Terms of trade for independent producers finally arrive

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The February edition of IHL highlighted the new Codes of Practice (the Codes) which have been introduced for dealings between the UK public service broadcasters (BBC, ITV, Channel 4 and Channel 5 (five)) and independent producers. These Codes of Practice came out of a review undertaken by the Independent Television Commission (ITC) into the UKprogramme supply market in May 2003 as part of the passage of the Communication Bill (which became the Communications Act 2003).

The review revealed that the independent production sector was operating in a highly uncompetitive market, which was stifling the development of the independent production industry. Accordingly, the ITC recommended some changes to the way public service broadcasters dealt with independent producers, and issued guidelines for codes of practice which governed dealings between producers and the public service broadcasters. These guidelines were to be followed in drafting new codes of practice, which would more closely follow the model operated by ITV (which was established under the Broadcasting Act 1990). After six months of negotiation (involving the public service broadcasters and Pact, the trade association representing the independent production sector), Ofcom, the ‘super regulator" established by the Communications Act 2003 (and the successor to the ITC) finally approved the new Codes in January this year.

The new Codes fundamentally change the way the BBC and Channel 4 in particular, and to a lesser extent five, acquire programming from independent producers. They move away from the traditional method of commissioning programmes (with broadcasters taking a complete assignment of rights and controlling the distribution rights), to a more limited licence of primary broadcast rights in the UK, with producers retaining control of and benefiting from the exploitation of all other rights in their programmes.

Although the Codes were effective from January this year, the industry has been in a state of limbo since then, waiting for new terms of trade to be agreed with each of the broadcasters. Despite Ofcom wishing to see these terms of trade in place by the end of April, after long and tortuous negotiations, Pact has now finally agreed new terms of trade with two of the key public service broadcasters, Channel 4 and the BBC. As Channel 4 and the BBC represent the majority of the programmes commissioned from independent producers in the UK, this represents a significant step forward for the sector. New terms of trade with five and ITV are expected shortly, although as the current agreements with ITV already provide for a limited licence of rights, and since five has in the past been much more flexible in its arrangements with the independent sector (entering into a variety of agreements ranging from full commissions to limited licences), the effects of the new terms of trade with these two public service broadcasters will be less significant for the independent sector than those with the BBC and Channel 4.

While the new terms of trade with the BBC and Channel 4 have certain differences, they both reflect the following:

A licence fee will be agreed at the outset for the primary broadcast rights (in other words the rights for the broadcaster to broadcast the programme on its own channel (in the case of the BBC this covers all its publicly funded services) for a limited number of transmissions during a five-year licence period).
Additional sums (being agreed percentages of the initial licence fee) would be paid to the producers for further transmissions of the programme (including, in the case of the BBC, packages of transmission rights on its publicly-funded channels).

The right for the broadcaster to extend the licence period once for a further period of two years upon payment of an agreed percentage of the licence fee. The copyright and all other rights in the programme (other than those granted to the broadcaster) are retained by the independent producer which will control all distribution rights in the programme (including potentially valuable ancillary rights such as merchandising, videos/DVDs, new media rights, and format rights). The independent producer will have sole discretion to choose the distributor of its programmes and ancillary rights, although the producer will not be able to exploit television rights in the UKduring the licence period (as extended), and there will be a holdback on the exploitation of other rights in the UK before the first transmission of the programme.

Where programmes are commissioned by the broadcasters, they will be entitled to a 15% share of the net revenues received by the independent producer from the exploitation of the other rights (increasing to 20% in the case of the BBC"s terms of trade if it has funded a pilot). Both sets of terms of trade envisage the broadcasters cashflowing the licence fee in most cases (thereby avoiding bank discounting of the contracts), either on the basis of a cashflow schedule specifically negotiated, or on the basis of standard pre-agreed tranches of the licence fee.
If broadcasters wish to acquire rights beyond the primary broadcast rights (which should be relatively rare) then negotiations for these rights must be separate, and only after agreement on the primary rights licence fee has been reached.

Both broadcasters have stated that they want to move away from the line-by-line scrutiny of budgets of programmes they commission to a more ‘fixed-price" culture where a licence fee is agreed based on the nature of the programme. All broadcasters have already issued indicative tariffs for different types of programmes as part of their Codes.
One of the most difficult issues which arose during the negotiations of the new terms of trade was whether, and the extent to which, broadcasters should be entitled to a share of revenues from the rights retained by the producer. The BBC and Channel 4"s Codes had slightly different approaches to this. The BBC"s Code simply stated:

‘The BBC expects to share in the net revenue arising from [the commercial exploitation of rights retained by the independent producer] on an agreed basis through individual negotiation in order to deliver value back to the licence fee payer and as an acknowledgement of the added value that BBC makes to the programme."

Channel 4"s approach more closely reflected the principle which Ofcom and the ITC had expressed, namely that broadcasters should only seek to negotiate a share of revenues if they contributed more than simply commission the programme. Its Code stated:

‘The Corporation will expect to participate in revenues generated through the exploitation of secondary rights where Channel 4 has contributed to the value of the programme in terms of editorial input, promotion and marketing, advice on business affairs or in any other way that has added to the value of the programme."

What constituted ‘added value" was likely to be an area of considerable negotiation in almost every case (particularly as many independent producers would argue that a number of the ‘added value" elements set out in the Codes were part of the standard commissioning process). Pact therefore decided to adopt a pragmatic approach. The agreed share of revenues at 15% is intended to avoid these negotiations, and speed up the process of agreeing commissioning agreements. While this might be seen as a dilution of the principle of limited rights licences, it nevertheless still represents a significant improvement in the position of independent producers, which had traditionally had little or no say in the distribution of the rights in their programmes, and were usually left with a 30% share of net profits.

Although these new terms of trade will undoubtedly have a significant impact on the independent production sector in the UK, and should enable successful production companies to develop viable and thriving businesses, inevitably with such major changes there are areas which independent producers will need to keep under review. These include issues such as:

(1) Are the broadcasters paying less for programmes as a result of the new changes and the more limited rights which are being granted to them? Ofcom has stated that it does not expect programme prices (and the broadcaster"s contribution to the programme budget) to drop as a result of the more limited rights being acquired by broadcasters.

(2) How will the broadcasters exercise their additional limited new media rights (which form part of the primary rights in the UKacquired as part of the licence of rights), and how will this impact upon the distribution of the programmes outside the UK?

(3) Will independent producers be left with such large deficits in their budgets that they will have to dispose of valuable distribution rights to secure the balance of the funding for their programmes?

(4) Will the broadcasters adhere to their stated policies of, in most cases, not wishing to review the budgets of programmes commissioned, but simply agreeing a licence fee based on the nature of the programme?

Under the Broadcasting Act 1990, public service broadcasters are required to commission at least 25% of their output from the independent sector (although Pact is lobbying for this to be increased), and independent producers are responsible for many of the most popular drama, factual and entertainment programmes shown by UK broadcasters. The next 12 months will be an important period for the independent production sector and for the public service broadcasters as the new arrangements ‘bed in". Despite the detailed and lengthy negotiations in arriving at these terms of trade, there are bound to be issues which affect particular productions and which will still need to be negotiated in the light of these new terms of trade.

The new terms of trade provide companies in the independent production sector in the UKwith a real opportunity to retain and exploit valuable rights in their programmes, enabling them to invest in future programming and build their businesses. Corporate finance activity in this sector has already increased dramatically since the Codes were adopted, and several mergers, acquisitions and alliances are likely over the coming months, as businesses start to recognise the potential increased profitability and financial viability of the sector.