June 1, 2002

The Art of the Deal: Making the Most of Your Cable Agreement

Congratulations! You’ve just hung up with your favorite development executive at your favorite cable network, and she’s confirmed that the network wants to proceed with the project you’ve been pitching. She tells you that you’ll be hearing from the network’s business affairs people, softens you up a bit for that process by reminding you that this is standard cable (translation: “We don’t pay much. We’re not like the broadcast networks or those big, rich premium cable channels.”), and leaves you feeling a combination of pleased to have sold the project and braced for the worst on the business side of the process.

Regardless of the network and the nature of the project, the business and legal issues you’ll face in structuring an agreement for the project can normally be reduced to a series of typical questions, such as:

  • What budget the network will approve?
  • How much of the budget will the network provide?
  • If they won’t put up the full budget, how do I fund the deficit?
  • Who will own the copyright?
  • What rights will the network have? What rights will I retain?
  • Can I enter my film in film festivals?
  • Who has the final say over the content of the film?

 

The Budget

Agreeing on a budget is normally the province of the development executive. Once that’s done, it falls to the business affairs executive to negotiate the portion of the budget in which the network will invest. If, as is often the case, the network is putting up the entire budget, business affairs will almost certainly demand that the film be a work-for-hire—that is, that the network owns the copyright and all of the rights in the film for all purposes everywhere forever.

If you’re prepared to accept the full amount of the budget from the network, you should also be prepared to accept its owning the film. In that instance, however, the filmmaker will legitimately press for a participation in the network’s so-called ancillary revenues. They include revenues from the exploitation of foreign broadcast rights and home video; they may also include revenue from other media or uses, such as book publishing or merchandising.

The filmmaker’s participation in ancillary revenues is normally a modest percentage of the network’s net profits from the film. These will be calculated by a formula in which all of the network’s revenues from all sources relating to the film are added up, a distribution fee (i.e., a payment to itself or an outside distributor for foreign sales, home video and other ancillary licensing) is charged, all of its costs for the production itself (including its overhead and interest) are deducted, and the resulting profit is divided between the filmmaker (a small share) and the network (the lion’s share).

There are a number of variations on this theme. In some instances, home video or book publishing revenues are accounted for and paid separately, outside the overall gross revenues. In rare instances, it is possible to demand that merchandising revenue also be accounted separately. In some cases, the basic formula can be modified so that the network deducts only a portion of the production costs from the gross ancillary revenues, on the premise that some of that cost of production is attributed to the network’s domestic broadcast of the film, in which the filmmaker doesn’t share revenues. The likelihood of securing any of these concessions in the net profits formula depends on the nature of the project and the filmmaker’s negotiating leverage.

Rights and Territories

If the network is contributing less than the full amount of the budget, you will need to supplement that contribution with co-production financing. In that case, you will simply grant the US network a license for specific rights during a specific time period in specific territories. You will retain ownership of the film and of all of the rights in it, other than those which you’ve granted to the US network. The specific rights granted and retained, the time period and the territory of the license, and the portion of the budget being contributed by the network are intertwined and negotiable. Not surprisingly, the network will argue to get as much territory and as many rights as it can for as small a contribution as possible; equally predictably, you will argue to give the network as little as possible for as large a contribution as you can extract.

In that negotiation, the most typical areas of “flex” are normally territory and home video rights within that territory. In most instances, a US network will insist on obtaining rights for the US and Canada, and on having the home video rights, at least in that territory, if not the entire world. Again, the nature of the project and the filmmaker’s leverage will shape the outcome. In a negotiation for a co-production, some US networks insist on obtaining an interest in the filmmaker’s net profits—that is, any profit the filmmaker realizes from the film after he or she has recovered the entire cost of the film. The formula for that calculation is similar, in reverse, to the formula for determining the network’s profits in a work-for-hire project. The size of the network’s participation is normally proportionate to the size of its contribution to the production budget, balanced against the fact that the filmmaker is bearing the risk of completing the film at a deficit.

Fees/Compensation

As a filmmaker, by now you are asking the over-riding question: “How much will the network pay?” That will depend on a wide variety of factors: the nature of the project, the network’s programming needs, whether it’s a single film or a series (with the advantages of economies of scale), whether it involves unusual production elements (a lot of travel, complicated graphics or animation, expensive rights clearances, etc.), whether there are unusual ancillary opportunities to exploit. On average, for a “one-off,” one-hour documentary, with no unusual cost elements, standard cable networks expect to deal with budgets of approximately $200-225,000, and will expect to pay no more than $125-150,000 for a license of 7-10 years for the North American (ie, US, Canada, and territories) territory. The range of the budgets on the premium channels tend to be higher, and the structure of the relationship with the filmmaker more flexible.

Clearances and Permissions

With the budget agreed and the rights and territory defined, you will turn your attention to the next tier of deal issues, some of which can reverberate back to the budget, which you thought was settled. One such secondary issue relates to clearances and permissions, which are universally the responsibility of the filmmaker. If your film relies heavily on material that is owned by third parties, such as film clips, published material, music, etc. (think of a film exploring rock music through the use of MTV clips and recordings), the cost of clearing the necessary rights can be substantial. If your deal with the network is structured as a work-for-hire, it will expect you to clear all third-party rights on that same unlimited basis—that is, in perpetuity for all media throughout the world. Even if you’ve succeeded in retaining ownership and some of the ancillary rights, your ability to exploit the film in foreign markets or ancillary media will depend on your having secured the necessary permissions to do so. However, the amount contemplated in the approved budget for clearances may cover only limited permission (say, five years in North America only) and be far less than required for such broad permission.

Errors and Omissions

Another secondary issue may relate to the cost of so-called Errors and Omissions insurance. This is often the coverage of greatest concern to the filmmaker and the network, since it covers against loss arising out of copyright infringement, invasion of privacy, libel and other content-based claims by third parties, and extends into the ongoing broadcast of the film. If your film presents a relatively low level of risk of this kind of claim, the amounts that the policy will cover and the cost of the premium will probably fall within a predictable range. However, if the film presents an unusual risk of claims (think of a investigative film using hidden cameras to explore adultery), the network may require higher-than-normal policy limits, or the insurance company may charge an increased premium to cover the heightened risk of a claim.

You may insist on (or the network may require) that a very expensive movie star narrate the film. You may show a rough cut to the network production executive, who realizes that the film would greatly benefit from some additional shooting—in India. Broad permissions, expensive insurance, even more expensive narrators, additional shooting, or a myriad of other factors can wreak havoc on what seemed to be an agreed-upon budget, and you may be forced to revisit the budget to address these extraordinary costs. Depending on the circumstances, the network may agree to increase the budget, or to provide additional financing to cover a specific extraordinary expense (called “breakage”), or may agree to reduce its requirements (lower insurance policy limits, or more limited permissions). Or, least attractive of all, it may insist that you meet its requirements without increasing the budget.

Issues may arise which are unrelated to money, budgets, rights, territory and other business matters. You may feel strongly about having final control over the content of your film (no network can be expected to concede the final say in what goes over its air). You may feel strongly about entering your masterpiece in film festivals (since this delays the network’s broadcast of the film—the reason they’re financing it in the first place—some networks are strongly resistant to allowing that; others are more flexible or even eager to see that happen).

In the final analysis, the deal between a filmmaker and a network depends on the specific circumstances surrounding that film—the subject of the film, the experience and credibility of the filmmaker, the needs and flexibility of the network. Just as each film presents its own unique set of production and creative issues, so there is no ‘one size fits all’ approach to the business side of process. Good advice, a measure of flexibility on both sides of the table, and a sense of humor and perspective (after all, it’s the film, not the deal, which is what this is all about) will smooth the business process and serve both the network and the filmmaker.

 

J. STEPHEN SHEPPARD is a senior partner in the New York City law firm of Cowan, DeBaets, Abrahams and Sheppard. His practice covers a wide range of entertainment issues and clients, with an emphasis in nonfiction film and television.

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