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«Rights, Camera, Action! IP Rights and the Film-Making Process Creative industries – Booklet No. 2 Rights, Camera, Action! IP Rights and the ...»

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Foreign pre-sales are very often an essential strategy for the producer trying to make certain kinds of films. The entire Hollywood business model today is reliant on its ability to distribute films on a worldwide basis. In many instances, the studios selfdistribute through subsidiaries across the world. In other cases however, they will choose to reduce their worldwide distribution risk by laying off rights to some of their tent pole movies to third party distributors in some territories, against a minimum guarantee. In Europe and the US, most independent films over a budget of US$5 million will generally need to pre-sell some foreign rights in order to close their production financing because the value they will collect from the licensing of local rights may not suffice. Most of the high-budget Chinese crossover films – i.e. films made for an international as well as a local audience – find considerable demand from foreign buyers at the pre-sales stage, as do a growing number of Korean films and films from Latin America’s leading production countries (Mexico, Argentina, Brazil). India has a vast worldwide diaspora (currently estimated to be over 25 million strong) as well as rising levels of demand for Indian films from non-expatriates;

although the Indian cinema pre-sales market still provides only a fraction of the production financing available in India, it is a very fast growing segment of the Indian film economy, with major companies now based in the Persian Gulf, the UK and the US as the three leading markets for non-resident-Indians, and offering substantial advances to producers against rights to those territories.

Another example of the dependency of film production on foreign rights’ opportunities is the Middle East and North Africa. A geographical land mass comprising of approximately 20 separate states, most of them united by a common language; the Arab world represents a potential audience of 320 million, many of whom belong to the affluent middle classes with leisure time and money to spare.

Rights, Camera, Action! – IP Rights and the Film-Making Process Today, Egypt remains the leading film industry in the Arab world. However, despite a population of over 80 million, the value of rights on the Egyptian market alone cannot in general support films other that those made with very low budgets. The reasons for this market failure are typical of the challenges experienced by film industries all over the developing world: the cinema-theatre infrastructure is insufficiently developed;

local television is as yet limited in its capacity to support local film production; there are no government incentives in place and video/DVD piracy is rife. For any film project with a budget over US$1 million therefore, the producer will have little choice other than to seek pre-licensing rights outside Egypt as far as possible. Luckily, the market for good Egyptian films remains extremely buoyant all over the Arab world.

The example which follows illustrates vividly the role of international pre-sales in the making of a higher budget film and exemplifies the sometimes complex arrangements required to ensure that each buyer can secure an adequate “window” of exclusive exploitation.

The film, Fool el seen el azeem, was an adventure comedy-genre film produced in 2004 to critical acclaim and with excellent commercial results. The film charts the comical mishaps suffered by a hapless Egyptian chancer who runs into trouble with a gang of local hoodlums. Having fled to China, he is recruited against his will into an haute cuisine competition, despite never having cooked in his life. In the process of trying to save both his life and the remnants of his dignity, he finds the time to fall madly in love with a local girl.

This type of family comedy with a romantic twist can be extremely popular both in Egypt and the rest of the Arab-speaking world. This is just as well because its main producer, Mohammed Ramzy had budgeted for a US$1.8 million film, with an additional US$200,000 in marketing and prints costs to support the release of the film in Egyptian cinemas. By the standards of most of the world’s film industries outside the US and Europe, this was a big budget film. Most movies in the Middle East are made for half – or much less than half – of Fool el seen el azeem’s costs.

Rights, Camera, Action! – IP Rights and the Film-Making Process *Used with permission from Mr. Mohamed Ramzy, Chairman, United Artistic Group, Egypt The above table shows in detail how this big budget film was financed using a combination of local rights and international pre-sales. Fool el seen el azeem makes for an exemplary case of just how strategic foreign rights can be in the making of an independent film. In this instance, barely 55 percent of the film’s budget came from Egypt, with the balance (45 percent) entirely made up of pre-sales to other territories and pan-Arab satellite TV operators. Looking more closely at the detail,

other issues emerge:

– The total amount raised, US$1.975 million, did not cover the budgeted total of US$2.9 million. However, the latter figure included US$200,000 in Egyptian cinema release costs (prints and advertising) of which the producers were required to cover only 10 percent upfront. The balance would be earned back by the local distributor from first position on local cinema revenues.

Rights, Camera, Action! – IP Rights and the Film-Making Process – A massive 52 percent of the budget came in the form of an equity investment against returns on Egyptian cinema release revenue only. The producers put up some of their own capital and assembled a portfolio of investors across the Arab region.

Investors were to recover their funds in first position on Egyptian theatrical, with an additional profit share of between 5 and 30 percent.

– Egyptian video rights represented only 1 percent of the total raised by the producers. This is testimony to the acuteness of the audiovisual piracy problem in the country (as in much of the rest of the developing world), which prevents these rights from having any current strategic value.

– Egyptian free television rights were also sold off for a very small sum (1 percent of budget), again evidencing the budgetary limitations of much public television in Egypt and the rest of the Arab world.

– In contrast, cinema and video/DVDs for the Gulf region were hugely strategic, contributing 19 percent to the budget. This shows the high level of technological development in the Emirates and the Gulf as a whole, as well as the higher percentages of household income which may be devoted to filmed entertainment – furthermore, it generally takes longer for pirated copies of a non-national film to flood those markets and the video distributor is able to use the time to his advantage.

– Of equal strategic value were the satellite television rights. These are commercial pan-Arab satellite operators whose footprint typically covers the entire region. They are financed out of a mix of subscription and advertising, depending on whether they are freely available over the air or encrypted.

– The producers negotiated rights for two free-satellite windows: Melody, an Egyptbased operator obtained the first window, while Rotana in Saudi Arabia, obtained the second run. These two sales combined brought in 7 percent of the budget.

– Encrypted satellite rights required separate licensing to three different operators, combined with a joint negotiation on exclusive windows: ART, a Jordan-based pay-channel obtained the first window, with a year’s holdback; Showtime was allocated second window while the third window went to ORBIT, which broadcasts out of Italy into the Arab region.

Rights, Camera, Action! – IP Rights and the Film-Making Process – Free television in the rest of the Arab region also represented a low strategic value, again evidencing the budgetary constraints of much of the public service channels, with pre-sales to ten different channels bringing in only 2 percent of the film’s budget.

– Rights for the rest of the world’s (ex-Arab territories) video/DVD exploitation sold for a disappointing 1 percent of budget. The potential market for Arab-speaking audiences outside the Arab region is considerable. However, a lethal combination of international video piracy combined with poor access by Arab-language titles to the shelf-space of high street video retailers and the under-development of alternative networks for legitimate sales and rental conspire to make these rights strikingly unstrategic at this point, despite the massive underlying demand.

The Fool el seen el azeem story illustrates the considerable value of international rights in a producer’s strategy. It also, in some ways, highlights the limitations of this strategy, inasmuch as some sets of rights continue to be licensed for well under their potential value. Endemic audiovisual piracy has a lot to do with it, as in the case of video/DVD licensing in Egypt, the country where the film was mostly shot.

Another factor is the under-funding of local public broadcasting, with budgetary priorities which may not allow them to become consistent supporters of local film production. Finally, it is important to note that not all films are suited to a foreign presales strategy. The appeal of Fool el seen el azeem in this respect was due in part to the popularity of Egyptian screen stars across the Arab world, but also to the fact that the movie was designed to be a broad popular comedy appealing to a common denominator of taste amongst Arab audiences as a whole. The majority of films are in fact extremely difficult to pre-sell outside their country of origin because their cast may be unknown beyond their national borders, and/or the subject matter deemed too narrowly local for international buyers.

5.ii The World is Not Enough – the role of the sales company

Producers capable of setting up their own international pre-sales as well as dealing with all the other demands of film development and production are few and far between. These are the senior producers with track-records, access to the best talent and a history of working with established rights’ buyers in foreign countries.

Rights, Camera, Action! – IP Rights and the Film-Making Process For the majority however, the road to pre-sales goes through an agreement with a company specializing in exporting films in the worldwide market, or raising pre-sales for them when they are still in development or production. In the film industry, these entities are referred to as sales agents or sales companies. The terminology is generic and does not do justice to the range and complexity of what these companies may offer the producer. Broadly speaking, there are three types of sales agents, each type corresponding to different positions in the market and degrees of power in raising finance.

At the bottom end of the market, sales agencies are small, not capitalized and generally specialized in smaller, auteur films corresponding to the more up-scale, cultivated end of the international film market. These companies are often dedicated enterprises with an impressive level of commitment to specialized films and a readiness to find a market for them abroad, often against great odds. What these companies cannot do, typically, is offer the producer a minimum guarantee on the sales of the film in foreign territories: the risk is simply too great, and the capacity of the sales agents to advance any money against the value of the rights is too limited.

What these companies offer is state-of-the-art handling of the film’s foreign sales potential after its completion. In this instance, the producer enters into a straightforward agency agreement whereby the sales agent is given the exclusive right to commercialize the rights in the film in pre-defined foreign territories.

At the middle-end of the market, some sales agents have the capacity to offer the producer a minimum guarantee (MG) against future sales/licensing of relevant rights to foreign buyers. The MG is an amount of income from future sales that is guaranteed to the producer, whether or not the agent achieves his sales targets. It therefore involves companies with sufficient selling power and strong cash-flow, because it represents a risk. In this instance, the producer may be offered an advance against the value of the MG, which is cash-flowed before or during production (typically 10 percent). The balance is generally paid after the producer has satisfied the delivery requirement of the sales agent.

At the top-end of the market, some sales companies act a little like Hollywood studios: they may become involved financially and creatively at script development stage; they sometimes have the capacity to attract star talent and, more importantly, Rights, Camera, Action! – IP Rights and the Film-Making Process they are capable in some cases of guaranteeing a significant proportion of the film’s budget (if their own creative requirements have been satisfied) without yet having pre-sold a frame of the project internationally. These companies may have output deals with powerful distributors or broadcasters in a whole range of countries and may be confident that they can obtain the right value out of the marketplace to cover their risk. They also have relationships with banks or gap financiers who are prepared to back-up their risk based on estimated values of future sales. Evidently, on such agreements, the sales company may take a full assignment (or long license) of foreign rights and may also negotiate to be included in recovery of income from the country in which the film is being made. These entities fulfill a role more akin to that of an executive producer than that of a conventional sales agent. The number of films financed in this way remains relatively rare and tends to be limited to highbudget international films with stars.

International sales agents are mostly operating in the European region and North America. A large number are members of the worldwide trade association of film exporters, the Independent Film & Television Alliance (IFTA), based in Los Angeles, USA. IFTA is a mine of information on the business of international film rights’ licensing and makes international distribution deal memos and agreement templates available to its members. Readers are encouraged to refer to IFTA for more detailed information about sales companies and any aspect of international rights’ licensing.

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