An entertainment company’s primary business is to create and distribute intellectual property (IP) to its customers and generate license fees (i.e., royalties) from those licensees. This is sometimes referred to as IP exploitation because the same IP is being used repeatedly as long as it continues to generate royalties for the company that owns or distributes its rights. For example, a large media company usually creates and exploits feature films through a theatrical release, DVDs, premium television, cable television, and network television markets, in that order.

The entertainment industry follows different pricing models depending on the target market and the mode of IP transmission to the end customer. These models are different based on the food chain being referred to. For example, customers pay $10 to $15 for a theater ticket, but the theater company often pays the distribution or media companies a fixed fee based on the number of copies or tapes for the film. Alternatively, end customers pay $10 to $20 for a blue-ray DVD at a big box store, which often pays $8 to $10 per DVD to the media company.

Pricing models, especially within the television industry, use complex calculations and varied models. Newly evolving formats of delivering content over antennas, direct to PCs, direct to mobile devices, and newly created on-demand channels have created a need for a flexible pricing modeling tool.

Background on SAP CRM-IPM Pricing Architecture

SAP CRM-IPM 7.0 with enhancement package 1 provides a solid base of SAP CRM architecture that caters to the media industry. SAP CRM-IPM only uses SAP CRM contracts to handle license sales (not an order or delivery document) and therefore inherits the pricing agreement and maintenance group concepts found in SAP CRM.

IPM license contracts are large multi-IP or multi-territory contracts in which each item requires unique pricing. This is handled by a concept called royalties scope. Depending on the unique pricing of each scope, a flat scope, performance scope, or advance scope is created in SAP CRM-IPM.

Pricing Models for Television in SAP CRM-IPM

First, you need to know the various pricing models in the television business and how each is handled in SAP CRM-IPM. License fee models in the entertainment industry are broadly categorized in three ways, and SAP CRM supports different line items for each one. The following models are referred to as royalty scopes:

• Total known fee up front: Referred to in SAP CRM-IPM as a flat scope, this is where users enter a known fee up front.
• Performance-based fee: SAP CRM-IPM refers to this as a performance scope. It allows users to enter an IP’s performance through a component called usage, which is tightly integrated with pricing via flexible configuration.
• Minimum guarantee: Called an advance scope in SAP CRM-IPM, this allows a user to specify a minimum guarantee amount for the licensee, which then is adjusted in an IP’s future performance.

Next, I review the fee models and the relevant SAP CRM-IPM pricing architecture.

Flat Fee

As their name suggests, these license fees are flat or fixed fees known up front. They do not vary based on an IP’s performance (the performance being exploited as part of the license sale). For example, say that for a specific IP, a media company charges a flat fee of $20,000. Though flat fees do not vary based on the IP’s performance during the license sale, fees vary from IP to IP based on other criteria, such as the duration of the film or program or a program’s past performance, which I expand on later in this article.

SAP CRM-IPM Solution for Flat Fees

Whether a fee is flat, performance, or advance, all are supported by standard SAP CRM line items controlled by item category configuration.

For flat fee and advance scopes, SAP CRM-IPM exposes conditions directly from the back-end pricing procedure into the CRM WebClient UI so that the contract processor or user can manipulate the pricing values. For example, Figure 1 shows a pricing procedure with multiple conditions in it, but only the conditions configured as manual are exposed for user entry on flat fees or advance scopes, as shown in the user screen in Figure 2.

Figure 1

Standard SAP CRM-IPM pricing procedure highlighting the manual conditions to control display on a flat scope

Figure 2

Flat scope displaying conditions configured as manual

Once you maintain the value in the CRM WebClient UI, Figure 3 shows how the pricing procedure is executed in SAP CRM.

Figure 3

Pricing procedure for a fixed license fee switched to manual

Pro-Rated Flat Fee Based on IP Duration or Count

A pro-rated flat fee based on IP duration or count are also pure flat license fees, but each IP’s license fee is pro-rated based on the IP’s broadcast duration (e.g., an hour-long movie is charged at 33 percent the rate of a three-hour movie). Similarly, for episodic products, entire television seasons are licensed together and charged at a fee per episode or on a fee per hour basis. For example, if the fee per episode was $10,000 and a season has 23 episodes, the season is licensed for $230,000.

To handle this scenario, the pricing procedure can have two different conditions manually entered by the user:

• Fee per hour          =    $10,000
• Number of hours    =    23

You can write a simple Java formula to multiply fee per hour times the number of hours to arrive at the total license fee. Alternatively, if your organization has an automated way of finding out the number of hours sold (e.g., via IP master data or a custom field), the system can automatically calculate the condition for number of hours using a value formula.

Once these Java formulas are developed, you can plug them into the pricing procedure as shown in Figure 4. As you can see, No Of Hours uses the base formula of 950 to calculate the number of hours (in this example, 23) from the film’s air time, and uses the value formula of 900 multiplied by the base (e.g., 23) with Lic. Fee per Hour (e.g., 10,000) to arrive at 230,000.

Figure 4

Pricing procedure configured to support license fee per hour multiplied by the number of hours

Flat Fee Based on IP Past Performance

A flat fee based on an IP’s past performance is also a pure flat license fee, but each IP’s license fee is calculated based on a known parameter (e.g., IPs with higher theatrical box office numbers are charged at a higher license fee than those with lower box office numbers).

Fee Based on IP’s Performance During the License Period

Unlike a flat fee, performance-based license fees are not known up front. As the name suggests, this fee involves pricing calculations based on an IP’s performance during its exploitation period.

For example, say that an entertainment company signed a deal with a Web site such as Amazon, YouTube, or Hulu, or a content provider such as cable TV, HBO, or the Dish network—these are referred to as the licensee in such deals. The company makes one specific feature available for download for this licensee and charges $4 for every download (also referred to as a “buy”) by the licensee’s end customer. (I should note that the licensee may be getting $6, $7, or more on such a buy from the customer.)

The IP’s performance is reported by the licensee to the entertainment company on a monthly basis or another frequency (e.g., quarterly or weekly) agreed upon between the two parties. Note that usage might be reported back by the licensee directly or by third-party usage collection agencies that track usage for the industry (this is a parallel business model within the media industry).

Say that usage for the first three months was reported as 80, 70, and 90 buys. Because each download is $4, the licensee is liable to pay the following: 80 x 4 = $320, 70 x 4 = $280, and 90 x 4 = $360 (Table 1).

Table 1

Sample fees based on IP performance

IP’s performance on pre-defined frequency is reported in the usage component in CRM-IPM component, which is a follow-up document to the main IPM license sales contract.

Now that I have covered a simple example in which the licensee pays for every buy, I’ll provide an example in conjunction with scales. Scales are used within conditions in standard SAP CRM, and involve a condition value that changes for a field or attribute’s range of values (e.g., fee per unit could change based on a product’s box office and theatrical admissions). During the pricing procedure, the specific condition’s (e.g., fee per unit) scale formula retrieves the correct value of the condition based on the value of field (e.g., box office admissions).

For example, say that an entertainment company signs a deal with a licensee and makes a specific feature available for download, charging: 

• $4 for every buy if the number of downloads in a month is greater than zero and less than 99
• $3 for every buy if the number of downloads in a month is greater than or equal to 100 and less than 199
• $2 for every buy if  the number of downloads in a month is greater than or equal to 200

Unlike my previous example in Table 1, the license fee per buy is different each month based on the number of buys (Table 2).

Table 2

Calculations with a scale-based condition

The SAP CRM and IPM Connection

Now that you understand what is expected from performance-based pricing, I will show you more about SAP CRM-IPM architecture and how IPM leverages standard SAP CRM functionalities. Table 3 provides an overview of this concept. In the next section, I examine each of the components in Table 3 in greater detail.

Table 3

Overview of how IPM leverages SAP CRM architecture for performance-based pricing

Usage Document Creation

An IPM license sales contract (transaction type IPMV) goes through a life cycle from in process to active to release to close (or custom stages defined by a particular client’s business processes). One of the key stages is release (i.e., formally activating the contract), during which follow-on processes are triggered. These processes include revenue recognition, billing due list creation, and so on.

In addition, when a performance scope is released, a usage confirmation document (transaction type IPMC) is created as a follow-on document to allow the user to specify periodic performance numbers of each IP’s exploitation in the market.

You can achieve this by configuring:

• Copy control of the transaction type (i.e., from IPMV to IPMC)
• Copy control of transaction type IVB1 (i.e., the item category of the contract’s billing relevant item (BRI) to IVH1 (i.e., the item category of the usage confirmation document)

Start by following IMG menu path Customer Relationship Management > Transactions > Basic Settings > Copying Control for Business Transactions > Define Copying Control of Transaction Types. First, select the record marked for IPMV to IPMC copy control. This is standard copy control of SAP CRM, leveraged by IPM to create a follow-up IPMC (usage) document from IPMV (contract). All other fields can remain blank for this configuration (Figure 5).

Figure 5

Transaction type copy control configuration needed to create a usage document

Next, take IMG menu path Customer Relationship Management > Transactions > Basic Settings > Copying Control for Business Transactions > Define Copying Control of Item Categories. Select the record marked for IVB2 to ICH1 copy control. Again, this is standard item-level copy control of SAP CRM, used by IPM to create line items in the follow-up usage document. All other fields can remain blank for this configuration. The usage document does not need any condition records, so select Do not copy conditions in the Copy conditions drop-down menu (Figure 6).

Figure 6

Item category copy control configuration needed to create a usage document

Frequency of Usage Posting 

Once you create the usage confirmation document, note that it is created with usage confirmation lines. Each line represents a periodic record. The default usage frequency is controlled by the billing settlement plan associated with the contract item category.

Follow IMG menu path Customer Relationship Management > Transactions > Basic Settings > Billing Plan > Define Billing Plan Types (Figure 7). This is standard billing plan configuration and is needed to create the usage statement screen and the bill usage statement at a pre-defined frequency (e.g., weekly, monthly, or quarterly).

Figure 7

Standard bill plan type to create monthly usage statements and billing

Next, this Billing Plan type is assigned to a transaction and item category. For this, follow IMG menu path Customer Relationship Management > Transactions > Basic Settings > Billing Plan > Assign Billing Plan to Item Category. For this example, select the record marked for transaction IPMV and item category IVY2 and assign plan 10 to the IVY2 item category (Figure 8).

Figure 8

Assignment of default bill plan type to item category

The above configuration ensures that a default monthly usage statement is created for performance scopes (item category IVY2). However, with or without that configuration, you can still manually adjust the billing plan for a performance scope as shown in Figure 9 under Settlement Rules.

Figure 9

Billing plan and billing details of a performance scope

Populating the Usage Screen

Once usage confirmation lines are created for usage entry, each of those lines allows the user to enter usage data only for those data points that are needed by pricing calculations. For example, if fee per buy was used in the contract, usage must allow the user to enter the number of buys. However, if pricing is based on a percentage of advertising revenue specified in the contract, then usage needs to allow the user to enter the amount of revenue.

This dynamic screen configuration is based on the data value profile assigned to the performance scope within the contract. The data value profile shown in Figure 9 (which I assigned manually to a performance scope) consists of three data values (i.e., variable parameters on usage screens). You can reach this screen by following IMG > Customer Relationship Management > Industry Specific solutions> Intellectual property management > Basic Functions > Pricing > Define Data Value Profile. This example profile allows the usage screen to display three data values: sales volume, sales quantity, and transmission (Figure 10).

Figure 10

Data value profile

As this step only refers to screen population, the next section describes how this data flows into pricing calculations.

Passing Usage into Pricing

SAP CRM-IPM allows usage to flow into pricing via data values. To enable this, follow IMG menu path Customer Relationship Management > Industry-Specific Solutions > Intellectual Property Management > Basic Functions > Pricing > Define Data Values. There are two types of data values—value and quantity.

Value data values are configured in SAP CRM-IPM (Figure 11) and mapped directly to a condition type (Figure 12). These are used for revenue, volume, and so on. In my example, sales volume from usage data flows directly into pricing condition 17B2.

Figure 11

Define data values of Value

Figure 12

Sales volume will flow into pricing condition 17B2

Similarly, quantity data values are configured in SAP CRM-IPM but mapped directly to the pricing procedure, which is notable because it implies there is one—and only one—quantity data value being passed to pricing. As shown in Figure 13, 1IR3 Confirmed Sales Quantity is configured as a quantity data value and directly mapped to the pricing procedure (Figure 14).

Figure 13

Define data values of quantity

Figure 14

Confirmed sales quantity now flows into the pricing procedure

Calculations

Now that you understand how the usage screen is created and configured, how the data is posted, and how data is pushed to the pricing procedure, I’ll show you how it all gels together to arrive at a net value of a usage-based license sale. This is represented by performance scope.

There is only one pricing procedure per transaction in standard SAP CRM-IPM (as well as SAP CRM), so all types of scopes—flat, advance, and performance—use the same pricing procedure. To see this, follow menu path IMG > Customer Relationship Management > Basic Functions > Pricing > Define Settings for Pricing > Create Pricing Procedure (Figure 15).

Figure 15

Standard IPM pricing procedure

Just like with standard SAP CRM, each step of the pricing procedure receives its value from any of the four following sources. The configuration I describe allows retrieval from each of the four sources, which I describe next:

• Price agreement of item, header, or previous transaction
• The previous step in the same procedure
• Custom value formula
• Custom source

The first source is the price agreement of an item, header, or previous transaction. For example, 17QI Lic.Fee (Qty) IR is circled in green in Figure 15. Such condition types have an assigned access sequence that also accesses the condition tables (also known as price agreements). Note that SAP CRM-IPM uses item pricing agreements for IPM conditions that also support scales. You can assign an access sequence to a condition by following IMG menu path Customer Relationship Management > Basic Functions > Pricing > Define Settings for Pricing > Define Condition Type as (Figure 16). Whichever conditions need data retrieval from source one (e.g., pricing agreements) need to have the access sequence assigned as shown in Figure 16.

Figure 16

Condition type configuration and assignment of access sequence

If pre-delivered access sequences are not sufficient, you can define your own access sequence by following IMG menu path Customer Relationship Management > Basic Functions > Pricing > Define Settings for Pricing > Create Access Sequence. Here, define your own sequence similar to what is shown in Figure 17. Once you create an access sequence, you can assign it to the condition type shown in Figure 16.

Figure 17

Define access sequence

Another source could be the previous step in the same procedure (e.g., 17PI takes total of step 99 as condition base).

The third source involves creating a custom value formula (in this example, 0TTE uses formula 11000 to obtain the condition value). The steps for this are beyond the scope of this article.

Finally, you can also use a custom source in SAP CRM-IPM or from the usage document. For example, note in Figure 18 that 17B2 Basis: Sales Vol. IR is highlighted. Such condition types are configured with source J: IPM: Basic Value in condition type customizing. These conditions receive the value from usage via the data value configuration explained earlier in this article in Figure 12. Such custom sources can be assigned to a condition type within condition type configuration, which is reached by IMG menu path Customer Relationship Management > Basic Functions > Pricing > Define Settings for Pricing > Define Condition Type.

Figure 18

Condition type configuration and assignment of data source

More Business Scenarios for Performance Scope

Now that my description of SAP CRM-IPM architecture has given you the details on performance-based pricing, I examine various other scenarios in the entertainment business. You can handle all of these scenarios using standard IPM with the integrated usage pricing feature.

Fee Per Buy

The fee per buy example was covered previously in this article and involves a license fee based on every buy of a film. For buy-based pricing, the licensee is allowed to download or have a local copy of a feature film and watch it multiple times. For example, this is the case when a U.S. customer receives a list of paid movies on cable channels and, once purchased, the movie stays in the set-top box for multiple viewings.

Fee Per View

The licensee pays a fee for every view of the IP. Normally, this IP may not be available for download onto the customer’s set-top box or machine. Irrespective of the arrangement between the licensee and its end customer, the licensee has to report how many views a specific IP has and pay the entertainment company accordingly. Typically, fee per view is a lower price than fee per buy for the same IP.

Fee Per Subscriber

This model is used when an entertainment company wants to charge a licensee based on the license’s viewership among customers, not for every IP viewership or purchase. Imagine that a TV network has 1 million subscribers in a geographical area in January 2011. The entertainment company made an agreement with the network and provided it with five average box office hit feature films for 2011. Instead of charging a fee based on every view or buy, the entertainment company agrees to charge the TV network -1.5 cent for each subscriber in each month of 2011. In this case, although subscriber numbers are needed on the channel level, you are required to calculate the IP-level subscriber count for each IP and maintain them manually against each IP in usage.

Minimum Guarantee (MG)

MG refers to a promised minimum by a licensee for scenarios in which the licensor’s revenue is based on performance of the license sale in a particular market and territory. MG protects the licensor’s license fees in cases in which the licensee is unable to exploit the IP effectively. MG is always specified in conjunction with a performance-based fee calculation and represented as advance scope.

Once a licensee promises MG to the licensor, the IP’s performance is tracked continuously to see if its performance goes over the MG. If so, the licensee pays additional fees to the licensor. This additional fee is called overage, and the process of checking continuously for overage is called advance recoupment. The licensee always pays more if the IP’s performance goes over MG—but what happens if the IP’s performance does not reach MG (i.e., a shortfall scenario)? This is answered by reviewing the types (i.e., item categories) of advances in the SAP CRM-IPM system (Table 4).

Pricing Challenges Faced by the Industry

Next, I note some common pricing business requirements that are a potential gap in SAP CRM-IPM. Enhancement details are beyond the scope of this article, but it is possible to fill these gaps with some custom development.

Ability to Support Custom Scale Base Types

Scale base type refers to various parameters that can be used as scale parameters. For example, perhaps the license fee is equal to the number of buys multiplied by the fee per buy, but the fee per unit itself varies based on the IP’s air time. Therefore, the scale base type is equal to the air time. The example in Table 5 shows how fee per buy changes based on an IP’s airtime. A 32-minute program will have pricing set at $3.20 per buy, while a 75-minute program has a $5.00 price per buy.

This example uses an attribute called IP’s airtime, but the list of attributes for scale base types often change when a company starts tracking a new IP attribute and needs to make a new scale base. There is no standard way of making pricing work without new formulas. To leverage an existing formula, you need to make a minor enhancement (beyond the scope of this article) to make this a configurable solution.

Header Level Pricing Agreements

Standard SAP CRM-IPM does not allow header level pricing (i.e., neither pricing procedure nor price agreements are allowed on the contract header, something that is otherwise standard in SAP CRM). With constantly changing business requirements in the media industry, you might need header level pricing rules (i.e., price agreements) that apply to multiple line items or follow-on contract sales.

For example, a specific multi-product deal could define pricing rules based on IP attributes. IPs with a box office total higher than $50 million have 40,000 as a flat fee, while IPs with box office totals of less than $50 million have a $20,000 flat fee.

You can expose the header components, as part of SAP CRM, on the user interface through custom enhancement. Using a field catalog and custom access sequence, the system can use the IP’s box office results to retrieve the appropriate value from header agreements for item-level pricing procedures.

Tracking Channel Subscribers

This scenario is described in the “Fee Per Subscriber” section and explains how subscribers are tracked at the channel and package level instead of at each IP level. This requires a need to track subscribers at a much higher level than an IP, but still use these numbers for calculating license fees for each IP sale. Because channel level subscribers are usually tracked on a monthly basis, not all IPs are active each month. Therefore, each IP consumes subscriber numbers from a different month of the channel, making this a very complex enhancement. Standard data value configuration (described in the section “Passing Usage into Pricing”) allows usage to flow in pricing from the same item’s usage, but not from a different source such as a channel or other object. As a result, this challenge requires a mathematical logic-based enhancement.

Maneesh Agarwal

Maneesh Agarwal is a manager with Capgemini’s SAP Service line. Maneesh has been working with SD and CRM solutions of SAP and implemented such SAP solutions for FMCG, leasing, healthcare, equipment manufacturers, and media and entertainment clients. Maneesh has strong expertise in SAP CRM Sales, Service, Contract Management, industry solutions (e.g., leasing and media-IPM), and specializes in SAP CRM and SD pricing.

You may contact the author at maneeshsapcrm@gmail.com.

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