Apr 2021

Content development in the digital age: The option purchase deal

digital tech taskforce hero 1 1024x512 - Content development in the digital age: The option purchase dealWith the proliferation of video streaming platforms, the streaming of, and demand for, digital content continues to grow and more so in this Covid-19 world we now live in. Whilst Netflix together with likes of Amazon Prime Video, Disney Plus, Apple TV, HBO Max and NBCU’s Peacock may be the household streaming giants cornering the marketplace, the digital content streaming marketing is also opening up to other digital entertainment companies providing more niche content, from family/kids, education and lifestyle to LGBTQ, on a global scale. Since consumption of such content is now not just limited to your home TV screens but through any form of mobile devices accessible at any time and any location, the demand for premium content today has never been so good. This content could be in the form of short videos and short films, webisodes, feature films, episodic series, shows etc. Each format created based on an original source material to meet the demands of today’s digital consumer. The search for original content or original source material from which to create original content has gotten more aggressive with competing buyers all paying top dollar. Budgets for content development and acquisition to feed the demand have also increased significantly increased. Generally, content development would entail either licensing or purchase existing content, or (where streamers or studios have deep pockets to do so) the acquisition of rights to create and own original content (whether feature film or series) based on the original source material. This original source material could be a literary novel, comic book, an existing feature film or a TV series. Famous examples include the “Harry Potter” Films based on the eponymous novels by JK Rowling; “Resident Evil” film series based on the Japanese horror video game series of the same name; “Atonement” based on Ian McEwan’s 2001 novel; “Little Shop of Horrors” an adaptation of the musical stage production; and “The Departed” a remake of the HK motion picture hit “Infernal Affairs”; “Game of Thrones” series based on the fantasy novels of George Martin; “The Mandalorian” episodic series based on the Star Wars film series, and so on.

As buyer, streamer/studios will want to acquire adequate rights that will enable it to create, exploit and monetize original content beyond its dedicated streaming platforms eg theatrical exhibition, publishing, theme parks, immersive and interactive new technologies etc. The owner of the original source material will not only be happy to see her own creation come to life whether on screen or otherwise, but will also want to be properly and adequately compensated for selling those rights, and be recognized for creating the material. Whilst content development has several different phases, for purposes of this article we briefly discuss some of the issues in acquiring and selling rights to develop and produce original content (whether film or series) based on original source material.

Purchase or Option

Whether to purchase or option the right to develop and produce a feature film or series based on an original existing work (eg. novel, feature film or series) hinges on the buyer’s finances and readiness to proceed. An outright purchase would mean forking out the full purchase price at the outset. The buyer obtains a full assignment and transfer of the rights (and what these rights are, will be discussed below), and becomes the absolute owner of the rights. She is then free to deal with it as she deems fit without any accounting or further payment to the rights owner.

If, however, the buyer is unable to commit to an outright purchase initially but would nonetheless like to be given time to develop the story with a scriptwriter, she could acquire an option to purchase. For an initial option fee, the buyer secures an option to purchase the rights which is effectively an exclusive license granted over an agreed period. During this period, the buyer can do several things: to develop the feature film or series based on the original source material, source and secure the necessary financing for the purchase of the rights and production of the film or series, and assemble a production team. When ready to do so, the buyer will exercise the option before expiry of the option period by paying the owner the full purchase price.

Rights

The current demand for content has meant that savvy rights owners are carving out rights instead of making all-rights deals with potential buyers.  Where streamers have a limited service footprint (eg. a South-East Asia), rights owners may prefer to grant rights for developing and producing certain specified language episodic series and/or feature films or limit the exploitation only to the streamers own platform. But for a studio with a wider service footprint and distribution muscle, it would seek to acquire all rights for exploitation in all media or a more comprehensive bundle of rights at least. Included in these bundle of rights are the ancillary rights, such as merchandising, soundtrack, novelization, theme park and publishing etc. Naturally, the buyer will want these rights in relation to the original content it is intending to develop and produce. Careful consideration is therefore needed when limiting the exploitation of these rights based on the original source material and/or the feature film or series developed and produced by the buyer. Any potential and unavoidable overlap should be properly managed and cleared defined in the agreement.

There is also the issue of derivative works (such as remakes, sequels and prequels, or further seasons of the series). The streamer/studio will want to own the right to make all derivative works. On the flip side, the rights owner may prefer to limit the right to produce just one remake or a second season of the series based only on the elements of the feature film or the first season (and not on the original source material), and no more. Added to this complication is the fact that there may be third party controls over the grant of derivative works (eg. author, financing partners, directors of the original source materials) resulting in further layers of competing interests to manage and resolve.

Pricing

The difference between an outright purchase deal and an option/purchase deal is that the fixed payment is paid upfront in the former and in the latter the payment is split into an initial payment of an option fee with a final payment of the purchase price. The purchase price is payable upon exercise of the option, failing which the option will lapse.  The rights owner may also negotiate for a contingent or ongoing participation based on the revenue derived from the exploitation of the rights (film or series) granted to the buyer. If derivative works are granted as well, there could be a separate fixed fee and participation applied for each derivative work.

Chain of Title

Particular attention should be given to original source material from rights owners who are not accustomed to using written contracts but instead rely on oral agreements and handshakes to seal a deal. The seller of the rights may not necessarily have been the original creators but may have become owner of the rights in the original source material only after acquiring ownership rights from the original owners or creators. The buyer is minded to ensure that proper due diligence is conducted on the rights owner’s claim of ownership and her ability to not just grant the option but to also subsequently transfer the relevant rights to the buyer upon exercise of the option. Is the rights owner also in a position to grant the derivative and ancillary rights? Are there third parties that might having competing interests in the derivative works? Will clearances and approvals need to be obtained before closing the deal? The buyer could of course rely on the usual reps and warranties as to the rights owner’s title and ownership spelt out in the agreement, but it is always still prudent to make the appropriate checks to avoid incurring all the hassles of protracted legal proceedings and cost.

Reversion

Despite the option being exercised and the rights fully paid for, the rights owner is interested to see that the content that the buyer was intending to develop and produce based on the rights granted is eventually and actually made and exploited by the buyer. This is especially so since the rights owner would have a contingent financial participation in the revenue if that film or series was produced; or the rights owner may wish to seek out a more compelling offer for the same rights from other third parties. In view of these contingent scenarios, the rights owner may negotiate for a reversion of the rights previously sold to the buyer if for whatever reason the film or series is not produced by the buyer. The reversion would kick in if the buyer has failed to commence principle photography after a period of time has lapsed after exercise of the option. On reversion, the rights owner will regain full control of the rights previously granted and will then be able to offer/grant those same rights to another streamer or studio. The buyer may, however, retain a financial stake in the rights reverted. What that stake is will be open for negotiation and could include the fees previously paid by the buyer to the seller, development cost incurred by the buyer and interest.

Conclusion

As with any commercial agreement, whether the deal should be a purchase or an option to purchase, what rights to sell or acquire, what price to offer for the rights or the amount of ongoing contingent participation based on revenue derived from exploitation of the film or series etc, is dependent on the relative bargain positions of the buyer and the rights owner, the popularity of the original source material and the economics of making and exploiting a feature film and/or series based on the original source material. What is clear though is that as the demand for content and the demand to create content based on original source material continues to heat up, these types of content development deal structures will be more common. This will also open up more discussions and recognition of the different rights in original source material that could potentially be exploited and the better management and protection of these rights.

 

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Written by: Michael Leow, Partner