Ilan Haimoff, Partner, and Michael Sippel, Senior Manager, at Green Hasson Janks, write:
As we reflect on our experiences from the past couple of years, the following are six general trends that transactional attorneys should consider when making their next deal with distributors:
- New Media: With the tremendous growth of New Media, including VOD, Subscription VOD (such as Netflix and Amazon) and other digital revenue streams, there is an ongoing debate as to whether these new forms of revenue streams represent television or home video. So far, it appears that the trend by distributors is to classify them as “home video,” now more appropriately termed as “home entertainment,” subject to a royalty. It is important for you to consider this issue as you negotiate the next deal, especially as more and more consumers are moving away from traditional television to new devices.
- Outsourcing: As more and more of the underlying work traditionally performed by distributors is moving to third parties due to cost-cutting measures and other efficiency initiatives, such trending could ultimately result in reducing your clients’ participations. This is because distributors could charge you for the underlying additional third-party costs and/or fees, plus still charge you the contractual distribution fees and/or overheads. You may want to consider clarifying, in the underlying agreement, how third-party fees should be handled and whether the distribution fees charged by the distributor are appropriate considering the level of outsourcing. For example, you could negotiate that any third-party fees should be subsumed within the distribution fee.
- Direct vs. Allocated Indirect Costs: You may be bearing general costs allocable among many films and television series which are not directly related to your program. They could be related to distribution and/or production and include areas such as wardrobe, computer and security allocations, general marketing, publicity, research, legal, data processing, computers and maintenance and other costs. While there may be a rationale for including such costs, make sure you consider if there is clarity as to whether or not you are bearing such costs (or if such costs should be subsumed within the distribution fees and/or overheads charged by the distributor) as part of your next deal.
- Production Tax Credits and Vendor Rebates/Credits Consideration for Breakevens: As more and more deals require a breakeven to be achieved by the distributor before participants get a share of the net profits of the program, it is important to also understand how such breakevens are calculated. Overall: the sooner the break is achieved, the sooner the participants would see payments made. And, once the breakeven is achieved, numerous costs become excluded, such as print, advertising and participations payments. This increases the overall profit participation to your clients. While breakevens can be complex, one important thing to remember is to ensure that the underlying agreement clearly stipulates that any reductions to costs (such as production tax credits/incentives and vendor rebates and credits) are reflected timely in the calculation of the breakeven for your program. Ultimately, regardless of when the credits and rebates are received, they should be included within the calculation of the breakeven since the original costs to which the credits and rebates apply are charged within the breakeven.
- Related Parties: Through industry consolidation trends, more and more vertical integration issues are present and, therefore, it is important to ensure that such relationships with affiliates are understood during the negotiation of your deal, and that accounting for such transactions are clearly delineated in the underlying agreement (arms-length and comparable sales provisions). For example, you may wish to add to the agreement that the studio should be required to provide supporting documentation verifying the arms-length provisions were properly upheld, such as emails, etc., proving that the studio did attempt to sell to other third parties.
- Product Placement and Reporting Thereof: As consumers continue to avoid commercials at all costs, advertisers are increasingly looking to distributors to promote their brands. Studios, however, may be classifying product placement receipts as revenues (subject to up to 50 percent in “distribution fees”) as opposed to crediting the production costs, which would decrease the 10-15 percent production overhead. You should consider clarifying in the underlying agreement how product placement receipts should be reported on your clients’ statements.
This post was originally published on the Green Hasson Janks Media Clips blog.