United States: Green Hasson Janks – "Brave New Media World: The Various Forms Of New Media, Studio Reporting And Potential Concerns"

Michael Sippel, Senior Manager at Green Hasson Janks, writes:

EST, VOD, SVOD, FVOD, and ADSS... What do they mean, and why do we care? The ascent of new media markets – with the simultaneous decline of the hard goods home video industry – is evidence of a diversifying brave new media world. Understanding the nature of the emerging markets themselves and how the different studios report them is imperative for those who follow entertainment trends – as well as advocates on behalf of the actors, directors, producers, creators and investors of film and television series, such as lawyers, business managers and participation auditors.

The major new media streams can be broadly defined as:

  • EST (Electronic Sell Thru) is a permanent digital copy granting the viewer unlimited access forever. Purchases primarily occur via online, mobile (through a smart phone or tablet) and/or Smart-TV at home, through vendors such as Apple and Amazon.
  • VOD (Video-On-Demand) is a temporary download allowing the viewer to watch the film/series a limited number of times within a limited number of days. Rentals of such primarily occur on your television set at home, online and/or mobile through vendors such as DirecTV, InDemand and Apple.
  • SVOD (Subscription Video-On-Demand) is subscription based and allows the paid subscriber to watch the film/series an unlimited number of times within a limited license period (usually one year). This primarily occurs at home, online or mobile through "over-the-top" vendors like Netflix and Amazon Prime.
  • FVOD (Free Video-On-Demand) is similar to SVOD but is primarily related to network and basic cable providers like ABC.com, FX.com and Hulu and does not require any additional payment by the viewer.
  • ADSS (Advertising Supported Streaming) is very similar to FVOD but generates revenues by selling commercial time and/or "pop-ups" within the broadcast.

With these variations, you care about convenience and costs if you are a consumer. However, if you are the talent or the investor involved in the film/series or their representatives, you care about how the related revenues, if any, are derived and reported to you or your client.

In newer contracts, reporting requirements are often contractually defined. However, older agreements are often silent as to how such revenues will be treated. In most cases, the actual reporting of the noted new media is as follows:

EST revenues are derived on a per-buy basis, and the retail sales price generally fall within a range of $10 to $20. The studio generally receives the greater of (a) a minimum amount per buy, ranging from $6 to $15 or (b) 50-70 percent of the retail sales price.

Studios emphatically state that EST is merely a replacement for standard home video and, as such, EST revenues received by the studio are always reported at the standard home video royalty rate (typically 20 percent).

As a participations auditor, I might argue the reporting is unfair, as the 20-percent home-video royalty is a historical standard based on a 50/50 split after deduction of all related costs – most significantly manufacturing, mastering, advertising and distribution. However, as EST has no related manufacturing or distribution expenses and little to no mastering and advertising costs, one can make the argument that the 20-percent royalty is unjust and not within the original intent of the historic royalty arrangement.

Also, depending on the age of the product, reporting requirements for EST might not be included in the contract between the participant and the studio. If such is the case, and depending on the definition of "home video" (which may make specific reference to words such as "device" and being that EST is not a "device" of any sorts), one might again take the approach that EST revenues should be reportable at 100 percent.

VOD revenues are derived on a per-buy basis, and the retail sales price generally fall within a range of $4 to $6. The studio generally receives the greater of (a) a minimum amount per buy, ranging from $2 to $4 or (b) 50-70 percent of the retail sales price.

The reporting of VOD revenues differs by studio; however, most studios state that VOD also functions as a replacement for standard home video and as such, VOD revenues received by the studio are most commonly reported at the standard home-video royalty rate.

Similar to EST, one can make the argument that the 20-percent royalty is unjust because little to no costs exists. However, an additional argument exists to report VOD revenues at 100 percent based on the standard reporting of pay-per-view (PPV), which is nearly identical in nature to that of VOD. The only major variances between the two is that PPV can only be viewed linearly at scheduled increments (e.g., from 2 – 4:30 p.m.), whereas VOD can be viewed anytime (e.g. 2:21 p.m.) inclusive of the ability to rewind, pause and fast forward during the 1-2 day window.

Another argument also exists that the residual amounts paid to the guilds are contractually based on 100 percent of the VOD revenues received while home video and EST are based on 20 percent or a number of downloads. Therefore, the participant is receiving only 20 percent of the VOD revenues but is charged with 100 percent of the residual expenses based on 100 percent of the VOD revenues.

SVOD revenues are not derived on a per-buy basis but are instead generated from monthly subscription revenues from SVOD customers. The revenues received by the studio are based entirely on negotiated license fees, extremely similar to those of free and pay television.

The reporting of SVOD revenues differ by studio. However, because of the nature and revenue recognition noted above, they are most commonly reported at 100 percent. For those studios reporting SVOD at a royalty, it is often that the agreement simply does not define the difference between VOD and SVOD and simply says "VOD." Thus, even though the nature is drastically different, the studio takes the more aggressive approach and subjects such revenues to a royalty because SVOD contains the words VOD. Some studios may agree that if the SVOD window is replacing the first pay television window, SVOD revenues should not be subjected to the royalty.

To make things more interesting, per Wikipedia, the pay television provider Epix, which is owned by Paramount, Lionsgate and MGM, signed a distribution deal with Netflix in August 2010 allowing its subscribers to view the movies only 90 days after their pay television premiere. Certainly, participation auditors and representatives of the talent/investors might be concerned with the overall reporting, if any, of such an arrangement.

FVOD revenues are generally not directly derived from FVOD exhibition because they are offered free to the customer. However, similar to ADSS, the platform may include abbreviated commercials and/or pop-up advertising. As such, FVOD revenues received by the studio, if any, are typically very immaterial. FVOD exhibition is much more prevalent in relation to television series than film.

Similar to SVOD, the reporting of FVOD revenues differ by studio. Some studios report FVOD revenues at 100 percent and others at the standard royalty rate. The arguments generally made by participation auditors and representatives of the talent/investors of the film/series are not based on the percentage of the amount reported to the participant but more specifically, exactly how much, if any, the studio is receiving from the applicable FVOD licensees, such as ABC.com or FX.com, etc., and Hulu, who is owned by NBC, Fox and Disney.

It is common that FVOD licensees do not report any applicable advertising revenues, etc., to the studio. Therefore, on a purely contractual/auditing basis, the studio won't report what it does not receive. However, this does not change the fact that they should usually be receiving revenues from the FVOD licensee. And, in many instances, the studio and the FVOD licensee are vertically integrated (ABC/Disney or FBC/Fox, for example).

The typical studio response to such emphasizes the silence or ambiguity of the language included within the agreement between the studio and the FVOD licensee. And, as they may effectively be a part of the same company, it is not uncommon to have verbal agreements and/or unsigned written agreements, resulting in the inability of either side to pursue legal action.

Participation auditors and representatives of the talent/investors of the film/series are generally of the opinion that the FVOD licensee should adequately compensate the studio, especially if they are vertically integrated, for the free content exploited on its websites, etc., some of which may generate advertising revenues but more of which is indirectly involved in building an audience for the FVOD licensees brand (i.e., free content drives consumers to the FVOD licensees website, which includes ads and other information regarding other products and projects and ultimately builds customers and promotes the entire brand).

ADSS is similar to FVOD in many ways but is different because, most of the time, the website is funded almost entirely by the generation of advertising revenues, usually through abbreviated and full-length commercials, pop-ups and banner ads.

Typically, the advertising companies will pay the ADSS licensees by spot or by number of clicks. The studios generally receive 60-70 percent of the ADSS revenue earned during the film/series exploitation. In many instances, the website is not affiliated with either (a) the studio involved in distribution and production or (b) the network or basic cable company airing the series. As such, studios report 100 percent of ADSS revenues to the participants.

The primary concern of the participation auditors and representatives of the talent/investors of the project is completeness and the inability to verify that the studio is receiving everything it should and reporting everything it receives. Another concern, for both talent and studio, is general piracy. Similar to Napster for music, many websites are not licensed to exploit the film/series and do so illegally. As such, the studios do not receive any related revenues. Piracy concerns are severe and trickle down to every market. If you know you can watch it for free, why buy the home video or download the digital content? Studios continue to spend millions on piracy protection, but continue to lose millions more on lost revenues due to piracy.

As those who follow entertainment trends as well as advocates for the actors, directors, producers, creators and investors of film and television series, we need to better understand the nature and reporting of new media markets, which continue to grow, evolve and spark debates regarding the sometimes controversial studio accounting. With the general decline of hard-goods packaged media (DVD and Blu-Rays), studios are finding themselves forced to make up the lost revenues elsewhere. And, what better arena exists than the ever-growing, ever-evolving and ever-ambiguous "brave new media world."

This post was originally published on the Green Hasson Janks Media Clips blog.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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