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All About Licensing: Part I

by Justin Sevakis,

Other parts in this series:
Part 2
Part 3

Licensing is as essential to the American anime business as breathing -- it precedes every new release, every translation and subtitling job, every line a voice actor speaks in a booth. New licenses are announced all the time, each one drawing varying amounts of cheering, armchair quarterbacking, and discussion.

Licensing an anime series isn't much different from licensing any other kind of film or television program, a time honored process steeped in a century of case law and a mountain of legalese. The process of licensing a show is not an easily broached subject to begin with, but since pretty much every contract also features a non-disclosure clause, even discussing it in public is usually verboten. As a result, virtually nobody knows what it takes to actually license a title.

Luckily, as a result of certain legal proceedings in the past year, we now have an entire licensing agreement in the public record. We can now explain every part in the process of licensing an anime, and how that license is maintained in the years following.

Why Licensing Happens

But we're getting ahead of ourselves. The contract comes at the end of the process. Before that, an elaborate mating dance must occur. Licensing a show is, after all, something akin to a marriage: a binding, legal agreement between two entities with the intent of doing something together that the two couldn't do separately. It's a long-term relationship that, under ideal circumstances, is built out of mutual trust and respect.

When the motion picture industry first started to develop in the early part of the 20th century, the world seemed like a much bigger place than it does today. An overseas voyage would take weeks instead of hours. Film could only be seen in theaters, and was stored on highly explosive 35mm film that weighed a good 70 pounds for a single feature. The logistics of distributing a film was insanely complicated, requiring detailed knowledge of local freight routes, train schedules and the constant nightmare of maintaining all those reels of film (which could only be played a certain number of times before getting beat up).

In that era, the idea of a company acting as a distributor in a foreign land seemed positively unthinkable. The logistical challenges were too great, the cultural barriers too tall, and communication too slow and unreliable to even think about trying to do such a thing. And yet, in the silent era, great works were being made all around the world. With just a few splices to replace inter-titles with a local language, any film could be quickly and cheaply adapted to a local market. With money to be made, a company anywhere in the world could license their film to local distributors in every country and reach a far larger audience. The film would benefit from the local expertise of the releasing company, and with any luck, they would have a hit on their hands and both companies would profit handsomely.

In the intervening years, the medium and the speed of communication has changed a lot, but the underlying reasons to license a show haven't. A local distributor can usually be trusted to know and understand the market in a way a foreigner never could. They can establish relationships with retailers and TV networks and tailor advertising to local cultural sensibilities. They can interact with customers and form a connection that would be insanely difficult for a foreign company to achieve. In the past, a local distributor would also be able to adapt (i.e. edit/rewrite) the content of the show itself to better suit the local market, though luckily this happens a lot less these days.

The Business of Licensing

So, say you're the producer of an animated TV series in a small island country somewhere in the Pacific. You hear that there is a market for your product overseas, and you want your new show to be seen by audiences around the world. How does one go about finding local distributors? And how do they find you?

The answer is surprisingly low-tech: meetings and phone calls. Producers cold-call or cold-e-mail companies that have released similar shows in their areas of the world before, and ask if they want to take a look at their shows. This is a big job, and requires pretty decent English skills. If a producer is too small to handle it themselves, they might hire a sales agent to handle this part of the process. They prepare screener copies, packets of flyers ("one-sheets") promoting new shows, and fancy catalogs of old stuff that might still be available. Some distributors like to license a bunch of TV shows or movies at once, so having a large amount of good, available content can be a real asset to getting a deal done.

And then there are trade shows, such as MIP-TV, American Film Market, TIFFCOM (attached to Tokyo International Film Festival), NATPE (National Association of Television Program Executives), and just for anime, Tokyo Anime Fair. These trade shows are huge affairs that are, by day, semi-formal meetings at booths (complete with info packets, screeners, and business cards), and at night turn into fun, casual grown-up talk. Much alcohol is consumed, and several hotel rooms are fouled.

For new distributors, these confabs are essential to getting into the content business -- it's an easy place to meet a number of influential producers, get to know them, and also meet peers and learn from them. The people doing deals are professional socialites. The friendships and acquaintences that begin at a convention often lead to decades-long business relationships. Likewise, an ill-advised bong hit at a company hospitality suite can result in nobody ever wanting to do business with you again.

Time to Do A Deal

Like any relationship, each agreement is its own story, with its own complications. The easiest way to explain it is to tell one from start to finish.

So let's say the new company AniProducer Co., Ltd. just made their first late-night TV series, Saliva Princess. They sent an English speaking representative to Tokyo Anime Fair, and there he met the owner of the new startup company 1Up Pictures LLC, who happens to be an American company that's just getting their feet wet in the DVD business. After a long night that ended in drunken vomiting at the classiest izakaya in Odaiba, the two are now best friends and the rep is CONVINCED that 1Up is the perfect company to release the beloved Saliva Princess in the U.S. And more importantly, the dude from 1Up seems to be interested. He thinks the market for saliva fetish anime is woefully underserved.

So the next week, the guy from 1Up e-mails the guy from AniProducer. The e-mail is a formal proposal:

"We are requesting ALL RIGHTS, including but not limited to, Video-On-Demand (via cable or internet, including free, subscription or paid), broadcast rights (including terrestrial, cable, satelite and IPTV), download-to-own, videogram (including DVD, Blu-ray, and any forthcoming technologies not yet invented), mobile, theatrical and merchandising."

The AniProducer rep shivers. That's a lot of rights to give up. He reads on.

"We will pay a minimum guarantee of US$50,000 for all 12 episodes, plus cost for delivery on HD-CAM, and a 15% share of adjusted gross revenues. We are requesting a term of seven years with a 6-month sell-off, with territory covering the US, Canada and Mexico. 50% of the MG will be payable upon signing, and 50% upon release of the first volume."

What does all that mean? Let's break it down…

            • Minimum Guarantee is the up-front license fee. The name comes from the idea that, should the release completely tank, that's the minimum amount they'd ever have to pay for the license. Many licensors ask for a huge minimum guarantee, since publishers can easily fudge the numbers when it comes to royalties later. A bird in the hand, as they say.

            • Delivery on HD-CAM is literally having someone duplicate the master tape (this can be up to US$300 per tape, which typically has 2-3 episodes on it), and FedEx it overseas. Not a big deal for a movie, but for a TV series that can add up quickly. Nowadays a publisher is just as likely to ask for broadcast-quality video files on a hard drive, since HD-CAM decks cost close to US$50,000.

            • Adjusted Gross Revenue is what's left of the sales revenue, after the publisher pays themselves back for marketing, manufacturing, production and the minimum guarantee. If a show bombs, or is too expensive to bring to market, that could be nothing, but for a hit, that could be quite a bit of money. 15% is a pretty low split – most licensors ask for 20%, and some go as high as 30%.

            • Term is how long a license lasts. For home video or all-rights, 7 years is pretty standard, though 5 or 10 years are both common as well. For TV or online-only, it can be as short as 1 or 2 years, though in the case of online, some contracts can automatically renew without having to renegotiate.

            • Sell-off is a period of time after the Term ends, where home video publishers are not allowed to print any more copies, but can sell (or liquidate) whatever stock they have on hand. Six months is pretty standard.

           Territory is the chunk of the world where the publisher is allowed to sell the show. The US and Canada usually get sold together (though not always), or this can be broken up by continent, official language (“all English speaking territories” is a phrase that gets used a lot).

There are other details for theatrical and TV that the 1Up guy neglected to mention. For regular, linear TV broadcast, there's usually a restriction on the number of times each episode can be played. Theatrical revenues and costs are broken down separately. But it was silly to even ask for those things – nobody is going to see Saliva Princess in a theater.

The AniProducer rep breaks out a calculator and discovers that 1Up is offering just over US$4,000 per episode, which is not a lot. But at least he's offering to cover the cost of copying and FedEx'ing the master tape, which at least cushions the blow.

The rep knocks on the CEO's door and pokes his head in. He explains the offer to the CEO, who looks nonplussed.

"Does Funimation want it?" The rep shakes his head. "What about Sentai?" Nope. "NIS? Viz? Right Stuf? Discotek?" None of them even wanted to see a screener. Saliva just wasn't their thing.

The CEO takes a deep breath. "So they're it, huh? Well, it can't be helped. But try to negotiate at least 20% and US$5,000 an episode. And don't give them broadcast, a company that small won't know what to do with it." The CEO wasn't really counting on a huge international sales price anyway. The Japanese DVD distributor shrewedly packaged the first disc with a large plastic balloon filled with water and corn starch, turning it into an instant bestseller.

So the rep gets back on his computer and replies:

"Thank you very much for your proposal. We would like to offer the following counter-proposal..."

Time to Put It In Writing

These are the broad strokes of the agreement – the basic structure of the deal. Once that's agreed upon (and cleared by the production committee), the two could write up a “deal memo”, which is basically just a formal one-page not-really-a-contract that they both sign. Deal memos are done so that work can get started while the contract is still being worked out.

However, most Japanese companies don't really like doing deal memos. They're an unnecessary step, and they require almost as many approvals and hand-holding as the full contract, so it's a lot easier just to cut to the chase.

So in this case, the next step is to work on the contract. We'll dedicate our whole next installment to that. It could take a while.

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