United States: Four Entertainment Deal Considerations For IP Rightsholders (and One For Entertainment Studios)

The success of HBO's The Last of Us and the blockbuster performance of Illumination and Nintendo's The Super Mario Bros. Movie ($508 million and counting worldwide at the time of writing) reemphasize the power of high-level IP as the basis for entertainment projects. When authentically adapted for film and TV, these powerful brands engage and energize a massive and committed fan base, driving viewership and providing a strong halo effect to the film or TV exhibitor.

Dealing with a successful IP—which can include a consumer brand, toy line, video game or tabletop game property, or occasionally a hugely successful book series—necessitates a nontraditional approach to dealmaking. A conventional movie or TV studio "all rights" option/purchase deal with minimal involvement of the rightsholder is unlikely to be acceptable to the owner of a billion-dollar brand. The stakes and the leverage of the rightsholder are completely different from those of most rights deals.

With that said, here are four deal considerations for high-level rightsholders when dealing with Hollywood:

1. Controls and Approvals

A traditional Hollywood rights deal generally gives little in the way of contractual approvals and controls to the rightsholder. An established author might get a "meaningful consultation" right with respect to creative decisions—but seldom more than that (unless they are Stephen King or John Grisham).

That is generally not workable for a video game or consumer product brand that is generating hundreds of millions (or billions) of dollars annually based on their IP, as those rightsholders need sufficiently protective approval rights over their IP. This is also what the audience will expect (and conversely, the audience will reject anything that is perceived not to be blessed by the original creators—hence the prominent upfront credits for Nintendo and Shigeru Miyamoto on Super Mario Bros.). This doesn't fit within the customary framework and levels of control held by the entertainment company, and as a solution it is possible to build mechanisms for approvals and/or agree to a "brand bible" up front that establishes certain parameters to give both parties comfort. The rightsholder may also want to discuss implementing a "path to production" construct to ensure that the production is moving forward on an acceptable timeline, and potentially permit cross-promotion with its other products.

Of course, trust is a huge factor in these endeavors. The Super Mario Bros. Movie was nine years in the works, as this interview with Illumination's Chris Meledandri explains.

2. Scope of Rights Grant

A traditional entertainment rights deal grants all rights in the property to the studio, excluding only certain narrowly delineated reserved rights. That may not work for a high-level rightsholder like a AAA videogame publisher that is already exploiting multiple product lines in the marketplace. Accordingly, the rights grant needs to be very carefully crafted, and may take the form of a limited license in lieu of a traditional grant.

This is an area where it is imperative to involve agents and lawyers who understand the concerns and practices of both areas intimately and who can broker a deal that gives the entertainment company the rights it needs—while also protecting the underlying rightsholder. It may be necessary to tightly define a distinction between "classic" and "production-based" merchandising, and set forth how revenues from both are distributed.

3. "New Elements"

Traditionally, any "new elements" that are created by the movie or TV studio and do not exist in the underlying property become the property of that studio. I often call this the "Daryl rule," after the original character that was created by AMC for The Walking Dead series. It has been an almost immutable rule for decades, but it is now being challenged for the first time.

The driver is largely video game developers, who cannot permit a schism in their IP and who need to be able to feed new characters and elements from the television or film adaptation into game expansions and DLC—effectively, the essence of "transmedia." Many a deal has fallen apart when the parties couldn't reach an accord on this issue, but entertainment companies that want to work with game IP will have to find a solution that is workable within the ecosystem of highly valuable gaming properties. Resolving this point requires highly nuanced language that addresses the concerns of both parties and allocates legal risk appropriately—but every circumstance is different and requires much informed discussion and compromise.

4. True Participation and Opportunity to Co-Finance

High-level rightsholders have already undergone one transformation in the past decade—from passive rightsholders to contractual producers with credits and direct creative involvement. The next frontier will likely be rightsholders co-producing and co-financing entertainment productions, and thus sharing the risk with traditional entertainment companies. That carries greater financial exposure of course, but the upside is exponentially greater—and it's already beginning to happen.

High-level rightsholders may want to consider building in some kind of co-financing option, even if limited to a situation where the entertainment studio elects not to finance the entire budget itself.

One Key Consideration for Entertainment Companies

Although dealing with high-level rightsholders can be tricky, it presents a huge opportunity for entertainment companies that are prepared to compromise, be patient, and construct a mutually beneficial working relationship. Many high-level IPs are genuine "worlds" that can spawn multiple movies or series, merchandising lines, and live activations, and this can inure to the benefit of the entertainment company, its other activities, and its shareholders. The deals can be extremely complex and nuanced, and can take a long time. They often require navigating different business cultures, and potential involve multinational dealmaking.

For all of these reasons, the involvement of experienced representatives is critical. With a willingness to be creative and flexible in dealmaking will come significant opportunity. The dividends are self-evident, and when an effective partnership is established, it can generate billions of dollars of value, forge a long-lasting creative relationship, and massively bolster both parties. When you get it right, it is one of the most rewarding things possible.

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