THE EVOLUTION OF ENTERTAINMENT AND MEDIA REPORT - PROFIT PARTICIPATIONS / NAVIGATING DISRUPTION IN
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ENTERTAINMENT AND MEDIA REPORT
THE EVOLUTION OF
PROFIT PARTICIPATIONS /
NAVIGATING DISRUPTION IN THE
MOTION PICTURE AND TELEVISION INDUSTRY
CONTENTS WELCOME
03/
Profit participations have always been a complex
WELCOME and emotional subject for talent, who wonder “Am
I being paid what we agreed to contractually?” For
04/
studios, it is about “Am I paying too much, and are
EXECUTIVE SUMMARY my stakeholders leaving money on the table?” Now,
with new delivery methods like SVOD, non-traditional
studios like Netflix and the proliferation of scripted
05/ HIGHLIGHTS FROM THE ENTERTAINMENT SURVEY
television series and independent films, we have
entered into a new era where profit participations and
deal structuring are continually in flux.
06/ TOP INDUSTRY TRENDS In this year’s whitepaper, we take a closer look at
where we have been, where we are and where we are
going with profit participations in a changing movie
08/ WHITEPAPER EXPERTS
and television industry. We have assembled a truly
knowledgeable group of industry experts to share
their views on this important aspect of the business as
12/
they consider what future deal structures will entail.
THE HISTORY OF PARTICIPATIONS This is our 5th annual whitepaper, and I am extremely
proud of the information you will find as you read on.
18/ TODAY’S LANDSCAPE: WHO IS GETTING THE $ This paper is part of our continuing efforts to provide
value to the entertainment community.
24/ THE IMPACT OF TECHNOLOGY
Ilan Haimoff
28/ GLOBALIZATION Partner and Entertainment and Media
Practice Leader,
Green Hasson Janks
34/ CRYSTAL BALL: GAME CHANGERS
41/ CONCLUSION
WE HAVE ENTERED INTO A NEW ERA
42/ APPENDIX A:
KEY TAKEAWAYS WHERE PROFIT PARTICIPATIONS AND DEAL
STRUCTURING ARE CONTINUALLY IN FLUX.
47/ APPENDIX B:
GREEN HASSON JANKS PROFIT PARTICIPATIONS PRACTICE
50/ APPENDIX C:
BIOGRAPHIES
Ilan Haimoff
Partner and Entertainment and Media Practice Leader,
Green Hasson Janks
2 3
HIGHLIGHTS FROM THE 2017
EXECUTIVE SUMMARY GREEN HASSON JANKS ENTERTAINMENT SURVEY
Introduction about the overseas market. Pick the right distributor to
There have been rapid changes in our motion picture and maximize your potential share of the profits. This even
television industry, including how content is delivered applies to what we do at Green Hasson Janks when
to audiences through new media platforms and where planning our profit participation audits. We need to
63% 46% 44%
content is consumed, driven by a huge increase in revenue make sure we have resources in place around the world
generated overseas. through our HLB affiliation, plus we need to gear up for
more travel.”
Ilan Haimoff, Partner and Entertainment and Media
Practice Leader at Green Hasson Janks, translates this Green Hasson Janks is an independent member of HLB Percentage of Percentage of Percentage of
industry change into practical advice. International, a worldwide organization of professional respondents who think respondents who prefer respondents who
accounting firms and business advisors represented in that PVOD will be an a large upfront payment currently have
“If I were to hire a company to distribute my film, I over 100 countries. This affiliation provides access to the option for a mass in lieu of any backend productions with Chinese
would look at studios that have networks overseas,” subject matter experts of other member firms in most audience in the next participation in today’s investment
Haimoff explains. “The multiples you can make with major cities around the world. “This affiliation provides three years entertainment landscape
overseas sales through the international market via a us and our clients many benefits,” Haimoff explains. ‘The
major distributor makes it a one-stop shop rather than biggest one for our Entertainment and Media Practice is
having to make territory-by-territory deals. Therefore, that we can pursue participation audits almost anywhere.”
you just need to incur the expenses once and the
revenue will be maximized.”
Of course, Netflix has disrupted the traditional model and
58% 70% 84%
has created a revolution. When they turn on the switch it
reflects deals they have made all over the world.
Haimoff expands. “Where you historically had generated
income through Netflix, it would be available in the U.S.,
Percentage of respondents Percentage of respondents Percentage of respondents
Canada and the U.K. in the past. Now Netflix, and even
who think there will be who think that major who think that the likely
Amazon (Prime), have distribution in almost every country
more U.S./China co- studios will experiment with price point at which a critical
in the world. It is global and instantaneous via streaming.”
productions to bypass the PVOD, but hold off releasing mass of viewers would
This digital revolution may impact the different windows
in the life cycle of motion pictures or television series and THE MOVIE film quota system licensing premium blockbuster consume PVOD offerings for
content on PVOD feature films is less than $30
may require a response from studios, exhibitors and other BUSINESS BOOK
stakeholders,” Haimoff added.
Green Hasson Janks Partner Ilan Haimoff
On the international front, Haimoff also notes that a title authored a chapter on studio accounting
that sells in China could generate significant revenues. and movie and television participation
“For example, Furious 7 made more than $390 million audits for the fourth edition of The Movie
of box office in China alone, which was more than the Business Book, a definitive sourcebook
that covers financing, revenue streams, WHEN YOU CREATE CONTENT,
49%
revenue generated in the U.S. and Canada combined!”
marketing, globalization and other current
topics. YOU HAD BETTER THINK ABOUT
The overseas market goes beyond the movie theaters, as
there is a real digital revolution that has occurred and is THE OVERSEAS MARKET.
still occurring. There is a growing customer base overseas “I am honored to be asked to contribute my
experience and knowledge to this book that Percentage of
whose buying power is increasing. Haimoff alerts content respondents who say
creators to take this into account. “It matters,” Haimoff is comprised of so many talented industry Ilan Haimoff
the most attractive M&A
says. “When you create content, you had better think experts,” says Haimoff. Partner and Entertainment and Media Practice Leader,
targets are those that own Green Hasson Janks
an extensive library of film
and television products
4 5
NETFLIX, AMAZON AND APPLE ARE
REPLACING TRADITIONAL BUYERS OF CONTENT. .
TOP INDUSTRY TRENDS Producers are attracted to the buy-out model with new
media buyers, where they are paid their production costs
REPORTED BY OUR SUBJECT MATTER EXPERTS plus a premium, with no backend. While this model has no
This year’s subject NEW MEDIA potential for an upside, it avoids the risk of losing money.
matter experts EACH OF THE
weighed in on the TRADITIONAL
trends that will
affect the movie TELEVISION WINDOWS ARE
BEING DISRUPTED
and television BY THE LIKES OF
industry and profit THE NATURE OF NETFLIX.
participations STAKEHOLDERS IS Is subscription-
in coming days, EXPANDING. MORE QUALITY TELEVISION based video on
months and years. More content CONTENT WILL BE CREATED. demand (SVOD)
owners, financiers, With so many channels to the alternative to,
Read on for more co-distributors choose from, audiences or replacement
in-depth analyses and others are will gravitate toward higher of, pay television
of these and other making profit quality content, regardless and/or home
trends. participations of where it resides. video? Could
more complex. SVOD become a
single source of
consumption for
the so-called cord
cutters?
NETFLIX IS A NEW
FORCE TO RECKON WITH.
THERE IS A SHIFT The studios suddenly
began to realize that PREMIUM VOD (PVOD) IS STILL AN IMPORTANT TOPIC.
FROM HOME VIDEO
Netflix is a major In the very near future, we will likely see an
TO SVOD.
competitor, which increase in PVOD explorations by conventional
The traditional home
industry leaders distributors and premium distributors like Amazon.
video business of
LITIGATION have intimated may This new digital platform will allow for early
DVDs and Blu-rays
have been a catalyst viewing at home, and at price points of up to $50.
is plummeting.
TELEVISION for Disney recently A major concern of exhibitors is that PVOD may
Meanwhile,
PRODUCTION IS MORE announcing that it will cannibalize theatrical distribution.
revenues have
IMPORTANT THAN EVER. dramatically be moving its content off
From a participation increased for SVOD. of the Netflix platform
audit perspective, more by 2019 and creating a
and more Green Hasson competing streaming
Janks clients are service instead.
involved in television. MERGERS AND ACQUISITIONS
The number of pay MAY ACCELERATE..
PROFIT PARTICIPANTS ARE TURNING
TO LITIGATION MORE OFTEN.
cable channels has
expanded enormously, FINANCING Verizon has indicated it has
an interest in acquiring a
In the past, agencies with package and it appears the STUDIOS WILL CONTINUE TO studio or cable company.
commissions would do participations reason for this trend UTILIZE OUTSIDE INVESTORS. International buyers, with
audits but mostly resolve claims/ is that studios want to Sharing the risk and reward deep pockets, are also on the
issues outside of litigation. However, take less risk on films, will be the primary motivation. lookout. There is even chatter
this appears to be changing. which have higher risk about Netflix being acquired
of success. by a major studio. All of these
deals reflect the desire to
vertically integrate, which
is driving much of the M&A
activity in Hollywood.
6 7
WHITEPAPER EXPERTS
PRINCIPAL CHAPTER AUTHORS
Green Hasson Janks is one of the
premier profit participation audit firms
in the world. Our professionals have
extensive career experience with a ANITA WU
wide range of global entertainment and Principal,
Green Hasson Janks
media companies, including every major
Hollywood studio and many smaller
studios and independent producers. Our
dedicated team has extensive participation
forensic experience, providing services
related to more than 83 of the top 100
domestic grossing live action films of all
time through 2014, as well as a long list of
top-rated television series.
ILAN HAIMOFF STEVE SILLS
Partner, Partner,
Green Hasson Janks Green Hasson Janks
PETER KLASS MICHAEL SIPPEL
Senior Manager, Senior Manager,
Green Hasson Janks Green Hasson Janks
8 9
WHITEPAPER EXPERTS
INTERNAL SUBJECT MATTER EXPERTS EXTERNAL SUBJECT MATTER EXPERTS
Green Hasson Janks is an independent
member of HLB International, a worldwide
organization of professional accounting firms
and business advisors represented in over
100 countries. “This affiliation provides us and
our clients many benefits,” Haimoff explains. CRAIG EMMANUEL
‘The biggest one for our Entertainment Partner, Vice-Chairman and
and Media Practice is that we can pursue Chair of the Talent Practice,
participation audits almost anywhere.” Loeb & Loeb
BEN SHEPPARD JOHN BERLINSKI
Principal, Partner and Chair of the
Green Hasson Janks Entertainment Group,
Kasowitz Benson Torres LLP
KEN HOLLOWAY
Senior Vice President
Finance and Controller,
Endgame Entertainment
TRACY LIANG
Supervising Senior,
Green Hasson Janks
DR. SEAGULL HAIYAN SONG
Senior Advisor, Hogan Lovells
Professor and Director,
Loyola Law School LA
10 11
THE
HISTORY OF
PARTICIPATIONS
PRINCIPAL CHAPTER AUTHOR
STEVE SILLS,
PARTNER,
GREEN HASSON JANKS
IMAGE SOURCE:
WWW.THEREDLIST.COM
12
12 13
Green Hasson Janks Partner Steve Sills, a pioneer “This case goes back to the 1970s, but it is still resonating would typically need to be in production for many years. Eighty to one hundred episodes used to be a good mark, but
in the participations field, shares a story about the today,” Sills explains. “Back then, there was a company the better marker now is the number of seasons produced, even if a season is only seven episodes.”
origination of participations. called Magnetic Video that negotiated with 20th Century
Fox to distribute Betamax tapes of Fox’s films. The cost Wu also thinks reality television is huge.
It Started with Jimmy Stewart to produce and market the tapes was approximately 60
Participations are generally thought to have begun with percent of the total cost, making the net 40 percent. Of “The business model for reality television is very different than for scripted television” Wu expands. “For reality
Winchester ‘73 starring Jimmy Stewart. The studio could that 40 percent, Fox got 20 percent and Magnetic Video television, there is a level of unpredictability, and perhaps limited potential, for exploitation in the supplemental
not afford him but paid him a percentage of the profits. got 20 percent. That became the model, and the standard markets. However, reality television can thrive from other funding sources such as sponsorships, product integrations,
The movie was a huge success and made money for amount paid to participants became 20 percent. The 60 format licenses and merchandising.”
Stewart and Universal Studios. Smart performers were percent for making the videos eventually was reduced
getting pieces of their movies long before this, though, to 25% to 30% as the industry matured. For streaming
as far back as the 1930s and 1940s. Performers that were services, the cost is negligible. So what happened to the
powerful enough had the leverage to do so. 80 percent differential? The studios now just keep it and
producers and content creators still get just the 20 percent,
Profit participation really took off in the 1970s and 1980s, even though the costs are reduced or eliminated.”
according to Sills.
Sills finds that the issue is with the studios interpreting
“Some smaller studios wanted to compete with the the contract in their own best interest. His approach is to
big boys and used percentage deals to get the talent go in and look at the contract in a different way to claim
on board,” Sills says. “There are some really well- additional compensation for his clients.
publicized examples like Jack Nicholson on Batman, but
MOVIE MONEY:
there are many, many more. The inevitable result was For Anita Wu, a Principal at Green Hasson Janks
legal challenges, many times centering on the studio’s specializing in profit participations, television is a key UNDERSTANDING
definition of the ‘net profit’ from which the participations focus. HOLLYWOOD’S (CREATIVE)
were paid. No matter how much money a film made, it ACCOUNTING PRACTICES
seemed like it just broke even in the end. The irony is that “In the composition of our work, we are seeing a shift
stars still want net deals because it means they are moving toward more television profit participations,” Wu Green Hasson Janks Partner Steve
up the food chain, even if they do not personally make explains. “In the past, most of the profit participation Sills is the co-author of the industry’s
money — it means they will be able to negotiate for more audits we performed were focused on the film side of our most important book on profit
the next time.” industry. Now, in the age of ‘Peak TV,’ which reflects the participation accounting. The book
glut of television products out there, a long-running show describes the distribution of a motion
Key Shifts in the Profit Participation Landscape can easily eclipse the financial success of a blockbuster picture’s “profits,” which for most
Since Jimmy Stewart disrupted the process, there have film, or even a blockbuster film franchise. And talent filmmakers is a murky, labyrinthine
been seismic shifts in profit participations. The change representatives are fighting hard to secure the backend domain ruled by studio/distributor
from digital media to new media is one part, but Steve reward for their clients. Early on, it is difficult to tell how accountants and lawyers.
Sills is more concerned with what has led to that and how much these television profit participations will ultimately
studios are reacting. be worth, though. For it to be profitable, a television series Movie Money unravels, demystifies
and clearly explains the film
“It is about vertical integration — studios buying industry’s unique, arcane and creative
businesses that are ancillary to theatrical distribution and accounting practices. It examines a
how that affects participations,” Sills says. “For example, film’s various revenue-consuming
we audited a film at a studio and noticed that no sale had IT IS ABOUT VERTICAL components and presents numerous
industry definitions of gross and net
been made to Netflix for SVOD rights. The studio had given INTEGRATION - STUDIOS profits and the many ways in which
the rights away as part of a pay television arrangement
with an affiliated company. The affiliate retains the Netflix BUYING BUSINESSES these figures are calculated. It also
revenue and since the studio receives no share of that provides in-depth discussions of
revenue, none is reported to the profit participant. The
THAT ARE ANCILLARY TO various aspects of profit participation
studio still gets the money through the back door — their THEATRICAL DISTRIBUTION. terminology, accounting practices, and
deal practices along with chapters on
investment in the pay television entity. My concern is that
more of these types of transactions will occur.” audits, claims and negotiating tips and
tricks. A third edition of Movie Money is
Sills describes another case that changed the profit Steve Sills currently in process.
participation model. Partner,
Green Hasson Janks
14 15
CELEBRATING THE 10TH ANNIVERSARY NOW, IN THE AGE OF ‘PEAK TV,’
OF THE PROFIT PARTICIPATION AUDIT DEPARTMENT AT GREEN HASSON JANKS
A LONG-RUNNING SHOW CAN EASILY
ECLIPSE THE FINANCIAL SUCCESS
OF A BLOCKBUSTER FILM, OR EVEN
A BLOCKBUSTER FILM FRANCHISE.
Anita Wu
Principal,
Green Hasson Janks
The first thing one notices about Green Hasson Janks In 2007, when he was 60 years old, he decided to merge with
Partner Steve Sills when meeting him is his passion for all Green Hasson Janks. He promised the firm that he would
things entertainment. “I get to work in an industry that I love stay five years, but it has now been 10, and he is still going
being involved in,” Sills says. “I love going to the movies and strong. He still loves what he does and sees no end in sight.
listening to music.” Sills’ involvement with entertainment
began at home. He described growing up in a “show “Joining Green Hasson Janks has given me the opportunity
business” household. to expand our practice,” Sills explains. “The entertainment
business was transforming into an international market,
“My father was a business manager, representing various and I wanted access to more resources to serve my clients.”
entertainment clients, like Monty Hall from Let’s Make a Deal
fame,” Sills adds. “My mother was an actress and appeared Green Hasson Janks now has 18 people that do profit
on stage, in film and on television.” participation audits, supplemented by the international
reach of HLB. Sills feels he could not have grown like that
When Sills turned 14, he started singing with a rock n’ roll on his own.
band, joining various bands several times over the years.
Even his military service related to entertainment — he was Ilan Haimoff, Partner and Entertainment and Media
assigned for a year to a base in Northeast Thailand where Practice Leader at Green Hasson Janks, applauds Sills.
he had a radio and television show.
“Through the merger in 2007, Green Hasson Janks achieved
Sills started 40 years ago as a CPA at Laventhol and Horwath. a significant presence in profit participation audits,” Haimoff
Most of his clients were in the entertainment business says. “It also gave us a great presence in the industry
because that was his interest. After about five years, beyond participations — it really enhanced our visibility
Laventhol and Horwath acquired a small entertainment firm and position. Thanks to Steve, we are the go-to firm for
that specialized in profit participation audits and asked him participation audits.”
to get involved. He did that until Laventhol and Horwath went
out of business in 1990. He then started Sills & Adelman.
16 17
TODAY’S
LANDSCAPE:
WHO IS
GETTING THE $
PRINICPAL CHAPTER AUTHOR
ANITA WU,
GREEN HASSON JANKS
18
18 19have financial skin in the game,” Wu says. “There may “There are two aspects to the
be explicit language in their contracts that addresses issue,” Emanuel explains.
at-source reporting, the treatment of ‘soft money,’ limits “Is there a change in the deal
THE RECENT TREND IN INDEPENDENT
on the amount, if any, of allowable overhead charges, etc. structure? Yes. Is there a real THEATRICAL RELEASE PERFORMANCES
There also tends to be more visibility to the underlying change to the economics? Yes
documents in an audit setting for those who bear some of again. Netflix is a buyout — are HAS TO LEAD TO DISTRIBUTORS
the financial risk in a project.” you giving away the upside? But
only a small number of movies
REQUIRING BETTER TERMS FOR THE
Craig Emanuel, Partner, Vice-Chairman and Chair of have an upside anyway. You are RISK OF PUTTING UP SIGNIFICANT P&A.
the Talent Practice at Loeb & Loeb, also feels there has giving away your upside and on
been a shift in the number and nature of stakeholders. a highly successful movie you
will leave money on the table, but
Ken Holloway
“Except in limited circumstances you see the concept of what is the real consequence of
Senior Vice President Finance and Controller,
first dollar gross participation largely coming to an end that? The Netflix/Amazon/Hulus
Endgame Entertainment
and participations, even for major talent who now share of the world are changing the
in a breakeven ‘pool’ participation (which the studios nature of our business.”
claim is making them more of a partner in the project Craig Emanuel, Partner, Vice-Chairman and Chair of
ending).” Emanuel says, “The value of the pool is getting Emanuel sees differences between companies like the Talent Practice at Loeb & Loeb, adds some sage
reduced, as is the definition of what is being included Amazon, which has a genuine theatrical release, and advice for the industry.
in the pool, resulting in a shrinking participation. That Netflix, which does not and where the potential for a
Deal Structures are Shifting represents a major shift over the last few years. The only backend participation still exists. “We cannot ignore the shift that is taking place in our
In a new world ruled by SVOD, Netflix and a radically money you can count on is the money that is budgeted business,” Emanuel says. “Deals will need to adjust to
altered delivery landscape, it was inevitable that deal into the film. Box office revenue just does not translate the “As a consumer, why spend the money on going to the that model. It is better to get a film made and seen than
structures would change. More content is spread across same way anymore, and studios are a lot more savvy in theater if you can see it at home?” Emanuel asks. “The not. Box office revenue is largely flat, but the younger
audiences, films debuting on streaming services and not offering bonuses that would be payable prior to their independent film business in many cases is moving audiences are moving to Netflix or streaming or not
shorter televisions seasons mean studios want to pay less, true breakeven position.” away from the theatrical release unless they are the watching movies at all. Many in that generation do
while content creators and talent want to be paid at least kind of movie that might attract award consideration. not even have a television — they are not going back
the same as they have become accustomed to. Emanuel sees a couple of major impacts to talent, For a Fox Searchlight or a Sony Classics, films may get to the theater unless it is an event movie. There will
producers and stakeholders. released on 50-75 screens for limited runs but it is hard be exceptions, but that is the changing nature of our
Green Hasson Janks Principal Anita Wu sees a definite for them to sustain longer runs unless the film becomes business. Exhibitors now have the challenge of getting
studio strategy regarding talent. a breakout movie or has attracted attention through people to go to the theater — they are updating their
festivals or awards.” venues with features like restaurants, bars, and shopping,
“For talent, which is largely defined as actors, writers, and providing more of a cultural experience than just
producers and directors, many studios now set aside a Ken Holloway, Senior Vice President Finance and going to the movies.”
specific percentage for profit participations that is put up THE ONLY MONEY Controller at Endgame Entertainment, a financier
for grabs — it is up to the talent and their representatives and independent film producer, also describes some Mergers and Acquisitions May
to divide that percentage among themselves,” Wu YOU CAN COUNT ON challenging differences related to producing a feature for Drive Further Industry Disruption
explains. “Generally, we are starting to work with a larger
number of profit participants on a given project. In a pool
IS THE MONEY THAT Netflix, as compared to the traditional independent model Mergers and acquisitions like Lionsgate’s purchase
of STARZ, MGM taking full ownership of EPIX, Hulu’s
– foreign presales and a studio domestic release.
deal, presumably, everyone would have the same profit IS BUDGETED INTO ownership by Universal, Disney, Fox and Turner, and
definition. Outside of a pool deal, while there may be “Netflix is a great partner, but the tradeoffs are not the pending acquisition of Time Warner by AT&T
some differences in their profit definitions, the interests of THE FILM. insignificant.” Holloway explains, “A guaranteed fee continue to reshape the entertainment industry and
the various participants are aligned on most of the issues
we come across, and we feel they would get better results
BOX OFFICE comes at a cost of not owning the IP (no library value) and have an effect on participations. Notably, Apple ended
2016 with $246 billion in cash, enough to buy Netflix
no results-based upside potential. For a content creator,
if they audited and settled together. They should be REVENUE JUST DOES the lack of long-term ownership rights is a material change and HBO’s parent company, Time Warner, with more
allowed to join forces, but some studios balk and instead to their business model.” than $100 million left over!
seem to take a more divide-and-conquer approach to NOT TRANSLATE THE
resolving common items of dispute.”
SAME ANYMORE. Holloway went on to say, “Having said that, the recent Anita Wu of Green Hasson Janks sees a more
trend in independent theatrical release performances has complicated participations process as a result.
Wu is also seeing the nature of a project’s stakeholders to lead to distributors requiring better terms for the risk of
expand to include more content owners, financiers, co- putting up significant P&A – thus lessening a producer’s “We pay close attention to transactions like MGM’s
distributors and other roles. and talent’s upside, which somewhat levels the field.” acquisition of EPIX six months ago,” Wu expands. “EPIX
Craig Emanuel
Partner, Vice-Chairman and Chair of the Talent Practice, is a pay television exhibitor of mostly film. When we audit
“Definitions tend to lean more favorably to those who Loeb & Loeb
20 21profit participations, we look for the money generated “Arbitration can have the benefit of confidentiality and
in all of the supplemental markets — for example, if a
Bond film is shown on EPIX, we want to make sure the
transaction was reported at fair market value, and that no
can offer a more streamlined and cost-effective approach
to resolving disputes. The trend towards confidential
arbitration has resulted in fewer disputes being made
FIRESIDE CHAT WITH BEN SHEPPARD
other rights were given to EPIX without a proper valuation public but no shortage of disputes being litigated.” GREEN HASSON JANKS LITIGATION SUPPORT AND EXPERT WITNESS PRACTICE LEADER
of such rights. Studios want to extend their reach into all
forms of distribution — it is to their advantage to own as
many theaters, broadcasters, etc. as possible, and offer
their exclusive content to the public, but that also means Jennifer Sullivan, Senior Marketing Manager at Green Hasson Janks, sits down with
they can charge their affiliated companies less for access Ben Sheppard to discuss the role of litigation in today’s entertainment landscape.
to the content and hold onto more money within their
overall corporate structure. From a profit participation
SULLIVAN: What does the term “expert witness” mean for the film. By “pre-litigation,” I mean there were contractual
perspective, the potential for undervaluing revenues and/
entertainment sector? questions, but no suit had been filed. The bank syndicate
or overcharging expenses is real cause for concern. In
SHEPPARD: The expert witness concept is about bringing that provided the financing had funded a loan with the
addition, for services trying to break into the marketplace,
actual industry experience and knowledge to bear on a expectation that they would get their investment back
there is the intangible value of their exclusive content plus a reasonable return.
case to help explain nuances. It is preferable when trying
helping to build their brand. Of course, there also may be
to either support or rebut a damages analysis.
benefits from vertical integration — if distributors own SULLIVAN: Did they achieve that goal?
several arms throughout the entertainment and media
SULLIVAN: In today’s landscape, are there some types of cases SHEPPARD: Partially. After the film’s release, they got their
space, their products get out more widely.” that come up more than others? money back, but not the return. They were thinking of
SHEPPARD: Breach of contract cases come up quite often. suing the studio, and they brought me in to look at their
Craig Emanuel, Partner, Vice-Chairman and Chair of These can include profit participations when talent, greenlight model. I looked at that and their revenue
the Talent Practice at Loeb & Loeb, also warns about the for example, believes a studio is not complying with a participation agreement to determine if the syndicate’s
pitfalls of vertical integration. contract. expectations were incorrect. The greenlight model was
good, but the assumptions used were not likely to occur.
“It will have an impact in that you are now faced with SULLIVAN: In breach of contract cases, are the issues the same
an additional level of issues regarding pricing for these as they were five years ago or has it evolved? SULLIVAN: That is interesting. Can you tell us more about the
different companies,” Emanuel says. “It is always a SHEPPARD: The types of issues are definitely different from assumptions?
concern. On one level, having consolidation in certain five years ago. One case I recently worked on looked at SHEPPARD: It became apparent that they had not
areas is a good thing because it promotes better commerce damages from a SVOD standpoint. I suspect we will see thoroughly researched the assumptions they were using
between related companies, but we need a greater level of a lot more of that, meaning that as content distribution to determine the film’s revenue. They did not ask the right
scrutiny to make sure the pricing is fair. Consolidation is shifts to new modalities, contractual interpretations are question — they asked if the assumptions were possible,
inevitable — when studios eliminate the middlemen, the more likely to be questioned. but not how likely the projections would be achieved.
more profitable they become.” THERE IS A GENERAL
Litigation is Sometimes the Answer
LITIGATION TREND. SULLIVAN: Can you describe “slate financing” and how it differs
from profit participation?
SULLIVAN: That must have been a long, involved court case.
SHEPPARD: It could have been. The case was in New
John Berlinski, Partner and Chair of the Entertainment PARTIES WHO SHEPPARD: What changes is who the parties are at the Zealand, and as part of negotiations, the syndicate’s
Practice Group at Kasowitz Benson Torres LLP, has table. Slate financing is where a studio finds an investor Queen’s Counsel asked me if I would have made the deal
a practice that centers on entertainment litigation and USED TO WORK to help offset the studio’s production risks on a number knowing what I know when the deal was made, and I had
involves profit participation disputes and other licensing
disputes. He represents both studios and talent.
OUT DIFFERENCES of films. This has been going on since before I started 20
years ago. The money comes from a variety of sources
to say it was doubtful. I soon heard they had settled.
INFORMALLY ARE like bank loans, insurance-backed bank loans, hedge SULLIVAN: That is not what I expected to hear!
“There is a general litigation trend,” Berlinski says. funds and foreign financing — they all have separate SHEPPARD: We can set reasonable expectations — that is
“Parties who used to work out differences informally are NOW RESORTING TO revenue participation agreements. It is similar to profit a quality I see lacking from a lot of experts, at least ones
participation, but these investors are typically in a junior I have come up against. I am asked to base an opinion
now resorting to litigation. For example, you did not used
to see talent agencies suing buyers, or studios bringing
LITIGATION. position from actors, directors and producers — who will on certain assumptions and I give my opinion, but those
claims against networks, but that is becoming more get their money first. As you might suspect, this is an assumptions can be wrong.
common because of the focus on the bottom line.” atmosphere that generates disputes.
SULLIVAN: Any final words?
John Berlinski SULLIVAN: Can you tell us about a specific case you were SHEPPARD: In this business, integrity is the only commodity
Berlinski adds, “The way those disputes play out has also
Partner and Chair of the Entertainment Group, involved with? we have. I am not here to find the highest answer or the
changed over the years. More and more disputes are being
Kasowitz Benson Torres LLP SHEPPARD: Here’s an interesting one. I worked on a lowest answer — I am here to find the right answer.
resolved in arbitration proceedings,” Berlinski explains.
pre-litigation case for a New Zealand-based feature
22 23THE IMPACT OF
TECHNOLOGY
PRINCIPAL CHAPTER AUTHOR
MICHAEL SIPPEL,
GREEN HASSON JANKS
24
24 25Technology is driving rapid change in the movie and strategically with its investment in BAMTech, and others
television industry. Tech experts are working on new and are expected to follow suit.
even more disruptive technologies every day. Advances
can be in filmmaking, as in the use of drones to film Sippel sees the reasons for the quick ramp-ups as fairly THE USE AND ADVANCEMENT
sequences for Pirates of the Caribbean: Dead Men Tell obvious.
No Tales, advances can be in the theatrical experience OF TECHNOLOGY PRESENTS AN
like 4D or immersive experiences, or they can be game “Technology has already been a huge part of the EXCITING FUTURE FOR THE WORLD
changers like SVOD. entertainment industry’s success for at least the past 10
years through Internet, digital and streaming services,” OF ENTERTAINMENT, BOTH WITH
Taking Digital Platforms In-House Sippel explains. “It is now a survival strategy to embrace
There is speculation about the major studios trying to vertical integration and create efficiencies. Studios must
CURRENT CONCEPTS SUCH AS VR,
build up their own digital platforms to host their exclusive focus on the bottom line and show a return on investment 4D AND PVOD, AND WITH UNKNOWN
content. The most obvious player is Disney, which recently for their stakeholders — growth is the name of the game,
announced even if there IDEAS YET TO EVEN EXIST.
they were are less people
removing their going out to the
content from movies.”
Netflix and Michael Sippel
launching Tech Companies Senior Manager,
their own Now Producing Green Hasson Janks
streaming Original Content
service The most
by 2019. prominent
According to examples of
the Hollywood tech companies
Reporter, crossing over into
Disney will content creation
not create the are Netflix,
technology, Amazon and
but will Hulu, but there
acquire a are numerous
majority of examples.
BAMTech,
the streaming In these cases,
technology Sippel thinks the
company word “tech” is “The new players like Netflix and Amazon are looking for structures to get out of traditional backend deals — we are
owned by ambiguous and now seeing more buyouts or estimated backend deals. The investors, creators and other talent will still be entitled to
MLBAM, misused. profit participations, but the structure and reporting responsibilities might change.”
the internet
1
company owned by Major League Baseball . “Anyone in an online digital space could be a tech Cybersecurity and the New Technology
company,” Sippel explains “Amazon is a tech company Hacks of companies like Disney, Netflix, Sony, HBO, C-SPAN and many others are a major issue in Hollywood. The issue
Green Hasson Janks Senior Manager Michael Sippel and is now a content creator. Apple iTunes and Apple Play may stem from the way movies get made — from coming attraction trailers that are designed to draw audiences into
sees this as a logical progression. are apps you can choose from. Facebook Play is a new cinemas to eye-popping 3-D visual effects that burst off the screen, studios routinely farm out large chunks of work to
2
one. Google, and many others are in this space. It is logical vendors around the globe who compete to provide lowest-cost solutions .
“The studios are behemoths,” Sippel says. “They have that the trend will continue. There will be more and more
seen how successful Amazon and Netflix are, and they all content, and viewers will have endless choices, whether Sippel sees cybersecurity issues as potentially massive.
must be looking at this — I am sure they will all have some that is good or bad.”
form of streaming subscription service within the next “Companies like Sony and Netflix have strong measures in place, but if they can be hacked there is no limit to the
three years.” Sippel adds that profit participation and contracts will be hackers’ ability,” Sippel says. “It is an issue. I have seen it in participations, where we are two to five years behind
affected. (mostly due to the audit queue). We all saw it become an issue in the home video world (which is now dying anyway),
Acquiring and Investing in Technology Companies but 5-10 years ago piracy affected the price at which the studio could sell their product due to guys on the street flooding
Major studios are spending to quickly ramp up their “Generally, participations should remain basically the the market with cheap copies. Another concern is release dates. Someone could grab your content and release it ahead
technology capabilities. Disney again is thinking same, but the deals will be different,” Sippel expands. of you. I am only slightly joking when I say that studios should seriously consider spending the money to hire a hacker
to teach them how to avoid being hacked — maybe they should learn from the best!”
1 2
26 http://www.hollywoodreporter.com/news/disney-pull-movies-netflix-launch-streaming-service-1027793 http://www.latimes.com/business/hollywood/la-fi-ct-hacking-disney-netflix-20170523-story.html 27GLOBALIZATION
PRINCIPAL CHAPTER AUTHOR
ILAN HAIMOFF,
GREEN HASSON JANKS
28
28 29around a long time, and was used mostly by game shows THE LOS ANGELES TIMES
and reality shows. In these cases, a show format started
LIST OF THE TOP 10 GLOBAL FRANCHISES4
in another country and then was sold to other countries.
American Idol, Big Brother and Wipeout are examples.
Each was customized for a local audience. Homeland is
$9.3
1
MARVEL
another example — Fox bought the rights based on a show
CINEMATIC
in Israel and made it a huge success after customizing it to BILLION
UNIVERSE
an American audience.
Haimoff does not see much correlation to the television
market, however.
“On the television side, as much as they try to make the
2 HARRY
POTTER
$7.7
BILLION
world global, they need to customize a show to reflect
local culture, attitudes, humor and much more,” Haimoff
says. “Movies have done better, especially where they
have broad concepts like science fiction, horror, or action.
Again, I would use the Fast and Furious franchise as an
3 STAR
WARS
$6.7
BILLION
example, but there are many others like Star Wars, James
4 $5.0
Bond or Harry Potter.” JAMES
BOND BILLION
Overall, Haimoff sees this as a growth engine for
Over the past decade, there has been a continual shift with big-money contracts to create content. Netflix globalization.
toward international distribution, and the overseas has original programming, of course, but they also
box office can now be as, if not more, important than
the U.S. box office. A U.S. flop can be profitable if it
makes money overseas — take the recent example of
buy the rights to make a television series or motion
pictures available to subscribers as a first window in
television markets. For example, for a television series
“It is a way to exploit emerging markets for the shorter
term,” Haimoff explains. “The rapid growth will subside,
but right now it is working. Studios can leverage a
5 X-MEN $3.8
BILLION
Transformers: The Last Knight, which did $130 million on a network, this type of deal says that the next time it franchise or brand and go back for sequels — a great
domestically3 and $475 million overseas. Based on its shows will be on Netflix rather than cable. example is Furious 7. The key is to find a way to distribute
$3.8
6
THE FAST
$217 million production budget, it would not have been it to as many territories as possible. It is a form of leverage AND THE
a success if measured by just its domestic revenue Ilan Haimoff, Partner and Entertainment and that generates lots more buyers now, even though this is a BILLION
FURIOUS
performance. All things considered, Paramount Media Practice Leader at Green Hasson Janks, sees traditional concept. By releasing sequels, marketing costs
recently announced its plans to release another confusion in the marketplace as a result. are reduced because people are familiar with the brand.”
Transformers movie sequel in 2019.
$3.7
Anita Wu of Green Hasson Janks sees a lot of interest
from international investors.
He sees exclusivity as a way to build the subscriber base
for Netflix, regardless of what content is being acquired
or created. “It will add to the subscriber base if that is
7 TRANS-
FORMERS BILLION
the only place to see the content,” Haimoff explains.
ON THE TELEVISION SIDE,
AS MUCH AS THEY TRY TO PIRATES
$3.7
8
“There are so many investors from countries around “If they generate it, they can control it, but the number
the world who want to learn from, and invest in, of subscribers they can add diminishes vis-a-vis the OF THE
Hollywood,” Wu says, “Also, with a higher rate of amount they spend. I hear from bankers that Netflix is MAKE THE WORLD GLOBAL, CARIBBEAN BILLION
borrowing more money to create more content. The goal
growth in entertainment consumption abroad,
domestic entertainment companies are in hot pursuit is to add subscribers, but at some point on the curve it
THEY NEED TO CUSTOMIZE
$3.6
A SHOW TO REFLECT LOCAL
9
of forging strategic alliances with international players may slow down.” JURASSIC
and expanding their global presence. From a profit PARK BILLION
participation standpoint, that means we are seeing an Haimoff says there are options for staying ahead of the CULTURE, ATTITUDES,
curve. “They can do things like reducing the money
increase in our foreign clientele, as well as heightened
interest in performing audits internationally.” spent on new productions, or they can look for new
HUMOR AND MORE.
$2.7
Netflix Exclusivity
Netflix is now “the global channel,” with 190 territories
sources of income, such as licensing to television
licensees in the U.S. or overseas,” Haimoff says.
Ilan Haimoff
10 DESPICABLE
ME BILLION
and counting. The ambitious channel is also bringing Format Licenses Partner and Entertainment 4
http://www.latimes.com/entertainment/
in major names like Adam Sandler and Shonda Rhimes Format sales is a traditional business that has been and Media Practice Leader, movies/la-ca-mn-25-most-powerful-
Green Hasson Janks franchises-20160524-snap-story.html
3
30 http://www.boxofficemojo.com/movies/?id=transformers5.htm 31TRENDS IN THE CHINESE FILM INDUSTRY
With China emerging as a significant global player in the film industry, Chenxi
“Tracy” Liang, Supervising Senior at Green Hasson Janks, sat down with Seagull
Song, a law professor, practicing attorney and published author, who advises
entertainment companies in connection with U.S.-China cross border transactions.
LIANG: What do you think will happen with Chinese LIANG: How have the front-end and backend profit
investment in the U.S.? participation deals in China evolved over the years?
SONG: We have seen a slowdown in terms of China’s direct SONG: Ten years ago, participation deals did not quite
investment into the U.S. since the beginning of this year exist in China. But thanks to the booming Chinese film
due to various reasons. Instead of the “hot/easy money” industry, participation deals have become much more
that flooded from China in the past few years, we will see common these days. Yet, as with the United States and
more “rational money” and more scrutiny in such cross- elsewhere, the challenge is how to define the “net profit”
border transactions moving forward. in such deals. We have witnessed a number of litigations
at Chinese courts as a result of the ambiguity in such
LIANG: What about U.S./China co-productions? definitions during the past two years.
SONG: U.S.-China co-productions are still limited in
number, and most of them have not been very successful LIANG: Are there any innovative distribution terms utilized
at the box office level, because it is rather difficult to by the Chinese players?
create a movie that is appealing to both Chinese and SONG: Yes. In addition to the traditional flat-fee and
global/Western audiences due to cultural differences. percentage-based distribution arrangements, we also
The new trend now is to produce movies targeting one saw the “Box Office Guarantee/Distribution” arrangement.
type of audience (say the Chinese audience only), but then Under such deals, the Chinese distributor will make its
bringing Hollywood “elements/talents” into the film, such own prediction on how well the film will do at the box
as hiring scriptwriters, cast members or even special office level, and then offer a “guaranteed payment” to
effects teams to make the film more at an “international the film investors. If the film does really well and the box
standard.” Examples of such include Monster Hunt office revenue goes beyond its “guaranteed threshold,” U.S.-CHINA CO-PRODUCTIONS ARE
and Wolf Warriors II. Both movies were Chinese local
productions with Chinese leading actors, distributions and
the distributor could enjoy a high percentage (up to 70-80
percent) in the revenue sharing. But on the flip side, if the
STILL LIMITED IN NUMBER, AND
investors; but behind the scenes, Hollywood influences
(i.e., creative talents and consultants) were present in
movie does not sell well and the box office revenue is well
below the guaranteed threshold, then the distributor only
MOST OF THEM HAVE NOT BEEN VERY
both films to give them a “Hollywood feel,” which is more
enjoyed by the Chinese moviegoers.
gets its “distributing fees,” but at the same time needs to SUCCESSFUL AT THE BOX OFFICE LEVEL,
pay the “guaranteed share” to the film investors. Under
such circumstances, the producer could walk away with BECAUSE IT IS RATHER DIFFICULT
LIANG: What are the opportunities for U.S.-based companies a decent package of “guaranteed payment,” despite the
and talent? failure of the movie at the box office. TO CREATIVE A MOVIE THAT IS
SONG: For the major studios, what they are after in China
is the market access, meaning 1.4 billion people who are LIANG: What changes have you seen in the financing/
APPEALING TO BOTH CHINESE AND
potentially moviegoers and content consumers. For the distribution deals between Chinese investors and GLOBAL/WESTERN AUDIENCES DUE TO
independents, the Chinese market also means additional Hollywood studios?
distribution channels, meaningful foreign sales revenue SONG: Deals between China and the U.S. have not changed CULTURAL DIFFERENCES.
and also more financing opportunities. For talent, China much in the past couple of years. From the Chinese side,
provides great opportunities. Given the increasing even though the Chinese players have become more
cooperation between the agencies in Hollywood and sophisticated in deal negotiations, most of them still do
Chinese studios and the increasing demand for U.S. talent not have enough bargaining power to get the terms in
working on Chinese films, the U.S. talent will see more
Dr. Seagull Haiyan Song
their favor. From the U.S. side, some of the U.S. players Senior Advisor, Hogan Lovells
and more opportunities to work on China-related projects, are more interested in working with “highest bidders” Professor and Director, Loyola Law School LA
whether it is related to acting, scriptwriting, composing, rather than “seasoned players” from China because it
consulting or other opportunities. is “easy money.” But this attitude could lead to potential
problems down the road if their Chinese partners are
total outsiders and have no clue as to what they are doing.
We have seen this happening many times.
32
32 33CRYSTAL BALL:
GAME CHANGERS
PRINCIPAL CHAPTER AUTHOR
PETER KLASS,
GREEN HASSON JANKS
34
34 35So what is next? Not every idea takes flight, but things “The studios and exhibitors have not agreed on a PVOD 100 percent? Or will they try to squeeze the participants by The Impact of PVOD and SVOD on Release Windows
like SVOD, PVOD and virtual reality/augmented reality window, with the sticking point being the revenue share reporting on a royalty basis. Since PVOD is an alternative Industry insiders are contemplating whether SVOD
may significantly affect how Hollywood does business in split between studios and exhibitors; until both parties for the theatrical distribution, it will be interesting and PVOD will dominate the entertainment scene in
the coming years. figure out a viable business model to grow the overall to see if studios classify PVOD as theatrical or home coming years. It seems likely that films will have shorter
pie, a short term alternative will likely be to change the entertainment. This should be something to look out for theatrical runs and the ability to see first-run movies in
Premium Video on Demand theatrical window. This could be done by shortening the until a new model emerges.” the home will expand. Many insiders also wonder how the
Premium VOD (PVOD) is a term used to describe movies exclusive theatrical window to the first two weeks of a emergence of PVOD may impact theatrical admissions and
that would be offered to view before being available on movie’s theatrical release and then grant access to PVOD Theatrical Subscription Model — home entertainment spending.
streaming services or Home Video (Blu-ray and DVD). for the rest of the theatrical window,” Klass explains. Searching For the Next Netflix
Some predict that PVOD may be the next industry Right now, the great majority of ticket sales are for Ken Halloway also sees the generational change affecting
disruptor. Ken Halloway of Endgame Entertainment wonders what a specific film, rather than a monthly or weekly home entertainment.
will happen to theaters when consumers watch movies at subscription, but the subscription model has the industry
Sean Parker’s Screening Room Concept home on small screens. buzzing. After the tremendous success of SVOD in the
Sean Parker had a 2016 start-up called Screening Room home entertainment market, theater owners have begun
that would give users the ability to watch movies still “The theater operators need films to show — what experimenting with various recurring charges to allow IN THE NEXT YEAR,
in theaters from the comfort of their homes for $50 for happens when the consumer decides they will not pay to customers to see unlimited movies for a specified time.
a 48-hour rental. Exhibitors were critical of the idea as see that type of content on the big screen?” Halloway says. EXHIBITORS WILL
many theatrical chains oppose any encroachment on the “They will not have enough product to fill their screens. Klass thinks this will appeal to the younger generation
exclusivity of the theatrical window, approximately 60 to They might supplement with live performance events, of viewers, “Millennials like a subscription model like
BE SQUEEZED TO A
90 days after release, and major studios were concerned but right now that is small, and I am not sure how much Netflix, but they are not yet the majority of theatergoers.” 30 TO 45 DAYS’
with piracy. Screening Room is still in development and bigger it will get.” Klass continues, “At this time I don’t see this as a
currently working on anti-piracy technology. replacement option. Right now there is too much risk in EXCLUSIVE
The Impact of PVOD on Windowing
Peter Klass wonders how this will ultimately affect
participations.
upsetting the current business model. You see exhibitors
adding bells and whistles to try and keep the theatrical
THEATRICAL
Because of a concerted effort by the studios to push for audience and continue to sell popcorn.” WINDOW AT MOST.
shorter windows, in 2017 we witnessed major theater “The major impact on the reporting of PVOD for talent
owners reluctantly engage in negotiations to shorten and investors on their participation statements is how the Clues from the DEG Year-End 2016 Home
the theatrical window. Theatrical exhibitors do not want studios and distributors will report revenue. Will it be at Entertainment Report
movies to be accessible on PVOD The annual DEG Report captures the state of the home Peter Klass
during the initial theatrical release, entertainment market in the U.S. The 2016 report showed Senior Manager,
as the first few weeks of a theatrical that the market has stabilized — SVOD and other digital Green Hasson Janks
run are the phase when studios and sales have replaced losses in physical media (DVD &
exhibitors get most of a movie’s Blu-ray). It is important to note that excluding streaming “Millennials have shorter attention spans and demand
revenue. Studio heads signal that subscription revenues (SVOD) the market continues to convenience,” Halloway explains. “That may dictate the
the PVOD offering will materialize sharply decline. Klass explains, “I believe SVOD is much future of SVOD and PVOD. This generation prizes the
sooner rather than later. Whether more analogous to television licensing, and if streaming social experience of going to a theater for blockbuster
PVOD is offered on day 1 or several subscriptions such as Netflix, Amazon and Hulu are not events like Star Wars movies and maybe scary movies too,
weeks post release, there is likely counted then the home entertainment market continues to but all in all, they would probably prefer to see a movie at
to be a contraction of the theatrical shrink. The hopeful outlook that new media revenue from home or on their iPhones.”
window within the next year. EST and VOD would replace the traditional DVD and Blu-
ray is all but gone.” Halloway also sees the box office as less predictable now.
Peter Klass, Senior Manager at
Green Hasson Janks, predicts that “Due to the shrinking home video market, studios “In the past, the box office had better predictability,”
PVOD will be a major force in the are shying away from reporting SVOD similar to TV Halloway expands. “Those days are long gone. We don’t
industry. (at 100%) and leaning to the historical home video know what the floor is on box office for a particular
royalty model (usually 20% royalty on revenue with no film. You might do $5 million box office on a quality
“In the next year exhibitors will expenses). As there is virtually no cost involved with SVOD film, with ‘A Level’ cast off of a $20+million P&A spend.
be squeezed to a 30 to 45 days’ distribution—with royalty reporting studios are retaining From a financing perspective, this introduces enormous
exclusive theatrical window at 80% of the revenue for themselves—profit participants uncertainty, but our industry will still be willing to finance
most. After that, releases will go are encouraged to seek advise on the changing film and exciting projects with stars people want to see. La La Land
directly to streaming and DVD television landscape.” and Girls Trip were examples of breakouts from that —
platforms” Klass says. breakouts will always occur.”
36 37You can also read
