Adding fuel to the flames of what sometimes seems like an erotic content fire sale, is the fact that its now not only traditional adult content producers that are licensing content. Today, it seems like almost every thematic adult website, every performer-oriented website and every amateur website is creating its own content. And more and more of these producers are finding that they can generate additional revenues by monetizing their content through licensing.
Content licensing is essentially a contractual matter. So almost always, the success and profitability of a content licensing deal will depend on how well the deal was negotiated and how skillfully the licensing agreement was drafted. The following are some basic tips for content licensors and content licensees to help negotiate the best licensing deals possible.
Tip No. 1: Be prepared and strive to build trust. Before you begin negotiating a content licensing deal, or just about any other kind of agreement for that matter, it is important to be prepared. You should always have clear objectives and know in what areas you are willing to compromise. I have found that it often helps to make a list of key deal points and negotiation goals with my client before commencing discussions with the other party.
It is also important to understand what the other party’s interests are and what the other side wants from the deal. Understanding the other side’s goals, interests and concerns is a critical part of getting the best deal by helping you to determine what is, and what is not, likely to be negotiable for the other side.
Finally, it is important to remember that at the beginning of negotiations it is important to build trust with the other party. Trust can be an invaluable aid in the negotiation communication process, and in some instances, save a great deal from being lost.
Tip No. 2: Know your rights. Licensing content is all about rights, specifically intellectual property rights. A fundamental understanding about what these rights are can tremendously help you efficiently negotiate a good content licensing deal.
In the context of adult content licensing agreements, rights are entitlements that a person or an entity obtains from a content owner to exploit some or all of the content owner’s rights. These rights, in turn, come from the governmentally created intellectual property monopoly in the copyrights that the content owner possesses.
For example, in the U.S., an owner of the copyright in a work possesses a limited monopoly granted by the federal government that entitles the owner to control the duplication, distribution, performance and modification of the copyrighted work. Through a licensing agreement, the owner may give or “grant” some or all of these rights to another person or entity through a license.
For example, among other things, the content licensor can determine the duration that the grant of rights will last. For example, the term of the license of rights might be for a day, a month, a year, or even in perpetuity.
The content owner can also limit the scope of the rights granted, by licensing some, but not all, of the rights associated with the content. For example, the owner might license limited rights to a company authorizing it to distribute copies of the owner’s content via the licensee’s company web site, while reserving all other rights, including, for example, the right to make any changes to the content. This would, for example, effectively prohibit the company from editing or otherwise modifying the owner’s works.
Similarly, the owner may limit the license to use the content to one or more specified distribution media. For example, a content owner might grant a distribution license for cable or satellite broadcasts of the licensed works while prohibit any use of the works by the licensee via the Internet, via mobile platforms or even via any other media.
A content owner can also limit a content license to a particular geographic area. When this is done, the limited area to which the license applies is usually referred to in the licensing agreement as the license “territory”. For example, a content owner might grant a license authorizing the exhibition of the certain works by means of cable broadcast in the territory comprising North America.
Because there are many rights inherently associated with content, and each can be separately licensed, it is sometimes difficult for clients to initially grasp just how useful and profitable effective exploitation of content rights can be. To better convey the concept of separately licensable content rights, I have found that it is often helpful to conceptualize the bundle of rights associated with content works as a bundle of sticks where each stick is a separate right that could be parceled out to a different person or entity. For example, let’s say an adult content producer was interested in licensing 50 video clips that had previously only been available on the producer’s web site. One of the rights “sticks” associated with the clips might be the right for a content licensee to distribute the clips via IPTV in Germany for one year. Another rights stick might be the right for another company to include the clips in a DVD compilation that is restricted to distribution in North America only. Other rights sticks in the bundle might include, for example, third-party website distribution of the clips, mobile distribution rights, and the right to distribute the clips via hotel “in-room” entertainment systems.
As you can see, there are a large number of ways that the rights associated with virtually any adult content can be “sliced and diced” allowing a content owner to profitably exploit the same content over and over again. In fact, it is this fundamental character of intellectual property rights, the ability to separately exploit many different rights that can be limited in duration, geographical application, and in other ways, that provides tremendous opportunities for content licensors to profitably exploit their works over and over again.
The same attributes also provide great flexibility to content licensees, enabling them to negotiate content licensing deals that can be mutually beneficial for both licensors and licensees when such rights are creatively exploited by skilled negotiators.
Tip #3: Don’t over-license. One common problem I frequently encounter in content licensing deals that have commenced before my entry into the process involves what I call the “over-licensing of rights.” This can occur when either a licensor has given up rights more than necessary or a licensee has agreed to license more rights than the licensee needs.
Over-licensing is problematic for a number of reasons. For licensors, over-licensing can limit the licensor’s ability to enter into other deals regarding the subject content. This is especially true if the rights granted are exclusive rights. For licensees, over-licensing usually means that the licensee has over-paid the licensor for an excess of rights that are actually not required and/or desired.
When content license negotiations are properly conducted, the natural tendency for licensors and licensees is to negotiate an agreement that is directed to their nearly diametrically opposite interests. These polar interests should, under normal circumstances, drive the negotiations. This means that a content licensee should generally want to obtain, at the lowest possible cost, the broadest license of as many rights as possible to exploit the subject content. On the other hand, a content licensor should generally seek the highest licensing rate possible in exchange for the narrowest grant of rights.
Unfortunately, however, it is my experience that adult content deals will often not be negotiated in a manner that most effectively serves both parties’ interests. Often one or both parties will overlicense the content, generally because of a lack of experience negotiating or structuring content deals, or a fundamental lack of understanding of how content rights can be more effectively exploited.
The following are some examples of areas where overlicensing commonly occurs in adult content licensing situations.
Media over-licensing. Media over-licensing generally involves situations where a prospective content licensee will seek to acquire rights to use the content in either more types of media than the licensee has the means to exploit or in more media than the licensor should prudently allow.
For example, it is not uncommon for a content licensee whose businesses exclusively involves distribution of adult content via the web to seek a license from a content owner which will be paid for via a revenue sharing arrangement. Unfortunately, it is also not uncommon for a prospective licensor in such a situation to be presented with a draft license agreement that would grant to the licensee the right to distribute content “via the Internet, via mobile telephone networks, and via any and all other distribution means now known or hereinafter invented.” More often than not, such an over-licensing arrangement would not likely be the best deal for the licensor. This is because in our example, the licensee has no prior history of exploiting content via mobile phone networks. Therefore, it would seem unlikely that any appreciable revenue will be generated for the licensor in exchange for the grant of mobile and future technology distribution rights. Moreover, in addition to likely giving up valuable rights for nothing in return, if the licensor enters into the agreement on the hypothetical terms stated, the licensor could be foreclosing any opportunity to enter into an exclusive licensing deal with a mobile phone content distributor or a prospective licensee that develops a new means of content distribution.
Territorial over-licensing. A content licensee will often seek to obtain a content rights license applicable to the largest territory possible. Often the initial content licensing draft will indicate that the territory covered will be “the world” or “the universe.” In my experience with virtually every major content distributor in the adult entertainment industry, however, I have yet to find a single company that has the ability to effectively exploit adult content rights on a global basis by any media means other than the Internet. Therefore, if the content licensing deal involves DVD distribution, cable or satellite broadcasting rights, hospitality establishment rights (e.g., hotel inroom entertainment), or mobile rights, substantial care should be taken not to engage in territorial over-licensing. This is especially true if the license fee payments will come from a revenue sharing arrangement.
In general, I usually suggest that the prospective licensee should be required to justify the need for each geographic area in which the license will apply, especially if the licensor will be granting exclusive rights in the territory and/or the deal will involve revenue sharing.
Exclusivity over-licensing. Like media and territorial over-licensing, many adult content licensors are approached to enter into content deals that require the granting of exclusive licenses that are unnecessary or contrary to the licensor’s best interests.
Exclusivity over-licensing can be especially problematic in situations where the exclusive license is coupled with media and/or territorial over-licensing and a revenue sharing arrangement. Care should be taken by the licensor to be sure that the licensee has the ability to exploit the content and generate revenues throughout the licensed territory by all the media means exclusively licensed. Otherwise, the licensor risks that the deal will imprudently foreclose subsequent profitable opportunities that may arise for the licensor to generate revenues in such parts of the territory, and by such media means, that are beyond the licensee’s abilities.
Term over-licensing. Another common form of over-licensing pertains to the amount of time a licensee is granted to exploit the rights provided by the licensor, i.e., what is known as the “term” of the license. Licensees understandably seek to obtain from licensors the longest possible term for the least amount of money, while licensors understandably seek just the opposite.
The most common problem involving term over-licensing results from a licensor’s inefficient “lockingup” of content in an exclusive rights license for a period of time that forecloses subsequent exploitation opportunities. Therefore, for licensors, care should be taken to be sure that the content will not be subject to an exclusive license that will unnecessarily prevent the licensor’s ability to subsequently exploit the content.
For content licensees, term over-licensing most often results in situations where a licensee has ongoing payment obligations throughout a term that is longer than the period of time that the licensee can profitably use the content. To avoid such term over-licensing, licensees should take care to negotiate a term that does not exceed the licensee’s ability to exploit the content unless the license provides the licensee with an option to terminate the license early.
Tip No. 4: Include good accounting and audit provisions in revenue sharing content licensing deals. For licensors in content licensing deals where the licensor’s compensation comes from a share of the revenue generated by the licensee’s exploitation of the content, it is imperative that the licensor have sufficient rights to verify that the revenue sharing payments are accurate.
In license deals involving revenue sharing, at a minimum, the licensee should provide detailed periodic reports that accompany license payments to the licensor. Further, the licensor should be granted liberal access to licensee’s books and records regarding revenues generated by the exploitation the content, as well as the right to audit the licensee’s records at least annually. In the case of an audit that reveals a discrepancy of 5% or more, license agreements commonly require the licensee to pay for the cost of the audit along with the immediate payment of any amounts owed that are revealed by the audit.
Tip No. 5: Include appropriate representations and warranties. Adult content licensing agreements involve a type of content, which, if not lawfully produced by the licensor or lawfully exploited by the licensee, could send one or both parties to jail. Because of this each adult content licensing agreement should include appropriate representations and warranties regarding the content and its use, including warranties that the content contains no depictions of minors, that all of the records required by 18 U.S.C § 2257, 18 U.S.C § 2257A and 28 CFR 75 have been properly created and maintained, and that the licensee’s exploitation of content will at all times be lawful.
Tip No. 6 Be prepared for disputes down the road. Prospective content licensors and licensees seldom want to dwell on the topic of dispute resolution while they are in the middle of negotiating. But this is exactly the time when the parties should consider how they will effectively resolve any disputes that may arise under their agreement. Care should be taken to be sure that if there is a dispute, it will be resolved at a location that is convenient for you, and that the adjudication of the dispute will use the laws that will work most effectively in your favor. For example, for American licensors and licensees in content licensing deals involving a foreign party, it is usually not in the American party’s interest to litigate disputes in a foreign territory under foreign laws.
Also, it is important for licensors to be sure that each work licensed has been registered with the U.S. Copyright Office within the first three months of its initial publication, or no later than the time the content is provided to the licensee. If the license agreement is drafted such that any continued use of the content after an uncured material breach of the agreement is a copyright infringement (which is often recommended), the licensor can benefit from the availability of substantially enhanced remedies for copyright infringement if the licensor has registered the work prior to the commencement of the infringement by the licensee. These enhanced remedies include the availability of what is called statutory damages of up to $150,000 per willful infringement of works licensed, as well as the possibility of recovery of attorney’s fees.
Tip No. 7: Engage an attorney experienced in adult content licensing matters to draft/review your content licensing agreement. The topic of adult content licensing is complex and ever-changing in the face of the dynamic economic realities of the adult entertainment business and the constant emergence of new technologies and new ways to exploit adult content. As such, the negotiation and drafting of effective adult content license agreements is as much art and future forecasting as it is a business and legal endeavor. As such, if you are considering the licensing of adult content, regardless of whether you will be a content licensor or a content licensee, I strongly recommend that you consult an adult entertainment attorney with experience in the negotiation and drafting of adult content agreements as early in the process as possible.
This article is not intended to be, nor should be considered to be, legal advice.
Gregory A. Piccionelli is an adult entertainment attorney. He can be reached at his firm, Piccionelli & Sarno, at (818) 201-3955 or at greg@piccionellisarno.com.
