Best practice when selling rights

An analysis of three years of sales and distribution deals.

OVERVIEW

Ten years ago, after your movie’s cinema run was complete, the next steps were fairly orderly. Your distributor and/or sales agent would have negotiated terms for a home entertainment release, possibly a television broadcast and some ancillary incarnations, such as inflight entertainment, hotel TV systems, merchandise or even a soundtrack.

For creators, distributors and sales agents alike that ‘back-end’ rights ecosystem has drastically changed. And not just for filmmakers, but in television and digital originals as well.

Broadband internet improvements (and the resultant threat of piracy) has raised audience expectations of being able to view content at the same time globally on the device of their choice. The advent of streamers has meant that once complex rights and distribution deals can potentially be replaced by a single deal, like when Netflix commissioned and exclusively broadcast Australian drama Tidelands all around the world.

All areas of the distribution chain are under pressure, evidenced by eOne pulling out of the Australian market. As such, the deals that creators are now being offered vary widely and it’s become more difficult to spot a fair deal.  So to help producers land the best deal Screen Australia provides the following “best practice” suggestions.

WHAT IS A FAIR DEAL?

For the first time, Screen Australia has published an aggregate of deals that were processed for Screen Australia-funded titles across a three year period (May 2016 – May 2019 inclusive).

This data represents the summation of hundreds of deals and gives a sense of the most common terms. Four key best practice deal terms emerged (outlined below), which Australian creators can use as a guide when negotiating with their distributor and/or sales agent.

“However, it’s worth noting that this guide is only for a point in time. The distribution and sales landscape is changing with such speed that in five years’ time best practice may look completely different,” said Rakel Tansley, Manager of Marketplace within Screen Australia’s Strategic Policy and Industry Insights department.

“The central tenet that creators should be working to is that their creativity has a monetary value. As such, creators must understand what they are giving away when negotiating rights, and must be able to spot a bad deal.”

“On the flip side, distributors and sales agents are under immense pressure and it’s in nobody’s interest to see their businesses fail. Creators should work with their marketplace partners to negotiate fair, mutually beneficial deals.”

“And if in doubt, Australian creators can always contact us directly. We can’t give you commercial advice, but we can give you guidance in terms of what deals are being done for content similar to yours.”

1. HOME ENTERTAINMENT

Best practice: The starting point for both Video/DVD Rental and Sell Thru should be 80/20% in favour of the distributor.

Despite the introduction of streaming services, home entertainment is still big business in Australia. The Australian Home Entertainment Distributors Association (AHEDA) 2018 Yearbook states that local home entertainment sales (physical and digital) generated $2.2 billion in 2018.

Physical Sell Thru (e.g. a DVD) has been in decline since 2011 (AHEDA Yearbook), but is still a reliable source of business. In Australia, GfK data for the AHEDA shows that despite a 17% volume decline from 2017 to 2018, nearly 30 million discs were sold in 2018 with a market value of $520 million. However the AHEDA noted sales of TV series on DVD “recorded the biggest decline, down 27% in value and dropping to its lowest share since 2011.”

Digital retail or Electronic Sell Thru/Download to Own (e.g. iTunes) in Australia was worth $133m in 2018 (up 9.9% on 2017) according to the AHEDA. The discrepancy between physical and digital market size is reflected in the deals being done.

Digital or Electronic Rental in Australia (e.g. iTunes or Telstra TV Box Office), is increasing according to the AHEDA (up 13.1% to $157m in 2018). Physical rental is virtually non-existent.

In the study period, for both Video Rental and Sell Thru rights, most distributors (around 43%) offered 80/20% splits in favour of the distributor, while only 9% of distributors are sharing 50/50. It suggests that most distributors still see the monetary value in this traditional form of distribution, while those offering 50/50 are starting to see Video Sell Thru and Rental as more akin to SVOD.

For consideration:

• When the split is in favour of the distributor, all expenses should be recouped from the distributor’s share of gross receipts and not from the producer’s share.
• Check if the Distributor sub licenses some or all of its home video rights, and if they do, you could expect a 50% split from that portion.
• If there is a sub distributor, you would expect the receipts on which the split is based, to be deemed to include any sub distributor fees deducted at source.
• Producers should try and keep the same split across both Video Sell Thru and Rental rights.
• Producers are sometimes offered a lower percentage share for Sell Thru rights and a higher rate for Rental rights (where less of a return is expected). The data showed this was particularly common in territories such as Israel, Japan, South Africa, Taiwan, the Middle East and Canada.

2. TELEVISION

Best practice: The starting point for Free and Pay TV should be 30/70% in favour of the producer.

In Australia, 22 feature films released on local free-to-air TV in 2018 and a record-breaking 44 local adult TV drama programs aired.

Viewing on catch-up services, which is included in FTA TV rights, is also growing and supplementing terrestrial viewing. For instance, the finale of the ABC series Mystery Road had the highest average number of views for an episode (233,000) of Australian drama across 28 days in 2018. More recently, Network Ten reported Five Bedrooms as being particularly popular on Ten Play.

Internationally, the sale of TV rights continues to be a way for Australian production companies to create sustainable businesses. As FremantleMedia’s Jo Porter said: “What is great is Australian tape is selling. It doesn't need to necessarily be remade in an American accent anymore. Our voices are cutting through and people are getting more and more used to hearing an Australian accent on their screen, however they consume it.”

For Pay and Free TV rights the splits have been consistent across the three years. On average 60% of distributors offered between 30/70% and 40/60% in favour of the producer worldwide. However, 30% of distributors have negotiated 50/50 for Pay and Free TV revenue in Rest of World (i.e. all markets except Australia and New Zealand). While uncommon in Australia, a small proportion of distributors have offered 50/50 locally.

For consideration:

• Producers should not to give up TV rights. In Europe there have been a number of sales where the international distributor has offered standard back end splits across multiple rights except for TV. In these cases, 100% of TV gross receipts have been returned to the distributor, with nothing going to the producer.

3. SVOD

Best practice: The starting point for SVOD should be 30/70% in favour of the producer, however the majority of distributors are still offering a 50/50 split.

Research from Roy Morgan shows almost 14 million Australians have SVOD or Pay TV, up 7.9% since 2018. Of that number, 11.5 million Australians have Netflix (up by 17.6%) and 2.9 million have a Stan subscription (up 43.2%), with Amazon Prime, YouTube Premium, Fetch and other smaller services also experiencing fast growth.

Internationally, with multiple platforms now available to stream content, there has been a shift even in the past three years as to how projects are financed and how these contracts affect gross receipts*.

The Screen Australia data shows that 73% of distributors have offered a 50/50 split for SVOD rights. However, 20% of distributors offered a higher split in favour of the producer, pointing to this becoming more accepted.

Creators should note:

• Producers should view SVOD rights the same way as TV rights i.e. 30/70% in favour of the producer.
• Producers should be aware that in several territories including France, Canada and Australia, some distributors have grouped SVOD rights with Video Rental and Sell Thru rights. In these cases the split has varied between 75/20% and 80/20% in favour of the distributor. This should be avoided. SVOD rights should either be kept separate or grouped under TV rights, not Video Rental and Sell Thru.

*Gross receipts refers to all money received from the exploitation of the licensed rights (theatrical, TV, SVOD, video, ancillary etc)

4. OUTPUT DEALS

Best practice: Distributor output deals should not impact the producer’s percentage split.

Another point to consider when negotiating is that many distributors have ‘output deals’ in place with sub distributors e.g. they have a multi title agreement with another distributor/broadcaster for the home entertainment release.

There have been instances where distributors have offered producers a reduced share of gross receipts if an output deal is in place. For example, the normal 30/70 split in favour of the producer in TV might be reversed to be in favour of the distributor because of an output deal. Producers should be mindful of these deals and be watchful for any mention of split rates varying if output deals are in place.

Creators should note:

• The deal with the primary distributor should be inclusive, so that regardless of what output deals the distributor might have, it should not impact the producer’s percentage split.

FURTHER INFORMATION

Producers are advised when selling rights to ask the Distributor what the back-end splits and terms are for each right.

Beyond the trends outlined in this article, producers of Australian content can ask for further information from Screen Australia at no cost.

Marketplace staff will not disclose specific comparable deals but can guide producers in what to expect for e.g. a television sale to a German streaming service.

GLOSSARY

Based on the IFTA – International Schedule of Definitions

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