The audiovisual industry is a multi-billion-dollar industry that covers the whole ecosystem consisting of production, distribution and exploitation of audiovisual content like films, TV series, animation, music, programming, and video games.
In our series about collections in international business sectors, in this article we will assess what characterizes account receivables management in the audiovisual industry. We will focus on license agreements, royalties, the audiovisual supply chain and relationships.
License Agreements in the Audiovisual Industry
Firstly, we should look at how revenues are generated in the audiovisual industry. Generally, revenues consist of so-called royalties in connection with intellectual property. These royalties become contractually payable when the distribution rights of audiovisual content are exploited. In general, such distribution rights are licensed from one party to the other under so-called license agreements or distribution agreements. The licensor grants the licensee the right to exploit content in specific media, in a certain territory, for a determined period of time. In exchange, the licensee pays the licensor royalties for the distribution rights. The royalties can be based on a formula whereby licensee and licensor share the royalties generated in the licensee’s jurisdiction, or the licensee can pay the licensor an advance, or minimum guarantee, for any and all royalties generated. Licensor invoices the licensor the royalties due under the license agreement. It is important for accurate and effective account receivables management to understand how the licensing of the distribution rights work, and how in return royalties are generated and invoiced.
Understanding the Audiovisual Supply Chain and How Royalties Flow
Secondly, it is important to have an understanding of how distribution in the audiovisual industry works and where royalties come from. In the most simplified model, distribution in the audiovisual industry takes place from one licensor to one licensee, whereby the licensee exploits the distribution rights exclusively through its own channels. This is the case for example for the traditional movie studios, the streaming platforms and large TV networks. In such case, royalties will flow directly from the single licensee to the licensor.
However, it can also be that a licensee, in order to exploit the rights, needs to sub-license the distribution rights in order to generate revenues. This is the case in an independent distribution model, whereby the licensee is a smaller, independent distributor, who sub-licenses the distribution rights to for example TV networks, streamers, video stores and cinemas, in the case of movies. Royalties in this scenario will flow from the sub-licensee (or exhibitor), to the licensee (the distributor), and from there to the licensor.
Often, if audiovisual projects are sold by an international sales agent rather than by the licensor directly (which is more of a rule in case of independently produced projects, especially in film, animation and TV series), the royalties will even pass via an additional layer, being from the licensee (or in fact, from multiple licensees) to the sales agent, and from the sales agent to the licensor.
Account Receivables and Relationships in the Audiovisual Industry
Finally, it is essential to understand that the audiovisual industry is predominantly a relationship business whereby people generally know each other personally and are continuously in business with each other. This can at the same time be of benefit to account receivables, as well as cause disadvantages. The benefit is that people often know a lot about each other’s businesses and solving an issue with an invoice can be a phone call away. On the other hand, the disadvantage can be that people are destined to continue working together, causing that often a soft approach ends up in delays and interference with effective account receivables management. This is the reality an account receivables executive will need to deal with.
To effectively and accurate carry out account receivables management in the audiovisual industry, it is important to understand its characteristics. We specifically discussed how license agreements work, pointed out the importance of understanding the supply chain and how royalties flow, and how essential relationships are and how this affects account receivables.
If you want to know more about account receivables managementfor the audiovisualindustry,or for international business sectorsin general, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.
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David Zannoni