Rights and Royalties – if you have ever dealt with the management or distribution of certain kinds of intellectual assets, then you have probably heard of these terms. While rights and royalties are not exclusively the domain of intellectual assets, for the purposes of this article, we will deal with them as such.
We will use films as our example. For those in the business of distributing films, rights and royalties are a primary concern. Film distributors collect movie distribution rights from various producers. As the company goes out into the market place and produces distribution deals, they develop royalty concerns. Rights to distribute films are typically specified in terms of “what”, “to whom”, “where”, “when”, and “how”. Let’s look at an example.
The rights to show a film on DVD, in a theater, or via online streaming, are sold to particular individuals or companies who will try to profit from showing the film to end customers. Different deals are made for different formats. A deal may stipulate that a film can only be distributed on DVD in the US, or in the European market. Another deal may specify streaming rights available in the Asian market. These deals are always set for a specific amount of time – such as a year. Another aspect of the right to distribute could be exclusivity versus non-exclusivity. Certain rights derive different prices – exclusivity will almost always drive a higher price.
Now, there are two tracking challenges in this model:
- Inventory – As a distributor acquires more rights to more properties, the kinds of deals made can be complex which can easily lead to confusion. For example: a distributor does a streaming deal for a certain number of films in Asia and another in North America, and one is for one year and the other for two years. Then, someone comes to them and asks to do a deal in the US and you are not sure. Hence, inventory in this environment is about remaining available rights that have not been sold off.
- Rule Checking – As you do deals, the variables can be complex. One film may have been distributed in different ways to many markets. With all good intention, you may find that you agree with a buyer on a deal term but then you realize that you broke a rule because of previous struck deals. Rule checking can become cumbersome as deals are typically specified in legal contracts and may not be well organized.
What’s needed here is a good rights management system which will help reveal where there is extra inventory and where you may be breaking rules. For example, if you try to craft a deal in Canada, the system will reveal if the prospective deal is possible. Or if a distributor wanted to conduct a DVD deal in Germany at the same time that he has a deal in Europe, the rights management system will inform the user that the deal isn’t possible – because the rights have already been sold.
Now royalties. The goal of distribution is to get sell-through. Meaning, distributors have an obligation to pay the producer as the content is ultimately consumed. These deals can look any which way. Up front deals specify monies paid in advanced for the right to distribute. Certain promotion expenses may apply to address the need to build demand. Other management fees may need to get paid first before the distributor can realize any profits. Back end deals specify monies due upon actual revenue generated from end consumer consumption. All of this leads to a lot of transaction tracking and number crunching to ultimately determine the royalties due to the original producers. The number crunching is everywhere because the rights deals may specify many parties. It’s no wonder that royalties are typically paid quarterly — the task is daunting!
Generally, when the distributor gets started with a few titles, they track this kind of information in spreadsheets. But when there are fifty or more different titles, and there are fifty different spreadsheets – well, keeping track of this can become a nightmare. Once in this situation, it’s time to look for a rights and royalty management system. These systems are sophisticated because they manage parameters around what you acquire, who it was sold to, to whom the royalties are owed, and more. In essence, the system helps maintain order over sales, and helps take care of obligations. If any producer comes back with questions about the reliability of a distributor’s royalty calculation, they can rely on their solid tracking system for proof.
While these systems can be both challenging and expensive, they are needed to grow the business else costs get out of control. Most are not full-blown financial systems so they typically need to be connected to a good general ledger, accounts payable, and accounts receivable system, like NetSuite. Most of these rights and royalty systems require a significant amount of planning to adopt. The good news is that you can move titles and rights deals over slowly. Ultimately, adopting this software leads to more revenue, and lower costs.
Marty Zigman
Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.
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