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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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As a general rule, most independent low-budget film makers wherever in the world they live and work, will find it very difficult to attract a distributor into their financing plan before the start of production. Most successful films in this section of the worldwide film market are picked up by distributors after completion (festivals, film markets or preview screenings organized by the production or sales company) or towards the tail end of production, when a rough cut of the film may be presented to potential buyers. A rough cut is a version of the film in which most of the scenes are in the right order, where dialogue has been synchronized but which lacks elements of post-production finish such as optical or digital effects, music soundtrack, etc.

If you are amongst the happy few who have managed to attract a distributor to partfinance your film, an understanding of the difference between an advance and a minimum guarantee will be helpful to you at the point of signing away distribution rights.

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(ii) Advance – under this model, the distributor advances a sum of money against future revenues to the producer. The advance may be cash-flowed Rights, Camera, Action! – IP Rights and the Film-Making Process

4. Share-out of distribution revenues The standard approach worldwide is for the producer to receive a share of the net income the distributor receives from sales and/or direct exploitation. This is received by the producer from the point after which the distributor has recovered his distribution commissions (between 20 to 35 percent is the worldwide film industry norm though percentages vary according to each set of rights exploited), distribution expenses and – if applicable – the value of the advance. The recovery of the advance may also be with interest and the distributor may further insist on a share of the net profit if the advance was a sizeable one.

From the exhibition of the film in the theatrical market, the distributor receives a percentage which varies across the world on average between 25 and 50 percent of the film exhibitor’s gross. The balance is retained by the cinema to cover its overhead costs, i.e. the costs of operating the cinema. France has a specific statute which compels distributors and exhibitors to share receipts on the basis of a 50/50 split;

the UK, US and India are driven by individual market negotiations as is much of the rest of the world. In the US, the proportion varies according to the perceived value of the film to the exhibitors but averages out at 50 percent. In the UK, most independent films can only hope for between 27 to 30 percent of gross theatrical receipts to be retained by the distributor.

Thereafter, the split between the producer and the distributor will vary according to each agreement. In the US, producers directly attached to a major studio typically get 50 percent of the distributor’s net, after deduction of advances, print and advertising costs and studio overhead charges. In fact, since the producer has to pay out participations, i.e. net income percentages to key talent in the film, his actual percentage earned can be much lower than 50 percent. This is also the prevailing split of net profit in the rest of the world.

Rights, Camera, Action! – IP Rights and the Film-Making Process On video revenue, the deals vary enormously between countries and, within them, between the companies themselves, thus it is not possible to cover those in the appropriate level of detail within the scope of this introductory publication. New entrants to film production should begin by understanding the notion that video/DVD is an entirely different business model from the cinema release: whereas revenues generated from cinema come and go within a few months, video exploitation may go on generating revenue for over ten years. However, whilst films on cinema release generally have to compete with between 10 and 15 other films in any given week, films in the video market compete with thousands of other titles at any given time.

In this context, the management of a video catalogue by the video publisher becomes the main factor in making a film visible and competitive. If possible, the producer should always take great care in choosing a video publisher with a strong track record in managing catalogues over a long period of time, in order to ensure that his film gets the marketing support and market profile it deserves.

5. Assignment of copyright in the film

Very often, the film’s distributor will try to negotiate a full transfer or assignment of copyright in the film. The distributor’s reasoning may be that control over copyright will enable him to exploit the film fully in all markets (if he has obtained worldwide exploitation rights) without impediment and to take direct legal action in the event of the film being unlawfully copied and distributed by a third party.

6. Size and apportionment of distributor’s expenses

Every distributor will need to incur marketing and physical print costs in order to give the film its best chance in the marketplace. In negotiating the distribution agreement the producer will invariably try to ensure that there is a sufficient commitment to print and advertising spend on the part of the distributor (otherwise the film is more likely to fail) and that these expenses are capped – i.e. that the distributor may not go over the pre-agreed budget without the producer’s consent (the higher the spend, the less likely it is that the producer will recover any income from net profit, so he will want to ensure that any over-spend is justified).

The producer will also endeavor to negotiate consultation rights over the shape and direction of the marketing campaign to support the release of the film.

Rights, Camera, Action! – IP Rights and the Film-Making Process

7. Term of assignment or license As the rights’ market has become more elaborate and more prolific with the introduction of pay-per-view, video-on-demand and other digital media, this aspect of the producer/distributor negotiation has become more fraught. This is because both parties see them as strategic to their long term commercial interest. There is no specific rule of thumb for the term of an assignment or a license, with distributors fighting for long terms (between 15 years to perpetuity) and producers often attempting to negotiate shorter periods.

With very few exceptions, distributors are in a strong position to impose terms and a producer’s insistence on a limited number of years carries the risk of the distributor reducing his financial offer proportionately.

In some cases, terms may be variable and linked to certain performance expectations.

At its most basic, this means that agreements protect the producer against the distributor making no effort to release or exploit the film in other media and ensures that rights revert to him after a period of time during which no exploitation of the rights has taken place. The agreement may also provide for a more sophisticated approach. An example may be found in French film distribution contracts: if, after an initial term of 10 years, the distributor has recovered the advance paid to the producer plus the agreed marketing costs, he may be entitled to a series of 3-year extensions. However, the producer will have the power to revoke this clause and ensure that the rights revert to him.

8. Producer’s warranties

At the insistence of the distributor, the agreement will invariably contain clauses stipulating that all IP rights involved in making the film have been cleared and that the distributor will face no outstanding clearance charges or liabilities for underlying material to which the producer may have failed to acquire or license the rights.

2.v The Rights’ Jungle thickens – a strategic look at television rights As was pointed out at the start of this chapter, for producers new to the adventure of film-making and the complexities of IP-based transactions, an understanding of Rights, Camera, Action! – IP Rights and the Film-Making Process the changes in the value chain is an essential determinant of success. Rights are not neutral and abstract: they are alive; they are strategic and their respective value is constantly shifting relative to each other.

At the start of this chapter we evoked the complexity of the changes affecting the rights’ value chain. In film’s primary market, the cinema, print and advertising costs have increased several-fold in the past 10 years, while the number of films seeking a theatrical release keeps increasing. As a result, the market is overcrowded, the larger films tend to take up most of the available screens and there are fewer opportunities to give specialized, non-blockbuster films a chance to find an audience. The commercial performance of most films in the cinema is not sufficient to ensure that the print and advertising costs will be recovered, let alone the cost of producing the film.

This is the reality most film distributors the world over have to face. Where markets and technology are mature, and where piracy has not reached pandemic levels, distributors try to recover losses from theatrical exhibition by pinning their hopes on the video/VCD/DVD market. However, there too, the challenge is steep: in the larger Western countries the video market is flooded with over 100 new titles released each week. High street retailers, on the other hand, have limited shelf-space and the result – a quandary not dissimilar to that of the theatrical market – is that only the few high end commercial titles are displayed, drawing the attention of consumers.

Elsewhere in the world, mature film markets such as India or China are still seeing the value of the video market almost entirely destroyed by piracy.

In this adverse context, television appears to be the most solid component in the value chain. Despite being challenged by the advent of new media (pay-per-view, Internet streaming, cinema online, etc), with attendant scattering of advertising revenues and a relative decline in audience share, both pay television and free television continue to represent reliable outlets for rights’ exploitation. In countries with an emergent commercial television sector, new satellite broadcasters, such as India’s Sony TV, Zee TV and Sahara, increasingly compete head-on for rights to the more commercially-appealing films.

In Europe, many countries (France, Germany, Denmark, the UK and Holland are salient examples) have broadcasters who are ongoing partners of production companies and coRights, Camera, Action! – IP Rights and the Film-Making Process producers of films. In some cases, this is the result of an enlightened policy to get involved with quality projects to showcase to a national television audience. BBC Films – the feature film division of the UK’s public broadcasting system – has over the years become a respected entity in the independent film-making community, investing money into third party projects and developing its own projects in-house. In France, all broadcasters are obligated by law to acquire licenses for French language feature films;

independently, all the leading channels have film co-production subsidiaries which invest at risk in third party projects. In Denmark, broadcasters now also have certain investment and licensing obligations towards films produced by film makers in the Danish language.

In the US, the leading pay-TV channels (premium cable) have become commercially shrewd patrons of US independent films: market leaders HBO and Showtime both have their own branded divisions devoted exclusively to low-budget films.

From all the above, it would be tempting to conclude that the picture is very rosy indeed for producers hoping to attract broadcasting finance against transmission rights. In actual fact, broadcasting rights are a challenging proposition for producers because of a number of market factors.

Hollywood studios have output deals with the leading pay TV and/or free TV broadcasters in many countries around the world. These deals consist in a studio pledging a number of films to the broadcaster annually. Each film has a base price related to its performance in US cinemas (nearly always the film’s first market) and/or in local cinemas in the country in which the broadcaster transmits. The base price for each film may go up if the theatrical performance goes over a pre-set gross box office figure (this practice is referred to as an escalator). Output deals make good business sense: the studios are able to plan revenues in a safer, more accurate manner; broadcasters get exclusive supply, which makes good competitive sense.

However, the knock-on effect of these deals for non-studio producers is rarely positive: on the one hand, it leaves fewer slots available for other films in a finite schedule; on the other hand, rights for films offered to a broadcaster outside an output deal, tend to be acquired for much less, if not free-of-charge.

Film distributors in the producer’s country will rarely pick up a film for a theatrical release unless they can secure television rights too. This is perfectly logical since – Rights, Camera, Action! – IP Rights and the Film-Making Process as we have seen – most films lose money in the cinema and a distributor’s only hope of recouping his investment thereafter is in the next segments of the IP value chain. In countries where broadcasters are active participants in the financing of films, this presents the producer with a dilemma: on the one hand he needs a distributor in order to “launch” the film through a theatrical release and obtain revenue from other ancillary rights; on the other hand, if a broadcaster is offering to license transmission rights in advance – against a production advance – he knows that accepting this agreement will result either in a much lower offer from a local distributor or, indeed, no offer at all.

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