Legal Impact Report 2012

Talk of the digital revolution seems to have hung over Hollywood for eons, so one might think clarity is just around the corner. But entertainment lawyers indicate that there is more confusion than ever about the opportunities, dangers and dynamics of digital dealmaking.

Legal eagles are trying to discern where the revenue streams will come from in a business still defining itself.

In the first three months of 2012, digital revenues soared to $1.2 billion, from $698 million a year earlier, according to the Digital Entertainment Group. Subscription streaming increased five-fold. There were also jumps in electronic sell-through and VOD. That’s promising, but not definitive.

As Tom Ara of Reed Smith says, “The truth is that digital is not (yet) a replacement for physical homevideo, but we all know that it will be.”

In the meantime, some legal reps are bullish on linking clients with digital projects, while others completely avoid them — and still others are intrigued, but wary about spending too much time on something with so little return.

Name-brand talent is in obvious demand for original digital content, but they are also the ones more likely to fall into a contractual bind.

“Many of the digital production companies and distribution outlets are looking for top talent,” says Barbara M. Rubin of Peter, Rubin & Simon. She adds the clash of old and new can create conflicts. “The talent can’t be committed to a venture that’s going to eventually put them in a breach situation with their current employer.”

She faced that with a deal she was trying to make for a series lead actor to do webisodes. The problem is the production company was insisting on a contract clause to assure the thesp was available exclusively if the webisodes got a pickup as a primetime show.

“He could not commit to a webisode series because to do so would put him in a potential breach of contract,” Rubin says. “So the deal fell apart.”

Those are just some of the challenges in writing contracts for an emerging industry, still being monetized and with uncertain revenue streams, but with great expectations of future returns.

And as different types of deals continue to emerge, many will be tempting. “We’re starting to see people who create original content have their own YouTube channel. and they can make half a million a year doing that,” says Jeff Cohen of Cohen Gardner. The presumption that there will be a payoff only adds to the pressure to make a project pan out in the present. Instead of standing on their own, many webisodes are being used as an investment tool, with the end goal of a network deal. So in exchange for lower upfront payments, writers, actors and directors often want to control the copyright or reap bigger profits, which runs up against a production company’s position. That tends to be: “We put up the money, so we own it.”

Contracts for digital deals also tend to be complicated, as standard terms are still being defined.

“The paperwork can be as extensive for digital media as it is for a primetime network series,” Rubin says. “I have had business affairs executives at agencies call me and say, ‘Are you kidding me? I am going to do all this work for $50 an episode?’ Much of the contract language has to be revised and pared down and tailored appropriately. The volume of paperwork is, in my experience, too extensive for something so speculative.”

As counterintuitive as it may sound, one top entertainment lawyer, who asked not to be named, said he’s come to advise clients not to get involved in digital ventures.

“My own view is more money will be wasted than will be made,” he says. “I’m more worried about clients wasting their time or getting in over their heads.”

Often underestimated is the need for marketing heft, especially without studio or network involvement, he says. “Most talent is not that entrepreneurial. It takes someone with a little more initiative than most.”

Amazon is hinting at major forays into original content. Netflix is already making some. YouTube is launching a series of entertainment-focused channels. Even then, they face the challenge of letting consumers know they exist.

One area where the returns show some promise is the aftermarket of home entertainment. But even as studio and Internet players hash out who gets to exploit rights and when, no one is altering the way that artists are being paid, as much as guilds have focused on digital in their basic agreements. In negotiations, studios are treating digital delivery as an extension of homevideo — and by and large talent is paid at a comparable royalty rate.

“People are conscious of the fact that digital revenue is becoming a meaningful piece of the pie,” says Bryan Wolf of Ziffren, Brittenham. “If the market develops to the point where there are a lot of competing digital distributors like Netflix and Amazon, that obviously that changes the supply-demand equation. And it may lead to more profits and more favorable deals for talent and content suppliers. New players are not as entrenched in their thinking of how these deals need to work.” There’s every expectation that downloads and streaming and apps and whatever else will have so upended the business that it will alter the dynamics of dealmaking and create new opportunities.

“This space is really the Wild West,” says Reed Smith’s Ara. “It’s a cliche, but it’s true — so much change in so little time.”

Peter Caranicas contributed to this story.

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