As media consumption continues to transition away from physical media like DVD and Blu-ray into digital formats, the topic of “Big Data” has become more prevalent and a growing area of concern for rights holders, producers and film studios alike (licensors). According to The Digital Entertainment Group, digital rentals or transactional video-on-demand (TVOD) and digital sales or electronic-sell-through (EST) have largely replaced packaged goods as digital formats account, making up more than over 60 percent of U.S. consumer spending.*

REVIEWING THE STATS

With typical TVOD and EST agreements between licensors and the licensees (i.e., digital media providers such as Amazon or iTunes), revenues earned are based on actual transactions. This is a key area where Big Data concerns arise. Licensees typically report to licensors based on their consumer data. Reported information includes how many times a title was purchased or rented with certain contractual stipulations. The licensors then receive a contracted percentage share of that revenue.

Licensees are often large media companies processing incredibly large amounts of data. Some of this information is shared with the licensors but often not evaluated for contractual compliance. The data size alone would raise concerns surrounding the completeness of the information as well as the accuracy of the reporting according to the applicable contractual agreements and validation of remittance calculations.

DECODING THE DATA DUMP

Specifically, one major area of concern, as it relates to EST and TVOD licensing deals, is that the percentage share the licensors receive is typically dynamic and changes based on certain terms of the license agreement. These arrangements typically include different reporting thresholds affecting revenue sharing percentages based on various contractual variables such as format, time of release, and title’s performance.

An example of certain contractual stipulations that would impact the licensors' share of the receipts would be the calculation of the minimum fee per buy based on certain criteria or classification of the title between current and library. There is risk in this area as the application of the correct rate/price may be improperly assigned. Also, minimum guarantees associated with these deals may not be properly applied. Due to magnitude of the number of transactions included in these large P.O.S. data dumps provided to the licensors (i.e. the number of times a title is rented or purchased including the price point and transaction date), any error in relation to the application of the agreement-specific rates may result in huge variances and potentially additional amounts due to the licensors.

BREAKING DOWN BIG DATA

Often the agreements grant a certain number of free units or credits, promotions, and temporary price reductions to the licensees; this would need to be validated to confirm that the licensee is following the terms of the agreement. Additionally, within the details, there may be issues relating to miscoded transactions and other reporting errors. Furthermore, auditing these licensees may provide valuable information for the licensors as having more visibility to their data may also provide valuable insights into the home entertainment marketplace and title performance.

Big Data is definitely a topic of concern as it relates to ensuring accuracy and compliance of reporting of data from the licensees to the licensors. The potential value of consumer-level transactional data reviews could be substantial when considering the vast amount of transactions and the resulting revenues generated.

Looking ahead, with the digital landscape continuing to evolve and dominate home entertainment, it may be worth considering investigating into the reporting of the various digital licensees.

If you have any questions about the above content, please reach out to a member of GHJ’s Profit Participation team.

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Grace Guenon

CATEGORIES Media Clips

Grace Guenon, CPA, CFE, has more than three years of accounting experience providing participation audit services to clients. She specializes in film and television contract compliance audits on behalf of third-party participants, investors and co-producers. She also provides consulting support in…Learn More

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Peter Klass

Peter Klass, CFE, has more than 20 years of entertainment accounting and audit experience. He specializes in profit participations, distribution and contract compliance of film and television programs. He also consults on disputes/litigations, profit sharing arrangements, and settlement…Learn More