I had a lengthy conversation on twitter a few days back about cinemas in Nigeria, and one of the things that struck me is that there was a lot of misinformation out there about a number of things.
I can’t clear everything up, but one of the things that I can clear up is what happens to the box office revenue and how it’s shared amongst the various stakeholders in the cinema value chain.
The average ticket price in Nigeria is roughly N1,000, which is good because it makes the math easier. The chart above traces the journey of what happens to the money when a cinema goer buys a ticket. Assume this ticket is a proxy for box office revenue.
Taxes: The first thing that happens is taxes. The federal government takes 5% as VAT and the state government takes 5% as entertainment tax. I used to think the entertainment tax was very annoying and then I saw what obtains in the various Indian states. At which point I jejely stopped complaining about paying 5% as entertainment tax.
Net Box Office Revenue: The balance after taxes goes is called the Net Box Office and is shared between the Cinemas and Distributors.
Cinema Share: As the picture above shows, cinemas do get more of the revenue than everyone else, but not by much. Over time I expect the royalty rates to go up as individual films become more important for box office performance, however at this stage the cinemas are generally able to keep royalties relatively uniform.
Gross Royalty: The next deduction is what we call gross royalty or rental. Cinemas don’t own the films they show, instead they rent the films from the distributor and pay a royalty or a rental fee to the distributor.
In Nigeria for Nollywood films the royalty is set as 50 sliding to 40 — this was set before my time but all cinemas generally seem to abide by it despite Hollywood films having variable terms. I’m guessing that it was probably part of an initiative to support local cinema a while ago.
Anyway back to 50 sliding to 40. This means that in week one the royalty is 50%, in week 2 it is 45% and then in week 3 and beyond it is 40% — this means that the cinemas make more money the longer a film plays in their halls.
As an aside Hollywood films slide to 30%, which technically means that cinemas have a financial incentive to play Hollywood films longer, but that’s a story for another day.
In the example above — to make the math easier — we use week 1 royalty of 50%.
Witholding Tax: As you are aware, the FG doesn’t trust anyone to pay tax and as such before the cinemas send the distributor any royalty, they are required deduct 10% of the total sum as witholding tax. As a producer you can imagine that this is a painful something, but that is life in Nigeria.
So when you factor in all the taxes together the various governments take 14.5% of the box office as taxes. The government should take a leaf out of the books of the Indian and South Korean governments and be doing all it can to support the growth of cinemas.
Net Royalty: The net royalty to the distributor is the amount that is available for sharing once the witholding tax has been deducted. This amount will be shared between the producer and the distributor.
Distribution Fee: So distributors charge somewhere between 10% and 15% for the work of placing the films in cinemas and getting good times, ensuring long runs etc. I assumed a 12.3% to make the math easier. I’ve also heard that some distributors are now insisting on a flat fee, I can’t tell anyone not to take this offer, but it’s pretty risky to agree to this.
Producer Share: So now all the fees have been shared, and you are generally owe no one, the producer gets N355 out of the N1,000 ticket. This is roughly 35.5%, and given that this number will only go down as the film royalty drops, you find that on average the producer will get roughly 33% of the total box office amount. Granted the witholding tax is claimable by the producer to offset tax paid, but that is a discussion for another day.
A lot of producers feel that a net fee of 33% to 35% of the box office is too low a proportion for them given the work that goes into making a film. I just think that once you know the number you plan accordingly.
Of course I wish we were in the US, where the producer share is closer to 45% because sales tax is additive to the ticket price, but in the UK and India the number is similar to ours because of high VAT and/or entertainment taxes.
So there you have it, the cash waterfall for cinema in Nigeria. Hopefully you all found it useful. If you didn’t I apologise for boring you and will do better next time :-)
Laters,
