The biggest change in media companies over the last two decades is the shift away from physical products — printed magazines, books, newspapers, catalogs, etc. — toward digital content such as blogs, native advertising and video.
Many people assume because there's no physical product in digital media, costs are automatically lower than in traditional media. This is simply not true. The digital ecosystem comprises many different fees, residuals, royalties and so on. Moreover, the abstract nature of these costs can present a bookkeeping challenge.
Five Percent of What?
The abstraction inherent in digital media can make it difficult not only to determine both revenue and costs, but also to clearly spell out the system of measurement. From publishing content to purchasing digital ads, it can be hard to tell exactly where your budget goes. If you're running an ad campaign on social media, for example, are you paying for clicks or conversions?
The content side can be just as challenging. However, there are a few rules of thumb digital media companies should know. First and foremost: It's always better to own your content than to pay for content owned by a third party because of intellectual property rights.
Consider a simple photograph. If you commission a photograph — i.e. pay the photographer a one-time fee to shoot the image, which then becomes your intellectual property — you're free to publish that photograph wherever and whenever you wish. You can use it in perpetuity without ever paying another dime. If, on the other hand, you pay the photographer for use of an existing image, you're restricted to using that image only for a single specified purpose and/or a limited time. The number of page views can also impact the price.
If you intend to use a photograph (or video clip) for many different applications over an extended time, it can end up costing much more to pay for the ongoing rights than to purchase them outright. And that's to say nothing of all the hosting fees you'll have to pay on top of the rights fees.
One of the key concepts in bookkeeping for digital media production is modified adjusted gross receipts (MAGR). Basically, this means you start with the total amount of revenue a given piece of content generated and then subtract various costs such as production fees.
In one sense, MAGR is similar to the difference between net sales and gross sales in retail, where you start with the gross receipts and subtract cost of goods sold (COGS) to determine the net. What distinguishes MAGR is, again, the nebulous nature of many expenses, not to mention the sheer volume of them. Take, for example, the sliding scale for things like prints and advertising in the film industry. As one industry insider notes, "It needs to be said that these are malleable concepts."
The Best Defense Is a Good Offense (and Vice Versa)
The fluid nature of digital media can be either a blessing or a curse from a bookkeeping perspective. In general, it's better to take a proactive rather than a reactive approach to defining terms and asserting claims — and to document industry practices to support your position.
The bottom line? In addition to a knowledgeable bookkeeper, you'll need a lawyer who is well-versed in production deals to clearly spell out as many details as possible, such as how MAGR is calculated, to avoid any issues further down the line.