Last month, we explored the market factors shaping discussions concerning digital content rights and found the terrain a little tumultuous. For certain, there’s been a lot of talk about how modes of digital distribution such as VOD, mobile and broadband are making inroads with consumers and threatening to supplant linear network broadcast in the coming decade. And consequently, broadcasters, cable and satellite providers and home entertainment companies are looking to lock up as many digital content rights as possible in an attempt to ‘future-proof’ their businesses. Producers, meanwhile, are often being asked for the same sets of digital rights by competing parties, so they’re starting to take a closer look at what rights exist and who should get them.

This is where we pick up the story and begin examining the ins and outs of negotiating digital rights deals. How are these contracts, which look into the future, being hammered out in the present?

The dilemma facing most content producers is that while rights to place content on digital outlets are in demand, there hasn’t been a corresponding spike in license fees. It’s also true that the revenue models for most of these digital delivery technologies are still being developed, making it difficult to put a firm price on rights. But it is possible to generate some cash by striking deals directly with wireless or VOD carriers. At least that’s been Rainbow CEO Iginio Straffi’s experience.

If a broadcaster or home video partner is unwilling to bump up the license fee for additional digital rights because they’re not generating revenue at the time, the Italian prodco’s chief tries to hang onto them. ‘We’ll make some money, and eventually I can give [them] a share,’ he reasons. So far, he’s forged mobile and streaming-content internet deals in more than five territories for Winx Club, and these have brought in between US$30,000 and US$40,000 each. By his own admission, it’s not a huge amount of money to be pulling in when you look at it country by country, but with a global property, these revenues can add up. Interestingly, Straffi says when he was negotiating broadcast deals for Winx Club, the issue of digital rights never came up. But with Rainbow’s newest production, Monster Allergy (which is set to air in early 2006), negotiating VOD, mobile and broadband rights has very much been part and parcel of the deal-making process.

Know when to fold ’em

Of course, not everyone is in Straffi’s position. Traditional content distributors contend that they need these rights to market their properties and maintain the position of their brands (particularly in the case of broadcast). But holding back these rights for a show heading into production can drive fee advances down, which could make it difficult to finance the project. And a producer also has to determine which rights the broadcaster or home video distributor really needs to market a show, versus which ones can be exploited commercially.

‘One thing we know for sure is that audiences and revenue are dropping for conventional broadcasting,’ says Dan Fill, VP of interactive at Toronto, Canada’s Decode Entertainment. ‘Meanwhile, there’s the promise of new revenue streams from VOD, mobile, the internet, etc.’ Fill adds that there are new costs involved in facilitating multi-platform distribution, and they should be shared along with new revenues cropping up.

Broadcasters aren’t insensitive to this line of reasoning, and a few are addressing it ahead of the curve. Mel Alcock, senior VP of commercial affairs at Jetix Europe, admits that his opening gambit on a deal is for a ‘catch-all’ grant of exclusive rights (digital and ancillary). ‘Having exclusive rights enables us to take a coherent and coordinated approach to rolling out content on multiple platforms,’ he explains.

However, he recognizes that demonstrating Jetix’s ability to exploit those rights is key to forging these kinds of deals with content owners. For example, Jetix’s websites garner 50 million page views a month and operate in 17 languages, and the net is looking into launching a subscription streaming video service. That kind of market leverage is hard to ignore. Alcock is also open to making provisions in the contract for revenue splits on digital rights as they begin to make money.

Pubcaster ABC Australia is aggressively chasing and exploiting digital rights in the kids space. It’s beginning to put episodes on-line and has just launched a two-hour streaming video loop with Aussie wireless carrier 3 (operated by Hutchison 3G Australia). ABC Kids Mobile is a subscription service that targets parents with preschoolers and includes episodes from ABC Kids shows such as Franny’s Feet (Decode) and Busy Buses (Chatsworth). It costs consumers between US$2.30 and US$3.84 per month, and content is being refreshed every two weeks.

Angelo Tilocca, who’s heading up the effort as ABC’s manager of content licensing, forecasts that digital platform sales will challenge traditional broadcast sales in the next few years, and says it’s necessary to recognize that digital rights have value. Rather than assigning dollar figures, he enters into 50/50 revenue sharing agreements with content owners when he strikes a deal to put their programs on an emerging digital outlet, and he doesn’t pick up rights unless he can monetize them. ‘If you’re not within 12 months of exploiting these rights, you shouldn’t be tying them up and denying people the opportunity to do business in other platforms.’

Know when to hold ’em

What about cutting distribution contracts when they include no firm plans to pursue new digital revenue streams? Arguably, one of the most obvious solutions is to put the contentious rights in limbo, reserving them until exploitation is possible. Chorion director of sales and marketing Jackie Lynch says this is something she currently does with VOD rights to properties such as Noddy. Digital distribution and the VOD landscape are developing so quickly that the company is reluctant to license rights when it’s unclear what the parameters of the right might eventually entail.

Lynch cites a recent experience of Chorion’s to illustrate the point. A U.K. retailer approached one of the company’s home video licensees to sell digital video downloads over the web. ‘This isn’t at all what people envisage as VOD,’ says Lynch. ‘It could have quite easily been tied up in a broadcaster contract, even though it doesn’t really infringe on broadcast rights and is a great commercial opportunity for everyone.’

Also, there’s the question of value. If you give the right away for little or no monetary consideration, then that’s how it will be valued, says Al Kahn. The 4Kids CEO has instructed his distribution execs to take VOD and wireless rights off the table during sales negotiations until the market shakes out. ‘So you may have to sit back, suck it up, and wait until your new show becomes a hit – at which point someone may ask you for that digital package and say, ‘I’m willing to pay for it,” he notes.

Canadian prodco Nelvana tries to forge deals that only include rights for identifiable formats making money right now. Rights for streams with uncertain potential are frozen until there’s a commercial model in place. In its recent partnership with U.S. cable giant Comcast to create kids VOD channel Vortex, the company was able to exclude streaming broadband and digital sell-through rights as these businesses are still in their infancy. Digital sell-through – the downloading of content onto a computer hard drive for a fee – could have been lumped in as a VOD right if Nelvana hadn’t made the distinction.

This leads to another important point when it comes to inking deals in this environment. Both parties have to be as specific as possible about defining rights, and producers need to delineate exactly what digital rights they’re prepared to include in the deal.

Not only is digital technology changing so quickly that owners could lock up potentially lucrative rights without realizing it, but it’s also creating an avenue to launch brand-new content based on an existing brand. ‘If you’re not careful,’ says Decode’s Fill, ‘offering up rights can prevent a company from creating a derivative product that might have some market value.’

Fill’s colleague Dominique Bazay, VP of distribution at Decode, adds that a lot of standard broadcast agreements now include clauses that obligate you to deliver anything that’s created for digital media along with the program itself. Content owners need to keep a sharp eye out for this type of stipulation.

Blanket clauses labeled simply VOD or broadband rights also won’t work anymore. ‘You can deliver content to consumers via the set-top box, internet streaming and mobile, and that means you need definitions of those things in your contract so you know exactly what you’re including and excluding,’ says Chorion’s Lynch. ‘You can’t automatically assume anything.’

Another tactic that might help prevent tying up rights for too long, especially in light of the rapid pace of development witnessed in the last five years, is to try and deal in shorter contracts. ‘With a five-year term right now,’ says Nelvana executive VP of business development Doug Murphy, ‘it’s likely that in two years, you’ll have given something away that has substantial value.’ Rainbow’s Straffi agrees. While he used to routinely draw up five-year contracts, he’s now pushing for much shorter terms.

And if you’re experimenting with new digital platforms, the shorter the contract the better. Leila Pirnia, DIC Entertainment’s director of strategic planning and business development, says she tries not to lock up any digital right for more than a year. The company is testing mobile and on-line distribution methods in an attempt to gauge future revenue potential.

For his part, ABC Australia’s Tilocca doesn’t sign terms that go beyond 24 months because he doesn’t want to monopolize rights for burgeoning digital outlets that may not pan out.

Room to maneuver

In the majority of negotiations taking place at the moment, there’s little doubt that the content disseminators – and particularly broadcasters – hold the balance of power. Producers need to get exposure for their properties, first and foremost; all the digital rights in the world won’t be worth a thing if they don’t. But there is still a little wiggle room for producers who want to maintain some control.

Straffi suggests that a producer may be in a better position to hold back digital rights on a home video contract because there are more comparable companies to choose from in this medium than in TV. So if one home video distributor doesn’t like the proposed terms, it’s easier to find another partner. And if you do end up having to cough them up, video partners are more amenable to cutting producers a larger chunk of the back-end revenues realized on digital rights. This leverage may be especially useful when it comes to negotiating contracts in Europe because Decode’s Bazay says home video distributors in these territories are more insistent on landing VOD rights than broadcasters.

Cartoon Network Europe, for example, isn’t looking for exclusive rights on subscription-based VOD. ‘We like multiple touch-points for our content,’ says Casey Harwood, VP and commercial director of Turner Broadcasting Systems Europe. ‘We benefit from the exposure.’ The broadcaster considers itself platform-agnostic; the goal is to be on any and every device kids have access to, so the company will entertain revenue-sharing models if a platform takes off.

For their part, producers must maintain a flexible stance. ‘You have to weigh when it’s worth picking a fight,’ says Ken Katsumoto, executive VP of Lions Gate Family Productions. Does the technology and its exploitation warrant a battle? VOD is set to play an integral part in the future of Lions Gate’s video distribution business, but Katsumoto says there have been cases where he’s ceded VOD rights to a broadcaster. The trade-off? The broadcaster guaranteed to ‘promote the heck’ out of the series, which was more important at the time.

It’s difficult right now to sell a show without agreeing to include digital rights, but you can make a counter-offer to the broadcaster. Nelvana’s Murphy says revenue-sharing can work both ways. So if a producer is set on monetizing digital rights alone, they could ask to retain them in exchange for giving the broadcaster (and most likely the video distributor as well) a portion of the back-end revenues. And oftentimes, having solid broadcast and home video deals in place will be enough of an incentive to convince carriers and aggregators to cut fair deals for VOD and mobile rights.