Co-Authors Ilan Haimoff and David Simon
Background:
Motion picture distributors or studios often license motion pictures and television products to domestic and international television exhibitors in batches or packages. These packages contain anywhere from two titles to hundreds of titles. They can include first run theatrical motion pictures, library motion pictures, movies-of-the-week and television series. The values negotiated for these packages, as well as the values assigned to the individual titles within the packages, are an area of contention between profit participants and studio distributors. Studios generally maintain that the license fee for each title contained in a package is negotiated separately in order to achieve the maximum package value. When a single price is negotiated for the entire package, the studio will reallocate the total license fee to each title using an internal methodology that should result in the fair market value being assigned to each licensed product.
Considerations for Package Allocations of Films:
Every film inherently has a unique value, as each film derives its value through its strength at the box office and in license fees for further exhibition in streaming, DVD/Blu Ray and the vast array of television platforms and channels. There are several key aspects to consider when structuring an allocation of the overall license fee between the various films included, such as “star” value, box office gross, genre, awards, previous television performance, marketing opportunities and more. Most film distributors have libraries of films; thus, it makes economic sense to license multiple films to a buyer rather than only one. The distributors tend to offer the films as a package and assign a value equal to the total number of films in the package. However, it is not always clear how each film is assigned its apportioned value. This can be demonstrated in deals where films are categorized in tiers* (based on box office results), straight-lined without valuing each picture separately (for example, applying the same value to each film that is not a part of the first run category of films in the package), or are assigned an allocated value without an explicit contractual methodology (e.g., “negotiated”).
*With respect to the “tiers” approach, there is the concern with compression factor, which may result in allocating more of the package license fees to unsuccessful pictures and less to successful pictures. For example, an unsuccessful picture may likely receive a minimum license fee allocation (or a “floor”), while a successful title may likely receive a capped license fee allocation (or a “ceiling”).
The film seller and buyer should determine the value of each title in terms of the distribution platform for which they are licensing. For example, buyer for a terrestrial or basic cable channel must take into consideration the profit margin for the time periods the films would run. If the titles are valued so low that they would only play during the middle of the night, the license fee should reflect a low value. Alternatively, if a film contains “star” value, viewer recognition, popular genre and other important qualities, the value of the film would be higher, as it could be scheduled in important time periods generating higher revenue from advertising. The paradigm for pay television channel and streaming platforms is different because advertising is not a factor. However, the value of a film must still be measured in terms of its ability, along with other films, to attract and maintain subscribers.
There are various methods of assigning a unique value to an individual film. Some involve complex formulas involving near-algebraic methodology while others rely on the basic elements referenced above, such as star value, box office gross, etc. Regardless of the formula, the result is a compilation of researched, logical and pragmatic assignment of unique value to each film as part of a group of films.
Legal Challenges:
May 2010, a California appeals court upheld a 2007 verdict in favor of Alan Ladd, Jr. in his lawsuit against Warner Bros. Entertainment, Inc. regarding licensing of movie packages to broadcast television and cable networks. The court affirmed the studio had an obligation to “fairly and accurately allocate license fees to each of the films based on their comparative value as part of a package.” In this case, the package was allocated on a straight-line basis, and therefore, no allocation methodology was applied; however, the above court decision requires a methodology to be applied, demonstrating that the studio takes into account the comparative value of each of the pictures in the package.
Co-Authors
About Ilan Haimoff (Partner, GHJ)
Ilan Haimoff leads the Entertainment and Media Practice and the Contract Compliance and Forensics Department. His specialty includes profit participation and forensic accounting on behalf of talent, investors and co-producers at both the major and mini studios. Ilan has over 23 years of accounting experience in public accounting and private industry serving clients primarily in the entertainment, financial services and distribution service industries.
Ilan has written various articles and other publications as well as participated in various speaking engagements, focusing on entertainment, profit participation, royalty, internal controls and anti-fraud.
About David Simon (Media Executive and Advisor, Simon Bros. Media)
David L. Simon is a uniquely accomplished entertainment executive with a programming and production career in both the U.S. and around the globe. He is known for his distinctive team building management style, a result of his hands-on experience in content development and production, sales, marketing, distribution and P&L for some of the industry's most prestigious corporate brands. Simon derived vast benefit due to his experience thanks to the distinctive skills of such entertainment leaders as Barry Diller, Michael Eisner, Jeffrey Katzenberg, Rupert Murdoch and Steven Spielberg. He is the founder and president of Simon Bros. Media.
