Filtering by Category: "minimum guarantee"

Your Slice of the Pie Part 1 (Gross and Net Profit Concepts in Creator Owned Deals)

Added on September 26, 2012 by Gamal Hennessy.

A couple of weeks ago I introduced the different types of rights you could license as a creator and the different types of revenue you can get from a licensed work. In that post I hinted that there were specific concepts that impact how much you’re paid on any given deal. This post (and probably the next few posts) will go into more details about the economics of creator owned deals.

Types of Revenue

As a refresher from the earlier post, I need to point out that the various ways that creators are paid in creator owned deals. The three major ones are:

A royalty is a percentage that the artist earns for every finished unit that is sold. For example, an artist might receive 30% of every one of their comics that is sold to the public.
An advance is money that is paid before the work is finished. For example, a writer of a novel might receive money up for her novel based on the proposal not the finished product.
A minimum guarantee (MG) is money paid up before the work is finished, based on anticipated sales. For example, if a toy company plans to sell a new licensed toy for $10 and the creator gets 10% of that sale, then the creator gets $1 per unit sold. If the company expects to sell 100,000 units, then the MG that the artist gets for this deal is $100,000.

Definitions of Revenue

In general there are two ways that revenue is calculated for your royalty or minimum guarantee. There are gross profit and net profit.

Gross revenue or gross profits is the pure income that a product or service generates.
Net revenue or net profits is the income that a product or service minus certain expenses.

In the vast majority of cases, publishing deals are calculated by net revenue. The key for a creator is to know what is being included in the definition of net revenue and avoid situations where the expenses are always greater than the revenue generated.

Examples

Question: Let’s say you produced a comic called the Greatest Comic Ever (GCE for short). A publisher says they are willing to make a deal with you to publish GCE. They offer you 50% the wholesale profits as part of the deal. The comic sells for $2 wholesale. Is this a good deal?

Answer: That depends. The truth is there is no way for you to know if this is a good deal or not until you understand how the contract defines profit.

If the contract says you get 50% of the gross profits then you get $1 per book sold.
If the contract says you get 50% of the net profits then you have find out what is deducted from the gross to calculate the net.

The Net Revenue Trap

It is a fairly common business practice to deduct the cost of goods sold from the gross to determine the net. Cost of goods sold means whatever the publisher has to pay to produce and distribute your book. Those costs can include editing, printing, shipping, advertising, returns and a few other items. Most publishers track their costs in a document called a profit and loss sheet, so they know what percentage of every book goes into the cost of goods sold. Many publishers will list exactly what goes into the net calculations. This is helpful for figuring out where the money is going.

The problems occur when the creator has no idea what goes into the net calculations or the definition of net is so broad that it wipes out any potential profit for the creator. In the most unscrupulous contracts, the publisher will creatively expand the definition of net revenues to the point that the creator never gets any profit for his work even if it sells millions of copies. For example, if the wholesale price of GCE is $2 but the net deductions are $3 per book then the net profit is -$1 per book. That means you get $0 no matter how many copies the book.

Playing Your Position

It is unrealistic for an artist or creator to understand the nuances of licensing revenue, especially when they first enter the market. You need to focus on your craft and create the best property you can. You also need to have access to financial and legal professionals who can explain potential deals to you and allow you to make informed choices. That is why it pays to break down each contract and understand its implications before you move forward.

Next week, I’ll try to explain the concepts of recoupment and payment cycles to give you a better idea of when you can expect to get money from a deal.

Best

Gamal Hennessy

PLEASE NOTE: THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. IF YOU HAVE A LICENSEING OR INTELLECTUAL PROPERTY ISSUE, DISCUSS IT WITH YOUR LEGAL ADVISOR OR CONTACT C3 AT gamalhennessy@gmail.com FOR A FREE CONSULTATION.

Addition by Division (Separation of Licensing Rights for Creator Owned Deals)

Added on September 14, 2012 by Gamal Hennessy.

by Gamal Hennessy

Most of the contracts that my clients send me from publishers are fairly broad blanket licenses. Although the language of each one is different, it boils down to the same concept; the publisher looks for the artist to license all of the rights to all of their property in exchange for one fee. While this simplifies the contract for both parties, it also limits the earning potential for the creator by reducing the number of licenses his comic can exploit. A more experienced and profitable approach is to divide the property into as many licenses as possible to maximize the revenue and minimize the dependence on one licensing partner.

Separation of Power

As I discussed in an earlier post, creators can use the trademarks created from their work to license to product manufacturers. Instead of granting blanket rights to the publisher of the print comic, a more granular division of rights gives the creator more options and potentially more revenue. Licenses can be divided in the following manner:

Property: or what title or characters you are actually licensing. A license could be for all the characters and settings in a particular book, but it could also be limited to just one character or a group of characters or in some cases just a particular image from a particular book (like a cover image)
Licensed Good: or what you are permitting the licensee to create. You can be as specific as you like with the type of license you are providing. For instance you could grant a broad license for “clothing” or make it narrower by limiting it to “T-shirts”, “men’s T-shirts” or “men’s short sleeve cotton T-shirts”
Term: The time limit on how long the license will last. This is usually measured by years, but it could also be as short as a few months.
Territory: The geographic area that the license is limited to. This could be something as broad as a worldwide license, or it could be limited by countries (i.e. USA), groups of countries (NAFTA or the English speaking world) or continents (Europe)
Outlet: This is the type of venue that the licensed can be sold in during the term in the territory. It could be a broad concept like “retail outlets” or “online sales” or it could be a specific type of store (high end, mid market or discount chains)

For every license granted, there is a separate fee and a separate royalty for every item sold. There is also a separate negotiation for rights.

Example

Let’s suppose you have a popular title and you start negotiations with a clothing company to produce T-shirts with your main character. There are several approaches you can take including:

You might have granted the merchandise rights to the publisher, which means you get a portion of what ever he reports to you for a deal you had little or no input on.
If you kept the rights for yourself, you could grant the T-shirt company a world wide perpetual T-shirt license for a $10,000 advance and an 8% royalty off the suggested retail price.
If you split the rights up, you could grant the T-shirt company a two year, US only, mass market T-shirt license for a $5,000 advance and an 8% royalty off the suggested retail price. You could then go to a Canadian company and do the same thing. And do it again with a European company, and an Asian company. Instead of one advance of $10,000 you could be looking at $20,000 in advances from four companies for the T-shirt rights alone. You could potentially have dozens of clothing, toy, game, poster and other licenses for your property with licensees all around the world that generate revenue that dwarfs what you make from the actual book, all because you separated the licenses to increase the revenue.

Enforcement

While it is a giddy thought to think that your character could be on licensed products from New York to Cairo to Hong Kong, keep in mind that there is significant work involved in keeping track of a vast licensing empire. You not only have to keep track of what license you granted to which company, you have to monitor each one to make sure they don’t violate the agreement. It is not easy to make sure your American licensee isn’t shipping goods to South America, selling them and then not reporting the sales to you or paying for them. It is even more difficult to monitor and keep track of counterfeit knock off goods in far flung countries that will reduce your revenue and dilute your license. The cost in time and money to manage a diversified licensing plan is huge, but think about it; if your book was that big wouldn’t it be worth it to manage and control the licensing program?

Negotiating Power

I have already pointed out that new artists are often not in a position to reject a blanket license and negotiate divided license rights. When you are trying to get enough money to pay your bills, you can’t worry about holding onto the bobble head doll rights for South East Asia. But if you want to make the most of your creator owned deals or you are in a position to choose between a partner who wants a blanket license versus one who is more flexible with the rights structure, you might be inclined towards addition by division.

Best

Gamal

Get What You Give (Rights and Revenue for Creators)

Added on August 21, 2012 by Gamal Hennessy.

By Gamal Hennessy

A contract is basically an agreement between one or more groups for the exchange of resources. The exchange could be time and skill for money, goods for services, property for future gains or any combination of those things. The best agreements exchange roughly equal resources. The worst ones have one side trading large amounts of resources for little or nothing in return.

This is the problem that artists run into with many of the contracts that I see. The most important service I provide is showing my clients what they are giving up in comparison to what they are getting. I’d like to provide an overview of the different types of rights and revenue streams as a general overview for creators looking to get their projects into the market.

Types of Rights

As discussed before, copyright law gives the creator of an original work the right to benefit from the distribution of that work. There are various types of ways currently available for creators to exploit their work, especially when we consider comics. Some of the major distribution methods include:

Publishing (Print, novelization and Digital)
Public Display (gallery displays and public performances of some of the methods listed here)
Theatrical (Movies whether live action or animated)
Television (including network, basic cable, premium cable, PPV whether live action or animated)
Home Video (including DVD, Blu-Ray, etc.)
Live Performance (including Broadway performances and theme park performances)
Interactive (including console computer or mobile video games)
Merchandise (as discussed in last week’s post)
Audio (soundtracks and audio novelizations)

As new forms of distribution are created, new rights are created for the artists. These rights are universal, but they can be divided or carved out by geographic area, time frame, distribution channel, language and other factors. (This division can be complicated, so I’m going to save that for another post)

Types of revenue

Just as there are different rights that creators can use to get their work into the market, there are various ways that they can be paid. Creators need to focus on three ideas:

A royalty is a percentage that the artist earns for every finished unit that is sold. For example, an artist might receive 30% of every one of their comics that is sold to the public.
An advance is paid before the work is finished. For example, a writer of a novel might receive money up for her novel based on the proposal not the finished product.
A minimum guarantee (MG) is money paid up before the work is finished, based on anticipated sales. For example, if a toy company plans to sell a new licensed toy for $10 and the creator gets 10% of that sale, then the creator gets $1 per unit sold. If the company expects to sell 100,000 units, then the MG that the artist gets for this deal is $100,000.

These are broad revenue concepts. They are often altered and refined by concepts like gross, net, recoupment, offsets and other variables. (This is another complicated subject that I can talk about later.)

Choices that Artists Must Make

In certain creative circles, the types and amounts of revenue are fairly straight forward. Writers for some mediums often get an advance. A work for hire artist for comics often gets a page rate. There is more confusion for creators pursuing creator owned deals. There is often no advance, no MG and a blanket royalty rate for all forms of distribution. This puts them creators in a dangerous position since the lack of up front money and the uncertainty of any profitable sales in the future means that the creators are really working on spec while at the same time giving up all their rights to their property.

From the publisher’s perspective, it is understandable why they would take this stance in their contracts. Publishers protect themselves from risk by limiting exposure to projects that might not be financially viable. At the same time, they maximize their potential gain by securing as many rights as possible for projects that are financially viable. Artists need learn the same lesson. They need to counter the publisher’s position by attempting to limit the rights that a publisher gets for projects that are financially viable and maximizing revenue for every project they do.

I know negotiating power is often limited for artists. But having a clear understanding of the relationship between revenue and rights and clear goal of where they want to go can help maximize their limited negotiating power and increase their chances of success.

Best

Gamal