Tag Archives: dreamworks

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 Bail Out

No matter our behavior, the economy fluctuates from boom to bust on a fairly predicable basis. However, the severity of a bust is based in part on group (read: global market) psychology and bad, unregulated choices (don’t get me started on so-called “free market” thinking!).

Right now, the group think is pretty pessimistic and we’re in dire need of the equivalent of a global prescription for Prozac. A downturn is not a question at this point; only the extent of the damage and the timing of the recovery remain up for grabs.

The bail out measure before Congress will by no means prove to be a panacea. I keep hoping they will find a better way since the legislation – despite all the money – will not alter the landscape of losses or willingness to lend. However, it will remove a barrier to lending and mitigate some of the negative thinking. So, the sooner Congress works it out, the better for all of us.

I was recently assured by an elder statesman in the business that the industry will continue to flourish as it has in prior recessions and during the Great Depression since people continue to spend on entertainment as an escape from bad news. Peter Bart smugly approved in his column in Monday’s Variety:

Compared to the turmoil on Wall Street, Hollywood seems like an object lesson in prudent management. That’s why billions keep flowing into the movie business even when other industries are starved for capital.

OK, I know that’s really not the reason. Sucker money traditionally flows to Hollywood because investors want to meet girls, attend parties with movie stars and say they’re business partners with Steven Spielberg. Nonetheless, it’s still surprising to count the big bucks involved in the DreamWorks deal or in Ryan Kavanaugh’s Relativity Media or in Media Rights Capital’s portfolio at a time when the rest of the economy is locked in a liquidity crisis.

Suddenly, Hollywood’s managers seem downright austere compared with the crazies at Lehman Brothers. And movie-star salaries are pathetic relative to Wall Street payouts.

I’m not sure I agree since the entertainment business – like most businesses – requires access to credit to run. MGM is already struggling to service its existing debt and like the banks and other financial businesses, may be unrecognizable from its present form down the road.

Even before the current market crisis, Dave McNary wrote in last week’s Variety :

Start with plenty of labor unrest, add in the global credit crunch along with the consequences of too many movies in the market, and combine that with foreign distributors getting cold feet for anything but blockbuster Hollywood product.

“Any one of these factors would depress the business, so having all of them at once was something of a perfect storm,” notes Charles Heaphy, senior VP at City National Bank’s entertainment division. “This is like being in a rowboat while there’s a hurricane going on.”

With respect to startups, Jason Calacanis wrote:

It’s my believe [sic] that the economic downturn will be much worse than it is today, and that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and cross 80% of them off the list, because they will not make it to their next round of funding or profitability.

Tough times like these will require media and entertainment companies as well as startups to rethink their strategies for investment and growth for the foreseeable future.

It all sounds really, really bad.

It’s not enough that it’s hard to finance movies or a good idea; contend with getting distribution or vacillating VC’s; now you’ll have to work that much harder to even find potential investment let alone actual investors.

But the news may not be all bad. Money abhors a vacuum. There’s a lot of money out there sitting on the sidelines and plenty of people looking for places to put it; some of it from the most unlikely of places.

I’ve spoken to personal money managers whose sole duty is to make at least 20% on client money in good times and bad. Some of this money previously invested in oil, gas and securities but with these markets in turmoil, these investors are now looking for new investment opportunities. If bank financing dries up, private equity (e.g., hedge funds) – already a big player in motion picture financing – will likely replace it. Moreover, I recently had several discussions at the Toronto Film Festival and elsewhere with several emerging market financiers who all viewed the current US economic situation as a unique investment opportunity.

Let’s hope their optimism is contagious.