would, as a group, split the Weekly Operating Profits with the investors. In other
words, out of the $50,000 Weekly Operating Profits in the above example, part would be used to repay
the investors and part would be distributed pro-rata amount the royalty participants.
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In our example, we will do a straight conversion from percentages of GWBOR to “points” in the pool.
The Author has 6 points in the royalty pool, and the pool has a total of 15 points. The Author’s individual share of the royalty pool is calculated by dividing the Author’s number of points by the total
number of points in the pool.
6 points (Author) ÷ 15 points = 40% of the royalty pool
Now let’s assume that there is a 40% royalty pool in our scenario (though the percentage can vary from
one production to another and often increases at recoupment or at a set point over recoupment - this
figure is determined by the producer and/or general manager and can often be found in the Option
Agreement), meaning that 40% of the Weekly Operating Profits will go to the royalty participants and
60% will go to repay investors.
Royalty Pool
Weekly Operating Profits
Producer
20%
Royalty Pool
40%
Author
40%
LORT Theatre
7%
Designers
10%
Investors
60%
Underlying Rts
7%
Director
13%
Choreo
3%
Therefore, in our example, there are Weekly Operating Profits of $50,000, 60% of which (or $30,000)
goes to the investors to recoup the capitalization. The remaining $20,000 is distributed pro-rata among
the royalty participations as follows, using the percentages in the pie chart above:
Author
Underlying Rights
Director
Choreographer
Designers
LORT Theatre
Producer
TOTAL
$8,000.00
$1,333.33
$2,666.67
$666.67
$2,000.00
$1,333.33
$4,000.00
$20,000.00
Sometimes it is desirable to express a royalty participant’s share in terms of a percentage of all Weekly
Operating Profits, not just that portion paid to the royalty pool. For example, in a Broadway royalty
pool under an Approved Production Contract (APC), the Dramatist’s Guild requires that Authors receive no less than 15.56% of [100% of] Weekly Operating Profits prior to recoupment and 17.8% of
[100% of] Weekly Operating Profits after recoupment.
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To convert the percentages in the pie chart above, which express the participants’ share of 40% of
Weekly Operating Profits, to the corresponding percentage of all Weekly Operating Profits, simply
multiply the applicable individual percentage by the share of the Weekly Operating Profits going to the
entire royalty pool.
Author’s Share of Royalty Pool:
Royalty Pool’s share of Weekly Operating Profits:
Author’s Share of 100% of Weekly Operating Profits:
40.0%
× 40.0%
16.0%
The total distribution of the Weekly Operating Profits would therefore look like this:
Producer
8%
LORT Theatre
3%
Designers
4%
Choreo
1%
Director
5%
Underlying Rts
3%
Investors
60%
Author
16%
Important Contract Terms & Negotiating Points
In order to evaluate a royalty pool proposal, you must know the following information:
•
Number of “points” for the individual participant (the Author has 6 in our example)
•
Total number of “points” in the pool (15 in our example)
•
The share of the Weekly Operating Profits going to the royalty pool (40% in our example)
Additionally, you should be aware of the following features:
Minimum Royalty. Even in a pool there is usually a minimum royalty, often expressed as a per-point
dollar value, such as $750 per “point”. In our example, the Author’s minimum royalty would be
$4,500 (which is 6 “points” × $750 per “point”), which is payable each week, even when there are no
Weekly Operating Profits. When there are Weekly Operating Profits, the $4,500 is treated as an advance against the Author’s share of the pool. In our example, the Author would receive $8,000 from
the royalty pool—this is not in addition to his minimum, but inclusive of it.
Caps on Royalties. Sometimes, producers will try to put a limit on what an individual royalty participant can receive under a royalty pool. Usually, this “cap” is the amount the royalty participant would
have received under a “standard” formula of a percentage of the GWBOR or some multiple thereof.
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For example, in our scenario, the Author might receive 6 “points” in a 40% pool, up to a maximum of
6% of GWBOR. Alternatively, the cap might be something like 6% of 110% of GWBOR.
The original intent of the royalty pool was to create a scenario where royalty participants “delay” their
compensation by agreeing to share in weekly profits with investors through a payment system in which
royalties increase as gross receipts go up. As explained earlier, this protects the producer from having
to pay royalties when the show is losing money. Keep in mind the producer will still pay minimum
royalties during losing weeks, but those minimums are generally budgeted as part of the shows running
expenses. However, you can see that a cap on the royalty pool protects the producer from having to
pay too much in royalties, and there is no cap on the amount paid to investors. Many royalty participants (and the Dramatist’s Guild) object to any sort of cap, explaining that producers shouldn’t have it
both ways.
Recoupment. Under the traditional gross royalty arrangement, there are usually increases in royalty
payments upon recoupment of capitalization. For example, the APC provides that Authors receive
4.5% of GWBOR prior to recoupment, increasing to 6% after recoupment. Similarly, royalty pools
often provide for a post-recoupment increase in their pool’s share of Weekly Operating Profits. For
example, in our scenario, the 40% of Weekly Operating Profits going to the pool prior to recoupment
might increase to 45% of Weekly Operating Profits after recoupment.
Note that producers will often want to have the increase occur not at true recoupment (100% of the investment returned), but at some point after that, such as 125% of recoupment. This is another important point to watch in evaluating a royalty pool.
4-Week Cycles. Finally, one needs to know what the accounting period is for the royalties. Traditionally, royalties have been calculated on a weekly basis. However, even the APC provides for some adjustments to this. The APC allows for 4-week cycles to be utilized during such times as the Christmas
season, when sales might be extremely high one week, and quite low the next. It is better for a producer to have 4-week cycles throughout the production, and this will often be proposed. This allows
the producer to offset loses across more weeks.
WOP Week 1
WOP Week 2
WOP Week 3
WOP Week 4
Cycle NOP
$100,000.00
($20,000.00)
($30,000.00)
$10,000.00
$60,000.00
However, it is clearly better for royalty pool participants to have a weekly accounting period, since
they will get a share of the royalty pool during profitable weeks and at the very least their minimum
royalty during losing weeks.
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