Now that most of the big opportunities in sponsorship have been snapped up, advertisers are looking at programme funding as an alternative TV marketing channel. Osborne Clarke’s film finance specialist Phil Alberstat checks out some key legal issues.
Legal and Commercial Issues of Advertiser Funded Programming –
by Philip Alberstat, Partner, Osborne Clarke
The popularity of video on demand (VOD) and the spread of personal video recorders (PVR'S) like Tivo and Replay are clearly a threat to traditional broadcasters. Although PVR's are only available in 1.7 million homes in the US and fewer abroad, the combination of PVR's and VOD could be available to half the United States population by 2007 according to new data from Forrester Research. They claim that electronics manufacturers and pay-TV broadcasters intend to build PVR's into set top decoders and DVD players/recorders, lifting the total in use in the United States to 30 million within 5 years. Forrester feel that, by then, viewers will watch 28% of their TV on demand and skip 19% of the scheduled advertisements. News, weather, sports and other live programming will continue to boast immediacy, but other forms of traditional programming will suffer. Their survey claims that 76% of advertisers will respond by cutting their ad spending and in order to make up for the loss of effectiveness, there will be an even greater emphasis on other forms of advertising such as product placement, sponsorship and enhanced television adverts.
As a result of the shift away from traditional advertising, an alternative source of television programme finance may come from advertiser funded programme production (AFP). As programme budgets become tighter and television advertising revenue continues its decline, interest in advertisers contributing as co-funders of UK and international television programmes is rising fast. Unlike sponsorship, the upside of AFP is that advertisers can provide a new source of production finance that goes directly into the production budget of a specific programme. The potential downside is that the advertiser funder may want too great a degree of editorial control in return.
For legal and business affairs executives, structuring an AFP deal can be a complex exercise that raises many legal and commercial issues.
From the commercial perspective, there are a number of different models for production. One model is typified when an advertiser covers the total cost of producing a programme which is then distributed internationally and provided to broadcasters in exchange for on air credits and commercial air time. This means the advertiser funder recoups its investment primarily through the media value the show generates.
Another model might be called the "domestic model". The position here is different because the media value attached to a single programme on UK television is rarely high enough to cover production costs. The "domestic" model involves an advertiser contributing a proportion of the production cost for example 30 or even 100% of the programme budget. In return, the advertiser obtains the right to be associated with that programme off air and subject to the level of investment, may also get a share of the associated rights. In the "domestic" model an advertiser brings more than just production finance. Their interest lies mainly in adding marketing support and building a culture around the programme to benefit both the programme and the brand.
By investing in a content franchise, the advertiser essentially becomes an owner or part owner of the programme asset. Even though the advertiser or brand owner feels a sense of ownership they should not confuse this with editorial control. For many programme producers there is a deep concern about being forced to compromise their ideas just to have a programme made. For most producers, editorial independence and integrity remain sacrosanct.
The following are some of the issues that should be considered when negotiating an agreement in relation to advertising funded programming.
The legal issues
Ownership of rights
Under the traditional brand owner/advertising agency relationship, the brand owner will be the ultimate owner of most or all intellectual property rights in the advertising created by its agency under their terms of engagement. Following this traditional model, the production company that creates an advertisement for television, will also assign (with some exceptions, for example in respect of characters created by the production company) all rights, in the advertising produced by it to the advertising agency or the brand owner direct.
The dilemma that arises in an AFP transaction is that the traditional advertising agency/brand owner/production company relationship does not apply and that the AFP transactions may fall outside the scope of the traditional client-agency agreement. An advertising agency may devise and develop a format, programme or series for its client either on a speculative basis or under client instructions. Alternatively, the agency may work closely with a production company in the development of a format, programme or series. In these circumstances it is essential for the advertising agency and production company to define their relationship prior to the development and creation of the underlying rights in the format, programme or series. Some independent production companies may require some form of ownership in the format and for programmes that they develop and eventually produce and may not want to assign all rights to the advertising agency as in the traditional model that applies to the production of advertisements. Of course, others may be happy to work according to that traditional model.
Adding to the dilemma of who owns which rights between the advertising agency and production company, is the changing business model of advertising agencies. One of the trends emerging from the decline in traditional advertising is that many advertising agencies are trying to break away from the traditional client/agency relationship and, in an effort to generate different revenue streams, strive to own some or all of the underlying intellectual property in their creative services. Advertising agencies are looking to redefine their relationship with clients and as a result redefine the basis of their relationship, the client/agency agreement. Under the traditional client/agency agreement it is virtually impossible for an agency to negotiate a split or sharing of rights deal with a production company who assist them in the creation and development of a format or television series under an advertiser funded programming deal. In order to attract top creative talent within the television industry to work with brand owners and advertising agencies, some form of co-ownership of rights may be required AFP to develop as a stable business model.
Distribution
Under an AFP deal, one must consider who has the right to licence, distribute and exploit the programme once it has been aired by a broadcaster in a domestic territory. For example, if a brand owner, advertising agency and production company have created a series of thirteen episodes of a programme that were fully funded by the brand owner and broadcast by Channel 5, one question that remains is who has the right to exploit the series outside of the United Kingdom. Aside from the terms of the broadcasting deal, issues such as engagement of a sales agent, sales commissions, distribution costs and approval of sales all must be agreed upon prior to the production of the series. Brand owners and advertising agencies are not generally well versed in the sales and distribution of television programmes whereas an independent production company may have considerable experience in negotiating with a television sales company. Also, an independent production company will most likely attend the major programme sales markets such at MIP TV and MIP COM and may have developed strong relationships with sales companies from their existing programmes. Alternatively, the domestic broadcaster (in this case Channel 5) may have a sales arm to their broadcasting business and may suggest that international sales are handled in house.
Various issues relating to distribution need to be considered and covered in the relevant agreements between the brand owner, agency and broadcaster. If a programme or series is to be sold outside of the domestic territory, the brand owner may require that their original investment in the programme is fully recouped before sharing any revenues with the agency or production company. Under this scenario, it is essential that all parties are clear as to who is selling the programme or series, have agreed a commission structure and a cap on expenses by the sale agent and have a recoupment schedule in place, setting out who is entitled to the proceeds of any sales.
A brand owner who has funded a large portion or even the full budget of a programme or series may require approvals in relation to the distribution or exploitation of the programme outside of their home territory. The brand may be international in its reach and will not want a programme or series to be seen anywhere outside of the domestic territory that the programme was broadcast. This may be a result of different marketing and sales strategies in certain international territories.
Approvals
Approvals are one of the most important issues raised by brand owners.
The purpose of brand owners' investment is for the programmes to build on their brand and to achieve an image that their brand can be identified with. As a result brand owners wish to ensure that the content of the programmes is in line with their investment.
As above, brand owners will wish to ensure that the final version of the programme or series will not have a materially, adverse effect on the brand or the brand owner's reputation. Although some may feel that this strikes at editorial independence, the brand owner should have some right to remove an offending episode or veto the broadcast of any unsuitable material.
Another one where approvals are important to brand owners arises from their fear that one of their direct competitors may advertise before, during or after any breaks in the programmes they have funded. Therefore, in negotiations with broadcasters, this issue is of utmost importance and will often be considered a condition precedent of the deal. When negotiating a sales agency agreement to sell the programme outside of the domestic territory, there must be a proviso that any distribution agreement concluded by the sales company with another broadcaster will ensure that a direct competitor is not permitted to advertise, sponsor or be associated with the programme or series being sold. Whether this is practical or conducive to international sales remains to be seen.
Rights clearances
During the production process of a television programme, it is essential that the production entity is responsible for obtaining and paying for all third party clearances, waivers and consents, including performing rights in respect of any music used in the programme. Even though these tasks are standard practice, brand owners who are involved in the funding of programmes may not consider the full cost of third party clearances. When budgeting for a programme, the brand owner must consider the full scope of the clearances that are needed and whether the production budget adequately provides for such rights. If a programme or series is intended only for domestic use then it will only be necessary to get clearances in a specific territory. However, if the intention is to exploit the programme in other territories through international sales to other broadcasters then wider clearances must be obtained.
Additional forms of exploitation
In some circumstances a brand owner will commission a programme based on a format that they wish to use on a limited basis. For example, they may only wish to have the programme or series broadcast on a business network such as CNN or CNBC for a fixed period of time. The issue that arises is when the programme format is successful, and the brand owner who has funded the programme does not wish to pursue a future series, what right does the agency or production company have to exploit a further series of that programme format?
In this case some form of pre-agreed format licence should be negotiated between the brand owner, the agency and the production company. The terms of this licence should set out who will have the right to create further programmes based on the original format and may include provisions which restrict that party from having the programme funded by a direct competitor of the original brand owner/funder. In addition, there should be specific provisions regarding sharing (if relevant) of any revenue in relation to international sales and other forms of exploitation such as merchandising based on the programme format.
Liability, termination and confidentiality
In addition to the usual warranties (such as that the programme will not breach any of the Independent Television Commission (ITC) regulatory guidelines), indemnities and liability provisions that are standard in any commercial agreement, provisions should be made for errors and omissions insurance which is very specific to film and television production. Despite the best efforts of a producer, mistakes will sometimes be made in relation to source material, third party material or commissioned material where proper clearance has not been obtained. In these circumstances, a producer can insure against such risks by way of an errors and omission insurance policy (E&O insurance). Other parties involved in the production can be named under an E&O insurance policy and the brand owner and the advertising agency involved in the AFP should usually be named on the policy.
The parties to an AFP agreement should also insist on fairly stringent confidentiality provisions. They may each have different reasons for wanting this. The brand owner will want to protect sensitive information about its business or brands that may be disclosed during the development and production process. The advertising agency would want to ensure that the production company will not solicit a direct commission for a programme or series from the brand owner or interfere with the agency's relationship with its client. The AFP agreement should also contain provisions whereby the production company cannot publicise or issue a press release in relation to the programme without the written consent of the advertising agency or brand owner.
As advertiser funded programme production moves up the agenda of brand owners, broadcasters, advertisers and producers, the conflicting interests between the parties to these deals will eventually find a common ground This type of production financing eventually moves to centre stage in the television industry, but it is going to take a while for the various different business models to fully evolve.
Please contact Philip Alberstat on 020 7809 1066 phil.alberstat@osborneclarke.com or Nick Johnson on 020 7246 8080 nick.johnson@osborneclarke.com if you have any queries in respect of advertiser funded programming.
