Chapter 26

Licensing and Distributing: The Business of Programming

The production and distribution of television shows and movies are stories of the business side of copyrights and trademarks. You cannot create these works, bring them to outlets, or show them to the public without appreciating how much these legal issues are embedded in the system. This chapter offers a short tutorial on the system.

Start with an Idea

Every program and movie ever launched started with an idea. As you know, ideas are not protectable. A sitcom about a lower-class couple that lives in the suburbs, fights a lot, has three kids, and loves pizza or a movie about aliens racing through space to recapture a comrade and destroy the world of their enemies is not a substantial enough expression to claim copyright. But take the kernel of the idea and give it more complexity, more detailed expression, and you move into the layer of protectability.

Flesh Out the Idea

For a movie or a TV series, “detailed expression” usually takes the form of a treatment or proposal. Fleshing out ideas into a story is the work of a lonely screenwriter or the effort of a small, collaborative team. Creators are often leery of showing ideas to others for fear they may be stolen. The basic intellectual property advice is always the same: Flesh out your ideas first, expand the notions, and write them down. Once written, copyright law comes into play. The more refined is the storyline and the characters, the more protectable they become.

Give Access to the Story to Others So It Can Happen

Access is another key issue. In most cases, creators need to take a risk: They need to tell others about the story. Many people believe their ideas are so precious that, if they tell anyone else, they will be stolen. However, if a creator wants to give that idea the chance to move from one person's private mind to the world at large, he or she must take the chance. Nevertheless, there are ways to protect one's creations. The simplest is to have the recipient of the treatment sign the “nondisclosure agreement” discussed in Chapter 18. An NDA is a short legal agreement that provides that the creator will tell the recipient about an idea or plan provided the recipient agrees not to use it without permission, usually for a limited time. The standard NDA usually has some saving clauses that indicate that, if an idea is public knowledge, already in development by someone else in the recipient's company or presented to the recipient by some independent party, then there is a presumption that the idea is not protectable. Not every recipient is willing to sign such a document, but if one does, the NDA offers a creator some legal protections.

If a recipient refuses to sign an NDA, a creator may have to decide whether to disclose an idea without a formal legal agreement. Even in such cases, if the recipient receives the idea, dismisses the creator without so much as a “thank you,” and later uses it without consent, there still may be a basis for the creator to cry foul and prevail. Copyright law is replete with tales of recipients who learned the hard way when they were sued for taking a character or idea developed in an unsolicited movie script.

Protect against Unfounded Claims

For the producer or media manager, protection against such events is essential to smooth business operations. Generally, this means not taking work on an unsolicited basis. Return unsolicited scripts unopened. Do not get fooled into accepting a work without a contract or at least a short document that acknowledges that the producer owes no duty to the person disclosing the story or idea if

• The producer has a similar idea in development independent of the submission.
• The idea or story is already in the public domain.
• The idea or story comes to the producer from another legitimate and unrelated source.

Of course, if material is useful, be prepared to pay for the rights. Paying early is key, because early is when the producer has the most bargaining flexibility.

Who Is Involved?

Sometimes an idea is pegged to a particular person's involvement. A story may come attached to a writer, director, or actor. In such a case, if the idea is a winner, the best course is to allow the principal a role but leave open the option of replacement, if necessary. Frequently, successful concepts fall victim to egos and unworkable bargains. So anticipate the need to bring on qualified replacements for the original creators. This is a touchy topic, but one that needs to be negotiated early in the process so that the work does not fall victim to the players.

The Funnel

The process of developing television programs or movies can best be visualized as a large funnel. At the wide-open mouth, thousands, even tens of thousands, of ideas float around. As the funnel narrows, so do the number of ideas that get converted to treatments. As you might expect, few treatments make it to the script stage (Figure 26-1). While a theatrical script can be sold for $100,000 or more and a television script for $25,000 and up, when interest is established in a script, you are at about the halfway mark in the program or filmmaking process. Getting to that point is so competitive that most folks have long since retreated and returned to their day jobs.

Figure 26-1 The Content Funnel

Once a script is finished, financing for the project must be arranged. The studio system, which bankrolls projects, is the most visible and reliable source for big projects. However, independent producers are also key players in the process. Many films and pilots are developed and paid for by someone with cash and a dream or companies with resources and a plan. Even then, only a handful of finished programs actually get distributed and publicly released.

Among the things the creators of works, as well as the producers and the managers of the media outlets, must think about are these:

• Production costs. What are the likely costs of making the work? This includes everything from hiring the creative team and performers to having the sound stage, microphones, camera equipment, lights, location fees, sound and visual effects, legal and insurance, accounting, food for all, and clean-up crews.
• Clearance of rights. What is needed to make the work, such as underlying storylines, privacy rights of individuals, music (original and cleared), clips, third-party content? Document everything with signed releases, consents, and permissions.
• Ownership. Who owns what? Copyrights are divisible, which means that the law will separate into parts all the possible rights associated with a work. When acquiring rights, producers usually demand, “All right, title, and interest in and to the work in any medium now existing or hereafter created.” It is vital that the rights are spelled out clearly in the beginning, lest there be confusion as new use is found for the works, new technology develops, or new media evolve. It is easy to make a mistake, and even the big boys slip up occasionally. A few years ago, when Paramount Pictures converted many of its old films to video, a song from the movie Medium Cool, “Merry-Go-Round,” became the object of litigation because the composer claimed Paramount had failed to acquire the video rights to his music and the use of the music in the video was a violation of his copyrights. The court agreed, and Paramount had to dip into its bank account to square things up. You can be certain that many older films that were poorly documented have not been cleared for Internet-broadband digital uses. This failing requires distributors to identify those who hold rights to the work or elements within the film and reclear them for 21st century purposes. This can be a Herculean task.
• Ancillary rights. What are the related uses or spin-off properties? Nary a major movie or television series gets produced today without a number of spin-off properties, including clothing (T-shirts, hats), music (CDs, cassettes), cross-promotions (McDonald's or Pizza Hut giveaways), kiddy goods (lunch boxes, action figures, notebooks), videos (“The Making of…”)—you get the idea. Every one of these can be viewed in relation to the copyrights and trademarks. Ownership of those two key rights is vital to market the ancillary aspects of the works.
• International rules. Who controls foreign markets? As recently as the 1980s, an American film made the vast majority of its revenue in the United States. For television series, the percentage was even higher. Today, for many films, less than half the revenue comes from the domestic marketplace. It is a global content environment, and media works are among the most important and valuable of our international trade commodities. Planning for international distribution and licensing overseas is a vital part of the business. For example, clearing rights to music requires knowledge of the distribution plan. It may be cheaper in the short run to buy rights for the United States and Canada only instead of worldwide, but if the distribution plan calls for an international release, it could be a rude shock to learn how much more expensive it will be to add worldwide rights after initial release. In short, few works can be developed without a keen sense of the impact of international sales on the product. In some cases, international sales help define the internal content; that is, producers make the work compatible with international needs from conception. Big budget movies that do not keep this global opportunity in mind are unlikely to realize the full returns of the investment.

One international battle that has materialized involves the effort of France and other European nations to limit the percentage of a broadcast day (for example, no more than 40% of time) that can be devoted to exhibition of programming originating from the United States. Motion picture distributors protested this development, and the subject has become part of international trade treaty discussions. Content xenophobia is clearly economically inspired. American films already dominate European theaters, and the keepers of the cultural keys want to preserve broadcast time for local products. Like most attempts at censorship, the exclusion of content based on arbitrary criteria is destined to fail; however, in the meantime, the struggle to ensure fair access to the European marketplace will remain a hot-button issue for years to come.

The Movie Distribution System

Producing works is only part of the equation. What separates the studios from the rest of the world is that they not only produce movies and television shows, they distribute them. The major revenue is realized in distribution. While producers look to recoup their investment and make a profit, distributors take a somewhat reduced risk, hoping to hop on the joy ride when a movie breaks out of the pack. Just one or two unexpected blockbuster films can make a company a giant in the field. That is what happened to Miramax when The Crying Game grossed over $60 million at the box office or New Line Cinema, whose Teenage Mutant Ninja Turtles surprised the field with over $125 million in revenue. With Miramax and New Line taking in a hefty share of those figures, they were able to break out of the pack and establish themselves in the independent film distribution marketplace. Their successes led Miramax and New Line to be acquired by two major studios, Disney and Warner Bros. (AOL Time Warner). Of course, these numbers pale in comparison with the high stakes in moviemaking and distribution as played by the studios. These companies not only pay for making films but the costs of distribution, and they control all revenues. The average production cost of movies released by the studios ranges from $35–50 million, and distribution fees can be as much as $20–25 million. Big budget films range from $80–130 million in production costs, with distribution fees also rising.

One of the most fascinating stories of securing distribution for a film project was told by Peter Jackson (director of The Lord of the Rings: The Fellowship of the Ring, a massive 2001 Oscar-nominated epic) to TV talk show host, Charlie Rose. The New Zealand director, having acquired rights to create the Tolkien trilogy on film, convinced Miramax to develop the project in exchange for distribution rights. But when preproduction costs soared to $20 million, and the price tag on the epic (which was planned in two parts, original and sequel) neared $140 million, Miramax balked. Its parent company, Disney, set a $75 million limit on its projects and would not gamble $140 million on the two films. Refusing an offer to tell the trilogy in one 2-hour movie, the moviemakers were faced with a Hobson's choice—lose rights to the film or find a substitute distributor who would not only bankroll the production but reimburse Miramax $20 million.

The filmmakers had 30 days to complete the distribution deal. They gambled on a unique selling device. They spent their first week making a 36-minute documentary on the “making of the movie.” With this in hand, they went to LA to pitch their tale to the big hitters on Hollywood Boulevard. After being turned down even for pitch appointments, they reached their “last opportunity” listeners, New Line Cinema.

Playing it cool by suggesting their appointment book was overflowing when they had nary an entry, they presented New Line with their video. New Line executives instantly understood what they had—a great story of magic and mystery told by brilliant filmmakers. The only problem New Line saw was, since the Tolkien work was a trilogy, how could the film be only two episodes? To do justice to the work, it had to come in three parts. The creators were flabbergasted, and they achieved a movie miracle, a deal that reimbursed Miramax and guaranteed a three-part epic. With the first film achieving boffo box office receipts and nominated for dozens of film awards, New Line was handsomely repaid.

Another insider look at the way money runs in the studio distribution system was revealed in litigation initiated by Art Buchwald, a syndicated columnist, who claimed to have developed the idea for an enormously popular film, Coming to America, starring Eddie Murphy. The headline was that the film managed to gross $325 million but not make a profit.

How is that possible? The secret lies in the way money is raised to make movies, the hidden costs, and ultimately the accounting system of Hollywood and the definition of net profits. Here is a capsule look at the money side of making and selling movies.

Once a filmmaking idea takes shape, a production company (other than a studio that usually bankrolls an entire production) either covers all the costs of making a movie or obtains gap financing—the amount it needs to close the gap between raised funds and actual production costs. Sometimes distributors make up that gap by advancing funds in exchange for distribution rights; sometimes the money comes from other borrowed sources. Among the sources that are available is the “presale” market: Producers presell rights to certain venues or media, such as foreign, video, or television, licensing those rights and the rewards to those marketplaces to raise money to make the film. Those who guess right in securing the presold markets can strike it rich when the film becomes a hit. Witness Miramax's pickup of The Crying Game and the tens of millions of dollars it derived.

Paying the costs of production, which include acquisition of rights and paying all the personnel who work on the film (take a peek as the credits roll at the end of the movie to see all who must be paid), is the biggest need of the money chase. Finding a distributor for the film is the next key. Since many more films are produced than released, engaging the right distributor is a highly competitive and critical task.

The distributor chooses how to tell the public about a film, including

• Making a trailer (an art form in itself).
• Determining where the film will open and on how many screens.
• Promoting the film in newspaper ads, television spots, placing actors on the talk show circuit, and creating news stories about the film.

For these efforts, the distributor usually takes several chunks of the first money to come in. In the case of theatrical releases, the box office revenue is split with the theater venues. On average, the division is 55% (distributor)/45% (theaters), but in practice it can vary widely, from 90% for the distributor during the opening week, which is usually the biggest revenue-generating time, down to 20% in later weeks. The theaters, of course, have concession sales to compensate during the opening weeks, especially if the movie is a hit and brings in popcorn-munching, soda-drinking, candy-eating patrons. Out of that 55% of gross revenue, the distributor recoups many line item costs, which are factors in defining net profits. A close look at the recoupments reveals the keys to the distributor's financial success. The biggest items are these:

• Distribution fee (usually 25–35%).
• Recoupment of all payments to production (gap financing).
• Recoupment of all distribution expenses.
• Interest on all money advanced.
• Collateralization (recoupment) of costs from other markets, such as foreign, video, and television.

When one tabulates these costs and reduces the gross, the discovery is that little is left. When Paramount did its accounting on Coming to America, it kept coming up with new costs against which to play off the increasing revenue. That is how the $325 million movie lost money.

The Television Distribution System

Television distribution has some important differences from theatrical film distribution. First of all, the venues are different. Television has no box office, so all its funds must be made from licensing fees. Second, television programming fits into two key markets: network and syndication. For network productions, the costs of production can run as high as $1.5 million per hour. To raise money to cover the huge cost of creating a program for network television, producers license the show to a network, which in turn pays a license fee. On a per-hour basis, the network fee rarely equals the actual cost of production. Typically, ABC, CBS, NBC, and Fox pay producers 70–85% of the budget for the right to air the show on its affiliated stations during a selected time slot. Doing the math, that leaves a significant deficit. This shortfall is financed during a network run, and the producers hope to make up the shortfall with huge premiums in syndication. As we note later, for the successful shows, this formula works; for the network busts, the deficit may never be paid off. The escalating costs of network programming has created a backlash, where the networks work to reduce their outlays. One effect has been the rash of lower-budget reality and game shows (like Who Wants to Be a Millionaire, The Weakest Link, America's Most Wanted, and Survivor). These programs occupy key time slots and cost a fraction of a dramatic series.

Traditionally, the networks pay their affiliates a fee for the right to program each hour of prime time and other times during the day. In exchange, the networks make their money by selling national advertising time, while allowing affiliates to keep a few minutes of network broadcast periods for local sale. The sale of the time, based on the ratings of the programs, allows the networks to recoup their out-of-pocket costs.

Recently, some of the networks, notably NBC, have suggested that the network fee to stations might become a thing of the past. With national ad sales fluctuating and the local spot time holding its own, the networks think the time may be ripe to eliminate certain fees paid to stations for the privilege of carrying network programming. This change is sparking huge debate with the television community, and we will simply have to see what develops.

If the deficit is the bane of producers, syndication is their hope. Syndication involves selling episodes of programs, one station at a time, for rebroadcast over a number of years. The rule of thumb has been that a network telecast needs about 80 episodes to make it to syndication. With an average network run of 15–20 episodes a year, that means that a show needs a multiyear run on a network to have a decent chance to break out in the syndication marketplace. Some shows, like Friends, launched original episodes into syndication while the network run was still ongoing. Others had to wait for the network run to end. To every rule, there are exceptions. Jackie Gleason's The Honeymooners is a perennial with less than half the average number of needed episodes.

In the 1980s, prices for syndicated product went into the stratosphere, as stations vied for a handful of popular off-network television series. Topping the list was The Cosby Show, which collected hundreds of millions of dollars in syndication fees for its first 5- to 7-year run. With numbers like that, program producers saw green, and station affiliates were in a tough battle to guess what shows could help carry them in ratings battles during key off-network time slots, when stations keep most, if not all, the advertising revenue. Some shrewd station managers guessed gold when they planned their schedules. Early buyers of M*A*S*H paid a relatively small sum and made millions as the show's rerun popularity soared. Others guessed wrong on different shows and had a hard time recouping.

While the off-network syndication marketplace grew, so too did “first-run syndication.” Sparked by game (Wheel of Fortune and Jeopardy) and talk (Oprah, Donahue, Jerry, Sally, and Rosie) shows, this venue went from nowhere in the 1970s to the big time in the 1980s and 1990s. The key difference between network and first-run syndication is that producers must make all their money from the original sale of shows, many of which have little or no rerun potential. As a result, producers of these shows keep costs down and are creative in selling their product to the marketplace.

One creative selling mechanism that developed in the 1980s was barter syndication. In barter syndication, the producer fronts the costs of the production, while the station pays no any cash for the program; rather, the station gives the syndicator a certain number of minutes of air time. Then, the syndicator, patching together minutes from a hundred or more affiliates, creates a quasi-network of markets and sells time to advertisers for all the stations combined. In such an environment, having clearances in time periods that are attractive, as well as major markets that generate large viewerships, is vital to the revenue chase. Unless the first-run syndicator can stitch together about 70% of U.S. households, the chances of successfully selling barter time to meet expenses is difficult.

Strategic marketing can be all important. A first-run syndicator may choose to roll out programs slowly to build a national audience. The highly successful Sally Jesse Raphael talk show was distributed by Multimedia Entertainment in that fashion. Developed originally as a local show on a Multimedia-owned television station in St. Louis, Sally was gradually released in more markets, until it built a loyal following and had affiliates in over 95% of U.S. households viewing in that time slot. It lasted almost 20 years in syndication.

Some successful first run syndication programs produce a “leveraging effect.” One TV distributor, King World, which reinvented the game show with programs such as Wheel of Fortune and Jeopardy, introduced The Oprah Winfrey Show on the basis of its success with these shows. Oprah, which quickly rose to the top of the talk show format, has generated hundreds of millions of dollars in profits for the producers. The success of King World led to its acquisition by CBS/Viacom as a wave of media consolidations played out in the late 1990s.

Of course, with every success come many false starts. At the annual NATPE Convention, dozens of promising pilots and first-run programs are peddled, but the marketplace has little room for weakly achieving programs. As the movie funnel has a very narrow spout at the bottom of the chain, so too does the television syndication marketplace. The number of independently produced and distributed television shows that can make it is quite limited, even as the number of media outlets themselves have recently increased. This is because, with the movement of independent television stations to new network affiliations, such as Fox, UPN, and WB, fewer hours of the broadcast day are available for independent programs. Moreover, stations find that the competition for local viewership has shifted to news in recent years, so stations are reluctant to release time periods to syndicators when they can program local news instead.

The one bright spot in this picture has been the advent of cable channels. They have taken up some of the slack by offering new telecast opportunities for specialized programming. But cable itself is a unique marketplace, which strives to cater to niche audiences. Cable channels, such as Discovery, Home & Garden, A&E, and Bravo, set tight budgets and acquire programs for 10–20% of what the major networks pay. Therefore, dealing with the cablenets comes at a price. We discuss cable in more detail in the next chapter. What is important to keep in mind is that each venue—network, off-network, first-run syndication, reruns—requires rights clearances. The savvy programmer knows that maintaining control over the properties in the expanding but highly competitive marketplace is the key to success.