Evaluating that Character License: Why Not Do Your Second-Guessing Before Signing . . . and Avoid Those Nagging Worries Later?

April 2004
The Licensing Book

True story:  Not long ago, a new client called saying he had been referred to me by a current client.  He went on to say that he would like to send me an entertainment-character license for review, and that some of the content worried him.  I assured him that I would be happy to help, would review the draft and point out any concerns.  If he wished, I would then help him to negotiate changes in the draft.  He said, "Oh, no, it isn't a draft.  I've already signed it and need to understand what I have to do now."

How many times have you endured worries - or even sleepless nights - after signing a license for an entertainment property?  Did I pay too much?  Will the property be a success?  Will the licensor support it?  Will they undercut my line with other licenses or with premiums?  Will I cover the guaranty?  Are there hidden costs?

Only you can decide how much you're willing to pay for a property, but this article may at least help you understand better what you're paying for.  What follows is a discussion of only three of many major areas of focus that can determine whether or not you're getting your money's worth.

1.  Will the Property be a Success?

If the license is for a new movie or TV property, there is no way to know in advance whether it will capture the imagination of your target market.  However, the presence or absence of various elements can certainly be evaluated in determining the likelihood of the desired outcome.

Movies

Here are some questions to consider if the property is a theatrical release: Are major stars promised for the "lead" and supporting roles?  Will the licensor promise a minimum number of "screens" for a first-run theatrical release?  Will the release date occur within the preferred "window" for the type of property - Memorial Day to early summer for boys' "action" pictures, pre-holiday for younger-age or "softer" features?  Will the licensor specify a minimum for production and promotion budgets?  All of these can give a picture the chance to be a "major event".

Then there are peripheral elements that can strengthen the theatrical impact.  Will the DVD and video release be timed to reinforce the theatrical release and enhance your merchandise sales?  Will there be a related QSR premium offer during or following the release?  What other forms of support are planned?

Television Series

If the property is a TV series, there are parallel questions regarding the number of episodes, broadcast coverage of major TV markets and total percentage of U.S. homes, daily or weekly broadcast, favorable and consistent time period, second-season guaranty, measurable production values, cross-promotion programs, etc.

Of course, when you try to pin down licensors on these issues, you will hear arguments like "We can't guaranty what we can't control.  We don't own the theaters or the networks.  We can't tell you how many people will see the movie or what the TV ratings will be.  If the network doesn't want to carry the series in all markets, we can't force them to."

Pinning it down . . .

This may be accurate, but in the next breath, they'll be telling you how much you'll have to guaranty to pay them in royalties.  Two answers:  You can't guaranty retail results any more than they can guaranty ticket sales or TV ratings.  Nevertheless, while you're willing to make a guaranty of minimum royalties, you want portions of the guaranty tied to the fulfillment of certain of the above criteria.  For example, if the theatrical release doesn't achieve a certain number of screens, the royalty guaranty would be ratcheted down a notch.  If the promised TV coverage isn't met, a similar reduction.

You aren't asking for a favor; you're just asking that the licensor fulfill the sales pitch they've given you on the property, or else cut back your financial commitment in like measure.  You are not asking them to "guaranty" these things will happen, only to relinquish part of your guaranty if they don't happen.

2.  Where are the Hidden Costs?

The wording of the question implies that there are hidden costs lurking in the deal, because there nearly always are.

For example, if the property includes a major actor, might you discover that use of his or her likeness in your products is no part of the deal?  That those rights have to be "negotiated" with the actor's agent if you want to use them?

Actors, Clips

If you submit a print ad or TV commercial for approval that includes a still photo or film clip from the movie or TV series, might you be told that there is a separate fee to be paid to the production house or the photographer as well as to the talent, and, of course, contributions to various union pension funds?  If the movie or TV series is animated and likenesses shouldn't be a problem, will you have to pay for the use of actors' voices in your products or advertising?

Music

How about music?  Even though most original music used in a TV series is owned by the licensor, how often have you been told that music rights are a separate "profit center" in the company - or even a separate subsidiary - that has to be paid a fee?  And even when you've paid for the theme music to use in your advertising, don't forget that the "performance" is a separate charge.

Some of these are examples where a licensor should cover the associated costs.  In other cases, at the very least, the licensor should commit to obtain the best prices on behalf of the licensee and to disclose them upfront.

Still more costs . . .

Other "hidden" costs can arise from obligations that a licensee provide an "annual report from an independent auditor" attesting to the accuracy of its royalty reports or, even more broadly, its "compliance with the terms of this agreement".  Such reports can cost many thousands of dollars and should not be required of a licensee unless it is guilty of past violations of the license agreement.

Similarly, if the licensee must submit to and pay for inspection and testing by "an independent laboratory acceptable to" the licensor, or if it must use "artists and sculptors approved by" the licensor, who can say whether the fees charged will be reasonable or will penalize the "captive audience"?

The Beloved CMF…

This brings us to two potentially even bigger hidden costs:  the "common marketing fund"  and the grant of rights " . . . to the extent owned or controlled . . ." by the licensor.  The first of these is a required contribution usually measured as a percentage of the licensee's sales.  Unless the resulting monies are spent to promote the licensee's products and accounted to the licensee in detail, it's really just a royalty increase.  One strategy:  When the basic royalty rate is being negotiated, the licensee should ask whether there is any such required payment and whether the licensor will account for spending it to promote the licensee's products.  The royalty negotiation can then be approached with this element in plain view, rather than being raised by the licensor after the royalty rate has been agreed.  "Oh, by the way, you also have to pay a share of our cost to promote the property, but it's really to your benefit…".

Quitclaim

Potentially the most expensive but least recognized hidden cost is the qualifier to the licensor's grant of rights  " . . . to the extent owned or controlled by . . . ."  What this really means is "We can't be sure, but whatever we have rights to, you can use.  If it turns out that someone else owns part or all of the rights, it's your problem to resolve, but you still have to pay us."  Sound fair?  Hardly.

All of these hooks, nooks and crannies need to be considered carefully.  If you can't get rid of them, you'd better be ready to factor them into the price you're willing to pay.

3. Is the Term long enough?  Is the Term too long?

No, this isn't schizophrenia.  It's a question that needs to be evaluated based on the alternatives of the success or failure of the property.

On the one hand, if the product line takes off and your rights are for a defined period with no renewal options, you will likely find yourself bidding against your own success to keep your rights alive.  One of your competitors would be only too willing to pay a premium to take over the rights, now that you've made them valuable.  And don't be fooled by a "right of first negotiation" or even a right to match the best offer - doubtless that "best offer" will be more than it ever would have been for the unproven rights that you originally licensed.

On the other hand, if you face a minimum annual royalty and the line fails, you may wish you had negotiated for the right to "opt out" even if you have to pay a significant part of the remaining guaranty.  Anything less than the full amount is pure savings.  And the licensor may be willing to price this relief more cheaply if the negotiation occurs up front than if you have to go "hat in hand" after the fact.

Conclusion

These are three of the areas that can cost you sleep if they are not addressed in the negotiation for an entertainment property.  Some others:

"How did my exclusive rights become non-exclusive . . . .  Let me count the ways."

"How can these *!?#**!! approvals take so long?"

"How does the FOB rate apply to those sales?"

"What do you mean I can't recoup the guaranty during the selloff period?"

"What 'most favored nations' clause?"

Wouldn't it be better to ask more of these sorts of questions before signing on the dotted line?  The adage, "An ounce of prevention is worth a pound of cure" can apply as well to the health of your business as to your personal health . . . and might just enhance both.

Practices

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