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CMJ MUSIC AND FILM FESTIVAL

Monica Pa is an associate with Davis Wright Tremaine LLP who attended the CMJ seminar. Here is a summary of her general report of the panel's discussion, but questions concerning the information provided at the seminar or the accuracy of advice given should be referred to the panel members.

The welcoming remarks were delivered by Ken Swezey, Esq., who is the Chair, of the Entertainment, Arts & Sports Law Section, New York State Bar Association, and a partner at Cowan, DeBaets, Abrahams & Sheppard LLP, New York City.

The program was introduced by Joanne Abbot Green and Rebecca A. Frank, Esq.
“Recession Deal Making”

The moderator was Susan Butler, Esq., Executive Editor of Music Confidential, Butler Business & Media LLC.

The panelists were: Helen Murphy President, International Media Services, Inc.; Jonas Kant, Esq. Senior Vice President, Business and Legal Affairs, Sony/ATV Music Publishing; Michael Poster, Esq., partner at Sonnenschein Nath & Rosenthal

General Discussion Regarding the Publishing Industry During A Recession

Helen spoke about trends in the film and television industry in LA. She observed that publishers are still deriving income from synch licenses in advertising and TV, but generally, the industry is under tremendous pressure. Studios are cutting back on both internal spending and outside talent. For example, terms that were once standard are not being given out anymore. T&E for talent is being cut, which was historically sacrosanct. And these cuts have had a ripple effect throughout the industry.

The panelist observed that publishing is actually doing OK, while the rest of the music industry is suffering. Joel observed that “this is a changed environment, even from last year.” He noted that there has been some increase in performance-side royalties (because of streaming services like Rhapsody and Pandora), and this may increase if, for example, iTunes starts a streaming service. But this increase isn’t sufficient to offset the tremendous loss in CD sales.

Sale of Catalogues

The panel spent a good deal of time discussing this issue. The Rogers and Hammerstein catalogue was sold this year, but this catalogue and its sale was unusual for a variety of reasons. In this economy, many catalogues are not up for sale. There are few buyers, and many sellers are not compelled to sell, so there aren’t many “fire sales” happening. The owner of the catalogue is going to wait for the economy to rebound before going into the market.
Joel Schoenfeld pointed out that, while many catalogues are not formally up for sale, some sellers may be informally testing the waters (e.g., “I’m not for sale, but I’m willing to talk”). So whether a catalogue is up for sale depends on knowing who to ask and what to say.
It’s also unclear how catalogues are being priced. A deal can include bells and whistles that exaggerate the catalogue’s sale price, such as “kickers” or “earn outs”. With respect to “earn outs”, in a perfect world, if certain targets are hit, only then would the total price of the deal be achieved. Michael Poster pointed out that “earn out” provisions are incredibly risky. The buyer has to jump through hoops and meet the seller’s (perhaps inflated) expectations, may also incur high deal costs, and such provisions may likely end up in litigation. With an “earn out”, the seller has some control over the buyer’s future conduct and has a right to audit.

Michael pointed out that a notable exception to the lack of “fire sales” is the case of private equity funds that purchased publishing catalogues during boom times and now have to unload this asset. Accordingly, private equity firms are selling their catalogues for cheap. Jonas pointed out that Sony is happy to see these catalogues go up for sale by these private equity firms, and has been able to buy these catalogues at a discount.

Alterative Income Stream and Advertising

With declining music income, people are looking creatively at ways to attach other non-traditional income streams. Helen pointed out that the agent’s business model has changed. Agents and labels have been aggressively attaching a percent of the talent’s various income streams (e.g., the emergence of 360 deals). In light of all these hands in the artist’s pockets, artists are now trying to do something different, which is facilitated by the fact that digital distribution is possible, and the rights business is becoming more transparent.

On the other hand, while there has been an obvious decline in CD sales, music can be monetized is creative and unpredictable ways. No one expected cell phone ring tones to take off, and now music video games generate a substantial and unexpected source of revenue. There is also the Beatles Cirque de Soleil show, and there will soon be one for Elvis. The biggest growing source of music revenue is digital content. Publishers and traditional music industry have been slow to incorporate these developments. Digital content is now 40% of the market. Maybe the industry will finally be forced to shift when digital content is 70% of the market.

The panel discussed whether, at this point, substantial income can be derived from advertising. This was one question that seemed to really boggle the panel. One panel member noted that it can be done. For example, Google derives almost 90% of its income from advertising. There may be more targeted advertising. For example, Google is best at linking ads with digital content (using an algorithm), but perhaps there will be other ways of linking content with advertisers, or more integration of advertisement with content.

Jonas Kant, speaking from his perspective as the music publisher, noted that publishing is generally an ad based income, and there are fewer ads now. When an advertiser, filmmaker, or television program selects a song to synch, they want to go with “a sure thing”, meaning a song that resonates with the audience. Therefore, well-known songs are more often being selected because this may resonate more with the audience, and accordingly, advertisers are unwilling to go with lesser-known artists.

* * *
“Starting From Zeroes: Start-Ups & Digital Distribution”

The Moderator was Lisa Weiss, Esq., Partner, Sonnenschein Nath & Rosenthal LLP.
Panelists: Aileen Atkins, General Counsel, Napster, Inc.; Mark Eisenberg, Esq. Executive Vice President, Global Digital Business Group, Sony Music Entertainment, Inc.; Drew Lipsher, Esq. Partner, Greycroft LLC.

Discussion

Lisa gave a background on copyright law and the DMCA. She summarized recent safe harbor decisions, including the summary judgment decision in favor of Vios. In one decision, the court held that failure to use filtering technology (which is widely available) does not undermine the applicability of the DMCA Safe Harbor provision.

Drew, as venture capitalist, discussed what VCs consider when deciding whether to invest in a digital content service. He was asked how important was it that a business have a license before launching. The issue is whether a service should build a business first and then get a license, or get the licenses first and then build business. “Ask forgiveness, not permission?” As an investor, his preference is for the companies to get permission first because the risk of litigation– from a financial return strategy – is unpredictable. But he may be more liberal depending on the service’s proposed business model (i.e., whose behind the service, whether the service has good terms and conditions, whether the company is more established, etc.) A separate business question is whether there is any value in a user generated model, whether advertisers are going to pay the service, and whether the service has any hope of generating a profit.

When asked how a new business can balance the cost of a license versus the cost of an eventual settlement/litigation, Drew characterized this situation as: “death by firing squad or death by hanging.” The service knows that it is going to have to pay; it’s just a matter of ascertaining what will be their greater cost. He observed that this is a return on investment issue, which is largely driven by time. Moreover, services face the problem that the process of obtaining licenses is fraught with defragmented rights in a work, and the lack of transparency.
Aileen observed that, for many start-up services, they will not be able to get a license unless they can convince the content owners they have a viable business model, and then the question becomes the terms and conditions of the license. So for many start-ups, the content companies are actually the ones determining the business model for them.

Marc, who represents Sony, gave the label’s perspective. The general assumption is that everyone wants to make money. What labels look at is the service’s business model and its path to profitability. “We know that music is popular and consumption of music is high – but this isn’t a business model.” While labels do not need the services to prove profitability on day one, there needs to be some way to pay for the license, which is why it’s necessary to look at the overall credibility of the service. “Just because you have an idea doesn’t mean that you can be licensed.”

All business must pay their suppliers. A business rarely asks the landlord to give them space for free. For a restaurant, there can be a great chef, great cuisine, excellent space, but people are at the restaurant for the food. If food is what customers are going to eat, then the restaurant should pay for the food. In this case, the sine qua non of the start-up service is the musical content, so why is there a debate about whether the labels should be getting paid for this.

Aileen pointed out that services want to pay for the music they use, it’s just impossible to wrangle all the different interests (publishers, labels, etc.) prior to launching the service. There is no consistency in the process or terms. This difficulty is exacerbated by the fact that labels are trying to hold onto a business that is in decline, and are unable to shift their business approach to accommodate digital content.

Drew pointed out that the problem with the “restaurant” analogy is that a restaurant only has to negotiate with a single landlord, and there is a standard in pricing, a known market. The difference is that, in the licensing process for music, the terms are constantly shifting. A landlord doesn’t ask to see a business model when renting out space. A music service wants to be legitimate, but the terms and rates are constantly shifting. As such, there are tremendous inefficiencies in music licensing.

Marc responded that there is a difference between frustrations with market inefficiencies and throwing up your hands and acting in blatant disregard of copyright law. When asked whether the terms of a license depend on whether the service comes to Sony before launching, versus launching first and then seeking a license, Marc said that rates depend on how the service operates. An infringer isn’t necessarily going to do better in terms of rates. If someone comes to Sony having launched first, there may be a premium that Sony exacts. On the other hand, if the business is successful, it may have more negotiating leverage.

Aileen was asked whether, if she were now mentoring a young service, what her advice would be. She said that Napster launched in 2001 with only a handful of licenses. At that time, no one knew what they were doing. The environment now is completely different than in 2001. The financial cost for litigation is substantial, which includes both time as well as attorneys fees. On the other hand, the costs associated with obtaining a license from content companies are also high.

Moreover, services may develop and change as it grows. For example, Facebook did not have an obvious path to profitability but it had millions of users and a huge platform. When Facebook launched, it didn’t necessarily realize that there was going to be a huge business for games (which could now generate billions of dollars in revenue). It’s unclear how Twitter is going to make money, but lots of people are using it, so we’ll just have to see.

In terms of music publishing, Drew observed that rights disaggregation is the biggest problem. A licensee can go to a publisher, get rights and rerecord the work. Rights have to come back together because digital content is increasingly sophisticated. For example, all services now include video, so this implicates a host of issues, including synch and publishing rights. With traditional distribution of music, the labels use to take care of publishing. How many different ways are there to divide a pie? There cannot be meaningful negotiations with this many competing interests. If the labels do not want a compulsory licensing system, and do not want arbitrators saying what the rates are, then they need to come up with a way to make licensing more regular, standard and systematic.

* * *
“Footprints In Cyberspace: Following Consumers Online”

Moderator, Marc S. Reisler, Esq., Partner at Holland & Knight.

Panelist: Flora Garcia Privacy Director, Time, Inc.; Laura Stack, Esq. Division of Privacy and Identity Protection, Federal Trade Commission; Shane M. McGee, Esq. CISSP, Partner, Sonnenschein Nath & Rosenthal LLP.

The panel addressed privacy issues by using a hypothetical multimedia entertainment company to discuss various digital projects that this company wanted to launch.

The first hypothetical involves the company’s music division which wanted to launch a website to promote the latest release from their 12 year old pre-teen pop sensation named Rhoda. Rhoda’s website featured a section on “Rhoda Memories” where visitors could share online (including videos or picture format) their memories or personal encounters with Rhoda. The website could also include a section called “Rhoda dress-up” where visitors could post pictures of themselves dressed as Rhoda.

Flora said that, from an in-house perspective, the first question is whether users are going to have to register online, and if so, would they be asking only for their email address and user name, or would they be asked for additional information. Another issue is that, since this website concerns and likely targets younger consumers, the Children’s Online Privacy Act (“COPA”) is implicated. This law prohibits companies from marketing to children 13 or under without parental consent.

If the website is going to market to children under 13, then it needs to obtain verifiable parental consent. Even if the website only collects an email address, the company still needs to send an email to the parent to confirm that their child has permission to register with the site. The email to the parents should also notify them of what type of information was collected, whether information will be shared with third parties, whether there is a way to opt-out of the sharing of information or receipt of emails, and how the company is going to protect and use collected information.

COPA provides a sliding scale of necessary parental verification depending on the type of information collected and how the information is being used. If the website wants to collect additional information from the child, like what school they go to or their favorite mall, and perhaps share this information with third parties, then the company needs to provide additional information when obtaining parental consent. The website may need the parent to sign a form, provide credit card information to confirm their identity and consent, etc.

Laura represented the view of the FTC. She noted that deceptive practices are pretty straightforward: do not create a material deception that will mislead a reasonable consumer. If the website is aimed at children, then the standard is the reasonable child.

COPA generally requires a privacy policy, notice of certain rights (what are you collecting, why are you collecting it, etc.), what do you do to safeguard information, and it provides requirements for verifiable parental consent.

This hypothetical website also involves children disclosing more than just an email address because it permits users to share Rhoda photographs and stories. As such, even though the initial registration does not ask for any information other than an email address, because of this feature, COPA may treat this website as collecting personal information from children, which triggers heightened requirements of verifiable parental consent. Moreover, even if the website does not specifically target children, if the service has reason to know that children are accessing their site, then it needs to comply with COPA. The website should use some filtering technology, and/or hire moderators for the website (which can be outsourced). There is software available to websites to strip personal information from users (with mixed success).
The FTC applies the standard of “what would a kid normally do, what should you be doing to keep kids safe.” In seeking parental consent, there needs to be transparency. Parents need to understand what they are saying yes to. This is especially the case where the website includes posts of children’s photographs given that there is such a problem with child pornography. A practical advice for websites for children is to stay away from all photographs unless the service uses a good moderator.

Aside from COPA, the FTC looks at whether the website has provided full and accurate disclosures. For example, was there a full disclosure that the child’s information would be shared to marketers? Do the parents realize that their child is going to be on marketing list? Where the company’s subsidiaries, divisions or affiliates are marketing to the user, its unclear whether this counts as a “third-party marketer.”

Motion Picture Division

The second hypothetical involves the motion picture division wanting to launch a new website to promote its new PG13 film. The website includes the ability to purchase movie related gear and merchandise, and visitors will be able to register to receive texts from their favorite characters from the film.

Because this film is PG 13, we can assume that its a general purpose site targeting audiences over 13 years old. The website does not necessarily need to comply with COPA, but when users register for the website, the company should utilize an age-screening process that is age neutral (e.g., the website can’t just ask whether the user is “over 13.” The website also needs cookies to prevent “back buttoning” (if the user realizes that he or she will be prohibited from accessing the website because he or she initially truthfully said that they were twelve, this prevents the child from hitting the “back” button and changing their initial selection).
Data security is about avoiding unintentional disclosures of information. Financial information and SS# are the big concerns. So websites that collect financial information need to utilize reasonable security measures. Even if it is not engaged in any financial transaction, if the website requests credit card information (even if only to confirm parental information), it still needs to comply with “PCI standards”, which are industry standards that credit card companies have developed for security on the Internet.

Video Game Division

The third hypothetical involves a video-game division that wants to launch a website where it can have attorneys who represent clients in parking court to sign up. [This hypo didn’t make a lot of sense to me.] The video game division intends to sign up this website as a member of a behavioral advertising network that uses a click-track company (meaning, the browsing behavior of website will be tracked and it will share the data with targeted advertising).

The concern is that this website should not sell information that will permit marketers to identify any user; instead, they should just receive information about anonymous IP addresses that the marketer could pop ads to. Generally, where a third-party advertising network wants to collect information about a user’s web behavior, the privacy policy should disclose the fact that the website is selling information to third parties, and must make clear that there is an opt-out option (although to be safe, the website should use an opt-in option instead).

The FTC has published guidelines on behavior advertising based on browsing behavior, and guidelines have also been promulgated by trade groups. The FTC is in a “wait and see” mode; they are going to give self-regulation a final chance.

* * *

The Luncheon Keynote Address was given by John Scher, co-CEO of Metropolitan Talent Ons
John started his address with the general bleak observations that the concert business is in chaos and record labels are failing. His view is that the labels were counting the merchandiser’s money, counting the promoter’s money, and counting the artist’s money, with their hands out to take a piece of these income stream, but they weren’t trying to make their own money. He talked about how labels historically paid as little as possible (there was a time when labels paid only 2 4% of royalties to artists, or paid with Cadillacs). Artists had to fight to get a decent royalty, and once they get a royalty, they had to force the labels to pay them the full amount due.

The concert promotion business is also struggling, especially since the business of concert promotion has shifted over the past few decades (especially, consolidation of the concert business). Currently, Live Nation is the largest and only public corporation in the concert business, but it has never made a profit. When Clear Channel spun off its concert division into Live Nation, John claims there was about 3 billion debt written off by Clear Channel. “Live Nation was a disaster for Clear Channel; there was no synergy.” The lack of profit by Live Nation seems inconsistent with its monopoly status. It controls the shows, ticketing, the “essence of the business”. The reason why it is not profitable is because Live Nation is a monolithic company, which is only going to get bigger if its attempt to merge with the largest ticketing company (Ticketmaster) is successful.

John spoke about the history of the concert business. He said that in the 60’s the only acts that toured were successful artists pushed by the labels. As the music concert business matured, promoters realized that they needed to get involved in youth culture to know what hot acts were emerging. So concert promoters began working with young artists to develop them.
Historically, the promoters’ deal with the artist was that there would be a guarantee. Once gross ticket sale came in, the promoter would pay its bills, pay the guarantee, the next 15% went to the promoter, and anything left was split between the artist (60%) and the promoter (40%).

As the industry evolved, artists were not making a fair share on the recording side so they needed to make more from concerts. The deals began to change. First, artists received a reasonable guarantee, but started demanding that the split of net profits be increased from 60% to 85%. Then, guarantees started increasing.

John observed that “All graduates from Wharton should go to hell.” Since the artist’s business managers took in 5%, they needed to justify their existence by pressuring promoters because they couldn’t pressure labels (which were large companies with sophisticated lawyers). The guarantees increased substantially, which meant that promoters took on greater risk and “the deals got tighter.”

The concert promotion business was stable those day because of Premiere Talent and its owner, Frank Barcelona. Premiere was the largest talent agency in the music industry. Frank understood that promoters needed to make a fair living so he instituted the idea of paying the artist 85% of the net profits (not gross) but no guarantees (so the promoter would never lose). This idea didn’t last because the business managers insisted on a guarantee.

As a result, John contends that deals in the concert business are extremely one-sided: enormous guarantees (regularly $500K-1 million) plus 90- 95% net. The venue receives income from ancillary sales (concessions and service or ticketing charges). Profit margins are incredibly thin, and there can be no real competition with Live Nation. Its now extremely difficult for any party to make money in the concert business. Superstar acts do well because they receive huge guarantees, but concert promoters are unable to afford any artist development. “The Deal has strangled the industry.”

John then discussed how 360 deals with artists put additional pressure on the concert business. Labels wanted a percentage of the artist’s merchandise and/or touring, but they do not provide any additional service in exchange for this new income stream. John warns that, if this continues, there will not be a live music industry that anyone wants to participate in. Attorneys need to make deals that are fair and reasonable for all parties. Do not try to take advantage; instead, the best deal is one where neither side in 100% satisfied. Record companies need to stop holding their hand out, and the industry needs to be better at protecting intellectual property. The industry needs to realize that, without artists creating content and performing, then there will not be a music industry.

* * *

“Ethical Negotiation Practices”

Panelists: Howard Siegel, Esq., Partner, Pryor Cashman LLP, and Professor John P. Sahl Faculty Director, Miller-Becker Institute for Professional Responsibility, The University of Akron School of Law.

Howard and John opened the discussion by observing that there is a general preconception that entertainment lawyers are unethical. Namely, that the artist’s criminal problems can be attributed to the their lawyers. But this is because the media is focused on celebrities, and entertainment attorneys are in their orbit. There are few news stories about non-celebrities (or their lawyers).

Practical Tips

• Do not “shoot from the hip” when giving advice to individuals about potential legal problems because the standard for finding a lawyer/client relationship is a low one. By giving quick advice, you run the risk of exposing yourself to potential malpractice liability.
• Always Have a Retention Letter. Contingency fee arrangements must be in writing. In New York, an attorney must have a written retention letter even if he or she has a non-contingency relationship if the fees will be in excess of $3000. The letter should also make clear the scope of representation. In taking on new business, keep in mind what is your level of competency and expertise.
• Communicate. The key source of trouble is lawyers who fail to maintain adequate contact with their client.
• If you receive a letter of inquiry from a disciplinary committee, participate fully and promptly. The key is to short circuit a full disciplinary inquiry. Even if you believe the disciplinary complaint is baseless, cooperate with the investigation because you can be reprimanded just for failing to respond.
• Analyze your errors and omissions policy, and be sure you know what is covered. Statistically, law graduates will have 3 to 5 malpractice actions initiated against them, which does not include disciplinary proceedings. Have an office policy about client files, client confidences, how the phone is answered, how you advertise for services, etc.
• Fee Disputes. because a client may elect mandatory fee arbitration (in New York), your retainer agreement should not be inconsistent with this. If there is a fee dispute, don’t take the disputed amount out of the client’s trust account.
• Ethics of Negotiation. You can refer to the law and other considerations in negotiating with third parties. When negotiating contracts, your client needs to agree to the terms of the agreement. If you are given oral authority for a range in negotiations, its best to put this authority in writing.
• Have a Scrubbing System. All drafts of agreements are discoverable in any subsequent litigation and can be used against you. So consider whether you should use oral communications instead of email.
• Be careful about threatening criminal action in communications with opposing counsel. This is not prohibited, but you should have some basis for threatening it rather than using it as negotiating leverage. By contrast, an attorney may not threaten to bring a disciplinary action. Although you can remind opposing counsel that they are crossing the line, you cannot blackmail or threaten a disciplinary action because you are obligated to report all disciplinary violations.

Representing Multiple Parties

In representing multiple parties (e.g., musical group), or in motion picture deal where you represent both the producer and director, bear in mind that groups always get along great in the beginning; “every divorce started out in a mad love affair.”

When representing multiple individuals, there may be differing goals and expectations. Rule 1.7 provides that a group’s lawyer may represent an individual member of the group provided the representation is not inconsistent with the group’s interest. This rule also provides a list of possible conflicts of interest, but try to “listen to your gut.”

You may continue to represent the group and/or stay involved in representing client where there is a potential conflict of interest if you obtain informed consent (and the conflict does not arise in litigation). Informed consent includes a full disclosure of the benefits and risks of continued representation, and a discussion of alternatives.

A multiple representation may require the lawyer to provide the client with a new or revised disclosure statement, retainer agreement and at least a written waiver. Courts are more likely to uphold waivers signed by clients when it provides specific and complete information about all possible conflicts.

Truthfulness with Persons Other than Clients

Aside from the obvious duty of be truthful to your client, you also have an obligation not to make false representations of material fact to third parties on your client’s behalf. And you also may have an affirmative duty to disclose material facts when necessary to avoid assisting clients in a fraudulent action. A “material” fact is broadly defined as any fact that will change a person’s course of conduct. Finally, a misrepresentation can occur if you incorporate or affirm another person’s false statements.

This begs the question of the difference between commercial puffery versus false representation. Statement that may be the “strict truth” may be technically true, but if you suggest a falsity, this may also subject you to a disciplinary violation. In attempting to create a bidding situation, take the high road. Permissible commercial pufferies are statements of opinion. You cannot misrepresent a fact.

* * *

“From Treatments To Royalties: The Basic Lifespan Of An Indie Film”
Moderator: Susan Bodine, Esq., Cowan, DeBaets, Abrahams & Sheppard LLP.
Panelists: Madhu Goel, Esq. Director, Legal & Business Affairs, A&E Television Networks LLC, Dan O’Meara Green Film Company; Marc Simon, Esq. Partner, Cowan, DeBaets, Abrahams & Sheppard LLP.

1) PURCHASING RIGHTS: Madhu Goel

Madhu first set forth the basic development deals that studios have with a producer. This can range from (a) an exclusive deal (where the producer is tied to the studio, which may be costly but then this gives the studio a lot of freedom) (b) a first-look deal (the studio has right of first refusal on a project); or (c) a housekeeping deal (where the studio provides some support, like an office space and a secretary), which is usually offered to a younger producer.

If there is no overall deal with a studio, an independent producer can pitch an idea, treatment, or screenplay to a studio through a pitch meeting. In order for the producer to protect his or her idea, he or she should try to get the studio to sign an NDA/confidentiality agreement prior to disclosure of the idea, which ensures the confidentiality of the pitched idea. But, if the director/producer is just starting out and doesn’t have any leverage, it may not only be difficult to have studio sign the NDA, the studio may have the director/producer sign a submission release, which is an acknowledgment that the pitch may not be unique, that the studio receives millions of pitches all the time, and even if the studio decides not to do business with that person, there is a chance that it will develop a property that is similar to the one that was pitched, and the producer promises not to sue the studio. Bear in mind that ideas are not protectible under copyright law, only the expression of ideas are protected. So if the expression of the producer or director’s idea is expressed in a “treatment”, then the treatment is protected by copyright law, and any derivate work created based on the treatment may also be barred. The director or producer, however, may have other state law claims, like breach of implied contract, but this may require a showing of novelty, depending on whether you are in New York or in California.

Option Purchase Agreement: Deal Points

Generally, the buyer of option rights wants the longest period of time to exercise the option. The standard option period is 12-18 months, but this can be much shorter. The price for the first option may be a percentage of the purchase price of the property, based on a higher back-end price or a percentage of a the film’s budget. Note that you may want flexibility in determining the option price. If the film development is only at the beginning stages, the parties don’t know the type of studio or the financiers who will support the project, so someone selling the rights does not know whether they are going to be involved in a $20 million or $80 million budget movie.


2) FILM FINANCING: Dan O’Meara

Two key concepts to keep in mind: (1) the waterfall; and (2) control by investor. All the other deal terms tend to be pretty boilerplate, but these are two issues can be deal-breakers.
“The Waterfall” is shorthand for a provision in a financing agreement that describes how the film’s profit will be allocated. The money is paid out in tiers. Most investors are concerned with where they are located “in the waterfall”, meaning their priority in being repaid their investment. Typically, two interests will be paid first: (1) the film’s sales fees (must hire an attorney and sales agent) and (2) the costs associated with a full theatrical delivery. After all the investors recoup their investment and premium, then the remaining money is divided between the producers, partners, investors, and other interests.

The second issue is the extent of control that an investor can have over what the producer does. The investor may have some general rights. For example, whatever was represented to them about the film’s budget and financing cannot change materially without the investor’s approval. (There may be a “most favored nation’s” clause providing that the producer cannot make any other finance deals on terms that are better than the terms that the producer has with that investor.) An investor may want to have some meaningful approval or consultation concerning the sale or distribution of a film, or some right to have control over key creative decisions. All of these deal terms will depend on how much leverage the respective parties have.

3) FILM PRODUCTION: Marc Simon
Creation, development, and production are the mechanics of film. The goal is to have the production team moving forward. A producer will want to create an entity (typically an LLC) to own the film, which facilitates accounting, clarity of ownership, and limits liability.
Some production considerations include:

• Location. Many states offer substantial tax credits, and some are transferable credits that can be sold. In New York, film tax credits can be turned into actual cash down the road, a money back credit, which can be substantial. Another issue is that film financing may be a tax deduction, which can be a selling point when trying to raise funds from wealthy individuals. An equity investor may be able to “write off” 100% of his or her capital contribution in the current year of production.

• Chain of Title Issues. Who owns the underlying property rights in the film. All the ownership agreements between producers and investors should explicitly address who owns the film, and there should be no conflicts among the various agreements so the LLC can sell the film without any issues.

• Clearly Defining the Term “Budget”. Many financing terms are based on the budget, such as bonuses.

• “Back End”/Contingent Compensation or Profit Participation (also known as the “producer’s share”). In an actor’s agreement, there may be a provision that the actor may recover 5% of the “producer’s share” as part of the actor’s contingent compensation.

• Writer’s Agreement. One issue may be the writer’s credits, including whether the writer receives shared or sole writing credit. The writer’s compensation and/or bonus may be based on his or her respective credit. There are certain industry standards for agreements with writers.

4) DISTRIBUTION: Susan Bodine

The process for obtaining film distribution is currently going through substantial changes. Its becoming increasingly rare for an independent film to be purchased wholesale by one distribution company who will pay a large advance and distribute the film worldwide on all different platforms. The film industry is reconsidering how films get seen and monetized. Right now, its hard to say “this is how it works” because this is a time of great experimentation. Traditionally, the goal for independent filmmakers was to have the film financed with private equity, then the film debuts at Sundance. The producers hire a great indie sales agent and the day after the film’s debut, it is sold to a distributor and then wins a bunch of Oscars.
Newer and smaller distribution companies have emerged, and they do not necessarily purchase worldwide rights. There are also newer models of distribution (Internet, VOD, TV) or distributors who start investing during the film’s production. Indiewire is a good website which discusses what’s going on in the industry, and covers DIY film distribution and marketing.

* * *

“Destination Unknown: What’s Next For The Industry In 2010”

Moderator: Vejay G. Lalla, Esq., Moderator Associate, Davis & Gilbert LLP
Panelist: Stanley Pierre-Louis, Esq. Vice President, Associate General Counsel, Intellectual Property & Content Protection, Viacom, Inc.; Drew Stein President & COO, IMO; Lance Podell, Esq., CEO, Next New Networks; Peter Drakoulias President, GAF Holdings

The panel addressed a range of issues. Here are just a few of the topics that they touched on.

(1) DRM Free Websites. Consumers apparently prefer MP3s without DRM (“digital rights management”) protection. Is DRM dead or are there different models to choose from? Content creators, however, want DRM and are still testing other ways to protect digital content. Consumers may want to be able to burn CDs, so are there other ways to have the content locked up, and under what terms. There can also be rental models or different uses. ITunes, which represents 80% of the market, does not use DRM.

Stanley talked about Viacom’s approach to DRM protection for audio-visual works. Consumers can view its shows in different ways (either pay by downloading on iTunes or free on Hulu). Mobile is still a growing area, especially since bandwidth constraints are improving. The key is to have the flexibility to test various ways of getting content to consumers by using different models.

Piracy is obviously a big concern (e.g., the Viacom-YouTube litigation). There are ways to create a filter to track unauthorized uploading on peer to peer networks. The content owner can use “watermarking” on blue ray disc. Another way to stem the tide of piracy is to give notice to persons engaged in illegal peer-to-peer downloading without suing them (a three-strike rule for infringement).

(2) How to Make Money from Content. Newer trends include TV on the Internet. There are two types of content. Content that was originally shown on TV and then repurposed for the Internet, and content created FOR the Internet. Content for the Internet is less expensive to create, there is less production and a quicker turnaround time. TV for the Internet is an exploding market. One way to keep cost down is to steer clear of copyrighted music by creating their own music for these programs.

(3) Another Emerging Trend is Branded Entertainment. Content created for the Internet is better able to utilize branded entertainment because of its ability to turn around content so quickly.

Branded entertainment includes more than just product placement. For example, the Gates Foundation has sponsored TV shows where the “product” that was being “placed” was a concept (e.g., encouraging kids to finish high school). The foundation paid the TV program to convey that message, which weaved the “staying in school” theme into that TV program.

(4) Is Music Superstardom Still Possible? What is role of marketing for superstardom? In marketing new content, what is role of the record label? Historically, the label’s main job was to put their muscle behind an emerging and promising musical act. They would distribute the artist’s music, promote the artist, give tour support, give an advance, and then these costs would be recouped through the sales of the musician’s recordings. Now, with mp3 files, the label’s control over the channels of distribution are less relevant, and MySpace and Facebook has usurped a part of the label’s promotion functions.

The question was posed on whether record labels missed the boat on digital content. Labels were slow to come to the party, and now they are trying to innovate. For example, Warner just inked a deal with YouTube where Warner may be involved with the sale of music video on YouTube.

The key to innovation is finding out ways to get consumers to engage with the content on the website, and for that, there needs to be compelling content. For example, games on websites are now huge. Both labels and other content generators need to use new technology to reach people and get them to come to their website. Larger, monolithic companies are not able to innovate the same way that smaller companies can. So now large companies are working with young entrepreneurs companies.

Lightening round predications for 2 years from now: what will be super hot/cold

Stan: As TV become more adapted to the computer, there will be a switch to Internet TV, and more people will be listening and watching content on their mobile devices. Screens hooked up to televisions will be better quality, and there will be more VOD and Netflix instant-movie streaming models.

Liam: prices will start rising for content. On the web, there was initially a culture of “I shouldn’t have to pay for content”. It will become more accepted over time that content/information is no longer free on the Internet (e.g., newspapers charging for membership).

Peter: larger industries are going to be more nimble, and will start looking at smaller channels, which will create new opportunities.

Drakoulias: Consumers are demanding everything on their time and on their channels. In two years, while traditional advertising will still be around (e.g., sponsorship), the general trend will be towards more accountability of advertising dollars. Also, more directed advertising to consumers, so it’ll be a tension between algorithms (e.g., Google and Pandora) and instinct.

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This page contains a single entry from the blog posted on November 3, 2009 4:50 PM.

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