Negotiating The Holdback: What's At Stake

By Jonathan Gardner  |  27-Dec-2011

One of the most difficult negotiation points today for independent film producers in their domestic distribution deal is the hold-back of the release of the picture in the foreign territories. This one point by itself can bring the producer grief from almost every side, from his foreign sales agent to his own investors.

Even though foreign sales tend to fund the lion's share of a production budget, the domestic distributors still wield enormous leverage. Perhaps this is because the US territory is often reserved, and therefore viewed as the single most important profit-center for a film. Another reason is that if a film catches fire stateside, it can have huge effects on its sales overseas. Maybe the biggest reason is that US distributors, while not paying what they did back in the day still pay more on average than almost any other territory.

The biggest dog gets the biggest bone, which means in this case that US distributors will almost always demand the right to the worldwide first release of the movie. Contractually, the foreign distributors are required to hold back their release of the picture until after the US release. So how does this clause affect the independent filmmaker?

With his finished film finally in the can, the indie producer's usual course of action is to take the picture to the various festivals and markets and hope for a US distributor, the bigger the better, to come calling. Here's where it gets tricky. In a tight domestic market, US distributors are moving very slowly to pick up product. Often a film will have to wander like Job around the world before finally returning home. While the festival circuit is ongoing, the producer will start to get pressure from a couple different directions. The first is his equity investors. Foreign distributors usually make small down-payments, with the balance payable upon delivery of the picture. So the question the angel investor starts asking is: why don't you go ahead and deliver the picture to the foreign territories so I can start recouping the money I spent to make this masterpiece?

The producer's answer does not often satisfy: because if I deliver to the foreign distributors, and they release the film, I will be severely damaging my ability to secure a domestic deal. This is, in one sense, a so-called agency problem. The investor's interest lies first in recoupment, and second in achieving profits. The producer, by contrast, would prefer to achieve profits, even at the expense of early recoupment, because the producer does not actually bear the loss but does participate in profits. If the US sale is the perceived profit center for the picture, then you can see why a producer would prefer not to make delivery to the foreign distributors until he has exhausted all possibilities of a US sale. So the equity waits… and waits…
The other pressure will often come from the foreign sales agency. The foreign sales contracts are fully paid on delivery of the picture, which means the sales agent won't realize its full commission until the producer completes delivery. If the producer waits for the US distributor to commit, and then the US distributor wants the picture held back in the foreign territories, the sales agent - who may have advanced money in terms of marketing and deliverables - will be waiting a long time for its commissions.

So how do the parties protect themselves in these scenarios? First let's look at the sales agent and foreign distributors. When negotiating the deal with the sales agent, the foreign buyer will demand an outside delivery date. The outside delivery date gives the buyer protection from a domestic distributor who sits on a film for a long time waiting for the right moment to release it; and it allows that same buyer to plan its release schedule. Sales agents, in the service of their producer clients, will try to negotiate those delivery dates as far out as possible to give the producer time to shop for that elusive domestic deal. At the same time in their own agreement with the producer, the sales agent will try to negotiate a more near-term outside delivery date which can be used to protect the buyers in a pinch. Agents tend to be very smart people.
In the deal with the domestic distributor the producer needs to be careful. The hold back language initially presented will often be open-ended, guaranteeing the US distributor the right to the first release of the picture. Actually, the question gets a good deal more complicated when you consider that in the current market, a theatrical movie in a foreign territory may only be a VOD title in the domestic territory. Therefore, the holdback will be broken down by media, i.e. Foreign DVD/VOD Holdback shall be not sooner than US DVD/VOD date or 4 months after the US theatrical release, whichever is sooner.

More and more the windows are becoming compressed and we're seeing more simultaneous Theatrical/VOD deals from innovative distributors such as IFC and Magnolia. This can be very threatening to a foreign distributor planning on a theatrical release. Having a movie play on TV in the United States before you show it theaters in France is not good business. In such case, the producer must work hard to negotiate an exclusive theatrical window for the foreign buyers which will likely precede the premium VOD release in the United States, but the length of that window may be only a few months.

So, other than having a terrific lawyer, how do producers increase their leverage in the domestic negotiation? One technique I've been seeing recently is a producer involving the foreign sales agent in the domestic negotiation. If the sales agent is strong, and handles a portfolio of titles, it may have greater negotiating power, especially with the smaller domestic distributors; and of course the sales agent has the incentive to protect their buyers.

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