Everybody Wants Some … Equity from Advertisers, that is

By Schuyler Moore, May 21, 2009

The age of equity movie investment by advertisers has arrived. There has been a seismic shift in the last year and big advertisers are going Hollywood.

Ford recently created a dedicated department with the sole task of stepping up Ford’s s positioning in films, including equity investments. Importantly, the new department solves the dilemma of how to get the marketing and financial departments within big companies to talk to each other, which is necessary for these transactions to work.

Studios such as Sony, recognizing the importance of this development, have created a department with the sole responsibility of tapping this source of financing. They have entered into multi-year overall product-placement deals in exchange for funding from the sponsors, including Miramax/Coors and New Line/Samsung.

Advertisers have been funding 100 percent of the equity for certain television shows, including GTX and The Restaurant, and are creating their own shorts to view online or as trailers in theaters, including BMW’s shorts on the Internet and the Seinfeld/Superman shorts by American Express. Management firms have entered the fray, with some of them hiring people to broker these deals.

Equity investment by advertisers raises new business and legal issues that need to be resolved to make the transactions work. The issues can be analyzed in terms of money in, money out and control. Closing these transactions requires trail-blazing a new path through this financial wilderness.

Depending on the size of the investment and the sophistication of the advertiser, the advertiser may feel entitled to exercise ultimate creative control, including final cut. Must the hero drive off in a Ford-while eating a whopper from Burger King?

Advertiser control might mangle the film, which would be self-defeating, so a careful balance must be struck to prevent the film from becoming a non-marketable commercial. If done with creativity, products can be woven into the fabric of a film in a way that strengthens it artistically (e.g. Castawaywas a two-hour subliminal Fed-Ex commercial). The trick is putting into words a mechanism that assures the advertiser the desired exposure yet gives the producer the flexibility to make a compelling film.

The solution may require mutual script approval and guarantees of a certain amount of on-screen product time according to pre-established guidelines.
One key question is determining the timing of funding. Producers tend to view equity as at-risk money, which should be made available during pre-production, even prior to closing any production loan or obtaining a completion bond. While this is unfamiliar territory for most advertisers, they naturally want to fund shoulder-to-shoulder with other financiers under the sheltering umbrella of a completion bond, although they are more flexible on this issue than banks.
Given the level of control that goes with a significant equity investment, advertisers may ask for adjacent advertising, such as a brief ad prior to the start of the film, inclusion of a short “special” on the DVD, and even a promotional song on the soundtrack.

One of the most difficult aspects of these arrangements is that many of the issues need the approval and cooperation of distributors (including foreign distributors), but they are not at the table. In addition, the advertiser may be insisting on a minimum number of theaters or P&A in particular territories, or it may be insisting on confirmation that the distributors will not edit the film. In these cases, all or part of the financing may be subject to the condition that the producer obtains distribution agreements complying with these requirements. The producer will then have to effectively impose these requirements on the distributors, and the distributors may be disinclined to acquiesce to these requests. (“Oh, by the way, we need you to guarantee to our advertiser a few things…”)

One of the key issues that the advertiser will be looking for is the right to use the images of actors from the film for advertising products. Once again, the producer is in the bind of having to promise to the advertiser certain rights that the producer simply does not control at that time (the permission of the actors). This can be a touchy subject, particularly for top talent. All the more so when the advertising blurs the distinction between cross-promotion for the film and outright advertising for products. The actors may expect to be compensated for this right, and the advertiser might reasonably be required to pay any associated increase in compensation.
If the advertiser intends to create a particular product line based on the film, such as a product line incorporating the title or trademarks from the film, the producer may seek to obtain a royalty from such sales.

Yes, the going is tough, and the negotiations can take months, at least until we get our sea legs on these transactions. But the rewards are worth it big time since advertisers have the unparalleled capacity to make a film happen. The next big financing wave is hitting the shore — and it could be a monster.