I must first tell you the functions of the three bodies.
A Producer is, perhaps, the most important person involved in the making of a film. There are three stages when a film is being made: 1) Pre-Production, 2) Production and 3) Post-Production.
At the Pre-Production stage, the Producer finds a script or hires someone to write one based on a book, article or an idea he may have. When the script is ready; the budget is prepared and the Producer looks for Investors to invest in his film. Also, at this point, the Actors, Director and Production Manager are hired. When the money is secured from Investors - the Producer, Director and Production Manager hire the other staff for the production of the film.
During the Production stage, the Director instructs the Actors and confers with the Cinematographer and other technicians in order to get the best possible shots. Once the entire script has been shot, the film moves to the Post-Production stage.
In Post-Production, the actors finish dubbing (if required) plus Special Effects, Background Music and Sound Effects are added to the film. Once Post-Production is complete the Producer sells the film to a Distributor for a profit (a sum greater than the cost of the budget).
The Producer usually earns a salary (included in the budget) and a percentage of the profits from the sale of the film which is divided between the Producer and his Investors. In some cases, If the Producer sells all the rights of his film to one Distributor, the Producer is entitled to a share of the Distributor's profit.
A Distributor is the one who has everything to lose in releasing a film. In India, Distributors purchase a film from a Producer - based on Star Cast, Director, Producer, Lyricist and Music Director - and pay the Producer the amount of the budget + some profit. The bigger the Actor(s) the more the Producer will earn. For Example, if a Salman Khan film has a budget of 40 crores, the Distributor will easily purchase it for 45 crores giving the producer and his investors 5 crores in profit, the Distributor then has to pay for the cost of Prints and Publicity which would add another 5 crores to his cost of the film. In this scenario, if the Producer keeps the Satellite Rights he makes more money from that, but the Distributor doesn't get a share from it. So, if the Producer of a 40 crore film sells its Satellite Rights for 15 crores all that revenue goes into his pocket in addition to the 5 crores profit he received from the Distributor. Plus there are also Music Rights, if the Music Rights are sold for another 5 crores, the Producer has already made a profit of 25 crores before the film is released. The Distributor on the other hand is in the hole for 50 crores and can only recover it from a successful theatrical run where the film generates more than 110 Crores (more on that later).
An Exhibitor is the multiplex chain or single screen theaters where the film will be shown. The Distributor makes arrangements with Exhibitors to showcase a film in as many of their screens as possible and the Exhibitors earn a share of nett collections (the revenue after tax has been deducted from the gross collections) based on an agreement decided upon after the strike 2009. According to the agreement, In the first week the Exhibitors and Distributors divide the nett collections 50/50. But things change after that because in the second week the Exhibitors share goes up to 57.5% and Distributors share drops to 42.5%. In the third week, the Exhibitors get 62.5% an Distributors earn a 37.5% share. In the fourth week and weeks beyond that, the Exhibitors earn 70% and Distributors share falls to 30% of nett collections. The reason for this arrangement is... since most people have seen the film in the first week the collections start to drop after that, but the Exhibitors still have to keep staff around in case the film runs for more than one week. The Exhibitors don't have anything invested in the film itself. The Exhibitors' cost are the cost of hiring staff for each show, cost of food, drinks, electricity, etc.
You may have noticed on many TV shows the host only speaks to the Exhibitors to find out how a film is doing, they hardly ever speak to a Distributor. Well, the reason for that is simple, when a film is released the nett revenue it earns are divided 50/50 between the Exhibitor and Distributor in the first week and if a 50 crore film earns 45 crores in the first week the Exhibitors are laughing, because they've recovered more than their cost of hiring staff, etc and are making a profit. But the Distributor only earns half of that and still has to recover an additional 27.5 crores in order to break-even. Now if the film is liked by the audience and gets positive reviews, it may earn another 35 crores in the second week but the Distributor earns 14.875 crores because their share drops in the second week leaving another 12.625 crores to be recovered. In the third week if the films business is 20 crores, the Distributor earns 7.5 crores. By the fourth week and beyond the film will likely earn another 10 crores at most in it's life time which gives the Distributor another 3 crores. But, even after a successful run, the Distributor falls short of making a profit - earning only 47.875 crores of the 50 crores cost. So, even though the film made 110 crores nett at the box office, once the revenues are divided, the Distributor is in a loss. In this case it's the budget that killed the Distributor even though it made a huge profit for the Producer and Exhibitors. If the film cost the Distributor 40 crores he would have made a huge profit and the film would've been a hit instead of falling into the flop category.
There are some rare situations in which the Distributor owns the Music and Satellite Rights as well. In these cases they're able to recover their money even if the film is a box office disaster. Take the recent flop film Zindegi Na Milegi Dobara. Even though the film has had a decent box office run and made lots of money for it's Exhibitors and Producers, the Distributor (Eros Entertainment) won't recover their 55 crores cost from the theatrical run. Luckily they own the Satellite and Music Right (24 crores and 7 crores, respectively), which will get them to the break-even stage and perhaps earn them a couple of crores in profit. But without the Satellite and Music rights the Distributor of Zindegi Na Milegi Dobara would've faced a loss of atleast 25-30 crores.
Very few Hindi films ever earn more than 100 crores at the box office. So far only 3 Idiots, Ghajini, Dabangg and Ready have crossed 100 crores in nett collections. Since only two stars Salman Khan and Aamir Khan have crossed the 100 crores mark it's stupid for the Producer and Distributors to believe that any film with a big star name attached has the capacity for doing the same - these films were exceptions. In India, 10 films in a year won't cross 100 crores, so it's a dumb idea to have budgets over 50 crores for every Hrithik Roshan, Shahrukh Khan, Ranbir Kapoor, Ajay Devgn, Saif Ali Khan, Sanjay Dutt, Abhishek Bachchan and Akshay Kumar film that comes out.
So far there's been 1 film each year for the last 4 years that has managed to cross 100 crores in nett collection. Until Filmmakers and Distributors understand the economics of the film industry, films will continue to flop and it's not necessarily the content that causes a film's failure, it's usually the budget, the market isn't large enough to support films with such high budget. Hrithik Roshan has been suffering the wrath of big budget flops for the last few years. Zindagi Na Milegi Dobara, Kites, Guzaarish, Jodha Akbar all would've been huge hits had they been sold for a reasonable price. It doesn't seem fair that Producers and Exhibitors make huge lumps of money while the Distributors and the films suffer.
I hope this explanation gives you a better understanding of how the Producer-Exhibitor-Distributor structure works in the film industry.
