Debt, Equity, Financing, Hedge Funds, Independent Film, Lawyers, Negotiations, Notable

Black Box Dealmaking

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"RFID closed" by AMagill

Over the past 18 months, I’ve watched countless film projects rise, flounder and fall with the promise of financing. The prevailing wisdom is that things have gotten so bad with oil, gas and real estate investment that film finance actually looks like a safe bet for equity investors. Oh, if it were only so. Film investment for equity players continues to be a very risky play.

Although debt financing continues to be a dim prospect, Comerica Bank, Union Bank and National Bank of California continue to back certain films from reliable players. From my perspective however, the end of debt financing of motion pictures came almost three months after the collapse of AIG and Lehman Brothers when the US rescued the bank in mid-finance of a movie I was working on. The bank ultimately financed the picture though I like to think that the collective efforts of the lawyers, the bank executives and the producers involved had a hand in getting the deal done.

Depending on the day, sheer will to make things happen is either over-rated or under-rated. And so it goes with film financing.

I’ve reviewed countless Stand By Letters of Credit (SBLC’s), real estate investments restructured for film finance, Sole Trader deals out of the UK, nine figure film funds from – depending on the day – Vancouver, Taipei, Shanghai and New Jersey and sources of black box financing where, for reasons not entirely clear to me, the identities of the investors and the financing methods used are veiled in secrecy. Not one of these sources of financing has come through. For its part, black box financing may be illegal or even dangerous. In a post-Bernie Madoff world, you just can’t leave the risk of financial games to chance. Get transparency or don’t do the deal.

Some of these prospective investors may prove to be the real deal but at best, they are all long shots. Do your due diligence so you know who you’re dealing with, the sources of financing and whether the investor is prepared to provide you with references (i.e., prior projects they’ve financed) and proof that their funds actually exist through escrow or bank confirmation. Some financiers may be more forthcoming than others and at some point, given the limited resources of time, money, knowledge and passion, you may have to go with your gut in deciding whether to proceed.

I have to believe that a number of would-be film investors are earnest and either don’t know that they don’t have money to invest or get cold feet at the prospect of closing; while others may be lookey-loos who simply want to do lunch at The Ivy and play the producer game but really don’t have any money to invest.

But still they come with promises that entice producers and other creatives. Just make sure you don’t get stuck picking up the check.

Copyright, Internet, Music, UGC

Loose Lips Syncing Shifts

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"Wax Lips" courtesy of Red Clover

Back in the 80’s, MTV was cutting edge. To many of us growing up back then, music videos were as much a part of the soundtrack to our lives as the music itself.

Inspired, my high school class produced its own music video; a lip syncing production of Devo’s We’re Through Being Cool which was seen by less than a thousand people at my school’s annual musical revue. [Note to Roslyn High alums, please send me a copy and I will post it here!]. Today, kids produce lip dubs in just a few hours and mass distribute them to millions worldwide through viral video websites like YouTube.

Here’s a lip dub of I Gotta Feeling by The Black Eyed Peas. A couple of kids from the University of Quebec, Montreal (UQAM) shot this video with 172 students in one take and one rehearsal.

Here’s “the making of” video of the UQAM lip dub [Subsequently blocked by UMG. I can’t figure why of the two, Universal Music Group chose to block the “making of” footage and not the lip dub itself. Updated: January 21, 2012]:

Here’s the original music video produced by The Black Eyed Peas.
I prefer the UQAM students’ take.

Of course, lip dubbing raises all sorts of legal issues concerning copyright, fair use and commercial exploitation of works owned by others. Apparently, the students didn’t clear the music though I suspect the cost of doing so would have been prohibitive.

So are mass distributed, viral lip dubs bad or good for the music business? The band? Do they cut into or promote market share? Do they dilute the promotional power of the band? [Ed. Note: Don’t ask me about this last one. I hear this argument from label reps every time I negotiate with them.]

With over 3 million hits on YouTube and publicity from news outlets and blogs like this one, The Black Eyed Peas could never have garnered that kind of exposure on their own. YouTube’s Audio ID program can link lip dubs and other user generated content on its website to online buyers of the band’s music. That kind of Internet exploitation should be music to the industry’s ears.

[UPDATE: January 18, 2010:] As reported on The Trademark Blog, Capitol Records sued Vimeo in Federal Court on December 10, 2009 for copyright infringement from the site’s exploitation of lip dubs.

Complaint Capitol v Vimeo

According to The Trademark Blog, Capitol needs to persuade the Court not to follow Io Group v. Veoh or UMG v. Veoh. These cases held that file sharing services like Vimeo are not liable for the creative (and arguably infringing) activities of their users.

As I wrote earlier, the music industry needs to have an honest and public discussion about whether such uses actually promote or dilute the value of their works. So far, I haven’t seen any proof one way or the other. In the end, it might not matter. People will continue to find creative and novel ways to exploit existing works despite the risks. It’s incumbent on the music industry to figure out a way to squeeze some profit for themselves out of that.

Lawyers, Litigation, Negotiations, Notable, Reading List, Representatives, The Culture

My Intern’s Reading (and Viewing) List Part I

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"Copier Tech" Courtesy of Yo Spiff

Every year, I take on at least one intern to work in my office. I expect them to do quite a bit of scut-work and provide support to the office.

In return, I let them see and hear what it’s like to negotiate and litigate in the entertainment business. The reps on the other side of the deal are usually gracious enough to allow the interns to listen in on conference calls and the interns attend depositions, hearings and settlement conferences when we’re involved in litigation matters.

I also require my interns to complete a reading and viewing list and be prepared to discuss it with me during the course of their internship.

Here’s the first in a series of what was on last summer’s list in no particular order:

Animal Planet

Everything (ok. well, not everything) I know about the entertainment business I learned from watching Animal Planet.

All negotiations (indeed, most human interactions) can be reduced to basic animal-like drives and instincts. Like the clip here between a male and female bear or the bull moose locking horns below, negotiations involve the struggle for dominance and submission.

Watch it. Really. Trust me. Once you understand that negotiations are really driven by human behavior and human needs, you can increase your ability to address the needs demands of the opposing party without giving away the store.

Next: Glengarry Glen Ross

Career, Debt, Digital Downloads, Distribution, Equity, Film, Financing, Guilds, Hedge Funds, Home Video, Independent Film, Internet, Markets, Notable

Quantum Mechanics

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Pipe Wrench courtesy of Scott Arch

Despite all of the self-help books preaching the contrary, people have a hard time living outside the moment. So, it’s difficult for them, let alone a whole industry to shake the mindset that the current ecology of the business will continue to be bleak forever. But this sour economy is just a part of a normal business cycle which will pass.

Eventually.

If we’re willing to wait. And survive while we’re waiting.

Will the business be the same? I doubt it. It will be continue to evolve as it always has in the film business. A decade ago, insurance-backed financing was all the rage. Then came sale-lease back deals from the UK, investment from German film funds and most recently, private equity and hedge fund financing. Those were good times. Good times.

However, dramatic, paradigm shifting change – the kind of change required to modify an outmoded, global business model created decades ago and move entrenched players with special interests – requires what Nassim Taleb calls a Black Swan event. Like a rare black swan, nothing less than an impropable sequence of events like limited access to credit, labor unrest, rampant piracy, the rise of the Internet and the collapse of distribution windows and the pre-sales market can bring about meaningful change to this business.

Even so, the fundamentals of the film business remain. People like good movies, especially those with good stories and high production values. And there remain untapped distribution channels in emerging markets and emerging technologies. Where there’s a demand for something, there will always be a business.

Bill Mechanic, a key player in the studio world and now, the independent movie business put it best in his keynote at the IFTA’s annual Producer’s Conference back in September:

The independent world, which should be aiming to do things better and different from the studios, doesn’t have that as a mandate at all. If anything, the only thing that independent distributors and financiers look for is the same. Maybe costing a little less than the majors, but they want what the studios want, or in Fight Club-speak, they want copies of a copy.

* * * * * * * * * * * * *

In that way, Hollywood in the broadest sense of the word is much like Detroit. It’s a manufacturer’s mentality that reigns, seemingly indifferent to the consumers it serves. Ignore whether the consumer likes our product as long as they buy it.

* * * * * * * * * * * * *

The next 2-3 years will be even worse, not because of the flood of new releases, since that is already abating, but rather due to the effect the over saturation has had combined with the economic downturn. New money is going to be hard, if not impossible to find. Ad sales are down, so TV networks around the world, other than cable, aren’t buying. Add in a confused video market, and it’s going to be tough. To my mind, the next few years will be about survival.

* * * * * * * * * * * * *

. . . [A]lot of waste is going to be cleared from the marketplace. Excess product will go away, the people who don’t take the business seriously will go away. Hopefully those who make crummy movies will also go away, but that may just be a personal wish.

* * * * * * * * * * * * *

[The film business] is a game for winners. And those who win today will win to an even greater extent than at almost any point in the past. . . . Those who will win will be smart about what they make and how they sell their films. They will hopefully make good films but perhaps even more key they will make unique films that stand out, which means they will not have to compete against the bulk of the films for talent. They won’t look like all the other films so they won’t have to spend as much money marketing them.

It’s not that the buyers aren’t there. Consumers, TV outlets, retailers and, yes, even pirates want what works. Don’t believe me? Ask Summit about Twilight. Ask Searchlight about Slumdog Millionaire. Ask Screen Gems about District 9. Ask Focus about Coraline.

The takeaway? To get through this down period, be good, be different and as Tim Gunn says, make it work!

To read the complete transcript of Bill Mechanic’s keynote speech and some really informative reader comments click here to Nikki Finke’s blog.