Commercial films almost always pass through one, and at times several, distributors. Film distributors are, in some ways, agents of the producers. At the same time, they are also essential to market the film that will eventually lead to its commercial success. It is for this reason that producers must approach a film distribution agreement with care.
This is the third in a series of three blog posts. Our first post covers basis of an actor contract, and the second post covers the basics of a film production agreement.
The end of the post-production process may signify the final stage of bringing a creative content – in the form of a film – to completion, but it also brings about the unique challenges of enduring the process that will eventually put the finished product on the screens before the general audience. Commercial films almost always pass through one, and at times several, distributors. Film distributors are, in some ways, agents of the producers. They are essential to market the film that will eventually lead to its commercial success. It is for this reason that producers must approach a film distribution agreement with care.
Several factors may affect the extent to which a producer will be able to negotiate a film distribution agreement. Factors such as previous track record of commercial success, star-power of actors, and competing offers will come to play when negotiating a distribution agreement. In this article, we look at some of the key terms that are typically covered under a film distribution agreement. Some of these terms may be negotiable, which others are industry standard and are usually expected to be left alone.
Split-Rights deal: The most important thing to bear in mind when entering into a film distribution agreement with a distributor is that not all of them will have the expertise to represent the producer in every form of release medium and markets. It makes sense to seek multiple distributors to cover the various markets, mediums and/or territories where the producer expects to release the film. For this reason, producers typically opt for a split-rights deal wherein the rights to the film is split between multiple distributors – and some of those rights may be retained by the producer to be exploited independently.
Such split-rights may pertain to rights in respect of particular territories (domestic vs. International), or the medium of release (e.g. Theatrical Distribution Rights, Pay Television, Free Television, Video-on-Demand, Transactional Video-on-Demand, Subscription Video-on-Demand, Semi-Theatrical/Non-Traditional Release, and Transportation Release, etc.) In many cases the distributor will obtain the rights and will further distribute the rights to the film to other distributors (i.e. to sub-distributors) who may have the necessary reach and expertise. In such cases, the distributor acts as a middleman for the producer, and ensures that the film can be released in the desired medium (one or more) and across multiple territories.
Restriction on reserved rights: It must also be noted that in the event the producer intends to reserve certain rights for itself, the distributor may require such rights to be exercised only after the expiry of a pre-determined time period. This enables the distributor to ensure that the audience is not split between more than one medium, which might eat into the revenue that the distributor expects to generate from the release. For example, a distributor may put a condition that the producer will not release the film as a video-on-demand (a right that the producer may have reserved for itself) till two months after the theatrical release of the film. Or the distributor may require the producer to hold off from releasing the film on home video, till a month after the release of the same on video-on-demand.
Distributors also will almost always require their rights to be exclusive for any given territory. This is to ensure that they do not have to compete with other distributors for the same film in the same territory.
Term of a distribution agreement and issues of non-performance: Distribution agreement may have a term of up to 20 years, though shorter term of between 5 and 10 years are also commonplace. It may be noted that as the time progresses, the saleability of the film (and audience interest in the film) dwindles. For this reason, producers face a dilemma when a distributor does not adequately market or distribute a film leading it to have a lesser commercial success than anticipated. Producers should negotiate an early termination clause linked to performance. In many cases, even if such right is exercised, it is already late for the producer to recoup the lost opportunity.
Consideration to producers: The consideration payable by the distributor to the producer for the right to distribute the film may be in the form of an advance, a royalty, a share of revenues, or even a flat-buy-out fee. Royalties are typically paid by home video distributors. Theatrical distributors and transactional video-on-demand distributors prefer to pay a share of the revenue generated; while general broadcasters and OTT distributor will typically use the flat buy-out fee.
The advance paid to the producer will be adjusted against the royalties earned by the producer from the commercial exploitation of the film. Since the consideration is an advance, the producer will have to first earn-out the advance sum received by it before any further royalties are payable to it. It helps the producer to secure the largest amount of advance that it can collect because (i) they don’t have to pay it back if the film does not do well commercially, and (ii) the high advance will incentivise the distributor to ensure that it generates enough revenue to justify the advance amounts. However, a distributor giving a larger advance will also seek a higher distribution fee to compensate for the high upfront cost/ risk taken by it.
Payment for third-party rights: Producers may also be responsible to pay for third-party rights for licenses used by them in their film. This is typical when the music rights for the soundtracks used in the film lie not with the producer, but with other parties. In such cases, the producers should ensure that their revenue is enough to cover the third party license fee. Alternatively, producers may negotiate with the distributor for an assumption agreement whereby the distributor will take unto themselves the obligation to pay such third parties for the rights licensed by them in respect to the film.
Sub-distribution of film: As discussed earlier, distributors may sub-distribute a film to other distributors to cater to territory and medium niches that they are not fully capable of handling by themselves. Producers should know the parties involved so they can determine if they will be better off negotiating directly with such sub-distributors (instead of through their primary distributor). The disadvantage of the distributor having multiple sub-distributors is in what is known as ‘fee-stacking.’ This means that fees is deducted by the distributor and also the sub-distributors, and the remainder is paid to the producer. Thus if the sub-distributor deducts a distribution fee of INR 20 on a sale of INR 100, and remits INR 80 to the distributor (distribution fee is taken @20% in this example). The distributor will then deduct its 20% fee on the INR 80 it has received from the sub-distributor and pay the producer only INR 64.
Modification rights: Distribution agreement may entitle the distributor to undertake certain modifications to the film prior to its release. This may include editing of sensitive content for general viewership, inserting subtitles, shortening the film to fit a particular broadcast time, or even change the aspect ratio of the film to fit particular screens (imagine in-flight entertainment modules).
However, producers must ensure that the right of the distributor to modify the film is limited and clearly specified in the agreement. This is to ensure that the creative control over the film remains with the producer, and no part of it is modified that has not been specifically agreed to by the producer.
Physical media and other deliverables: The agreement will also provide for certain physical media and associated marketing materials (still images, artwork, trailers, copyright registrations, third-party licensing documents, etc.) to be provided to them. These are to be returned to the producer at the end of the term of the agreement. Producers must ensure that the list of deliverables can be reasonable and economically delivered to the distributor. Certain deliverables viz. trailers may require additional expense on the part of the producer. Producers may have the right to negotiate the items forming part of the deliverables.
All in all, the distributor is responsible for marketing the film, and to ensure that it becomes a commercial success. For this reason the terms provided in a film distribution agreement must be sufficient to ensure that both the parties – the producer (as the creator of the work) and the distributor (as the marketing and distribution arm) are able to sufficiently and reasonably exploit the film for commercial gain.
For more on the topic, please feel free to reach out to us at contact@ikigailaw.com.
Disclaimer: This article is meant for general informational purpose only and is not a substitute for professional legal advice. This article is based on the laws applicable in India as on the date of publication.
