BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal on Monday, January 3, 2011)
An effective representative should know the substance and trends of the industry in which he or she acts. As 2010 draws to a close, some key developments and trends in the entertainment industry are worth noting.
Motion picture financiers and distributors, especially the majors, became increasingly focused on so-called franchise films involving continuing characters based on novels, comic books and graphic novels. The number of films that the majors produced diminished and 3-D technology became more important in enhancing box office revenues.
As a by-product, negotiations involving continuing characters in underlying properties became increasingly complex and relevant. (We touched on this subject in our April column about the turnaround provisions applying to film rights in Michael Connelly’s Hieronymus Bosch character.) Studios increasingly focus on provisions relating to rights in author-written sequels and the right to create studio sequel stories for characters that have franchise potential, and the bundle of rights being sought may now include theme park rights and dramatic stage rights.
The phenomenal success of the Stieg Larsson series illustrates the value placed on continuing characters. Three films were produced and distributed in the Swedish language. The film did extremely well internationally and was relatively successful in the U.S. Yet, Columbia Pictures has such confidence in this franchise that it is producing its own version of the trilogy, starring luminaries such as Daniel Craig and the relative newcomer Rooney Mara.
Another controversy looming over the motion picture industry (the New York Times has referred to this as a “Hollywood Brawl”) relates to the window between the release of a film and the time when it is available to the consumer for home viewing by means of video on demand. Traditionally, films were withheld from home viewing for at least 120 days following the initial theatrical exhibition. However, independent companies such as Magnolia and IFC have reduced the window to 45 days (and in the case of “All Good Things” the release was even prior to the initial motion picture release). Theater owners have been resistant, to say the least, to shortening the window and the major studios are debating how to deal with it.
Studios lament that sales of DVDs, which have been a significant profit center for years, are in steep decline, owing in part to the increase in film viewing and downloads via the Internet through services like Netflix, HULU, YouTube, Amazon, CinemaNow and iTunes. Earlier this month, Netflix, which built its business by distributing DVDs by mail to consumers, announced that its revenues from Internet streaming now exceed its revenues from DVD distribution and that in January it will inaugurate a streaming-only option for a monthly subscription fee of $7.99.
Netflix’s profits are increasing, among other reasons, because streaming avoids hundreds of millions of dollars per year of postage costs. Earlier this month, Netflix replaced The New York Times in the S&P 500 and several months before that, Netflix made news by reportedly agreeing to pay nearly $1 billion over five years to Epix, a premium movie network launched by Viacom, Lions Gate and Metro-Goldwyn-Mayer Inc. in exchange for rights to films from those studio owners for its online streaming service. This year, Netflix also made a “pricey” deal with Relativity for its film library. However, it has been speculated that Netflix’s $7.99 monthly fee won’t be high enough for the company to pay studios top dollar for movies in future deals, which may reduce the number of films it acquires, or its profitability, or both.
Media analyst Michael Nathanson at Nomura has noted “The first engagement the industry had with Netflix was innocent. DVDs were selling, and it didn’t seem like much of a problem.” Jeffrey Bewkes, Chief Executive of Time Warner expressed a similar sentiment; according to the New York Times, he observed that in the late 1990s the media industry embraced Netflix as a new distribution outlet for renting DVDs without foreseeing that the company would speed the decline in DVD sales, which had become a major source of industry income. As it evolves into a streaming service, Netflix now raises fears among cable companies that consumers will cancel relatively expensive cable TV services and switch to online viewing. This is called “cord-cutting.” 1
For years, talent has complained that the method by which they shared in contingent compensation from the distribution of DVDs was unfair — even “unconscionable.” Now with DVDs in decline and the economy still weak, reduced profitability has led to a general tightening of the contingent compensation arrangements being made with many highly paid performers, directors and writers. First dollar gross provisions are more difficult to obtain, having been replaced by a higher percentage amount based on defined terms like adjusted gross receipts and gross (minus certain deductions) after breakeven. Further, as revenues from Internet distribution of films increase, representatives have been focusing on how revenues from such exploitation will be included in gross receipts or otherwise accounted for. Their task will be compounded by the growing presence of subscription services, of the type mentioned above.
Unions already have been focused on this issue, but actors, directors and writers who negotiate above-scale definitions are being challenged to invent different, and from talent’s perspective, a fairer division of revenues from streaming revenues than they receive from DVD sales
The Internet also has figured prominently in discussions relating to the television industry. As with feature films, a substantial number of viewers report that they access TV programs on the Internet through their computers or Internet-enabled television sets and devices like Sony Internet TV, Logitech Revue, Apple TV, TiVo Premiere and Roku. Mobile devices also give new access to Internet based programming. These technological developments, as well as the poor economy, are contributing to “cord-cutting” too.
Although the networks continue to dominate in major event programming such as the Super Bowl and the Academy Awards, the importance of the free television networks as a source of original series has continued to shrink in relation to cable (which has entered even the late night comedy arena with the successful debut of Conan O’Brien). This trend has affected the order patterns for development of newly-created episodic series, causing developers to become increasingly creative in making their financial arrangements, including funding from foreign sources.
Looming over the entertainment industry is the effect of Comcast’s acquisition of NBC (assuming approval). The combination of a powerful cable operator, cable programmer, network owner, television and content producer and Internet company, with all their tangential businesses, is causing widespread discussion, speculation and, in some quarters, dismay.
In the publishing industry, discussion and contract negotiations have focused heavily on the emergence of e-books and e-readers. Several major publishing companies adopted the so called “agency model” through which e-retailers sell e-books as their agents, while Random House and smaller publishers continue to distribute under the more traditional formula in which e-retailers buy books at wholesale and set their own prices. The amounts received by authors also have been affected. (See our August column.) There does not yet appear to be reliable data on the percentage of total trade sales attributable to electronic books. Early in the year, the estimate was 5% to 10%, but some recent books reportedly have sold as much as 30% in the form of electronic books.
Marketers have been testing new forms of commercial messages in e-books, reportedly including the placement of videos, graphics and text along the borders of digital pages. Targeted advertisements based on the content of the book and the demographic and profile information of the reader also are in the works. 2 Attorneys and agents who negotiate publishing agreements must now deal with provisions relating to how authors will be compensated for such advertising. Some authors object to having any advertisements included in their books or to particular types of ads; a spokesman for Random House declared that ads will not be placed in that publisher’s e-books without the approval of the author.
Publishers are trying to sell books in as many platforms as possible. For example, Decoded by Jay-Z was placed on sale in a $35 hardcover edition. The digital edition also was made available at that price, although Amazon.com and Barnes & Noble sell it for only $9.99. (Because the publisher is an imprint of Random House, which has not adopted the agency model, e-retailers can sell the product for any price they choose.) Random House also has released the book in a variety of other editions, including an application that is expected to be available in the near future for the iPad, iPhone and iPod Touch. Also contemplated is a 10-song version of the Decoded app for $9.99 with interactive lyrics. If a consumer pays an additional $24.99, she will get 26 additional songs with lyrics. Further, Random House will be offering an enhanced e-book edition for $35 which includes video interviews with Jay-Z plus two additional videos. This format can be bought via the Amazon Kindle app for the iPhone, iPad and iPod Touch. 3
Provisions that govern enhanced e-books and apps now are included in many publishing agreements. Issues such as how much visual and audio material may be included in an enhanced e-book and who is responsible for obtaining and paying for it now are being negotiated. It’s highly important to coordinate provisions in publishing agreements that involve audio and visual augmentation of books with provisions in agreements with motion picture companies relating to adaptation of the book into a film. Film producers often seek to prohibit visual and aural representations of books’ characters and settings outside their own films, not so much to avoid a competing product but because they want the exclusive opportunity to root an unconflicted look and feel to the book’s major elements in the public’s imagination.
Several weeks ago, an article in the New York Times discussed the demise of illustrated children’s books. However, e-readers with color capability such as the iPad and Nook Color have opened the door for publishers to showcase books with illustrations. This advance may be significant not only for children’s books, but also for cookbooks, photography books, and other heavily-illustrated texts.
Star power continues to drive Broadway success, although some major musical productions without celebrity involvement have thrived and some productions with star power have failed. In commenting on the demise of “The Scottsboro Boys” and “Bloody Bloody Andrew Jackson,” Charles Isherwood in the New York Times stated: “The shriveling of Off Broadway as a commercial marketplace means that productions more likely to thrive there must brave the more challenging Broadway environment, whether they are temperamentally suited to it or not.” Both of those musicals had played to sold out Off Broadway runs. Isherwood describes them as being deficient in “the all important theatrical ingredient on Broadway these days: celebrity casting.” 4
According to the Broadway League, the current audience size remains fairly consistent with those of recent years, with an increase in domestic attendees and a decrease in international attendees. As reported in Variety, “The average Broadway theatergoer remains a wealthy, well-educated Caucasian female; although the average age skewed slightly older to 45 (vs. 42 the prior season). Almost 70% of the buyers making decisions were female.” 5
The industry anxiously awaits the opening of “Spider Man: Turn off the Dark” with its budget of $65 million; it will have to wait longer because the opening again has been deferred, now to February.
In an earlier column (December, 2008) we discussed the attempts of not-for-profit theater venues and festivals to seek a share of subsidiary rights income payable to authors from shows that premiere at its events. Earlier in the year, the New York Musical Theater Festival reversed its position on that score. Previously, its contracts with authors claimed a share of future proceeds including two percent of the author’s gross on all income received from the play in excess of $20,000 over ten years. Although the Festival has backed away from encumbering the author’s income, it still demands a share of subsidiary rights income earned by the producer who puts the musical play into the festival.
Music labels, which have never recovered from peer-to-peer sharing, continue to sell fewer recordings each year. Global sales of recordings by record companies sank 7% in 2009 compared to the previous year. 6 Even the rate of increase in digital sales — which represent half of total U.S. music sales —flattened in the first half of 2010. 7 Music labels have been at the center of monetizing popular music for decades, as they’ve been bank-rolling new talent, assuming most of the economic risk in launching new sounds, and reaping great rewards from every highly-successful performer. It seems safe to say, however, that the popular music industry is in transition to something different.
What that new dominant model will be is yet undetermined as artists look for alternative means to make money from the music they compose and perform. Some have begun downloading digital recordings to their fans directly, either for a payment or for free in order to attract them to concerts. Concert touring is another means for artists to make money that involves neither music labels nor recordings. (Aggregate concert revenue reportedly is also in decline, however, perhaps because sharply higher ticket prices have discouraged attendance by teens and young adults.) Performers have begun to profit from corporate sponsorship of their music videos shown online; the Wall Street Journal recently reported that outside corporate investment in music is rapidly approaching that of the traditional record companies. 8
Sponsorship dollars, however, usually go to performers with a fan base. Start-up bands and established performers alike can benefit from YouTube, Twitter and Facebook. Some bands have successfully solicited donations from fans in return for special access to performances and merchandise. 9 And apps for the iPad and other tablets may prove to be the next financially meaningful way for performers to connect with their current and future fans.
The entertainment industry is nearing the end of some cycles (such as the heavy contribution of DVDs to motion picture profitability); it’s at the beginning of others (like significant revenues derived from streaming audiovisual works and downloading e-books); and in the middle of others (traditional forms of television still remain a formidable aggregator of audiences). As we wait to assess the impact of foreseeable developments in 2011, such as the acquisition of NBC by Comcast, we anticipate the inevitable unforeseen ones as well.
1 Arango, Tim, “Time Warner Views Netflix as a Fading Star, ” The New York Times, December 13, 2010.
2 Steel, Emily, “Marketers Test Ads in E-Books,” The Wall Street Journal, December 13, 2010.
3 Trachtenberg, Jeffrey A., “Delivering ‘Decoded’ ‘in Multiple Ways,” The Wall Street Journal, December 13, 2010.
4 Isherwood, Charles, “Theatrical Stumbles of Historic Proportions,” The New York Times, December 12, 2010.
5 Cox, Gordon, “Broadway demo stays steady,” Variety, December 9, 2010.
6 International Federation of the Phonographic Industry, Recording Industry in Numbers 2010,http://www.ifpi.org/content/section_news/20100428.html, April 28, 2010
7 Reuters, “U.S. single digital music sales flat this year: Nielsen,” http://www.reuters.com/article/idUSTRE68Q2FM20100927, September 27, 2010, citing Nielsen research.
8 Kulash, Damian, “The New Rock –Star Paradigm,” The Wall Street Journal, December 17, 2010.