Back to Newsletter

New Media, New Contracts

INTRODUCTION
New media is a term that describes the digital technologies used to create and distribute media since the late 1980's. New media is at its core a disruptive technology. For centuries, dating back to before the printing press, each emerging disruptive technology has upset the existing order and forced the media industry to revise its revenue models and even sometimes to create new models from scratch. Despite the fact that disruptive technologies have been emerging and revolutionizing the media industries for centuries, digital media appears to be different. Never before has the distribution of discreet copies of media products had such a low marginal cost that it is nearly free.

The Internet in particular has provided a way to reach more consumers with a much larger range of products for a lower cost than ever before. The Internet, however, has also made it possible for anyone to become a distributor. Prior to the Internet and file sharing systems, in order to be a successful intellectual property pirate, a significant amount of start-up capital was required. The creation of thousands of illicit DVDs or books or the operation of a pirate television station required an up-front investment that was cost prohibitive for most. Today, anyone with a $600 laptop can be a pirate. Various social, legal and technological solutions have been used to curb illegal distribution with varying degrees of success, but the problem remains that in many instances, "free" is the cost point to beat.

Since the introduction of television, the media industry has operated under a model that is based on "windows" of exhibition during which a distributor would license a retailer to exhibit, rent or sell copies of its products to the general public. In many cases, the retailers are licensees like television stations and iTunes, but in some cases they are retail stores like Best Buy and Walmart. A simplified version of today's windows starts with a new film exhibited in theaters, then released on DVD, then video-on-demand, then exhibited on pay-tv, then on broadcast-tv, and then on basic cable. Due to new digital technologies, however, the windows are in flux - some films, notably Steven Soderberg's "Bubble," have released under a model called "day and date" where a film is released in theaters and on DVD on the same day or on DVD and video on demand on the same day.

The windows are laid out in a fashion designed to maximize revenue available for the film as a whole. Consumers will pay more to see a film on the big screen than they will to watch it on DVD and pay-tv has traditionally paid more than broadcast or basic cable. For a variety of reasons, including lower marketing costs and combating piracy, the windows are becoming shorter. This change in the window structure has led to some significant complaints from the retailers responsible for delivering the content to consumers in each window. Each retailer is trying to protect his market share from other legitimate retailers, but the force no one likes to discuss is again piracy. If the distributors don't make the product available on DVD and on iTunes the same day, then any consumer that wants a strictly digital copy could download the product for free from an illegal file sharing network. The goal of the distributor remains to get the consumer to pay for the content, regardless of which retailer delivers the content. Due to this market pressure, the windows will likely continue to get shorter and closer together, and some windows may be eliminated or combined, and some may even flip.

All disruptive technologies force changes in the legal arrangements between distributors and retailers. As each new technology emerges, how and when content is made available by retailers to consumers changes.

The initial acquisition of rights remains largely the same as it has since the passing of the 1978 Copyright Act: a distributor either pays for the creation of the work as a work made for hire (thus having complete ownership of all rights from inception) or acquires a finished work in the form of an assignment of rights - typically all rights - for a period of time. The biggest contractual change we have seen in response to new media in this context is the addition of the language "all media, now known or hereafter devised." A typical grant today would include all rights to exploit the material throughout the universe in perpetuity in any and all languages, for all now known or hereafter devised uses, media, platforms, manners and forms. Alternatively, some distributors have adopted a more explicit approach, incorporating "new media clauses" that specifically state that the parties acknowledge that new technologies will be developed and that the assignment is intended to convey all future rights, including all future distribution technologies.

The earliest motion picture contracts did not contemplate creation of new technologies that would allow for secondary distribution channels (such as television and home video); thus, many early contracts acquired rights in a less all-encompassing way, which has led to difficulties distributing some early works in new technologies.

For instance, in Boosey & Hawkes Music Publisher, Ltd. v. The Walt Disney Company and Buena Vista Home Video (145 F.3d 481 (2d Cir. 1998)), the language that addressed the acquisition of rights to certain musical compositions was spread throughout four sections of the contract. Disney acquired the right "to record [the music] in any manner, medium or form, and to license the performance of, the musical composition"…"in one motion picture"…"in synchronism or timed relation to the motion picture"…"conditioned upon the performance of the musical work in theaters" having a valid performing rights society license. The contract also contained a clause reserving all rights not specifically granted to Disney to the composer. In interpreting this language, the Second Circuit found that whether a license covers a new use, i.e., a new technology, hinges on the foreseeability of the new technology at the time of contracting.

While the case ultimately resolved in Disney's favor, lengthy litigation would be less than desirable every time a new technology emerges. Thus, it is important to ensure that the language of earlier agreements is carefully reviewed before older material is repurposed for new media.

Generally, the contracts between distributors and retailers are very similar across all technologies; however, with the emergence of each new disruptive technology, including new media technologies, the agreements between distributors and retailers are evolving in five pivotal areas: 1) the grant of rights (sometimes called the license); 2) the term of the agreement; 3) exclusivity; 4) the financial compensation structure; and 5) security measures.

The grant of rights to new media retailers must be tailored to the type of distribution in which each retailer engages. The grant of rights to an electronic sell thru service (like iTunes) will look quite different from the grant of rights to a DVD retailer. In each case, the distributor and retailer must address how the retailer delivers the content and what the retailer may allow the end user to do with the content. For DVDs, the grant might state that the store may sell the DVDs to the public and would likely include an MSRP. For an electronic sell thru service, the contract must address what technology may be used for the download, what format the download may be stored in, what devices it may be viewed on, how many copies may be made, what medium the copies can be stored on, and what happens if the download is accidentally deleted. Additionally, the grant must include restrictions that are not relevant to retailers of DVDs. For instance, on-line retailers could easily add advertising to a download, which would be impossible for a DVD retailer. It is, in fact, quite common for a contract to restrict advertising not only on the download, but also on the website where the download is initiated.

Additionally, the language we use to describe the technologies is evolving. To define television in 1960 was quite simple - television was the live transmission of synchronized moving pictures and sound via a modulated analog radio signal transmitted by an FCC licensed network which could be viewed on a television set. Last week, all television in the United States switched over to digital signals and it has become very difficult to define television in terms of the technology used to distribute it. For example, a recent contract granting broad television rights utilized the following language:

_{…any and all forms of television now known or hereafter devised, whereby the consumer may view a temporary copy of a motion picture via an Authorized Transmission Method, including, without limitation, free television, basic cable television and premium subscription television (i.e., pay television), all "video-on-demand" formats ("VOD") in which the end user selects the time or limited time period when the Picture may be viewed, including "subscription video-on-demand;" all "pay-per-view" formats ("PPV") in which the end user pays for access to a particular motion picture at a particular time established by a schedule not wholly controlled by the end user; and streaming of the motion picture as part of a linear broadcast during which the end user has no control over the time when such motion picture is transmitted over the Internet or cellular wireless networks provided such transmissions are via an Authorized Transmission Method. As used herein, Authorized Transmission Method means any and all means of electronic transmission now known or hereafter devised, by which an end user is authorized to view and/or receive the motion picture, which transmission includes, but is not limited to, broadcast, cable, satellite, telephonic lines, DSL, broadband, over-the-air wireless transmission, closed systems, virtual private networks, or via the Internet.}

This language defines a very broad understanding of "television" given the technology utilized to distribute motion pictures to end users today. While a grant this broad is unusual, it demonstrates the complexity which must be addressed when teasing out which rights to give to a new media service. Additionally, the definitions used to describe the grant of rights to a new media service can cause disagreements and lawsuits between distributors and their existing retailers over whether or not new media uses conflict with the exclusive grants held by the existing retailers. For instance, in Starz Entertainment, LLC v. Buena Vista Television, Inc., No. 07-C-01895, (C.D. CA March 22, 2007), http://www.scribd.com/doc/17731/starzsuit, Starz alleged that the selling of Disney films on a download-to-own basis via iTunes and Walmart.com violated Starz' exclusive right to distribute the Disney films on television. The suit ultimately settled, but at the center of the case was the definition of "television." Thus, all previous agreements with retailers must be carefully reviewed and evaluated before the language for any new media agreement is settled.

The speed with which new technologies and distribution methods are being introduced has accelerated considerably since the introduction of the Internet. Before the Internet, distributors and retailers often entered into long term and exclusive contracts. Some of these contracts, notably pay-tv contracts like the Buena Vista/Starz agreement, lasted for a decade or more. The overlap of these older agreements with the emergence of the new technologies has both slowed the adoption of new technologies and created an environment ripe for disputes between old and new media.

The lesson learned from these conflicts is that the terms of new agreements should be shorter and non-exclusive. New agreements must anticipate new technologies and new economic models that might emerge - giving distributors the ability to take advantage of new opportunities. For a start up new media service, it is not unusual for a distributor to offer only a one or two year agreement with the distributor having a unilateral option to extend for one or two additional years. This trend towards shorter and non-exclusive terms (not just for new media but also for existing technologies) is likely to continue for the foreseeable future.

As new media technologies are introduced, the financial terms of contracts are another aspect in flux. Contracts now contain an imaginative array of revenue sharing models that may be combined in a dizzying number of ways. For example, some contracts may describe a strict percentage of gross or net, sometimes with a floor and/or a ceiling, a minimum guarantee, a flat per consumer periodic fee, per click fees, shares of advertising revenue, barter advertising, or any number of other methods of collecting and sharing revenue. As with all accounting, the definition of gross and net is another ongoing conundrum, which can only be addressed on a technology-by-technology basis. Downloads over the Internet to a laptop have a particular set of costs and income model, whereas downloads over a cellular network to a mobile phone have an entirely different set of costs and different income model. When drafting these agreements, the challenge remains to include all revenue and deduct applicable costs, which is harder than it may seem unless you clearly understand the technology operating behind the scenes.

For any new technology, there will be new security measures which retailers will be required to implement to protect the intellectual property of the distributors. Motion picture prints shipped to theaters are carefully tracked via specialty shippers and are destroyed when they are no longer useful; DVDs are protected by an encryption system; and new media technologies are protected by digital rights management (DRM) software. DRM is the mechanism by which a retailer restricts a consumer from further distributing a downloaded motion picture. There are many DRM solutions available today. FairPlay by Apple and Windows DRM are two of the most popular, though there is no industry wide standard. New media contracts often dictate not only which DRM must be used, but what settings must be set within the DRM software. For instance, a download from iTunes may be played on five different registered computers and may be moved to any iPod synchronized to a registered computer; however, it may not be moved off the iPod. On UnBox, Amazon.com's download service, a consumer can view a downloaded motion picture on up to two computers and up to two portable devices (e.g., Creative Zen or SanDisk Sansa View). Another example of the changes in security that come with new media technologies is geo-locating software that is used to prevent consumers from outside of the retailer's licensed territory from downloading the content. As with all of the changes arising from the introduction of new media technologies, understanding the technology is the key to drafting a clause that addresses the needs of the distributor, retailer and consumers.

The methods for distributing content to consumers are changing rapidly and the contracts drafted to facilitate this distribution must carefully address the past, present and future technologies. A careful evaluation of existing agreements, exacting drafting of the definitions and grants in present agreements, and flexibility in all terms to protect the future new technologies are the keys to a successful transaction today.

_{Juliette Youngblood is Partner and Chair of Irell & Manella's Entertainment Group. Ms. Youngblood has 20 years experience in entertainment law, including negotiating digital distribution agreements./p>}

<sub>Deborah Ann Henderson is a member of Irell & Manella's Entertainment Group with more than 15 years experience in the film and television industries, including time spent as a studio executive and as a producer. She also holds an LL.M. in Computer and Communications Law from University College London.

Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067-4276
(310) 277-1010
http://irell.com</sub>

Back to Top

Back to Newsletter