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PART 1: WHEN DO TV SALES BECOME PROFITS?

Sixteen relatively recent Australian TV shows have earned more than $1 million each in gross revenue, and nearly $43 million as a group.

THE QUICK READ

To make a profit from Australian television drama production generally means a show has to have sold well internationally. But attracting healthy sales revenue doesn’t guarantee profit for all: it depends on the level of financing and marketing costs that have to be repaid and what arrangements apply to all the different players. It’s a complicated business.

The Principal

When do TV sales translate into profit?

Home-grown primetime Aussie drama delights audiences across the country week after week, as the ratings attest. Later it finds its way into lounge rooms across the globe. There it also has a positive impact for Australia, feeding into inbound tourism, for example, and helping cross-border partners and potential partners in government and in business of all kinds, familiarise themselves with Australia.

Clearly, this kind of programming has a cultural value to local audiences, but to what extent does it also have commercial value? This question will be explored through the prism of a group of successful shows that Screen Australia has invested in. We use these shows because they deserve a shout out, there are lessons behind their success, and the agency only has access to the financing and sales data behind shows it is involved in.

There are 16 top current earners – adult drama earners – that have attracted more than $1 million in gross revenue so far, three of them more than $4.5 million (see “Methodology used” below). Together these 16 projects have accumulated more than $43 million, most of which is export dollars, and with a number being new to the marketplace, they will continue to bring in revenue.

The fly in the ointment when considering profitability is the cost of manufacture. These are individually crafted items – it’s not a production line scenario – and the total cost of making the 16 productions amounted to $145 million, or more than three times the revenue they’ve accumulated to date. And the shows that are being examined are the most successful of recent times. That said, only about half the cost has to be repaid before profits flow, which brightens the picture somewhat. (See under “Financing Australian TV drama” and “Recouping to investors” below.)

Taking an across-the-board approach to the question of whether TV is financially profitable is inadvisable because it depends whether the question is being asked on behalf of investors, the producing team, the distributor, the broadcaster, etc.

Let’s officially name the 16 successful titles and reveal a little more about them, explain the methodology behind the list, outline the nature of the revenue, lay out how TV drama is financed, then dig deep into this issue of profitability.

Australian drama hits

Three cheers for the following Australian drama hits (in alphabetical order):

<em>Cleverman series 1</em> Cleverman series 1

CLEVERMAN
6 x 1hr
Production companies Goalpost Pictures Australia, Pukeko Pictures (NZ)
Broadcaster ABC
International distributor Red Arrow International
goalpostpictures.com

THE CODE, series one
6 x 1hr
Production company Playmaker Media
Broadcaster ABC
International distributor DCD Rights
playmakermedia.com.au

DEADLINE GALLIPOLI
4 x 1hr
Production company Matchbox Pictures
Broadcaster Showcase
International distributor NBC Universal Television
matchboxpictures.com

DEVIL’S PLAYGROUND
6 x 1hr
Production company Matchbox Pictures
Broadcaster Showcase
International distributor NBC Universal Television
matchboxpictures.com

THE DOCTOR BLAKE MYSTERIES, series one
10 x 1 hr
Production company December Media
Broadcaster ABC
International distributor ITV Studios Global Entertainment
decembermedia.com.au

<em>INXS: Never Tear Us Apart</em> INXS: Never Tear Us Apart

INXS: NEVER TEAR US APART
2 x 2hrs
Production company Shine Australia
Broadcaster Seven
International distributor Endemol Shine International
endemolshine.com.au

JACK IRISH SERIES
6 x 1hr
Production company Essential Media and Entertainment
Broadcaster ABC
International distributor DCD Rights
essential-media.com

MISS FISHER’S MURDER MYSTERIES, series one and two
13 x 1 hr
Production company Every Cloud Productions
Broadcaster ABC
International distributor all3media international
everycloudproductions.com.au

THE PRINCIPAL
4 x 1hr
Production company Essential Media and Entertainment
Broadcaster SBS
International distributor DCD Rights
essential-media.com

RAKE
8 x 1hr
Production company Essential Media and Entertainment
Broadcaster ABC
International distributor DCD Rights
essential-media.com

<em>Secrets & Lies</em> Secrets & Lies

SECRETS & LIES
6 x 1 hr
Production company Hoodlum
Broadcaster Ten
International distributor Cineflix Rights
hoodlum.com.au

THE SLAP
8 x 1 hr
Production company Matchbox Pictures
Broadcaster ABC
International distributor DCD Rights
matchboxpictures.com

TOP OF THE LAKE, series one
6 x 1hr
Production companies See-Saw Films, Escapade Pictures (NZ)
Broadcaster UKTV
International distributor BBC Worldwide
see-saw-films.com

UNDERGROUND – THE JULIAN ASSANGE STORY
90 mins
Production company Matchbox Pictures
Broadcaster Ten
International distributor NBC Universal Television
matchboxpictures.com

WENTWORTH, series one
10 x 1 hr
Production company FremantleMedia Australia
Broadcaster SoHo
International distributor FremantleMedia International
fremantlemedia.com.au

The methodology used

Much checking and rechecking of figures went into putting this list together, as well as extensive consultation with producers.

Two criteria were used. Firstly, a show had to have clocked up significant gross revenues – that is $750,000 or more – during the period July 1, 2012 to March 30, 2016. Focussing in on recent times meant the discussion would centre on current market conditions and shows that are still fresh in the mind.  Secondly, each had to have accumulated more than $1 million in revenue to date. (To be honest, there are two on the list that haven’t yet reached $1 million, but they are so close that it would have been mean to leave them out.)

Producers and/or distributors must supply figures to Screen Australia’s recoupment division via royalty reports that list the names of the buyers, what rights have been sold and how much they have been sold for. Screen Australia can also request information – if news of an unreported sale appears in the media, for example – and has the right of approval over sales in major territories so often knows about, and advises on, sales under negotiation.

Complicating the picture somewhat is currency exchange rates: the US dollar is the preferred currency in the international sales business – although some European territories prefer the euro – and a big slice of the revenue came in during a period in which the Australian dollar skyrocketed and then dipped.

Confidentiality applies

The titles of the 16 successful shows are listed in alphabetical order, rather than being ranked by total revenue received, because of the strict confidentiality rules under which Screen Australia operates. The agency makes public how much it directly invests in each and every drama at the end of every financial year but finance comes from a variety of sources and it cannot reveal all the financing details.

The drama – all made by private businesses with no obligation to make public any financial data – is part-funded by tax rebates (see under “Financing Australian TV drama” below) and there are harsh penalties for not heeding the confidentiality provisions of Australian tax law.

Permission was sought from the producers just to reveal that a drama was on the list. This article is being published as a prelude to a series of interviews with some of those producers, and also with international distributors intimately involved in these shows. Some may agree to disclose certain financial details, including total gross revenue.

“The fly in the ointment when considering profitability, is the cost of manufacture.”

Success factors

Even if there were no issues around confidentiality, ranking the 16 dramas by revenue could be misleading because there are so many factors that determine why one show earns more than another.

Number of episodes or duration always has a big influence on sales, for example. At one end of the list there’s Underground – The Julian Assange Story, a 90-minute telemovie; at the other there’s not one but two series/seasons of Miss Fisher’s Murder Mysteries, at 13 hours each.

When a show is recommissioned, interest usually grows in the overall franchise, prompting additional sales of previous series. Examples include Miss Fisher (three series completed), The Doctor Blake Mysteries (series five now being written), Top of the Lake (series two now in production), The Code (series two in the can), Wentworth (fourth series in the can) and Rake (fourth series about to air). That there were three telemovies in the marketplace before the Jack Irish series would have had a positive impact on its success too. Note that there are two series of Miss Fisher in the list because Screen Australia invested in them both. Further series of it and others mentioned here have grossed more than a $1 million in revenue too but they are not on the list because the agency was not involved.

Another big determinant behind sales is how long a drama has been in the international marketplace: the longer it’s been, the more opportunities it’s had to accumulate revenue. Of the shows listed, most entered in 2012, 2013 or 2014. The exceptions are: Rake, series one, which is a 2010 property that has remained popular with buyers and is a series still in production; Deadline Gallipoli and The Principal from 2015; and Cleverman and the Jack Irish series from 2016. Cleverman made the list before it was broadcast in Australia, making it a stand-out success.

Predicting whether a show is going to tap into the zeitgeist and be popular with audiences is a very big gamble. Other factors range from the cast to the track record of the behind-the-scenes team, the genre to the originality, the quality of the execution to current buying trends, and the level of competition to the nous and enthusiasm of the distributor.

Behind the scenes on Miss Fisher's Murder Mysteries series 1

Gross not net

As stated several times already – but it cannot be overstated because of its importance – the more than $1 million accumulated by each of the 16 productions is gross revenue not net revenue. Most of it has come through sales of the finished program to other countries. In the jargon of TV, these are rest of world (ROW) sales with ROW meaning anywhere outside Australia and New Zealand (ANZ).

Withholding tax (WHT), a tax levied by governments on income due to non-resident entities, must be paid out of gross revenue. The WHT on the sale of Australian drama can range from five to 30 per cent depending on the locations of the buyer and the seller.

WHT notwithstanding, grasping the difference between net and gross revenue from television sales necessitates tracking the involvement of the international distributor – or seller – because the gross revenue from ROW also has to cover the advance that’s been paid by the international distributor, commissions (also known as distribution fees), and marketing and other expenses.

Australian television drama can be very profitable for international distributors, most of which are non-Australian companies. But just as it is expensive and risky to produce TV, it’s also expensive and risky to get it to market. Let’s break down the distributor’s commitments and remuneration.

Advances paid by the distributor

International distributors generally secure the rights for a program for the world excluding ANZ. Sometimes they will also handle ANZ rights but, in the majority of cases, an Australian distributor is appointed by the producer to sell the other ANZ rights that exist alongside those belonging to the local commissioning broadcaster or subscription TV operator. (Again, see “Financing Australian TV drama” below.)

In return for the rights, the international distributor will usually pay an advance that might also be termed a distribution guarantee or minimum guarantee. It is an amount of money advanced against anticipated ROW sales either directly or via a lender. The advances paid by the distributors on the 16 shows were between $300,000 and $2.2 million – or $50,000 and $550,000 per hour – but there were very exceptional circumstances associated with the biggest advance. The median advance paid was close to $80,000 per hour.

These advances are critical pieces of the financing jigsaw and are repaid out of gross ROW revenue.

Commissions charged by the distributor

All distributors charge commissions, usually at a flat rate of between 30 and 50 per cent of all revenue. Amounts vary depending on the parties involved and whether the commission is charged on a broadcast, new media or airline deal, etc.

Total commissions paid to date to international distributors for each of the 16 shows range from $280,000 to $1.8 million. Just as revenues will grow so will the value of commissions and, generally, the distributor will get commissions for seven to 10 years, the usual length of the agreement with the production company.

Sales expenses clocked up by the distributor

Various sales and promotional expenses paid by the distributor also have to come out of gross revenue. These are often capped at five per cent of that revenue but the distributor sometimes seeks the producer’s permission to spend an additional amount – on a big launch at one of the television markets, for example.

The largest additional expense amount recorded among the 16 dramas was $500,000 and it paid for foreign language versions of the program. French and German buyers in particular will almost always insist on a dub in their native language, rather than a subtitled version. These dubs are expensive but these markets can pay handsomely for drama. To date 12 of the shows incurred some costs outside the cap while the others are still new in the market and are yet to report on final costs.

The revenue remaining after WHT and commissions are paid, and after the advance and expenses are repaid, is then divided between the equity investors. This is net revenue, also known as net receipts. Before delving into this though, let’s take a detour and describe where the gross revenue comes from.

Rake series 1

Sources of gross revenue

The 16 dramas on the list have been sold to between six and 90 countries. Some sales are to single countries and others are multi territory deals – to Eastern Europe or Latin America for example. In the worldwide marketplace these days, one deal can mean a program is available to an audience that stretches across the globe, providing that audience has the appropriate technology.

Distributors stand in the shoes of producers to sell the rights in each territory. The distributor can also be referred to as the head distributor, sales company or sales agent. In the interest of clarity, for this next section only, the term “sales agent” will be used instead of “distributor”.

A sales agent may sublicense the rights to a sub-agent, generally in hard-to-sell territories where the sub-agent has good relationships with buyers. The sub-agent performs all of the functions of the seller in those territories. The sales agency agreement should state that the commission is inclusive of any sub-agent’s commissions, in other words, the sales agent covers the sub-agent’s commissions and expenses and all the revenue returned to the sales agent is put in the gross revenue pot.

Generally, the gross revenue collected by the sales agent is made up of the following:

  • Television license fees from international broadcasters and subscription video on demand (SVOD) platforms. The sales agent will generally sell direct for a flat licence fee that covers the right to screen the show. (SVOD platforms charge subscribers a monthly fee to access a library of content.)
  • Advances (or minimum guarantees) from home entertainment or transactional video on demand (TVOD) distributors. These distributors will get back their advances from returns, along with a fee and expenses, before paying what are called “overages” to the sales agent. Home entertainment includes DVD. TVOD incorporates both online rental and download-to-own.
  • Revenue from airlines, either in the form of an advance from an international inflight entertainment distributor, who on sells to individual airlines, or in the form of a flat fee to Qantas, Virgin or Jetstar.
  • Fees associated with format sales

See here for information on the prices paid by different territories.

<em>Top of the Lake series 1</em>

“The dramas on the list have been sold to between six and 90 countries.”

Financing Australian TV drama

Let’s now revert back to the term distributor.

As mentioned, the net revenue remaining after WHT and commissions are paid, and after the advance and expenses are repaid, is then divided between the equity investors.

Understanding how net revenue flows and to whom requires a thumbnail sketch to be drawn of how drama is financed in the first place. Note that what’s being discussed here is new Australian adult television drama shown locally in primetime. (It is becoming more and more common to make drama at drastically reduced cost and distribute it on the web but financing that kind of programming is not what’s being discussed here.)

It has already been said that the 16 shows cost a total of $145 million. For the record, the range was from $900,000 to a highly unusual $3.4 million per hour, with the average being $1.4 million, and the median cost $1.1 million. (According to The New York Times the cost of US network shows was US$3 million per hour and cable shows US$2 million per hour in 2010. More recently Deadline Hollywood named several dramas that were costing up to US$4.5 million per hour.)

Generally the money that funds Australian drama production comes from:

  • Direct investment from federal and state film and television agencies.
    For information about what Screen Australia offers go here
  • The federal producer offset (PO), a tax rebate of up to 20 per cent of Australian production expenditure. The PO is not paid until after a show is completed and is generally cash flowed into the production via a loan.
    For information about Producer Offset, go here
  • A license fee from a local commissioner, that is, a television broadcaster, subscription TV operator or online distribution platform. This is a payment made for the right to air the show in Australia.
  • An advance from an international distributor.
  • Possibly, investment from the Australian commissioner – see above – in addition to and quite separate from the license fee.
  • Possibly, investment from the producer/production company.
  • Possibly, investment from private film or non-film industry parties.
  • Possibly, presales from non-ANZ territories.

The production budgets of the 16 dramas on the list each included direct government finance, a loan secured against the PO, a local license fee and an advance.

The vast majority had equity from the Australian commissioner and in two cases it was in the millions. Nine of the 16 had investment from the producer/production company, although in six cases the amount was less than one per cent of the budget. None had investment from a private non-film industry party and one secured a small amount from a private film industry player. Only one had international presales and those presales were very significant.

(“Presale” is a word that is defined differently depending on who the user is. An Australian producer or funding agency uses presale to describe a sale that is signed off during financing and cash flowed into the production budget. Such sales are not counted in gross revenue, are hard to come by, and are usually worth a lot more than sales made on finished shows. A distributor, on the other hand, may use the word presale to mean any sale locked down before a show is delivered.)

Note that it is not possible to get more than 40 per cent of the total budget from Screen Australia and the PO combined, according to the agency’s guidelines, which also state that the minimum license fee is $440,000 per broadcast hour.

(Alongside business partners, Screen Australia invested $37.5 million into 34 adult TV dramas in the three years up to June 30, 2015, the individual amounts ranging from $470,000 to nearly $1.9 million.)

Recouping to investors

As mentioned, any net revenue remaining after all the deductions discussed, flows to the equity investors, with the producer handling this disbursement. This flow of money is repaying the investment, which is also termed recouping the investment. In other words, it is not profit.

The sources of finance listed above that represent equity investments – and therefore have to be repaid – are the direct investments from government, providing they are more than $500,000, and any investments from the Australian commissioner, the producer/production company and/or the private non-film industry investor. (The Australian Tax Office indirectly repays the loan taken out against the producer offset, via a tax refund to the producer. The advance has already been repaid to the distributor through the sales made, and the license fee and any presales don’t need to be repaid.)

As explained, a distributor might make money from commissions even though it is not an equity investor. A local commissioner doesn’t get a share of revenue unless it is also an investor, but the commercial commissioners earn from advertising and/or subscriptions. A commercial commissioner might be Foxtel or Channels Ten or Seven (whereas the ABC and SBS are public broadcasters). Without a PhD in economics, it is near impossible to calculate whether they are making a profit from showing audiences Australian drama but the ratings tell us that it is some of the most popular programming in their schedules.

The producers’ position

Usually equity investors recoup in proportion to the size of their contribution, as per the separate ROW and ANZ recoupment schedules agreed to at the time of financing and contracting. Producers and/or production companies, the entities in charge of creating and exploiting the intellectual property, are a special case, mainly because of the producer offset.

The PO is a tax rebate that, as the name implies, belongs to the producer (and/or production company) and, because the PO is almost always cash flowed into the budget to pay for a portion of production, it gives the producer a stake in the film and television he or she creates. That stake becomes the producer’s equity investment. Technically, this means the producer is getting a cut of net revenue without having directly paid for it – unlike Screen Australia and the other investors.

(The producer could have promised the equity that the PO represents to some other entity in order to get the show financed. Screen Australia is concerned about how often and the extent to which this is happening.)

In certain circumstances some government agencies assign their equity investment to the producer – in Screen Australia’s case, when the investment is less than $500,000 – and the producer might also invest in his or her own right.

The producers’ share of net ROW revenue for the 16 shows listed was between 30 and 55 per cent. (“Producers’ share” can also be defined differently depending on the user. In this context it means the proportion that goes to the producer in the disbursement, whereas a distributor might use producers’ share to indicate the amount going back to the producer for disbursement to all investors.)

Bear in mind that each producer and executive producer (EP) will have earned a fee for his or her work. On the 16 shows these fees ranged from about $64,000 to an unusual $400,000 for producers and from $13,500 to $190,000 for EPs. There were between one and five producers and EPs on board each show. How many producers are on board, the experience of each producer, the budget and the duration of the show are key factors when determining fees. The average was $169,000 for the lead producer.

Most drama is a very long time in the making and the producer has had to cover overheads and development costs. There are also marketing demands and reporting responsibilities for many years after completion.

Residuals may be an issue

Depending on the decisions made at the contracting stage, residuals may have to come out of net revenue before it is disbursed to investors – perhaps also royalties, on the soundtrack for example. Residuals are payments made to the cast for screenings or reruns not covered by the actor’s original payment. Residuals are calculated on the basis of gross ROW revenue but paid out of net ROW revenue, which can lead to a sticky situation if there is a big difference between the two amounts. In fact, some sales don’t go ahead because the cost of residuals is prohibitive. Negotiations on the issue of residuals are currently underway between the bodies representing producers and actors.

The producer often needs to recover some marketing expenses in addition to the distributors’ marketing expenses.

“The advances paid by the sellers on the 16 shows were between … $50,000 and $550,000 per hour … The median advance paid was close to $80,000 per hour.”

In summary

Making profit from TV drama production, first and foremost, depends on the success of the show internationally. After that, each component of a show has to be examined – the advance, the budget, the way revenues flow – not just on a show-by-show basis but also from the point of view of each player in the chain.

Undoubtedly, because of the cost of production, it is a very high-risk game that equity investors will get all their production money back and then some. As a case in point, in its lifetime, Screen Australia has only ever invested in one adult television drama that has fully repaid its investment and made a profit for the agency. (On every one of the 16 shows listed, recoupment is flowing, meaning the advance and expenses have been repaid.)

But just because Screen Australia is only profiting from one show doesn’t mean that only one show among the 10 to 15 TV dramas that the agency backs per year, is profitable to the others involved. As explained, the distributor may be earning commissions, the producers’ position is not straightforward, commercial end users earn indirectly from advertising and subscriptions, and other investors may have been secured with the promise of an accelerated recoupment position.

There are Australian television dramas without Screen Australia investment that are profitable, in particular long-running series, and it is highly probable that the agency or its predecessor was one of the financiers in the set-up series. Generally Screen Australia will not fund any more than the first 26 hours of any one project.

(For the record, it appears that there is not necessarily a correlation between the gross earnings of a finished drama and its budget – there are just too many other factors at play. The show made for the least per hour of the 16, is in the top five earners, for example, while the most expensive is near the bottom of the list. As a percentage of the budget, the total gross revenue ranges between 10 and 74 per cent.)