Category Archives: Financing

Waiting For The Dough

"Commute, N Judah" courtesy of Heather

I decided not to attend the Cannes Film Festival back in May because of the dismal economy and what I expected to be a poor showing there. I learned things were even worse than expected when my colleagues in distribution reported from the near-empty beaches of the Cote d’Azur that the bottom had fallen out of the pre-sales market.

The Toronto Film Festival was supposed to be different. Four months after Cannes, with the banks flush with TARP funds and individual investors reportedly swapping oil and gas investments for classic cars, surely an uptick in motion picture finance had to be right around the corner.

I thought that Toronto would present a sea change in the degrading economics of the business; that the credit markets would thaw; and the cash equity of retired Silicon Valley and Wall Street insiders, the Chinese, the Indians and institutional investors would make the trek up to Canada in droves.

But Toronto felt like a bad dream about a big party that everyone attends but the host forgets to cater. People took meetings, did lunch, partied, went to screenings and generally did the things one does at a film market except buying, selling and investing in films. All of the elements for a successful market were there except cash. The money, it turned out, stayed at home.

Looking back at it now, I was overly optimisitic but hardly alone in my rosey outlook.

Yes, there were well-publicized exceptions to the lack of a market at the market. However, to the rank and file independent producer, the prospects remained bleak. Although the independent film business has been subject to business cycles in the past, many I spoke with in Toronto believe that business won’t bounce back to pre-recession levels.

The Internet is the double edged sword at play in any recovery. On the one hand, the Internet provides new sources of distribution revenues through streaming and digital downloads. On the other hand, the Internet’s ability to stream content is eroding traditional exploitation windows and risks shortening the profitability period for the typical commercial motion picture.

Still, the credit markets continue to thaw, albeit slower than many anticipated. New distribution models are rapidly evolving and with it, new deal points in the licensing of distribution rights.

And . . . the American Film Market is less than two months away. Maybe, just maybe then, producers will finally be able to get the money shot that they’ve been waiting for.

Interdependence Day

"118/365/year2 marionette" courtesy of "Riot Jane" aka Bethany

There’s been quite a bit of up-selling of independent pictures in Hollywood.

With the box office success of Slumdog Millionaire, indie films are the new darlings of the movie business after decades of being relegated to the wilderness of limited theatrical distribution and even more limited marketing budgets.

Seeking to capture greater market share, the majors absorbed distributors like New Line Cinema and Miramax years ago.

However, the studios never expected that their independent labels might produce pictures that would threaten to cannibalize their tent-pole productions.

Patrick Goldstein recently wrote in The Big Picture blog about Slumdog’s surprise performance and its likely chances of getting an Academy Award here. [Ed. Note: Goldstein’s post has since been removed but can now be found here].

After all, the irony of all ironies is that after giving “Slumdog” the bum’s rush, Warner Bros. spent millions running a best picture campaign for “The Dark Knight,” the highest-grossing film of 2008, which still ended up being largely ignored by Oscar voters, who failed to give it a best picture, best director or even a best original screenplay nomination.

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The sad truth is that most studios today don’t have the patience, the artistic desire or the skilled manpower to release a film like “Slumdog.” My guess is that Warners, having unloaded all of its specialty divisions, both Picturehouse and WIP, eyed its little gem (made for a paltry $14 million) and said–even if we put in months of painstaking work, it’s at best a double (industry parlance for a modest hit). Like most studios today, Warners is an assembly line, built to swing for the fences, eager to make mega-hits like “The Dark Knight” or “Harry Potter,” which not only make far more money but feed the studio’s valuable ancillary markets.

Warners is not alone. 20th Century Fox has little in the way of artistic ambitions, preferring to hire no-name directors, leaving the Oscar game to its Searchlight subsidiary. The same goes for Disney, which is happy to let Pixar take home a best animated film statuette and let its tiny Miramax subsidiary, which spends a fraction of the money it did when Harvey Weinstein was at the helm, play in the awards sandbox. Even Sony, which used to avidly pursue awards, has largely given up, preferring to pursue more commercial goals.

It’s a great article and I was with Goldstein until he wrote:

Of this year’s best picture nominees, only two were made at major studios: “The Curious Case of Benjamin Button,” co-financed by Paramount and Warners, with Paramount distributing, and “Frost/Nixon,” which is distributed by Universal Pictures. “Slumdog,” along with “Milk” and “The Reader,” were financed outside the studio system or by specialty companies. More importantly, if you look at the recent best picture winners, they are invariably made by fiercely independent filmmakers who rarely take their cues from the studio system.

The Coen brothers, who directed last year’s winner, “No Country for Old Men,” are so leery of Hollywood that producer Scott Rudin had to cajole them into even coming to town for a few glad-handing events. The same goes for Martin Scorsese, a lifelong New Yorker who directed “The Departed,” the winner in 2007. Paul Haggis, who directed “Crash,” the 2006 winner, lives here, but as a director operates just as far away from the studio system as Scorsese or the Coens. Clint Eastwood, who won in 2005 with “Million Dollar Baby,” is the ultimate outsider, making his movies with the same crew in the same quiet fashion, brooking little interference from any studio suit.

While I am pleased to see that American (and global audiences) are demanding more sophisticated fare, I demurred in the comments section of my client, Jonathan Wakeham’s blog on film @ mastersvo.com. I wrote that:

Although it may be true that these pictures were independently financed, such financing was likely based on the producers having US theatrical distribution in place prior to principal photography. US theatrical distribution essentially drives the value of foreign distribution rights up increasing the likelihood of financing a project.

For all their laudable (and at times, edgy) works, Scorsese, Rudin, Eastwood and even Haggis are part of the Hollywood establishment. Their involvement in a project can easily (relatively speaking) drive financing of a project. Saying that these pictures are truly independently financed . . . is like calling a wolf in sheep’s clothing a ewe.

While Slumdog is not a litmus test of what truly independent projects can accomplish given meaningful theatrical distribution and a real marketing budget, it does prove that audiences have a big appetite for original stories in an industry that insists on being increasingly derivative and increasingly risk-adverse.

And that’s a pretty happy ending in itself.

The Film Industry Is In A Pickle

Pickle Magazine, a film industry publication based in India about all things Bollywood and now, Hollywood, recently asked producer and sales agent, Ron Lavery to interview me and ten others for its American Film Market edition. After reading all eleven interviews, it’s clear that none of us agree on what the long term and short term effects will be on the film business given the latest seismic shocks (and those to come) to the overall global economy. Here’s my take:

Lavery: How do you think the current economic situation will effect AFM business this year?

Me: The entertainment business, like most businesses runs on credit. Although there appears to be a credit thaw . . . if the financial environment gets worse or even if it continues to improve at its current pace, the credit freeze will definitely affect AFM business this year. With limited access to the credit markets, buyers will be less inclined to close deals and will have limited buying power in the short term. Over the longer term though – and I’ve already witnessed it first hand – private equity will step in to do more traditional debt financing (albeit at a premium) if the banks are unable to do so.

Lavery: Do you foresee any mergers between distribution companies?

Me: Yes. Although mergers are already a part of the overall trend towards the consolidation of the business, the current economic climate will only accelerate this process.

Lavery : Are there any news ways of financing films on the horizon?

Me: Over the last decade and longer, people have been and continue to try to build a better film financing business model as the economics of the film business shift. This process will likely [continue to] shift at a tectonic pace especially if credit remains tight, the costs of production continue to rise and equity sources dry up. With the Internet as a potentially new distribution platform with untested sources of revenue based on either a subscription model (which won’t work) and advertising (which might work if the revenues become more meaningful), Internet exploitation windows may become a more significant revenue source for producers and distributors.

This is especially true now that that the technology exists to “geo-filter” the exploitation of films on the Internet on a territory by territory basis.

Electronic sell-through of video units of films may increase the value of minimum guarantees since the Internet will allow producers to have greater access to mass markets for their films during the video exploitation window. In some cases, producers may be able to directly distribute their films without an actual distributor just as artists have in the music business, thereby saving on costs by eliminating the middleman.

What is even more interesting is that short films are rising in commercial appeal.

Long relegated to film festivals, new distribution opportunities have developed on the Internet and on mobile phone and Ipod technologies for shorts. As a consequence, producing shorts are good for business since they have lower budgets and can now attract marquee talent who view internet exploitation as a cutting edge business opportunity that provides potentially great exposure with minimal effort.

Lavery: Will the economic crisis effect government subsidies and tax credits?

Me: With the drop in income here in the United States (and a corresponding drop in tax revenues), each locality is looking for new ways to attract revenues, jobs and new industry to each of the States but [they are also] forced to contend with a corresponding drop in tax revenues by virtue of providing the tax subsidy itself.

Meanwhile India, the Middle East, Eastern Europe and China will continue to be appealing places to produce films which might not provide tax credits per se but . . . increase the potential bang for the buck.

Lavery: Any thoughts on the enormous impact Indian film companies seem to be having on American film companies?

Me: While the current economic climate is adversely affecting the global economy, India is viewed by many in the entertainment business as a potential source of new financing as opposed to talent. The good news for Indian film companies is that if India is the source of financing, then there might be increased leverage to utilize Indian talent in American films.

The other factor is the increased reliance on foreign sales of American films which right now hovers around 60-65% of the budget of the typical mainstream American film. This in turn requires . . . increased reliance on foreign talent in an effort to increase the appeal to foreign audiences.

Lavery: Any thoughts on Indian financing opportunities like the recent Spielberg-DreamWorks deal?

Me: The Spielberg-Reliance deal is viewed by many as the high water mark of Indian investment in film. The good news is that other film funds do not and will not require market capitalization to this extent. I expect the formation of several Indian and Asian based funds with more modest capitalization ranging from US$35 million to US$80million in the near term provided economic conditions do not seriously deteriorate.

The Economy From A VC’s Perspective

View SlideShare presentation or Upload your own.

Venture Capitalist, Sequoia Capital put together a simplified slide presentation on start-ups and the economic downturn.

Less is more and this presentation simplifies a lot of the complexity of the current economic mess we’re all in. Be sure to check out slide #21 for the take away.

Many thanks to Fred Wilson’s blog A VC for alerting me to this.