So you’ve sold your TV show to a broadcaster in territory X. The hard part is over. Now your thoughts turn to licensing. You want a crack at the Pokémon and Teletubbies merch action. And why not? After all, licensing seems like such easy money: you charge manufacturers a fee granting them the rights to create a toy or T-shirt featuring your show’s characters, and every time someone buys one of the toys, you receive a percentage of the sale. With no overhead costs to worry about, you sit back and watch the money roll in, right?
Wrong. Maybe in the days preceding the first Star Wars movie things were so simple. Today however, kids entertainment licensing is a highly sophisticated and competitive industry, and new kids shows are toughest to sell. Even if you can convince companies to produce merchandise, those products will have to battle a universe of well-entrenched brands backed by deep-pocketed entertainment behemoths like Disney, Warner Bros. and Nickelodeon for the ever-shrinking real estate at retail.
That’s just one of myriad potholes that await producers who decide to embark on the road to licensing. You’d think it reason enough to discourage anyone from entering the business. And yet, the apocryphal licensing lucre to be had keeps a steady stream of hopefuls willing to try their luck. With that in mind, KidScreen has pulled together a licensing primer designed to help producers gauge the market reality of their Pokémoney-inspired pipe dreams. The first step for producers, of course, is to realistically evaluate their property for its licensing potential.
To license or not to license:
TV rules! Although there are some exceptions, if you haven’t sold your show to a broadcaster, don’t bother trying to set up a licensing program. If they exist, a property’s performance numbers from another territory-such as ratings or product sales, for example-can help you market your show to the trade in a new territory. A show based on a book property that’s well-known in the territory will also help your cause, but ultimately, ‘you’ll need the media engine of TV to drive your merchandise program,’ says Sid Kaufman, executive VP of worlwide merchandising at Canadian toonco Nelvana.
The better the broadcast agreement you’ve secured for your show, the more licensing interest it will generate (and the more leverage you’ll have when it comes time to negotiate deals with an agent and, by extension, your licensees). Ideally, a producer needs to have sold 26 half hours of their show to a strong broadcaster (in a good time slot) before potential licensing partners and agents will want to get involved, says Katarina Dietrich, director of entertainment at London-based Copyrights Promotions Licensing Group (CPLG), one of the largest independent licensing agencies in Europe.
Hiring an agent
Once you’ve sold the show to a broadcaster, your next step as the producer or owner of the property is to make the all-important decision to hire an agent to help manage the licensing programs in specific territories. Join the queue trying to find an agent who specializes in your property’s niche, yet who doesn’t already rep cookie-cutter propositions or have vested interests in competitive titles. Though some of the larger studios handle their licensing in-house, most will at some point also require the services of an agent, especially in foreign territories.
When looking for agents, there are several sources producers can consult. Industry trade org LIMA (International Licensing Industry Merchandisers’ Association) publishes an annual resource directory containing listings for agents, as well as the properties they represent. (Members can also access this info from LIMA’s website www.licensing.org.) Also on the Net, there are B2B sites, like the WHN Exchange and FastTrends.com, which list names of indie agents. Another good place to shop is trade shows that agents attend regularly, such as MIPCOM, The Licensing Show and Toy Fair.
Mary Graziano, manager of licensing at Montreal-based Cinar, suggests asking broadcasters for recommendations. If an agent already has a close working relationship with your broadcast partner, says Graziano, it helps when you’re trying to coordinate your merchandise program with the launch date of your TV show.
Increasingly though, broadcasters are nominating themselves to manage the merchandising program, which can pose both problems and benefits for producers. (For more on this subject, see ‘Licensing your property across the territories,’ page 130.)
It’s crucial that producers select the right agent from the get-go to avoid causing possible long-term injury to their property down the road. The dead-obvious route is to get references from broadcasters, retailers and other licensors they’ve worked with in the past. Early in the interview process, ask the agents for a marketing plan, if they haven’t already provided one. Comparing marketing plans allows producers to weigh the agents’ thoughts on how they would sell the property in their territory, what sorts of products it might translate into best, possible promotional opportunities, and what demographic group the property and the products would appeal to.
‘We’ll rarely work off the marketing plan an agent provides us initially. We look at it to get a sense of how the agent thinks and how well he understands the property,’ says Nicole Kaufman, director of international licensing and merchandising at Nickelodeon. Nevertheless, producers should try to get as many plans-replete with sales projections-as possible, says Cinar’s Graziano. By having competing proposals, you’re more likely to land a better agent (not to mention gleaning more info on the various territories).
Producers need to determine if the agents are the right fit. Have they represented a similar property to yours in the past? If they have, that may work in their favor. Then again, a show that’s too similar may impede your agent’s ability to sell your show. How many properties do they currently manage? If an agent has too many, he or she may not be able to dedicate enough time to yours.
There are pros and cons to using agents. On the plus side, you’re not dealing with the overhead that accompanies putting your own people on the ground. As well, agents are presumably familiar with local tastes and can help incorporate that knowledge into the strategy for your licensing program. On the minus: all agents are hired guns. They represent other licensors, many of whom are your competitors. ‘It’s really important to remember that agents get paid only on what they sell. In some cases, that could mean an agent is out in the market with a much more aggressive program than you’d like,’ says Nick’s Kaufman. The surest way to keep your agent in check, she says, is to clearly spell out the strategy you want them to follow in your agreement. Speaking of which, it’s time to sit down and hash out the terms of the agent’s contract.
Negotiating the contract with agents:
Known as the representation agreement, the contract with your agent stipulates what they will provide you, the licensor, and under what terms; it is here that serious attention to detail and awareness of what’s happening in the market literally pays off. While no two contracts are likely to be the same, each will have several key sections in common, starting with:
Agent Services: Typically, it includes signing new licensing and promotional agreements for your property, collecting royalties from licensees and coordinating marketing efforts with licensees, retailers and broadcasters, so that the launch of your merchandise program coincides with, or follows, the TV debut of your show.
Territories: This clause lists territory(s) in which your agent is allowed to sign new licensees. Increasingly, this can be a contentious area, especially for agents based in Europe, where trade between countries has become more liberalized. (For more see ‘Licensing your property across the territories,’ page 130).
Rights: This section of the contract details the rights to the categories you’re allowing your agent to sell in the territory, along with a list of ones the agent can’t sell. Known as the reserve rights clause, it will include rights that you as the licensor either don’t own or don’t want to give to the agent, says Tonya Lindo, who, as manager of international licensing at Nelvana, oversees contract negotiations with the prodco’s agents. For instance, if your show is based on a publishing property, the publishing rights would be owned by the underlying rights holder, in this case, the publisher or the author. Similarly, live theatrical rights, which agents may request because they want to launch a musical based on your property, may not be available either. Often those rights are tied up with the musicians who wrote the score for your show, says Lindo.
As for unencumbered rights you as the licensor should hold onto, toy and interactive top the list.
Most licensors will try to sign on global licensees for both categories, for two reasons: First, companies require long lead times to create both products. Often a toyco will need info on a show’s plotlines and characters up to two years before it airs. For competitive reasons, the fewer parties you divulge this information to, the better, says CPLG’s Dietrich. (It’s important that the categories you list in the reserve rights clause are clearly defined, to avoid hampering your agent’s ability to sell licenses down the road. ‘Interactive, for example, is often an ambiguous category when it comes to merchandising because you can have an electronic handheld toy, which is interactive, but that’s obviously not the same as a CD-ROM you’d use with your computer,’ says Nelvana’s Lindo.) The other reason for holding on to these rights-no doubt to the chagrin of agents-is money. Companies pay large sums-in the millions-for global toy and interactive rights, and selling them yourself means you don’t need to pay your agent a fee.
Additionally, CPLG’s Dietrich says it’s also common for producers/licensors to retain home video rights, which they will use as leverage when they’re trying to sell the broadcast rights to their TV show.
Agent Compensation: All agents work on commission. Though it can range from 25% to 40%, the average is usually 30% on all monies the agent takes in on deals they sign in the territory. There is an exception to this. As the licensor, if you sign a deal that impacts your agent’s territory, you will have to pay them a fee. ‘If we do a worldwide toy deal that includes their territory, because we’ve signed them on as an exclusive agent, we’ll pay them maybe half of their normal commission on product sold in their territory’ says Lindo.
In some cases, licensors are demanding agents pay them an upfront fee for the right to represent their property. If there’s enough of buzz surrounding your property, you can yield an advance from agents, says Nick’s Kaufman. Some licensors, like Nelvana for example, are starting to make this mandatory for all agents, as a way of ensuring that they will remain committed to selling its properties for the duration of their deal. Depending on the rights the agent has, this fee can range from US$10,000 to US$1 million, says Lindo.
Also near the section on payment, the licensor should include a list of thresholds the agent needs to meet whereby they’re bringing in enough sales through the deals they sign in the territory. The section will also include protocol agents need to follow, for things like administering agreements with licensees, collecting royalties and product approval. It’s basically a performance or an out clause, which allows you to terminate the contract if you’re unhappy with your agent.
Trademarks: A list of trademarks for your property should be attached to your agent’s contract. It’s important that you have registered your trademarks before your show airs, and well before you start thinking about licensing. You’ll need to register on a country-by-country basis, which can get expensive, but the alternative is often more costly. If you haven’t registered the trademarks in a territory, companies can create product using your property’s likeness without having to pay you a dime. Or worse, someone could register the trademark for your property in their territory, and make you buy it from them or force you to change the name of your property in that territory.
‘It can get tricky,’ says Nick’s Kaufman. ‘If you have a property airing in the U.S. and it’s popular, it immediately sparks interest internationally. So you really have to start protecting that property as early as possible, by registering your trademarks in as many countries you anticipate doing business in,’ she says.
Other Clauses: Internet. Increasingly, agents are asking to include these rights in agreements, which allow licensees to sell their products on the Net.
Many licensors have refused to grant them though, because they lead to territorial rights problems. Here’s why: if a licensee in the U.K. produces Snoopy socks and sells them on the Internet and someone in Canada buys them, then the Canadian-based sock licensee’s exclusive rights to make and sell Snoopy socks in Canada have been infringed upon. Consequently, that licensee could demand compensation from the licensor for lost sales.
Product Liability Insurance. A request U.S. licensors make of their licensees. It protects the property owner from being sued out of business, should a licensee create a product that injures a child or a consumer, and they decide to take legal action. The problem: Most countries outside of the U.S. (including Europe and Latin America) don’t have laws covering product liability insurance. Understandably, licensees are reluctant to pay the insurance, which is an added cost on top of the monies they’re already forking out to the property owner for the rights. If licensees refuse to pay, some licensors will allow them to opt out. ‘In that instance, we can’t enforce a law that doesn’t exist,’ says Nick’s Kaufman.
Miscellaneous: As the licensor, you’re responsible for supplying your agent with style guides on how your property is to appear across a variety of product categories, as well as the deal memos that agents give potential licensees to fill out.
Negotiating Contracts with Licensees:
Since agents work on commission, it’s in their interest to land the best deal possible for their clients. That said, it’s to your benefit that an agent favors potential licensees that have a solid credit history and a strong working relationship with retailers in the territory.
What Licensees Pay You: For the right to create product using your property, licensees pay a minimum guarantee (MG), which is the minimum amount of money you agree to accept for the rights to the licensed merchandise they sell. Depending on the category, MGs can vary from a minimum of US$10,000 (ties, for example) to millions of dollars (toys, for example). The licensee will either pay the full MG, or depending on the size of the deal, a percentage of it upfront, and the remainder within the first 12 months of holding the license or the first 12 months that product hits retail. On top of that, licensees also pay a royalty, a percentage on the product’s sale price they charge retailers. Some licensees will source product directly from factories in the Orient, which means they’re getting the merchandise at a cheaper price point than they would have been able to produce in their home territory. In such cases, ‘we’ll tack on an additional four percentage points to the royalty on their net sales because the licensee is getting that product at a discount,’ says Lindo.)
Currently, the royalty range for TV entertainment properties for all categories is 10% to 12%. It can go higher or lower, depending on a variety of factors-the popularity of your show, its time slot, your broadcaster and the length of your TV deal. ‘If your show’s going in with 13 half hours, you may ask for a lower than average royalty rate, and then raise it if the show is stripped or meets certain performance guidelines,’ says Nelvana’s Kaufman.
How do you know your agent has negotiated the best deal terms? Talk to other licensors, find out what the market is bearing. ‘You have to do your research,’ says Nick’s Kaufman. ‘If I’m unhappy with a royalty rate, I might build an escalator into the contract-I might start at a lower rate, but expect that it increase with time or volume,’ she says.
Additionally, licensors will also ask licensees to pay into a marketing or advertising fund, which is usually a couple of points on top of their royalty. Often agents are required to pay into the fund as well. Licensors will match whatever licensees and agents put up and use the money to fund retail promotions that help market the licensed product and the property. This a negotiable point: if agents and licensees are resistant to paying into the MF, some licensors will allow them to chip in on one-off promotions, although that makes it tougher to plan initiatives far in advance.
Launching your Merchandise Program
With your licensing program solidified, it’s time for your agent to hold a meeting with your property’s key partners: your broadcaster; key licensees (toy, video, interactive and publishing); and major retailers in the territory. The goal is to get everyone up to speed on the status of the merchandise program. Topics range from basics such as the date your show will debut on TV and when the licensed merchandise will be available to retailers, to what marketing initiatives are in the works and how each partner can participate. Some licensors, like Nickelodeon, allow their global licensee reps in each territory to spearhead meetings on a monthly basis. ‘We call it franchise management. The hope is all the partners will benefit from knowing what activities are going on in the market,’ says Kaufman.
Even after your merch hits retail, you must keep in touch with licensees and agents regularly. Says Nick’s Kaufman. ‘There’s a ton of administration you have to do when working with agents. People in my office talk to our agents at least once a week. Since they are representing other properties, you want to make sure that your property is top of mind. You want to be sure that you’re constantly on top of the agent, and that they’re working to your strategy.’