INTRODUCTION. While all the bugs haven’t been completely worked out just yet, it is now possible to receive full motion streaming video at up to 30 frames per second (fps) on your computer screen as routed through T1 or T3 telephone lines, or, as will likely be the norm over the next several ears, through cable television lines through the use of a cable modem. Using this high speed downloading technology, you can also download and replay a feature length movie with a download time of just less than a half an hour using a 56k modem.

Essentially, Internet movie distribution is the latest expression of a decade-old entertainment industry buzzword: video-on-demand. And just as few prognosticators at the dawn of the VHS era predicted families would go to a video store and stare at empty cardboard boxes that represented their movie choices, most industry prophets at the beginning of the decade believed video-on-demand would emerge from the television world and not the then-nascent Internet community. Alas, ten years later, we are on the verge of a true movie business revolution, and new models for doing business are evolving for these changing times.

Internet distribution companies (for the purposes of this article these entities will collectively be called the “Distributor”) are popping up just as rapidly as websites; some of these new companies include Sightsound.com, Broadcast.com, Reel.com, FasTV.com, Globalmedia, Inc., Cinema Now, Inc., and Spumco.com. This spring, Sightsound.com offered the Sundance hit“p” over the Internet at a downloadable price of $2.95 and Broadcast.com is currently offering (at the url www. Broadcast.com/Broadband/Trimark.html) the original“Leprechaun” film for free along with the Western genre pic “Real Bullets.”In the business model for the Broadcast.com films and others like them, advertising revenues are shared in some negotiated manner between the Distributor and the Producer. Utilizing either delivery mode,playback and image quality is as good as can be seen on your television screen when a movie is played back from your VCR and with the digital technology improving on a daily basis, you can expect an even better picture from your computer screen in the very near future.

These Distributors are aggressively pursuing Internet distribution rights, just as the video companies were aggressively pursuing video rights in the eighties. Is the Internet distribution route for producers a replacement for home video and television exploitation? Not yet, but with technology booming and an increased media spotlight on the Internet and its pioneers, the medium could prove to be a savior for independent filmmakers looking to eke out a profit in a marketplace that has often proved brutal to the 1,000-1,500 independently financed pictures produced every year in the U.S. The following are some of the issues a movie or programming producer (the “Producer”) should be thinking about when licensing a film or other entertainment program (the “Picture”) for Internet exploitation.

THE GRANT OF RIGHTS. There are currently two schools of thought with respect to the grant of rights in Internet distribution rights. The first school of thought is the traditional position when distributors are normally acquiring any rights, i.e., that the rights acquired to distribute electronically over the Internet are to be exclusive to the Distributor for a definitive period of time. Accordingly, under the exclusivity scenario, no one in the on-line universe other than the Distributor may offer the Picture for use, playback, download or rent over the Internet.The granting of exclusive Internet distribution rights is problematic at the present time in that, as yet no one company has had enough history or success in the marketplace to demonstrate that it can deliver significant revenue to the Producer by being the exclusive provider of Internet rights for the Picture. As a result, the Producer is taking a major risk by signing an exclusive Internet distribution deal for worldwide distribution because that one Distributor may not be successful in the marketplace, let alone survive what will prove to be a furious competition for supremacy in the medium.

The second, and more reasonable philosophy, at least in today’s marketplace, is for the Distributor to acquire non-exclusive Internet distribution rights for a period of six months to one year with options to renew at the end of the term. This approach would seem to make it significantly easier for a Distributor to acquire as many films as possible in order to build a market share and establish a beachhead as one of the premiere Distributors of entertainment product available on the Internet worldowide. It would seem that those Distributors who are allowing Producers to license non-exclusive rights at least until the key players in the marketplace have become established will have a better chance at long term success.

At present, there are basically two different types of Internet distribution processes used in the marketplace today. The first is the process which simply allows the user to pay a fee to download the movie under a specific limited license, for example -- one day, five days, one week, for a specified number of viewings, or , in the alternative, to license the motion picture for an unlimited number of private viewings.

The other method of Internet exploitation is the streaming method, which does not involve a download but which allows the viewer to view the motion picture from a computer scream as the information bits stream directly from the server over the phone or broadband cable lines and directly onto the user’s RAM, comparable to a “live feed” transmission. As a result, unless a viewer attempted to make a very poor quality tape of the streaming Picture off the computer screen, copying or piracy of streamed Pictures is less likely as there is no “permanent” copy downloaded onto the viewer’s hard drive.

This streaming method is the method of distribution that is currently being utilized by Broadcast.com with respect to motion pictures licensed by Trimark and Overseas Film Group. Currently the business model for this type of exploitation is to license pictures that have already played in their theatrical, pay-per-view, pay television and video windows (i.e., older movies) and advertising revenue generated while the particular movie is playing is shared between the Producer and the Distributor.

THE LICENSE PERIOD. The license period offers a number of issues that the Producer needs to consider and also presents two schools of thought from the Distributor’s point of view. The first issue has to do with when the Producer makes the Picture available for Internet exploitation. This certainly depends on the perceived marketability and the perceived desirability of Distributors for the Picture.

As Internet exploitation evolves, these decisions may become genre dependent. For example, horror, sci-fi and music/glam movies may prove to be more exploitable over the Internet than, say romantic comedies, as the computer-oriented audience tends to skew towards a younger demographic that grew up with the computer and cable television as part of their everyday lives, and who have had cable and/or T1 lines available to them at colleges and universities, which allow easier access to Internet movie exploitation. While “The Blair Witch Project” was not initially exhibited on the Internet, it certainly showed that marketing a rule-breaking, horror-type Picture over the Internet to young audiences can certainly have a major impact on the ultimate box office results.

From the Producer’s point of view, one has to at least initially go out into the marketplace to determine if the Picture is ultimately going to sell to a theatrical distributor. If the theatrical release is not a realistic opportunity, in today’s marketplace, a Producer should at least consider the possibility of using a first window initial Internet launch of the Picture to determine if it can develop its own following or its own market through Internet exploitation, and then perhaps, go back into theatrical, video, pay television and other media of exploitation. In that scenario the Producers license the film first on the Internet, perhaps for a period of six months. On the other hand, if a theatrical release is planned, the Producer may want to license the Picture on the Internet during the Pay-Per-View window or perhaps do what Trimark and Overseas have done with Broadcast.com and wait until the film has played its theatrical, pay per view, pay TV andvideo windows prior to exhibiting or licensing the Picture for Internet exploitation.

From the Distributor’s point of view, they obviously want the newest, freshest product available for exploitation on the Internet, as soon as possible. Accordingly, their obvious preference would be to acquire a license on the Picture for the first window of exploitation on the Internet, unless, of course that Picture had generated a substantial amount of awareness and marketing value through a major and successful theatrical release or other awareness-building campaign. In that case, the Distributor would want the Picture as early as possible after the initial theatrical release had played out. The Producer, however, has to consider the other media in which it seeks to exploit the Picture,including the pay-per-view, pay television, home video, and other media and make a decision where in the order of windows Internet exploitation is the most appropriate for the particular Picture. That decision must be made carefully as video distributors and perhaps television exhibitors may see Internet exploitation as direct competition and may seek to include provisions in their own license agreements which bar exploitation on the Internet prior to or during their particular license windows.

Currently however, based on the Internet distribution agreements I have reviewed and administered for Internet exploitation, the license period and grant of rights provisions simply separate media and provide for Internet distribution, with a term of a specific period of time, (i.e., six months to a year, all the way up to seven to ten years). Again the strategy behind setting these license terms differs from Distributor to Distributor; some Distributors want to make it as simple as possible to sign an Internet distribution agreement with a Producer and will agree to a one year or shorter Internet non-exclusive term, whereas other companies are seeking longer and exclusive terms which make it more difficult for a Producer to decide upon with whom and how long a license should be entered into.

As companies begin to establish market share and profitability , these questions will become easier and easier to answer and standard license periods, windows, and exclusivity terms for Internet licensing will inevitably emerge.

TERRITORY. Obviously, once a Producer makes a Picture available for exploitation on the Internet, it can potentially be accessed from anywhere around the world, unless, of course, the Distributor has developed the appropriate safeguards to block Internet exploitation from various telephone area codes and/or other security protections such as registration, which could also be used to block the availability of product into certain territories. While the Distributors would prefer to obtain the right to exploit the motion picture throughout the world, they recognize that the Picture’s Producers do have contractual obligations with other distribution entities for other media in various territories and have made provisions in their agreements to block Internet availability in certain territories where the Internet rights are unavailable. As a result, Internet licensing agreements can be made on a territory by territory basis rather than strictly worldwide. It remains to be seen how effective the security and blocking technology will be in terms of restricting availability of the Picture by territory.

ADVERTISING AND PROMOTION. The Distributor will generally require the right to use the name, voice, likeness, and photograph of the actors and the other creative talent involved in the Picture in connection with the on-line marketing and promotion of the downloadable Picture on the Internet, and, if they can get it, the right to promote their website and their other marketing and promotional activities. The Producer, however, should be careful not to grant rights in this arena to the Distributor that are not available under their various talent agreements. As is customary in other media, the length or running time of the use of these materials can usually be limited to not more that five minutes. The Distributor will also customarily require the right to create and use its own marketing and publicity tools for use in connection of the Picture, including without limitation, the right to produce original segments, trailers, written summaries and synopses, and excerpts of the Picture for the purpose of advertising, promoting and publicizing the Picture.

From the Producer’s point of view, one provision that a Producer should at least ask for, but may not be able to obtain, is a commitment on behalf of the Distributor to advertise, market, and promote the Picture in some specified and negotiated manner, such as buying advertising time, including free giveaways like T-shirts, caps, pens, or other merchandise promoting the Picture itself at college campuses, or some other promotions that go above and beyond the Distributor’s own constant efforts in marketing its own website.

CROSS LINKS. Most Distributors will allow and encourage cross-linking of websites, such that the Distributor will provide a link on its site to the official web site of the Picture, as long as the official web site in turn cross links its site to the Distributor’s. In this way, the Producer of the motion picture can use the marketing and publicity power of the Distributor to direct its users to its own site in order to allow the Producer to sell videos, DVDs, and other merchandise.

The Distributor would of course reserve the right to discontinue links if the Producer’s site is deemed objectionable. Nevertheless, a successful launch of a motion picture over the Internet may well be the impetus for driving Video, DVD and other merchandising sales for the motion picture directly from the Producer’s official website for the movie.

LICENSE FEE/PAYMENT TERMS. Since the market for downloadable and/or streaming exhibitions of motion pictures on the Internet has obviously not yet fully matured, as of this writing, advances for rights for motion pictures to be distributed solely over the Internet are not yet being offered (some aggressive Internet movie distribution companies seeking to build film libraries are offering small cash advances and/or options to purchase or outright grants of stock in their publicly traded companies, but in those cases, the distributors are requiring a grant of all rights, not just Internet rights). Presumably this will change in the very near future. What appears to be being offered to Producers is a relatively generous share of the gross receipts of the revenue received from the exploitation of the Picture on the Internet. Depending on the Picture and the perceived marketability, these shares tend to be in the 30-50% range of the gross receipts after the deduction of only collection costs, refunds, taxes, tariff, duties, and use taxes. Currently, there are no deductions being taken off for distribution expenses, which is the expense item that traditionally significantly reduces the Producer’s share of the gross revenue. In these types of deals where a Producer participates in the gross receipts derived from the licensing of the movie, there is now customarily no participation for the Producer in the advertising revenue that may be generated from the portal web site which is licensing the motion picture. Naturally, this exclusion of the Producer from advertising revenue may also change in the future, but also may not. Historically, television networks never crossed that line, but off-network TV syndication companies did agree to share advertising with producers.

As to the model where the motion picture is offered for free viewing and the advertising revenue is shared between the Internet Distributor and the Producer, currently it appears that the Producer’s revenue share in the advertising is relatively modest and the Producers are generally viewing this opportunity as additional marketing exposure for their Picture which will hopefully continue to drive additional video, DVD and merchandising sales as well. This of course may change as well.

Price ranges for rental and/or purchase of Pictures on the Internet appear to be falling in line with the current prices of rental and sell-through videocassettes at video stores. The current standard is about $2.95 for one day “rental,” $4.95 for a five day use, and $13.95 for an unlimited use license. Some of the Distributors are allowing Producers to set their own prices. For example, if the Producer feels his movie will rent or license better at $1.95 for three-day use, $2.95 for five days, and $9.95 for an outright unlimited use license, the Distributors can accommodate those strategies and place no restrictions on the pricing, allowing the market to determine the appropriate price for the product.

Payment terms at this time are relatively customary, with calendar quarterly payments to the Producer due sixty days following the end of each calendar quarter, coupled with an accounting statement showing the number of times each Picture was rented or licensed and providing for the total number of transactions for each picture, the gross dollar amount received and permitted deductions therefrom. The agreement will usually include the customary audit rights, which allows the Producer to examine the books and records of the Distributor at the Distributor’s place of business and to file a claim for additional payment, if applicable, within a reasonable time after conducting the audit.

DELIVERY OF MATERIALS. Because the Distributor will be disseminating the Picture over the Internet in a digital format to the ultimate user, delivering the Picture from the Producer to the Distributor is a relatively simple process. The Producer is required to provide the Distributor with a digital sub-master of the Picture and its trailer, if available. The expense of prints, interpositives and internegatives, and a number of the other customary and expensive delivery items required by Distributors in other theatrical and video agreements is not necessary. Additional delivery items which the Distributor will customarily require are relatively inexpensive to create and include the Picture’s one-sheet, including the title treatment and background information on the Picture, existing packaging for the Picture, if any, such as the VHS or DVD jacket, a copy of the soundtrack, if available, a press kit, a small selection of stills of the principal cast, a synopsis or a summary of the Picture, or any other available publicity materials, along with customary chain of title documentation.

The Distributor will agree to not authorize an copies of the sub-master to be made without the prior written consent of the Producer and will agree to keep the motion picture sub-master secure during the license period and agree to destroy any encoded and compressed versions of the Picture at the conclusion of the license period.

The Distributor will have a reasonable period of time (15-30 days) to view and determine if the sub-master is of acceptable technical quality for Internet distribution, and will have a reasonable period to request that the Producer satisfy or cure any technical deficiencies with said sub-master, which are listed in a technical report on the Picture.If the Producer is unable to make the changes then the Internet Distributor would have the right to terminate the agreement.

PIRACY/UNAUTHORIZED PLAYBACK AND DUPLICATION. As with any new technology and/or delivery system, Producers and copyright proprietors are understandably initially fearful that their product will be pirated and that they will lose revenue as a result of their lack of complete control over the dissemination of their product. This is a normal fear and over time, as the Internet becomes more widely acceptable for distribution, just as in the early years of the video era, this fear will subside. In order to combat any such hesitation, Internet Distributors have been developing various types of encryption technology and proprietary software which substantially reduces the risk of unauthorized use and duplication of the product.

One such company is Sightsound.com, which claims to have developed, and has indeed patented technology which places a special digital “key” on the digital sub-master which is downloaded onto an individual’s computer. This “key” allows the Picture to be viewed for the specific number of times or specific period of time for which the Picture is licensed (be it a short window of a few days or the unlimited use period). Once the term has expired, the “key” will not allow the Picture to be viewed again, unless and until the user returns to the Sightsound website to re-license the product. Additionally, should the user copy the Picture on a disk and then attempt to view the Picture on a different computer, or on the same computer after the initial license has expired, the “key” will automatically direct the new user to go to the Sightsound website to re-license the Picture for that particular computer. If this technology works exactly the way Sightsound claims it to work, and if indeed the technology will withstand any patent challenges, Sightsound.com will certainly have a competitive advantage in the Internet movie distribution marketplace, as this type of technology goes a long way to ease the fears of producers and owners of copyrighted materials who wish to protect the value of their product against piracy over the Internet.

It is interesting to note that Sightsound’s corporate policy with respect to widespread failure of its anti-piracy technology, should it occur, is to allow the Producer to terminate the license agreement as soon as it learns of the failure, but Sightsound will not specifically be held responsible for any damages that occur as a result of the failure of its technology or encryption software. It will be very interesting to see how all of this plays out over the next few years.

RESIDUALS AND CONTINGENT PAYMENTS. As one might expect, the Distributors are not interested in getting involved with making any contingent payments to cast and talent and/or assuming any responsibility for residuals. The good news with respect to the residuals as of this date, is that none of the talent guilds have negotiated provisions for the payment of residuals on Internet exploitation. That will certainly change in the near future, but at this time, no residuals are due to any of the talent guilds resulting from revenue received from the Internet.

With respect to contingent compensation payments due to actors, directors, writers and producers, and other talent, the Distributors take the position that these are obligations that the Producer has incurred, and it is the Producer’s responsibility to take care of those obligations.

BREACH/INJUNCTION. As is customary with most motion picture licensing agreements, Producers can expect to see a provision in the Internet licensing agreement which provides for a reasonable notice period for breaches on either side, but that in the event of a breach on behalf of the Internet Distributor, the Producer waives its right to any injunctive relief, the right to terminate the agreement, or to seek recision, the sole remedy being an action at law for damages. The only exception to this provision would be a situation described above, where in the event the encryption software did not work, the Producer would not have the right to seek damages but would have the right to terminate the agreement.

The protection of intellectual property.Particularly where an Internet Distributor claims that it has proprietary software or protectable intellectual property (such as Sightsound’s patents), one would expect to find a provision in the agreement where the Distributor would retain its intellectual property rights and its proprietary software that it developed to exhibit motion pictures and other programming on the Internet including without limitations any patents it claims to hold. The Producer of course would also reserve all of its rights in and to the Picture and any other software or intellectual property assets which it might have in connection with the intellectual property it holds or has created in connection with the Picture.

REPRESENTATIONS, WARRANTIES, AND INDEMNITIES. The customary representations, warranties or indemnities that are usually found in motion picture licensing agreements also appear in the Internet motion picture licensing agreement.

The producer will represent and warrant that it owns and controls all rights in and to the Picture, that it hasn’t violated any laws or regulations, that it has complied with all guild and union requirements, and that it hasn’t and will not violate the rights of any third party in connection with the exploitation of the Picture.

The Distributor will customarily represent and warrant that it will exhibit the Picture in its entirety, and will not delete or edit the titles and the copyright notices, that it will honor all credit obligations and advertising commitments and that it will not edit or add to the Picture in any way without the Producer’s prior written consent. Each party will indemnify and hold the other party harmless from all claims, costs, and expenses (including reasonable attorney’s fees) arising out of a breach of the respective party’s representations and warranties under the agreement.

NO SALES GUARANTEES. Since the market for Internet movie exhibition is still relatively small and because no one can predict the market potential at this time, and because it is probably a bad idea to make such predictions, one would expect to find the customary clause also found in many movie license agreements indicating that the Distributor has not made any guarantees, forecasts, or other estimates, expressed or implied, with respect to the number of transactions, the revenue expected, and/or the market share to be obtained from the Internet exploitation of the Picture.

CONCLUSION. As the computer installed segment of the entertainment consuming population continues to increase, and as the delivery technology continues to improve, one can expect that the delivery of motion pictures over the Internet will rapidly expand over the next few years. The Internet pricing, territorial limitations, the development of an appropriate Internet exploitation window, the issue of exclusivity and the license periods will begin to stabilize and a set of even more specialized standard terms for Internet exploitation will emerge.

With the exception of those particular terms, as one would expect, the Internet movie licensing agreement really is substantially similar to most licensing agreements used for other media in the entertainment industry.