Most Favored Nation: Licensing gets complex

Update, July 19: this post seems to be getting a lot of attention.
It presents a lot of info that might not be useful to someone with
more basic questions about MFN deals, step deals, or film/music
licensing in general. Please feel free to contact me for any questions.

OK, this one is a mouthful, and will be boring to a lot of people. Unless the title interests you, skip down to my previous blog entry. It’s got pictures and involves the word overkill.

I recently finished a somewhat complex licensing project. It involved motion picture assets from several major studios for use in a large-scale museum exhibit. It occurred to me part way through the project that the most-favored-nation deal structure was something that a lot of people have heard about conceptually, but that any example implementation is often hard to come by. I will attempt an explanation for the layperson, though the gritty details of the most favored nation (MFN) concept could easily take up a chapter in a book, and I’ve omitted boatloads of information. This explanation doesn’t address licensing for feature films/broadcast arena, which differs in some respects.

The Easy: Example Benefit

I’m assuming some familiarity with the basics of media licensing.

The most favored nation deal is pretty simple: You are licensing a bunch of things from a bunch of companies (licensors). The MFN deal says: I will give a licensor X, who is party to the MFN no less than any other licensor (this means ANY other, not just ones party to the MFN). This concept originated in international trade agreements.

Assume we are licensing music for a film using an MFN structure. This is pretty simple: If the highest rate you are paying is, say, $50/second for a background vocal (BV) and background instrumental (BI) sync license, then anyone who accepts the MFN rate gets $50/second for a BI/BV use.

Errata: I will pause to note right now that everyone asks for dollar amounts.
"What does X cost?" or "Can I license for -insert pop song-?", well, every situation
is different. It's extremely hard to even estimate without knowing the exact use,
and having in-depth familiarity with a company's catalog. $50/second is a mere
example. Rates can (and do) range from $100/song to millions/song, depending on
the song and the use...or in some cases, impossible, as I note way down below.

Why is this MFN thing good? It seems to push rates up at first glance. Well, if you can negotiate, the MFN rate can ensure a lower total cost for the licenses:

The general idea is to establish a reasonable rate appropriate for your budget and use, then negotiate licenses to match that rate. This means possibly pursuing the cheaper licenses first, gathering some quotes, then starting down the negotiation path. The licensors are often willing to take an MFN deal, knowing that their asset isn’t valued at any less than anyone else’s asset. This is important to them, because they have a fiduciary duty to shareholders to maintain the long-term value of the intellectual property.

As long as you aren’t diminishing the value of their intellectual property, either through low valuation or an inappropriate use (used in adult entertainment, etc.) they are usually fairly receptive to licensing.

One last point in understanding licensors is that generally, a $300 license for a small doc to use music at a festival costs approximately the same to administer as a $25,000 license for a pay cable series to use music. Which deal would you spend time on? Which might you let slide?

The Hard: Example Problem

Occasionally, the MFN rate will be too low for a given licensor, or for their given asset. For instance, if you have licensed a large stack of obscure 80’s glam metal for your doc on the rise of yuppie cocaine use, most of it in the vein and popularity of Dokken’s Alone Again, then you try and include Twisted Sister’s We’re Not Gonna Take It under the MFN, Universal Music is going to laugh at you. Actually, they won’t laugh, they will just say no, assuming they actually gave you a quote in the first place.

Do you bump the MFN rate up, thereby making everything more expensive, or do you accept that the asset is just too expensive?

Alternatively, you negotiate, and innovate. For instance: if you’ve negotiated the MFN rate based on a BI/BV use, perhaps you can actually save money by using that more expensive asset in a more expensive way: as a featured vocal/instrumental or closing (credit bed) theme, for instance. The licensor might then be willing to accept the MFN rate for BI/BV use + a premium for an additional featured use.

Bottom line? It’s all a matter of communication. There is often a deal to be had.*

Administrative Complexities:

Now, a part of this whole mess is making sure that one actually gives the MFN parties the MFN rate. In effect, you are asking them to trust you. Only rarely have issues of verification come up in my work, though I work outside the realm of major studio features. Anyway, this is a trust that cannot be broken. One can break it, but it’s a good fast-track career move to entry-level food service work. Don’t ever be tempted.

These deals get even more complex when different entities own different distribution rights (domestic/international splits, or a film clip with music, etc.), or if a step deal is involved on top of the MFN agreement. I might blog a little about step deals in August. Check back.

There are a few other things to remember: A sync license is only half of what you need. The master recording (the other ‘side’) must be licensed, or you have to commission a recording. Sometimes, the latter is cheaper, and often fun. I’ve helped record Elvis covers, Hot Chocolate covers, and TV themes. Those new recordings are bespoke creations, and can be made to fit perfectly. The Elvis song? Tempo changes to match the cut. The Hot Chocolate Song? Stylistic changes to match the subject matter. The flexibility can be worth the sometimes higher cost.

After all that, you need an accurate cue sheet. Don’t mangle the cue sheet. A lot of non-famous composers and peons (like me) get royalties, and cue sheets are critical.

I’ve mainly talked about music, but this MFN process applies to other assets like film clips as well. Film clips, like music almost always have a split, wherein the picture and any music are licensed separately.

Keep in mind that certain assets and uses require residual payments to unions and guilds such as the AFM/SAG/AFTRA/DGA/WGA. Use a clip from Titanic on the TV in the background of your period-piece-90’s narrative short? Pay up to SAG/DGA/WGA. You mix in some of the sound track? Pay up more. AFM probably wants a cut. It’s that Celine Dion song? Even more. These residuals tend to feed working artists, not the big names or corporations, so they mean a lot, despite the possibly annoying high-paperwork administrative work.

Now, in light of all that, I would risk giving a little bit of advice to producers out there:

Don’t hand licensing off to a PA or assistant. It’s tempting, because it’s just ‘paperwork’, and often boring at that. They will mangle it through no fault of their own, and any cost savings in labor will be lost several times over, because the PA/assistant doesn’t have the background knowledge to do it right, or quickly. Often, he or she is learning as they go. You don’t want them to learn on your project’s dime, or against your project’s deadline.

Before I did any licensing work, I had several years doing filings with performing rights organizations, some contracts administration, and a thorough business understanding of royalties and rights management. It mattered, and let me get things (mostly) right the first time I handled licensing.

*(You noticed the asterisk way up there? Awesome!) NEVER put yourself in a situation where you need an asset and can’t walk away. If you can walk away from the table, then you have options. Remember: Richard Linklater wrote Dazed and Confused but couldn’t use the eponymous song. It sucked, but Robert Plant wouldn’t budget. Linklater could walk, and did. The film was still made.

So: Hire someone who knows a bit about the process. You don’t have to hire an expensive entertainment lawyer (though having one take a look through contracts is always a good idea), but you do have to hire someone who is at least marginally capable. It can trim large chunks off your licensing costs, and make things happen quite a bit faster.

This was long…But hopefully useful.

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