«Rights, Camera, Action! IP Rights and the Film-Making Process Creative industries – Booklet No. 2 Rights, Camera, Action! IP Rights and the ...»
Rights, Camera, Action! – IP Rights and the Film-Making Process In broad terms, it can be argued that the more the film industry becomes capable of attracting a critical mass of equity investment, the greater its bargaining power will become in the negotiation over rights with distributors, television broadcasters, video licensors, telecom operators and other categories of film buyers. Conversely, a chronic lack of self-financing capacity makes the independent producer less able to withhold rights to a film until after the film is made. For the majority of producers, rights are disposed of early, when the project is vulnerable to being turned down.
In this way, the IP value becomes diluted between the various buyers and little of it remains with the producer, thus leaving his company without assets.
Equity investment is also present in individual films. In many cases in the independent film industry, powerful rights buyers such as broadcasters not only buy rights, such as free-to-air television, but also take an equity stake in the project.
In this instance, the buyer may make an offer for an overall price and negotiate with the producer (or distributor) over what proportion represents the rights acquired and what proportion represents the equity investment. The negotiation aims of the producer may vary according to his own perception of the likely success of the film. If he has the conviction that the film will be an overall success at home and abroad, he may want to do everything in his (limited) power to protect his share of the up-side – i.e. the net revenues generated from the film’s exploitation – by trying to convince the buyer to assign more of his proposed contribution to the rights acquired and to reduce his equity investment. On the other hand, the rights given away by the producer may be seen by him as very strategic, in which case he may be more focused on trying to reduce the period of time (term) of the licensing deal, in order to get those valuable rights back while they still have some residual commercial value. However, if the term of license is short, the price paid by the buyer(s) may be lower and the producer may need more equity investment to close his budget.
As a basic rule of thumb, equity investors (there can be several attached to the same film) recover their investment, with a premium, that is a sum of money additional to the sum initially invested, and/or a participation in the net profits, on a pro-rata basis.
Pro-rata means that for every US dollar of income earned by the film – after agreed deductions of bank loans, distribution/sales commissions and costs, etc – Rights, Camera, Action! – IP Rights and the Film-Making Process the investor will receive a share proportional to the share of the film’s budget represented by his investment.
In practice however, the investment recovery formula is rarely so straightforward: for reasons which are specific to the history of every deal: an investor may negotiate for an early corridor of income before other equity holders, until he has recovered a preagreed sum. Thereafter, the percentage of recovery may change again in favor of other equity partners in the film. Such preferential treatment is always negotiated and is justified by a number of factors: the investor may have been involved from the start of the project and taken a greater risk proportionately to others; he may separately have provided a bridging loan, meaning a loan which helps the producer cover his cash outgoings until more money comes in, at a critical point in the project’s life, etc. Similar deals may be negotiated to share out net profits in the film.
2.iii IP Rights as the Most Strategic Source of Financing
IP Rights are by far the most valuable assets the film producer is likely to hold in his hand when approaching the financing of a film project. Film industry insiders often describe the process of raising finance as a begging bowl experience. In actual fact, the producer is far from resembling the proverbial beggar; in our chapter dedicated to development, readers were able to glimpse the range of risks the producer will have taken in order to acquire the underlying rights in all the works utilized to produce the script, book, or anything else entering into the film’s concept. Additionally, the producer may have attached to the project a director and/or an actor with a strong reputation, making it more attractive to potential investors – producers should never underestimate their ability to build up their negotiating power in this way.
At this stage, the producer, wherever in the world he lives and works needs to have a firm grasp of how different sets of rights interact with each other inside a continuum of exploitation also known as the value chain. Without it, he will be clueless about how to approach negotiations over the licensing/assignment of rights against production finance.
What is the value chain? In most countries, there is a pre-agreed order in which a theatrical feature film will be commercialized. Traditionally, each form of exploitation Rights, Camera, Action! – IP Rights and the Film-Making Process happens in sequence, with each market (the cinema, television, video, etc.) having its own exclusive window of time during which the film may not be exploited in a different medium. Across the world, wherever a film industry has achieved a certain level of maturity and critical mass and wherever broadcast television is developed,
the traditional value chain has tended to be structured in the following way:
The point of windows as a convention observed by the film industry (specified in rights licensing/acquisition contracts and sometimes imposed by law or regulation in specific countries), is to ensure that maximum value can be extracted from each sequential cycle of exploitation of the film. It seems logical that if the film is available in video stores and on free TV at the same time as it is being released in the cinemas, each of these forms of exploitation will be hurt by having to compete simultaneously with the other. Buyers of the rights for each of these uses will have paid good money for the film and will want to protect their investment by maximizing commercial returns. They do not want their revenues to be cannibalized by other media being exploited at the same time.
But the film industry is in a state of constant change. Technology, in particular, regularly forces the market to mutate whether the film community likes it or not. Very often, it doesn’t: when television was first introduced, the film industry in the West fought a rearguard action against it. One prominent film industry figure prophesied that the newly-arrived Sony video cassette player would have the same terminal impact on the film industry as the infamous Boston strangler had had on his female victims! In today’s world, the rapidly expanding range of digital media and Internet broadband is forcing the industry into what is perhaps the most radical re-evaluation in its history since synchronized sound was first introduced. The existing value chain (and the allimportant windows of exploitation) is being challenged in a number of ways.
Rights, Camera, Action! – IP Rights and the Film-Making Process The unprecedented image and sound quality of the DVD, introduced to the market just over a decade ago, has revolutionized the video market. During the VHS days, video was predominantly a rental market. With DVD, millions of consumers worldwide have chosen to buy. This mutation has made DVD (until recently) the most profitable medium in the history of cinema.
Digital copies, unlike analog ones (VHS or Betamax) are an exact replica of the original and their quality does not decline over time. This factor is behind the commercial triumph of the DVD format in the West and VCD in many parts of the developing world. However, what profits the legitimate copy also profits the illegal one: the advent of DVD has resulted in the massive increase in video piracy. India, Egypt, Nigeria, Kenya are four examples of dynamic film industries in the developing world, where DVD and VCD piracy represent over 90 percent of the market, with legitimate distributors left to battle it out for the crumbs.
What is true of physical digital copies is also true of copies downloaded through the Internet or digital networks: a perfect copy can be made from films circulating illegally over the web. Once a film is uploaded onto the web without the consent of the right holders, there are few obstacles for people connected through broadband to download it and consume it without either renting or buying it. In countries with a high level of broadband connections, the control or rights over films on the Internet is a challenge for film makers and all participants in the film value chain.
Legitimate services of on-line cinema allowing people to rent or purchase films over the Internet and either download or stream them, have successfully emerged in the West over the past few years, especially in North America, France, the UK, Germany, Italy and Spain. In India, Tata Sky now also offers a video-on-demand service over the Internet. However, these services still represent a small proportion of the market.
As the impact of these technology-based changes is becoming more apparent, film’s most traditional market, the cinema, has been going through its own profound transformation. Releasing a film in cinemas is the most costly episode in its commercial career. According to the Motion Picture Association (MPA), the organization representing the major US film studios, the average amount spent on releasing a Hollywood film in 2005 was US$32 million. Hollywood may be different from other film industries but Rights, Camera, Action! – IP Rights and the Film-Making Process the fact remains that the cinema release of even the smaller films require substantial amounts of cash. In the West, little impact can be achieved unless the distributor in a large country is prepared to spend at least US$150,000 on a film. Furthermore, there are an increasing number of films competing for a finite number of screens.
As a result, it is more difficult for distributors to secure long runs (release periods) for their films because so many other films are waiting in the wings for a release date.
This lack of screen time is particularly damaging for the career of smaller, specialized films (those with no stars or special effects or spectacular action set pieces), because they are more reliant on a slow build-up of positive word-of-mouth to attract an audience and cannot hope to do so if the maximum release period available is between two to three weeks at the most: in this hit-driven industry, there seems to be a growing expectation that all films, large or small, should be released with the greatest possible number of prints from the very start and should attract most of their audience during the first week’s release. Whilst this logic works well for the blockbuster, i.e. the big budget films with stars, it penalizes smaller films whose distributors do not have the resources to flood the market with prints and expect quick returns on their investment.
For anyone approaching the film production rights’ maze for the first time, embarking on the journey without some grasp of these changes to the value chain would be equivalent to the round-the-world yacht racing skipper sailing without a compass.
Knowing the value of each form of exploitation relative to the others in the chain makes it possible for the uninitiated producer to strategize his approach to financing through rights, to have realistic expectations of what each rights’ market may yield and to determine what a realistic production budget for the film should be.
A criticism often leveled at film producers by financiers is that they tend to set their budgets according to their own (and the director’s) creative wish (or whim), without asking themselves what the market may be able to offer considering the genre, storyline, actors envisaged, the current state of the marketplace for films, etc.
Owing to the fact that these changes are still unfolding, the inventory that follows makes no claim to being completely accurate or exhaustive. It is merely a pointer to what may be happening and the authors hope it will be helpful in guiding the new entrant to producing a film.
Rights, Camera, Action! – IP Rights and the Film-Making Process As discussed above, the cinema exhibition market is becoming increasingly difficult and expensive for all but the larger, star-driven commercial films. Even in countries such as India or China, where many modern multiplex chains are replacing the old, obsolete onescreen cinemas, the new infrastructure is mostly beneficial to a small number of blockbusters. In most countries, cost inflation for prints and advertising runs well ahead of the standard rise in the cost of living, while it is increasingly difficult for distributors to keep even a moderately-successful film in cinemas for long. The cinema is still seen in most film industries as the obligatory launch market, whose performance determines the success or failure of the film in the next segments of the value chain. However, the price of entry into that market increases while its flexibility decreases. For many, starting a film’s career in the cinema no longer seems like the obligatory approach.
Cinema exhibition also suffers from the rapid growth of the market for film entertainment viewed at home. Factors such as the availability of high definition flat screens, multiple audiovisual channels and services through satellite or broadband fiber optics and the imminent introduction of the high-definition DVD (two competing systems are currently vying for the consumer’s interest) are all contributing to making the quality of home-viewing competitive with the cinema.
The value of cinema films in traditional television broadcasting (free-to-air and pay-TV) is declining steadily in the West. Broadcasters tend to pay less for movies because they see new entrants into the value chain – such as broadband pay-per-view and video-on-demand operators – jumping the queue and adding new opportunities for consumers to see the film before it reaches the traditional television schedules.