BY:Michael I. Rudell
(Originally published in Mr. Rudell’s Entertainment Law column in the New York Law Journal, December 30, 1999.)
Each Millennium I find it useful to reflect on matters pertaining to entertainment law. What follows is a selection of observations about business and legal issues in the music, theater, motion picture and television industries as we approach the year 2000. To the extent there are common themes, they are consolidation, globalization and digitalization.
Throughout its history, the music business has both suffered and benefited from new technologies. For example, unlawful reproduction of records has plagued the industry for decades. Years ago, record executives bemoaned not just the activities of underground manufacturers who would make mass duplication of recordings, but also consumers who used taping equipment to record songs directly off the radio. The Betamax case established that there is no prohibition against consumer copying within certain norms.
Today, advanced digital technologies allow even easier duplication of recordings by consumers, and, in particular, transfers by means of the Internet are proving a challenge to the record industry. A digital download allows the dissemination of the artistic work in pristine fashion and, in turn, that material is storable and subject to further dissemination. Thus, it is with great concern that companies are allowing their materials to be downloaded, as they fear the possibility that with each new digital release there will be a disproportionate number of unauthorized duplications made by consumers who download into their computers and then disseminate to others.
On the other hand, it is the common wisdom that new forms of recordings and methods of dissemination of music to consumers are generally beneficial to the industry. The introduction of the compact disc rejuvenated the catalog sales of all companies and the world of MTV and video promotion created alternate avenues of appeal for emerging bands.
In this atmosphere, legal issues abound. The decision in the case brought by the RIAA against Diamond Multimedia Systems (covered in this column on June 25, 1999), in which the court refused to enjoin the manufacture and distribution of the Rio portable music player, discusses various compression formats and analyzes the Audio Home Recording Act of 1992 and the Serial Copy Management System referred to therein.
The Internet has raised new issues to be negotiated between artists and record companies. Some companies are insisting that they be the owner of a website containing the name of the artist. A related issue is whether the artist may share in revenues if advertising appears on a website containing his or her name and whether that artist will receive a greater share of revenues if a product is sold to a consumer who first “hit” the artist’s site and then was linked to that of the company.
Another technological advance in the realm of recorded music is “watermarking” — a method of identification of recordings and their source of origin by encoding data within the digital information contained on the recorded product, in a manner which does not interfere with the audio quality of the music but which allows information to be extracted as needed. Watermarking assists in the prevention of piracy by making it easier to identify the source of an unlawfully used recording or excerpt, and also fosters identification of legitimate performances for the purpose of allocating fees among different recordings based on their playing time.
In the early 1980’s there began appearing in agreements between royalty participants (including authors, directors and choreographers) and producers of live theatrical productions royalty pool provisions which served as an inducement to investors to provide funding. As the formula developed, it became more burdensome on the royalty participants by providing for a shrinking amount of available operating profits and, on occasion, including amortization factors in the calculation. Author’s representatives now are attempting to counteract this trend by requesting greater advance payments than in the past and a share of the net profits derived from their plays. It is possible that these agreements will begin to appear more similar to those in the motion picture industry in which producers acquire all rights in return for such concessions.
An increasing number of entities are attempting to obtain a percentage of the revenues which an author customarily retains from subsidiary exploitations of a play, such as motion pictures and stock and amateur exploitations. The producer customarily receives a share of these rights, as do not-for-profit entities, directors and actors involved in workshops. Lately “dramaturges” have been attempting to share in them as well.
Over the last 20 years, the production of plays in regional theatres and other venues throughout the United States has mushroomed. Globalization also has had its effect in the live theatre industry, as partnerships are being formed to bring theatrical productions to venues throughout the world. To enable this to occur, producers are attempting to obtain worldwide rights from authors with the result that contractual negotiations have become increasingly complex and the rights that authors traditionally have held have diminished.
Motion picture studios remain the primary source of producing, financing and distributing major motion pictures. At the Millennium, the average motion picture produced by a major studio has a budget of approximately $60,000,000, and marketing costs can raise the expenditure by tens of millions of dollars. Some companies are willing to limit their potential profits by engaging in joint venture or partnership arrangements to produce and exploit a film in order to cushion the possibility of loss. With the booming stock market, producers are having an easier time than in the past obtaining financing for independently produced films. However, the future of insurance-backed financing, which has been of great assistance to independent producers, may be at a crossroads as indicated by the recent filing of lawsuits by underwriters against lenders both in the United States and London. If insurers withdraw from participating in film financing, it may become harder for independent producers to obtain requisite financing for their films.
Years after the theatrical community has had an opportunity to reflect on the implications of the Art Buchwald decision, in which a court described several aspects of the net profits definition commonly used by major studios as “unconscionable,” representatives of talent and studios still wrestle over contingent compensation definitions that now are referred to as “net proceeds” or other labels. A group of high echelon screenwriters has agreed to a contingent compensation definition to be used with one of the major studios, and at least one studio has stated its intention to utilize a more user friendly definition.
Court decisions, such as the one in a case brought by a victim of Benjamin Darrus and Sara Edmondson who told authorities they were inspired to go on a killing spree after they saw “Natural Born Killers,” have caused motion picture studios and others concern about possible erosion of their First Amendment rights. The claimant had alleged that Warner Bros. made and released “a film containing violent imagery which was intended to cause its viewers to imitate the violent imagery.” After a Louisiana Court of Appeals overturned the district judge’s grant of preemptory dismissal to Warner Bros., a petition for review of the case by the Supreme Court on First Amendment grounds was denied and the case was sent back to Louisiana for trial on the facts.
Bolstered by this decision, attorneys in another suit involving “The Basketball Diaries” have named a studio and the manufacturers of purportedly violent interactive computer games such as “Doom” in their complaints regarding so-called “copycat” killings. One cannot leave a discussion of the motion picture industry at the turn of the century without commenting on the phenomenon of “The Blair Witch Trial” and the impact of the Internet. Produced for a meager budget, the film will generate gross receipts in excess of $100,000,000. The success is due largely to the marketing campaign developed by Artisan which took enormous advantage of the Internet. This is bound to be a forerunner for future attempts at theatrical (and other) exploitations, and representatives are exploring ways to include provisions in agreements with distributors that can capitalize on the lessons learned from this campaign.
In the 1970’s, approximately 90% of the television audience was viewing one of the three free over-the-air television networks (ABC, CBS and NBC). Given this dominance, the FCC and the Justice Department prohibited those networks from producing, syndicating or having a financial interest in programming. These restrictions were lifted decades later when the 90% number had fallen to less than 60%. Today, while viewers have turned to cable channels, independent stations, home video and computers as alternatives, the free television networks (which have grown to six) still remain the dominant method of delivering a mass audience to watch a given series or event.
Although the networks have undertaken the production of an increasing number of programs, outside suppliers still are active. Their leverage, lessened in recent years, still can be formidable in instances in which the license term for an extraordinarily popular program is about to expire. This was the case involving “ER” in which NBC is reported to have agreed to pay a license fee of $13,000,000 per episode to renew its license for the series. To avoid, or delay, this circumstance, the networks are attempting to obtain a longer initial license period than previously for exclusive U.S. broadcast rights.
Five of the networks now are or are about to be owned (in whole or part) by program suppliers. Inevitably, entities which participate in the revenues derived from the exploitation of programs controlled by such suppliers will be concerned that they will be deprived of income because of the relationship between the exhibitor and supplier. Lawsuits have been brought by such participants, alleging that there has not been fair dealing in respect of such programs, and such claims are likely to continue. Licensees have begun including provisions in their agreements designed to lessen the possibility of such claims.
Networks and cable systems which traditionally have been fierce competitors have, in some areas, become collaborators. There is a recent trend in which a broadcast network and a cable network in effect share a window on an original series or movie. For example, “Once and Again,” the hour-long dramatic series that is broadcast on the ABC network, is transmitted three nights later as a repeat run on Lifetime. “Mary, Mother of Jesus,” a two-hour made for television motion picture that was broadcast by NBC in November, will have its second run, not on NBC, but on the Odyssey Cable Network which is a joint venture of Hallmark Entertainment (the producer of the motion picture) and the Jim Henson Company. Again, participants in the revenues from these programs will keep a watchful eye on these transactions when there is common ownership among the entities involved.
The new Millennium begins, as did the last, with the creation and delivery of content to an audience as the core of the entertainment business. The manner in which this is accomplished will continue to evolve and the challenge to attorneys practicing in this field will be to keep abreast of the increasingly complex business practices and legal issues.