Cross-Collateralization

A Notorious ‘Hollywood Accounting’ Tactic

Cross-collateralization is a clause frequently found in distribution and talent agreements that is a key reason why receiving ‘net profits’ or ‘backend points’ on a film is notoriously difficult. The clause gives the studio the right to bundle multiple revenue streams or even multiple films together into a single entity for accounting purposes. This means that every bundled stream or film must be profitable before any single part is considered ‘in profit’ and backend payments are triggered. It allows studios to use the success of one venture to pay for the failure of another, all before sharing any revenue with the talent or producers who were promised a share of the profits.

Common Forms of Application

This practice can be applied in several ways, each one creating a higher barrier for profit participants:

• Geographic Cross-Collateralization: A film might be a huge success in North America but a flop internationally. The studio can use the domestic profits to cover the international losses (including marketing costs). Until the film is profitable on a global, aggregate basis, no net profits are paid out.
• Media Cross-Collateralization: The theatrical release of a film might be profitable, but the studio may then spend heavily on a home video or streaming release. The profits from the box office can be applied against the costs of that subsequent release. The film’s overall account might never show a profit, even if its theatrical run was a certified hit.
• Multi-Picture Cross-Collateralization: This is often considered the most punitive form. If a director or star signs a two-picture deal, and the first film is a blockbuster but the second is a bomb, the studio can use all the profits from the hit to cover the losses of the flop. The talent could be responsible for a culturally and financially successful film and yet see zero backend participation because it was contractually tied to a failure.

The Importance of Negotiation

For agents, managers, and entertainment lawyers, fighting against cross-collateralization is a top priority during contract negotiations. A savvy representative will argue for each revenue stream (theatrical, home video, television, etc.) and each territory to be treated as a separate, un-crossed bucket. While studios have immense leverage and rarely give up this clause entirely, limiting its scope is a major victory for the talent and a crucial step toward having any realistic chance of participating in a film’s financial success.