Profit participation, or "backend," is one of the most complex aspects of entertainment dealmaking. Its intricacies are confusing even to many professionals working in film and television. To those from outside the entertainment industry, it is one of the deal components that tends to elicit a healthy dose of wariness. Most of us have heard of "Hollywood accounting," or perhaps followed one of the several major lawsuits where profit participation definitions were a significant issue.
With that said, this article aims to explain some of the most common profit participation structures in film and television, alongside some key considerations.
The Backend Pool
The "backend pool" is the simplest form of profit participation and is used primarily in connection with independent film. There is one "pool" of backend (which may be called "net profits," "net proceeds," or something else), which is calculated by running all of the gross receipts of the production through a negotiated revenue waterfall. Typically, collection agent fees, sales agent fees and expenses, and other "off-the-tops" are deducted before the financiers of the production recoup their investments plus a premium of 15–20%. Remaining sums are the "backend," and while the split may be negotiable, it is common for 50% of the backend to be allocated to financiers and 50% to creative participants such as the director, producers, and cast.
The backend pool structure is less complex than a typical studio definition because each percentage point of backend is worth an equal amount. Unlike in a studio definition, where "net profits" may sit behind several earlier and more favorable forms of backend, in theory, all net profit participants in a pool structure should be paid simultaneously on a pro rata basis. With that said, it is important to review the backend waterfall to understand the deductions that are being taken before reaching "profit," and also to ensure that there are no surprise deductions being taken. For example, an actor working for scale in an independent film may negotiate a hefty "deferral" that is paid before reaching "net" – and which could, in many instances, help ensure that no "net" is ever paid.
Studio Definitions
Unlike backend pool structures, studio definitions are run separately for each participant based on their negotiated definition. Accordingly, two different participants may have strikingly different definitions that begin paying "profit" at very different points. In television, the traditional backend structure is called "MAGR" (modified adjusted gross receipts). In motion pictures, it's "AGR" (adjusted gross receipts) – although the studios have different names for their backend definitions.
In studio definitions, there are multiple points of negotiation that are important to address. Two of the most important are the distribution fee and overhead (and/or "supervisory fee") being charged by the studio – effectively, how much the studio can deduct as fees. In studio motion picture deals, there may be a series of "breakpoints" based on a theoretical distribution fee to be charged by the studio. For example, "CB20" means the point at which there would be profits if the studio were charging a 20% distribution fee. Other key terms include how tax credits are treated and whether they offset the cost of production being recouped by the studio, what percentage of interest is charged, how digital distribution revenues from platforms such as VOD and EST are treated (on a gross versus royalty basis), and whether the studio charges an override on any third-party distribution fees. Moreover, if the producing studio is owned by the same parent company as the ultimate exhibitor, there may be language relating to how related party transactions are governed. In essence, how much will one division of the company pay another division for the exhibition rights in a production? That question was one of the key issues, among others, in the high profile "The Walking Dead" and "Bones" lawsuits.
The details can be complex and overwhelming, but the simple principle is this: a participant wants to maximize the sums that are considered "gross receipts" and minimize the deductions by the studio.
Given all of the complexity, participants often seek protection by requesting to be tied to the definition of another party, or potentially all parties – a so-called "most favored nations" clause. However, while participants should probably always make the ask, they should also manage expectations. Many studios, especially in TV, have firm policies that they will not give contractual MFNs. Moreover, it is not realistic in most instances for a rightsholder or participant with limited credits to be tied to the lead actor or director of a movie. For this reason, and many others, it is important that participants seek professional guidance when negotiating studio backend.
Box Office and Awards Bonuses
Box office bonuses remain a common structure for theatrical releases. Generally, these are contractually triggered at certain thresholds based on either domestic or worldwide box office. Those thresholds may be based on absolute numbers (e.g., at $400m in worldwide box office, and each $50m in WWBO thereafter), or at multiples of the negative cost of the movie (plus, often, prints and advertising). In most, but not all, instances, box office bonuses are applicable against the backend payable to a participant – indeed, several studios characterize them as "advances" instead of "bonuses." The advantage of box office bonuses is that unlike the forms of contingent compensation described above, they are linked to publicly available information available in the trades or through a service like Rentrak. Participants should always ask about how China is valued, because a dollar in Chinese box office is generally counted at 25-50%.
Awards bonuses seem to be being phased out, in part because there is not always a clear link between winning an award and the commercial performance of a production (particularly for "prestige" productions created for the arthouse market). With all forms of bonus, participants should make the ask and ascertain what the studio's policy is with respect to that particular project, so they are aware whether bonuses are being offered, and whether other participants have been accorded them.
A quick note for those coming from games – unlike in games, where bonuses may be linked to a game's Metacritic score, it is not customary in film or television to link bonus payments to review scores (either from Metacritic or Rotten Tomatoes).
Per-Points and Performance Bonus Formulae
In the streaming era, several companies have moved away from "true" backend, where actual revenues and deductions are calculated, towards point- and performance-based structures. Apple, Disney, and Amazon all use variations on these bonus point structures. Under this model, the actual financial performance of the production and the actual revenues of the production are irrelevant. Instead, participants are paid based on other factors that usually relate to the performance of the production on the streaming service.
There are multiple reasons for this shift. Firstly, it saves money in extreme success. Unlike a traditional backend definition, where upside for participants is theoretically unlimited, bonus point systems all include a cap on the earnings of an individual participant. Moreover, because only a limited number of productions can be "top performers," the structure inherently limits the compensation payable to those productions that don't rank highly. Secondly, it is less complicated to account. The studio does not need to actually run accounts and produce statements. It simply pays based on on-platform performance triggers. Thirdly, it avoids challenges relating to related-party transactions and imputing fees across divisions of a conglomerate. Finally (and relatedly), it helps prevent a time-consuming audit followed by a costly and long-running lawsuit from participants who believe that they are owed a greater portion of a production's success.
Each platform's bonus structure is proprietary, and while there are some similarities, it is important to understand the specifics of each structure and the triggers for payment. Some of the structures are based primarily on longevity (e.g., the value of a point increases with each series ordered). Some factor in budget, while others consider minutes viewed, awards recognition, or subscriber acquisition. It should also be noted that while certain platforms may have different "tiers" for valuing their points, most do not allow negotiation of the specifics of the definition.
Separate Pots
One of the hallmarks of the entertainment industry in 2025 is that ancillary rights are becoming increasingly important in success. Transmedia entertainment properties may be exploited as merchandising, generating a soundtrack, live stage or videogame adaptation, or location-based entertainment experience.
Traditionally, the revenues from these ancillary exploitations would run through the main backend definition, meaning that they would be crossed with the revenues and expenses of the main production. This often meant that any revenues generated from ancillaries (e.g., merchandising revenues) would be eaten up before the participants saw a cent.
Accordingly, studios and platforms may now offer "separate pots" in certain instances to particular stakeholders. In their purest form, a separate pot means that revenues from a particular form of ancillary right are separately accounted for. In the case of merchandising, that might mean that an administrative fee and expenses are charged and any third-party participants are paid before reaching "Net Merchandising Revenues" – but those revenues would not be further diluted by crossed costs. In theory, that means that participants will see monies sooner if a particular exploitation is successful.
There are still some things to watch. Some "separate pots" condition payment on the production achieving a certain breakpoint (meaning they are not true separately accounted pots). Moreover, it is important to review definitions. For example, a studio may include videogames as "merchandise" – meaning that revenues from a successful game are crossed with expenses from other forms of merchandise. Other studios may exclude games from "merchandising" – but not pay anything for a videogame at all. Finally, certain studios and platforms may pay fixed bonuses in lieu of separate pots in connection with particular rights. As ever, it is important to understand the ramifications of the deal and consult with experienced representatives.
Accounting and Audit
For those reading this and coming from outside film and television, I offer a key principle of the entertainment industry: if something is successful, there will be an audit and there will often also be a lawsuit. This is particularly true in instances where a related-party transaction is involved, or a production has been successful and is generated revenues downstream (for example, in subsequent windows and/or syndication). Accordingly, participants should also pay attention to the contractual terms and conditions relating to audit. For example, how long do they have to review, challenge, and audit a statement?
It is possible that with the dawn of the performance point model, auditing may become less commonplace. However, it is unlikely to go away altogether, because if the payments due in connection with a production are related to its performance on a streaming service, auditing the performance data of a service is the only way that it can be verified. While syndication-level money seems to be a thing of the past, point-based structures can still place millions of dollars at issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
