
Closing binder for $3 million film financing (left).
Closing binder for $25 million VC startup financing (right).
Last week’s Entertainment Business symposium at UCLA lacked the usual spark one feels when 500 lawyers gather together in one room. Even so, I live-tweeted a number of the highlights from the two-day event.
#uclaentertainmentsymposiym financing film slates are back
— Peter Kaufman (@Dealfatigue) March 8, 2014
#uclaentertainmentsymposiym interesting nugget: so much money in the film investment space that studios are raising their distribution fees.
— Peter Kaufman (@Dealfatigue) March 8, 2014
Photo: Headline act: Kenny and Harvey Takeaway: TV TV TV mantra (at UCLA Freud Playhouse) http://t.co/qzbG4zSBeI
— Peter Kaufman (@Dealfatigue) March 8, 2014
Yes. “@shericandler: TV or just episodic?" My take is both. One-offs with back door pilot potential are less risky though.
— Peter Kaufman (@Dealfatigue) March 8, 2014
#uclaentertainmentsymposiym advertisers getting squeezed out of TV and making their own content. Case study: LEGO movie
— Peter Kaufman (@Dealfatigue) March 8, 2014
#uclaentertainmentsymposiym Ratner: big brands will go direct to well recognized content creators for longer term deals to use their brand.
— Peter Kaufman (@Dealfatigue) March 8, 2014
#uclaentertainmentsymposiym (cont'd) as opposed to going through studios to talent/content creators.
— Peter Kaufman (@Dealfatigue) March 8, 2014
"We have a theatrical window followed by a piracy window" #goingforthefunny #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
@Dealfatigue So where do we go from here?
— Fay Hauser-Price (@Hauslightsfay) March 8, 2014
Bank discount/spread improved to 90% for state tax incentives (from 80%) #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
Who's banking incentive paper at 90%? I'm asking for a friend. #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
A lot of conversation but very little actual money from China investing in film #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
Sovereign wealth funds are back in film #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
"China's goal is due diligence of Hollywood docs/assets to replicate homegrown industry not to actually invest" #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
Declining European distribution market. #uclaentertainmentsymposiym
— Peter Kaufman (@Dealfatigue) March 8, 2014
Supergap is savior to indie financing but very expensive. "Teen money" interest rates. Lots of mez, P&A funds from hedges/family offices.
— Peter Kaufman (@Dealfatigue) March 8, 2014
Still remember seeing Harvey 5 years (?) ago at #tiff walking alone on the street post-Miramax Disney separation. He rebooted well.
— Peter Kaufman (@Dealfatigue) March 8, 2014
Say this about Harvey: portfolio approach to material/breadth of players/stakeholders in Weinstein projects (inside/outside biz) impressive
— Peter Kaufman (@Dealfatigue) March 8, 2014
You can deliver that if you're Bob and Harvey bc they leverage their substantial track record. Not so much for others.
— Peter Kaufman (@Dealfatigue) March 8, 2014
@Dealfatigue Disney dumped the Weinsteins because their profits weren't good enough – I side with Disney. Admiration smacks of desperation
— Edward Anthony Rayne (@rayne_ea) March 8, 2014
.@rayne_ea don't know enough of the details on that. I think the Weinsteins on a leash as Disney had was a great long game but …. 1/2
— Peter Kaufman (@Dealfatigue) March 8, 2014
.@rayne_ea shareholder value (for many public companies) usually requires shorter-term thinking 2/2
— Peter Kaufman (@Dealfatigue) March 8, 2014
@Dealfatigue Now that's the truth. What about people at no table? Where's the leverage & access?
— Fay Hauser-Price (@Hauslightsfay) March 8, 2014
.@Hauslightsfay need to execute with high production values on work that matters or art with authentic vulnerability. No cutting corners.
— Peter Kaufman (@Dealfatigue) March 8, 2014
Q&A questioner thanked Harvey for his contributions. Harvey said, "thank you, though some of the lawyers in this room may disagree"
— Peter Kaufman (@Dealfatigue) March 8, 2014
Fred Wilson wrote a piece on his blog today complaining about the film business’ distribution model. Fred wrote in part that:
denying customers the films they want, on the devices they want to watch them, when they want to watch them is not a great business model. . . . [Studio executives] insist that they need their windows. They argue they need to manage access to their films to extract every last dollar from the market. That just doesn’t make sense to me. If they went direct to their customers, offered their films at a reasonable price (say $5/view net to them), and if they made their films available day one everywhere in the world, I can’t see how they wouldn’t make more money.
While I have no allegiance to the current business model, I understand it. Producers of any new film hope to see it distributed in a number of distribution windows starting with an exclusive theatrical release and continuing through to wide release on multiple distribution platforms typically over the course of 12-18 months.
Wilson advocates simultaneous “streeting” across all distribution platforms. As technology improves, the lines of each traditional distribution window are blurring and will be replaced with something more akin to what Fred is advocating.
Even so, I can’t help thinking that audiences might lose something valuable in the process – maybe even movie theaters themselves. That would be ironic since movie execs sounded similar alarms when television was the disrupting technology in the 1950s. Then as now, movie theaters survived – but for how long?
What follows is most of what I wrote in response to Fred’s post with grammatical tweaking and references to other commenters omitted:
There are two . . . significant obstacles to simultaneously “streeting” movies across all distribution windows.
1. Movie theaters are a limited high-value distribution channel. There are only so many movie theaters and so many seats in those theaters. Only a small fraction of the movies produced each year get a theatrical release in the US. Foreign distributors look at a US theatrical release as a quality marker (this, despite the fact that international revenues generally account for 70% of a film’s budget). So a domestic theatrical in it of itself drives the value of foreign distribution rights up. This kicker in international revenues could not exist in its present form under a simultaneous street paradigm.
2. Allocation of marketing dollars. Movies and virtually every other product with novel elements have a distribution cycle, with demand for a well regarded/well marketed product highest at or near inception (e.g., the latest incarnation of any Apple product or Star Wars sequel). The costs of striking prints of the film – which are coming down as more theaters use digital projectors – and advertising (also called “P&A”) on a typical domestic release of a 1,000 screens or more are substantial. Studios/producers require millions in marketing dollars, sometimes in excess of the cost to make the movie, to theatrically release a movie in the United States.
The goal is to fill each and every seat of every screen in which the movie is shown to justify these marketing expenses (which, if successful, drives up the value of international revenues as noted above). That would not be possible if consumers had other, possibly more convenient choices that might dilute audience share at movie theaters. Although each exploitation window requires additional marketing spend, a successful US theatrical release can have a halo effect on subsequent windows (e.g., Titanic, the Twilight movies).
3. History of Industry Resistance to New Technologies. Lastly, the industry has always been hostile to new technologies. Silent movies were adverse to talkies which were against television which bristled to home video and so on to the present day.
The advent of on-demand viewing of movies in theatrical release is already part of an evolving theatrical release window. The industry needs time to adapt its model to the new demands of its audience. Change in the film business is inevitable even if it won’t come fast enough for the Fred Wilsons of the world.
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.