How Are Contracts Written in Entertainment Industry?

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The entertainment industry develops under the circumstances of economic uncertainty. The uncertainty arises from the companies’ constant formation, merging, re-forming, and dissolving. (Entertainment Law – Contracts) Certain risk always exists due to the constant changes in consumers’ tastes that determine the popularity of some artists and their performances and the failure of others. To reduce the economic risk to the minimum the entertainment industry relies on contracts (Entertainment Law – Contracts).

Various contracts either between firms or between firms and artists also exist to establish a cumulated advantage process in the industry. The contracts are based on the basic economics of the media industry – production, distribution, and promotion. The success of these processes determines whether the firms and artists can survive in the entertainment industry or not.

Speaking about contracts between artists and firms we should say that artists usually find an attorney or personal managers to get professional help before negotiating a contract with a firm. In general, the function of a personal manager consists in guiding various aspects of an artist’s career (Entertainment Law – Unique Aspects). The functions of personal managers differ throughout the artist’s career. At the beginning of the artist’s career, the manager performs the functions of agent, publicist, contract negotiator, or emotional counselor; in further stages of the artist’s career, the manager is responsible for dealing with specialists who handle various aspects of the artist’s career (Entertainment Law – Unique Aspects). As for the attorney’s role in the artist career, his or her functions include “conducting litigation, giving business advice, protecting intellectual property, and negotiating contracts.” (Entertainment Law – Unique Aspects)

In Jacob Slichter’s work So You Wanna Be a Rock &Roll Star one sees an example of how the drummer found an attorney and manager before negotiating a contract with Elektra. “Thus armed with an attorney and a manager, we began our negotiation with Elektra.” (Slichter, 2005, p. 35) After the negotiation with Elektra, the firm lends money for making an album. Since the band lends money from the firm, the firm signs a contract with them; they demand to allot a large amount of the profit of the album to pay for a producer, writer, and publisher, etc.

It means that to recover the fixed cost of their album, the album should become very popular: “We wouldn’t see one penny in sales revenue until we sold so many CDs that our slim percentage earned enough to pay off the entire recoupable debt.” (Slichter, 2005, p. 36) However, regarding the number of people who want to get into the industry, it is not that easy to become successful in the media market.

One of the factors that determine one’s becoming a superstar is promotion. This process consists of broadcasting the information about the item to be sold on profitable conditions. One of the reasons artists promote their products is to manage the uncertainty factor. Since they are not sure of their success, they promote their products to increase them as much as possible. Also, promotion highlights the artist’s proficiency, establishes his or her credibility, admits the artist’s style and personality, and maximizes his or her emergence in the public eye. Through the promotion of his/her business, the artist establishes one’s expertise and differentiates oneself from the competition (Media & Marketing, 2005, p. 33).

When artists negotiate contracts with media companies, they need to determine fixed costs and marginal costs. A fixed cost is a required cost when the item is produced and a marginal cost is a cost for the finished product to run the business. For example, in the media industry, they need a lot of money when they make a book. Also, they need marginal cost when they print their books and sell them to customers. Therefore, individual artists loan money from firms and negotiate contracts that cover their loans with the profit of their products. “As money from the sales of our records came in, we would be allotted a percentage of the proceeds, known as point.” (Slichter, 2005, p. 35) It means that the individual artists need to earn a lot of money to cover their loans.

Often contracts occur between firms. To succeed in the entertainment industry, firms need to increase the number of items produced. If we consider, for example, the filmmaking industry we will observe that firms from this sphere should increase the number of films they produce to have at least one movie as a hit.

It often happens that the movie company has to resort to some capital from another movie company. However, the rich company does not lend the full amount of money. For example, ER needs 3 million to make an episode, but NBC is only paying 2.4 million because ER is going to earn a great sum of money through re-run or making DVDs. Therefore, the companies negotiate a contract beneficial for both; the rich company demands promoting its product through the completed movie. It calls revenue streams that recoup the fixed cost from the other profit of the product. The rich company can promote its product at no cost.

To recoup the fixed cost of the product, it should have some level of the marginal cost needed. If marginal cost is too low, a lot of problems occur. Piracy is a pathological form of low marginal cost. Since pirates do not have to recoup for fixed costs, they have very low marginal costs to get a profit themselves.

In Edward Jay Epstein’s article Wal-Mart and the Shanghai Pirate (2006) we find an illustration of the mentioned above. The author states that “the video pirates of Shanghai, China, have developed an amazingly successful business model for exploiting the home market.” (Epstein) The article demonstrates the exploitation of the market with the low marginal cost of CDs: “The DVDs cost about $1.25, which is less than a movie ticket in Shanghai. As a result of this aggressive pricing, people in China rarely go to movie theaters.” (Epstein)

To survive longer in the entertainment industry, firms need to save some money on the marginal cost of the product. Thus, they merge and this helps them to save the marginal cost.

In addition, firms negotiate merging contracts with the purpose to get more profits for both and to manage the risk of failure. Synergy is one of the ways to increase the firms’ profit. “Synergy is a cooperation between and among divisions, creating opportunities by working together that would have been impossible working apart.” (Williams, 2002, p. 453) Cross-promotion is one of the synergy forms. It means promoting the sister companies’ products at no cost. For example, McDonald’s offers toys when kids order Happy Meal. The toys are mostly the characters from Disney movies. Mc Donald is promoting Disney when Disney promotes Mc Donald. Mc Donald does not pay transaction costs to Disney using their characters in the Happy Meal set.

Thus, contracts between firms and firms and individuals if appropriately handled bring profit to both parties. The knowledge of such concepts as fixed and marginal costs, uncertainty, the distribution of success, synergy, effective promotion, etc. and the proper use of this knowledge inevitably results in the firms’ and individuals’ success.

References

Entertainment Law – Contracts. Web.

Entertainment law – Unique aspects of entertainment industry contracts. Web.

Epstein, Edward Jay. (2006). Wal-Mart and the Shanghai pirates.Web.

Media & Marketing: MEDIA TYPES Self-Promotion – Something to Shout about? the Value of Boosting Your Business Yourself Came under the Spotlight at a Media and Marketing Nosh and Think-Tank at the Birmingham Post’s Weaman Street HQ. Here Kay Cadman, of Birmingham’s Core Marketing, Promotes the Promoters. (2005, September 12). The Birmingham Post (England), p. 33.

Slitcher, Jacob. (2005). So You Wanna Be a Rock & Roll Star: How I Machine-Gunned a Roomful Of Record Executives and Other True Tales from a Drummer’s Life. Broadway.

Williams, D. (2002). Synergy Bias: Conglomerates and Promotion in the News. Journal of Broadcasting & Electronic Media, 46(3), 453.

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How Are Contracts Written in Entertainment Industry?

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