Negotiating Digital Distribution Agreements

Business and Legal Issues to Watch in the Era of Netflix, Amazon, Hulu and VHX

By Simon N. Pulman

Digital and direct distribution options have created new opportunities for producers seeking to leverage multiple platforms to find new revenue streams and audiences for their work. While the traditional “all rights” deal will continue to exist as long as there are major distributors willing to pay a minimum guarantee and give a certain exclusive category of films a theatrical push, many producers are now looking at entering into (and understanding) two or more concurrent distribution deals with different and hopefully complementary partners. The goal for many of these producers is to maintain greater control over distribution and marketing, maximize value for investors and unlock the potential of growing digital platforms such as Netflix, Amazon and Hulu to benefit both the individual film and the longer-term career of its producer.

It is now not unusual for the producer of a moderately budgeted film to have separate agreements in place for theatrical, traditional home video (i.e. DVD and Blu-Ray), television and video-on-demand, plus an additional agreement with a foreign sales agent with respect to international rights. Moreover, some filmmakers who are willing to do some of the marketing and distribution legwork may also seek to “carve out” the right to directly distribute their films through streaming sites such as Vimeo and VHX (the subject of a recent Indiewire article here). These direct distribution sites allow producers to retain the lion’s share of receipts from their films, but also push most marketing and promotional responsibilities onto the producer.

Faced with many potential options – and rights issues – what do filmmakers need to know about distribution agreements? At CDAS, we represent many filmmakers and other content producers entering into distribution and sales agreements with major and mini-major studios, sales agents, aggregators and service providers. Here are a few threshold issues to consider based upon the many deals that we see:

The Money:

Large distributors still pay minimum guarantees, although these have generally declined in size and major seven figure acquisitions of independent films are limited to significant festival successes – typically narrative films featuring recognizable actors. Smaller distributors and VOD aggregators are typically not paying minimum guarantees although they may, in limited instances, commit to a certain P&A spend in connection with a particular film.

No matter the size of the MG, the key consideration from a contractual perspective is the payment period. Traditional distributors tend to pay the entirely of the MG upon full delivery, meaning that by the time the film has been released, the MG has usually been paid in full (there is sometimes limited flexibility with respect to the breakdown of payments that allow, for example, a bigger portion to be paid upon signature of the agreement). However, some new players in the market are paying minimum guarantees (or license fees) over a much longer period of up to two years from full delivery. This is obviously hugely beneficial to the distributor from a cashflow perspective, but can be harmful to a producer that needs to repay investors or cover delivery costs.

Moving onto how revenues from the exploitation of a film are disbursed, in a traditional distribution deal (especially with a major studio), it is not uncommon for all manner of costs and expenses to be charged against a film, and in many instances, costs are cross-collateralized so that producers end up paying for costs incurred in connection with other films. Outside of an all-rights paradigm, however, producers may have greater leverage to limit the costs that are charged against their film before the producer begins seeing revenues. Accordingly, it may be possible to cap costs at a reasonable amount that reflects the distributor’s actual third party marketing costs. Of course, films that are not being released theatrically may be marketed predominately through social media, earned media and online ads that are significantly less expensive than a traditional print or television campaign.

It is also important for filmmakers to get a sense of what subdistribution fees and costs, if any, are being deducted from gross revenues. Distributors may employ subdistributors to distribute a film on certain platforms, and ideally producers should seek clarification that any fee charged by the main distributor is inclusive of subdistribution fees. When dealing with VOD and PPV rights, producers may find it helpful to use spreadsheets to model how many cents they will receive on the dollar after deducting transactional platform fees (e.g. the 30% fee charged by iTunes) and any distribution fees and expenses. This will enable producers to budget more effectively with respect to delivery costs and marketing expenses (especially if the producer intends to bring in a third party distribution or social media consultant to help promote the film) and project their potential revenues and profits for the benefit of filmmakers and their investors.

On a final note with respect to revenues, note that while it remains possible for producers to negotiate a “box office bonus” in connection with a film’s theatrical performance, it is harder to negotiate comparable bonuses in the digital realm. Certain distributors may pay out bonuses based upon a film achieving a certain number of VOD “spins” (i.e., transactional purchases), but these bonuses may be limited in time and scope (e.g., only payable in the first 3 months of release). Additionally, with the lack of transparency in subscription VOD numbers, it is impossible to ascertain how many times a film is being viewed and, accordingly, request bonuses based upon its success on SVOD platforms (The Hollywood Reporter has an article on this broad topic here).

Rights:

Producers should take care to ensure that any agent or attorney that they engage possesses a robust understanding of the distribution landscape and is familiar with the capabilities, policies and procedures of the major players in the space (including digital platforms such as iTunes, Netflix and Hulu). A strong market familiarity is obviously greatly advantageous from a dealmaking and negotiation perspective, and it can also help producers avoid potential legal pitfalls down the line. As referenced above, producers will now frequently seek to exploit rights in concert with several different partners and platforms concurrently and it is imperative that they do so in a manner that protects their interests and does not place them in breach of any of their agreements.

Generally speaking, distribution agreements with smaller distributors should include solely the rights to distribute and market a film on specifically delineated platforms on which the distributor has a proven record of success. All distribution rights on other platforms and other subsidiary and derivative rights (for instance, merchandising rights, and the rights to make remakes, prequels and sequels) should be reserved to the producer. This is equally true of documentaries as narrative films, as it is not uncommon for the remake rights in docs to be optioned by producers and studios or for there to be opportunities to adapt the doc into a tv series, book or digital app.

Producers should start thinking about which rights they wish to grant to each distributor at the dealmaking stage, prior to even receiving a long-form agreement. Ideally, an experienced sales agent or attorney should assist with this process to ensure that there is no miscommunication between the producer and distributor with respect to which rights are being granted. Remember, distributors will view your agreement to deal terms over email as a binding deal that will be used as the basis for a long-form distribution agreement.

One final point on rights: we are beginning to see a potential conflict between television broadcasters and VOD distributors with respect to VOD and streaming rights, because broadcasters are increasingly seeking a VOD streaming “catchup rights” window to allow their viewers to watch or re-watch the film through the broadcaster’s website or app. Thus, it is important that any such VOD catchup window granted to a broadcaster is appropriately limited in scope and referenced in any potentially conflicting agreement so as to avoid a dispute. Some broadcasters are also requesting the right to simulcast films through “TV Everywhere” apps concurrently with live broadcast. This is typically not controversial.

Term:

While a ten to twenty five year term is still customary for an all-rights deal with a major or mini-major distributor (especially if it needs to recoup an MG), smaller companies are more willing to be flexible with the term of a distribution agreement. For a film that will do most of its business on VOD, it is now feasible to request a shorter term, in the two to five year range. This is good news for producers because, in a rapidly shifting landscape, it gives them the opportunity to reassess their options at the end of the term and either continue with their current distribution partner or explore other opportunities. This will be of particular benefit for producers of films that are likely to remain relevant and highly “discoverable” for a longer period of time – while the DVD market is in decline, there is the possibility that producers will be able to replace this lost revenue over a longer period of time through revenue derived from digital platforms. Groups and organizations such as Sundance Artist Services and Seed and Spark are working with filmmakers to provide tools to help build followings and increase and extend the viability of their work.

With that said, there are at least a couple of considerations to remember with respect to term. Firstly, producers should remember that a distributor may be obligated to remove their film from all digital platforms upon expiration of the term, which could render the film unavailable for a period of time on platforms such as iTunes. Secondly, producers should ensure that their lawyer negotiates customary termination provisions in the event that the distributor fails to fulfill its obligations or goes bankrupt. Provisions relating to bankruptcy and termination in distribution contracts can be somewhat nuanced, so it is critical that you engage a seasoned attorney who will help prevent the rights in your film from being tied up for an extended period in the event of bankruptcy.

Note that we’re currently seeing a good amount of consolidation in the distribution space, so producers should discuss this with their attorneys and ensure that their agreements provide for what will occur in an M&A scenario. It’s also possible that even smaller distributors will attempt to increase the terms of their agreements as they attempt to lock in rights and become acquisition targets.

Windowing and Holdbacks:

In addition to considering which rights are being granted to a party, producers should pay close attention to “holdback” provisions, which may limit their ability to exploit the rights that remain in their control. Holdbacks typically come in two variations: (i) geographic; and (ii) rights-based. A geographic holdback precludes a producer from exploiting a film in other territories before a certain date – for instance, a North American distribution deal may stipulate that a film cannot be distributed in any medium until three months after it has premiered on that medium in the United States. We still see these in many independent film distribution deals, even though major Hollywood releases have increasingly moved to a worldwide day-and-date (or heavily compressed window) model.

A rights-based holdback precludes the distribution on certain platforms until a certain period of time has passed (i.e. “windowing”).  For instance, a television broadcaster may wish to hold back subscription VOD (such as Amazon or Netflix) for a window of three to eighteen months after initial broadcast on the theory that SVOD availability could cannibalize the broadcast viewership. In the independent film market, the “ultra-premium VOD” window – whereby a film is released on electronic sell through (“EST”) outlets day-and-date with a theatrical release is gaining in popularity, and we have also begun seeing a premium EST window precede other forms of home video exploitation (this is why you can purchase a new studio movie for $19.99 through Vudu or iTunes before you can rent it or buy it on DVD).

It is important to reasonably limit holdbacks where possible in order to preserve distribution flexibility while understanding that windowing can be a key component in maximizing revenues from a film. Finally – under all circumstances – producers and their attorneys should pay close attention to contractual holdback provisions in order to avoid conflicts.

Delivery:

Delivery has always been a time consuming and potentially stress-inducing process, and little has changed in this respect despite the transition from film to digital elements. Nonetheless, producers – particularly those with smaller films – should pay close attention to delivery schedules in order to ensure that they are able to deliver all required technical and legal deliverables.

The precise requirements of each distributor will vary depending on size, corporate culture and distribution footprint (for instance, premium SVOD platforms with international rights may require producers to deliver dubbing and subtitling in many languages), but there is typically room for negotiation. To the extent that producers do not possess certain elements, these should be qualified, struck from the delivery schedule or, in some cases, created by the distributor and recouped from the gross receipts of the film. Of course, one of the many advantages of engaging representation early in the production process is that seasoned attorneys should be able to provide specific advice on which delivery materials will be required once the film is completed and, with respect to legal delivery, may be able to provide forms and templates to facilitate the process.

One further point to consider with respect to delivery: producers should consider requesting access to any materials created by distributor on a free (“gratis”) or reduced cost basis, so that any materials that are created by one distributor can be provided to the film’s sales agent or other distributors.

Simon N. Pulman is an associate in CDAS’s New York office. He can be reached at spulman@cdas.com and followed on Twitter at @simonpulman