If you’ve embarked down the road of raising money, following your road map (sometimes referred to as a business plan) and packed your knapsack with stock, the next stop on the money trail should be the Private Placement Memorandum.  The PPM is beautiful in both its simplicity and in its purpose.  This one short document (about 10 pages) is both an executive summary of your business plan and an action call for cash.

If you have completed your business plan and are now ready to raise money you need a PPM.  Unlike the article I wrote last month about seeking loans that are convertible to stock, this is a straight up offering to sell stock in your company. You can download various versions of the Private Placement Memorandum off any legal website or contact me and I’ll email you a blank copy in WORD.

Why I love the PPM…let me count the clauses.

INTRODUCTION
First things, first; tell them who you are, where you are, and how your company is organized:  [your company] is an [blank] company based in [blank], [your state], organized [when] ago by [your executive team] who currently serves as its officers and board members. The principal business of [your company] is [what….] [your company] was incorporated under the laws of [state] on [date], and has its principal offices at [your legal address]

DESCRIPTION OF OFFERING
The company hereby offers an aggregate of [#] shares of its common stock for sale at a price of $___ per share.  The Description of Offering is a three paragraph overview of the deal, how many shares are being offered at what price.  It also sets out how many shares have already been issued to the founders and current stockholders.  Most PPMs escrow the funds.  Let’s say you are raising $3 million:  The investors’ money is held in a bank escrow account until at least $1 million has been collected and deposited. That is referred to as the “threshold”.  Once $1 million has been raised the funds can be released to the company for its use.  If the offering fails to produce a minimum of $[000] by [specific date], the sale will be cancelled and the deposits will be returned to the subscribers, with interest at a rate of __% from the date of deposit. This protects the interests of the early investors should the offering fail to raise the threshold amount.  

USE OF PROCEEDS
The proceeds of the offering will be budgeted for a variety of different purposes. Management presently contemplates the following allocation of the proceeds from this offering:  This is a clear and succinct statement of how you plan to use the money.

CONTROL & DILUTION
The shares of stock that are being offered through this prospectus represent __% of the total shares of the company. If the offering is completed, [current stockholders] (who currently own 100% of the outstanding shares) will own __% of the shares, and will remain in control (usually) of the company.  This section goes into the details of who currently holds the stock and the value of those holdings.  It also lays out the rationale for the current stock price and the price point of the offering being made.

DESCRIPTION OF THE BUSINESS
This is information that is excerpted from your business plan.  It is usually no more than a page or page and a half.  It covers the origins of the company, a short description of its product/service, the compelling reason for its existence, sales and marketing aspects, and competitive landscape.  Again, brevity is beautiful here.  This is basically your “elevator speech”.

MANAGEMENT, BOARD OF DIRECTORS  & KEY EMPLOYEES
This is the easiest section to fill out.  It should have three sub sections, your executive management team (usually the founders), your board of directors (if any) and your key employees; [company] currently employs __# individuals, in addition to [management], and hires other individuals on a part time or commission basis for sales, editorial work, production, design and other matters.  Once again it pays to be brief here, no more than 200 words to describe the background of each person. You are not trying to impress your potential investors here, that’s what your business plan is for.

DESCRIPTION OF COMMON STOCK
The authorized capital stock of the company consists of [#] shares of common stock, the only class of stock authorized to be issued. Each share of common stock of the company, when validly issued and outstanding, is entitled to one vote on all matters to be voted on by stockholders, to equal dividends and to a pro rata share in the company's net assets in the event of dissolution, liquidation or winding up of the company. Shareholders are entitled to cumulative votes for the election of directors. The common shares, when fully paid, will be non assessable and are not subject to any liability for further call and have no pre emptive subscription rights as to any securities of the company. This clause basically sets forth the rights of the stockholders.

Under this section you also provide a “Cap Table” which sets out the capitalization of the company prior to the offering and after the offering, assuming that you will attract sufficient capital to sell out your entire offering.

INVESTMENT CONSIDERATIONS
This is the part of your offering where you try to scare your potential investors off.  It states that this is NOT a tax shelter; the market for the shares will be highly limited; that the company does not plan to pay “significant dividends” in the near future; that the investors should be prepared to hold this investment for a very long time; and that this venture is almost entirely dependent on the talents, experience and business relationships of the founders – and should anything happen to them that this entire business could close up shop.  Still want to invest?  You also have to explain in this section that the founders hold a vast majority of the shares and therefore almost 100% control over the business.  Any rights that new shareholders have must be set forth in a separate shareholder’s agreement. 

That’s about it.  The Private Placement Memorandum is your business plan in a nutshell, with a very specific request for funds attached.  Your PPM needs to be accompanied by a Subscription Agreement.  The Subscription Agreement is the document that the investor fills out and states among other things that they are a “Qualified Investor” with substantial financial holdings and know the risks that they are taking with this investment.  The investor can either attach a check to the Subscription Agreement, or more often wire funds directly into your escrow account. 

For those of you unfamiliar with corporate finance even these simple documents can seem complex, but for financial professionals like us, and most attorneys, these documents are simply tools of the trade.  If you have a compelling business venture you will want to attract investors — and they will want to give you money.   My beautiful little PPM is one of the tools you will need to get this done.  If you feel that you could use some guidance through the process, please feel free to call on us.

Would you like to raise investment capital from friends, family and people who don’t even know you yet?  This article will show you how we accomplished this quickly and efficiently for one of our clients.

Our firm was retained by a Northern California entertainment start up to set up and raise from outside investors up to $1.5 million.  The company had been in business for about one year and had completed their business plan along with the first phase of their product development.  There were three founding executives, each of whom had put in about $175,000 of their own capital.

Our first job was to restructure the company.  Like most small startups the founders had established the business as a Limited Liability Company.  The problem with LLCs is that the owners hold “membership shares” in the company, not stock.  Instead of selling stock we suggested that investors make “Bridge Loans” to the new “C” corporation that could be converted into common stock at a future date.  There is really no good mechanism to do this as an LLC, so we converted the original LLC into a Nevada based “C” corporation.  

Once the company was converted into a “C” corporation all sorts of options opened up for fundraising.  For example, “C” corps may have more than one class of stock.  You can have founder’s shares, common voting shares, common non-voting shares, preferred voting and non-voting as well.  Even the common and preferred shares can be priced differently depending on when the shares are purchased.  Example: “A” round common stock could be priced at $1 per share; and later “B” round common stock could be priced at $2 per share (or more), depending on the overall increased value of the company.  Note: the difference between common and preferred stock is that preferred stock always pays a fixed dividend, which must be paid to the preferred stockholders before any common stock dividend may be paid out.

Upon setting up the initial “C” corporation with 10,000,000 shares, we issued 6,000,000 shares to the three founding executives, plus another 225,000 shares, unevenly divided, among the first 5 employees, depending on their rank and length of employment.  An additional 1,275,000 shares were set aside as an incentive stock pool for new officers and employees.  A block of 1,500,000 shares of the initial stock was set aside for the Bridge Financing warrant holders.  The final 1,000,000 shares were put in reserve for new common stock holders and strategic partners.

Three important documents needed to be created to enable us to move forward:

• Bridge Financing Agreement – This is a seven page memorandum that sets forth all of the terms of the Bridge Loan, including the issue of warrants, valuation, rights, representations and warranties (if any), governing law, assigns, and timing.  The minimum loan amount allowed was $25,000;
• Warrant To Purchase Common Stock – A warrant is a right to convert a loan into common stock and establishes the price that the Bridge Loan can be converted, and when.  In this case, we established that after two years the Bridge Loans could be converted into common stock at the transfer price of $1 per share.  The Bridge Loan terms do not require that the loan holders convert their loans into company stock, but they do establish the mechanism and the timetable to do so;
• Promissory Note – This is the loan document.  In this case, the company agreed to pay the Bridge Loan holders 2% interest only, per annum, on their note for two years. After two years the note could be converted to common stock at the note holder’s discretion, through the exercise of the warrants.  The Note also establishes that “Maker may prepay all or any portion of the principal indebtedness without penalty at any time.” But also that “Maker shall not pay any dividends to its shareholders until all principal and interest on this Note has been paid in full.”

Once all the financing documents were completed, we were ready to meet with investors and accept checks and wire transfers.  My team, which included the three founders, was able to meet with about 36 groups and raised $1,115,000 from 24 investors.  The entire process took about 12 months to complete.  The two single largest investors were invited to join the board of directors as representatives of all the note holders.  As note holders, the investors had voting rights and some “super majority” rights that prevented the founders from making any business altering decisions that the note holders would not approve of (like giving themselves huge raises or changing the fundamental business of the company). 

After two years almost all of the initial 24 warrant holders converted their warrants into common stock.  The value of the initial stock went up from $1 per share to $2.50 per share for later investors. 

We are not saying that this is the only way to raise money for young, start-up companies, but it was an efficient one for these entrepreneurs.  What made this effort successful for this company was the fact that their project was based on a bestselling book by two of the founders, and they had already created a large and ardent following by the time they engaged my firm to do fundraising for them. 

Crowdfunding is becoming so (for want of a better word) crowded, and raising money from institutional investors often costs more and takes longer.  This method allows companies with a good business to raise fairly large amounts of money from investors in a way that benefits everyone.

If you too have a compelling venture and well thought out business plan, then this road map for raising capital may get you on your journey as well. 

Let us know if you need an experienced guide.

In the world of horse racing the handicappers look at how the racehorse has performed over the past season and then match that up with the track record of the jockey to determine if it is a winning combination.  They weigh that against all the other horses and jockeys in the race to determine if it is a good bet.  

When considering what films to make, producers have to make critical choices about selecting the genre, plot and the characters.  Due to marketing and financing considerations, it often comes down to a choice between betting on a genre specific project such as a thriller, scifi, action or horror movie, without any recognizable stars in it, or going with a bankable movie star and/or director.  So, do you bet on the horse (genre+plot+script) or the jockey (highly recognizable actor)? 

Distributors can sometimes establish a market value for genre films before they are completed, thus making the likelihood for pre-sales far greater than ‘execution-dependent’ films.  It is more difficult to assess the audience appeal of execution-dependent films based on the concept alone, as their success is contingent upon a number of unpredictable factors, such as reviews and release timing.  Such films have historically achieved lower pre-sales as the market tends to wait and see the finished product; hence, the need to rely on bankable stars and/or a name director to promote these films at the markets.

Unfortunately, this has also resulted in a glut of low-budget, genre driven movies; so much so that the distributors/foreign sales agents are now starting to reject these projects unless they also have a movie star attached in a lead role.  No longer will Eric Roberts or Gary Busey fit the bill.  An oversupply of low budget films has pushed down demand and allowed the international buyers to be more selective. 

I would have to also add that the person who bets on the horse and jockey also needs to consider what kinds of race they are running.  Is it a steeplechase, quarter horse, or thoroughbred race? Different races call for different kinds of horses and jockeys.  The bottom line is that money can be made in each kind of race, if you know what you're doing.1

Such is film.  The films sold at Cannes are vastly different from those sold at Fantastic Fest. Direct to video horror movies may surpass an Oscar nominee with a small theatrical release in earnings.  An Oscar winner may outpace the summer blockbuster over years of VOD and TV deals.  It's all relative as long as you position yourself well in the race of your choosing.  No matter what race you run, make sure you know what you are getting into.  That way you can increase your chances of winning every time.1

Investors often see genre driven films as low risk, quick turnaround opportunities, but they are also drawn to the higher quality projects with internationally bankable stars and directors with an attractive risk/return profile.  Everything depends on the distribution that the producers can line up.

So, do you bet on the horse or the jockey?  Increasingly, the answer is both.  Just like in horse racing, the handicappers are putting their money down on the combination of the two and comparing that to all the other horses and jockeys in the field.

Today, filmmakers run the risk of making that $250,000 scifi thriller, without finding any sales agent that will take it.  It’s kind of like building a mansion out of cardboard, just because you could do it, does it mean that you should?  That does not mean that a $100 million high concept film starring Johnny Depp and Morgan Freeman is a sure bet either, just look at what a disaster Transcendence was for Warner Bros.  As Mark Lágrimas says, “…money can be made in each kind of race, if you know what you're doing.”

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1 Contributed by Mark Lágrimas, a former Disney, MGM & CBS film & television analyst.  Now an independent filmmaker with Best Served Cold Productions.

I was walking down King’s Road in London one day, dodging the throngs of people propelling themselves forward with their heads bent down over their phones; just wanting to shout out at the top of my lungs, “LOOK UP!” That would of course been both useless and embarrassing, but it did make me think about how our minds are being reprogrammed to see the world in terms of screens, not landscapes.   

The human race is quickly losing its ability to focus on any one thing for more than a few minutes (or seconds) at a time.  In fact, there have been numerous studies that have shown that the attention spans of children, adolescents and adults are getting shorter and shorter.  This is having a profound effect on how we consume education and entertainment.  No wonder that the publishing industry, which has relied for centuries on humans consuming their information in books over hours and hours of reading, has been in a deep decline.  People are simply losing their ability to read for long periods of time. 

The motion picture industry has been drastically impacted by this phenomenon in two ways: First, audiences are drawn to action, animation and horror films where the scene changes every 15 to 30 seconds, mitigating their attention deficit; and Second, movies about people are getting crowded out by comic book superheroes, creatures and cartoon characters: The top 10 box office performers this year have been: Transformers, X-Men, Maleficent, Captain America, Spider-Man, Godzilla, Planet of the Apes, Rio 2, How To Train Your Dragon and The Lego Movie. Compare that to the top 10 movies of 1990: Ghost, Back To The Future, Die Hard 2, Pretty Woman, Home Alone, Presumed Innocent, Teenage Mutant Ninja Turtles, Total Recall, Dances with Wolves and Kindergarten Cop.  Not one of the films from this year is arguably about a human being, whereas 8 of the 10 films in 1990 were stories about people.

It begs the question, “Are we losing touch with our humanity?”

Film producers, distributors, and everyone else in our industry have to be concerned over this shift in consciousness.  It is no wonder that high quality television series have seen such an explosion in popularity.  People do not have to sit in a movie theater for two hours to get their entertainment fix when they can flip on their 50 inch flat screen TV’s and watch a 55 minute episode of Game of Thrones or Breaking Bad.  How can stories about real people, real heroes and real events compete with flying creatures, supernatural beings and dystopian worlds? 

This radical shift in attention spans has happened over just the past generation or two.  The world's first known movable type printing technology was invented and developed in China by the Han Chinese printer Bi Sheng between the years 1041 and 1048. In Korea, the movable metal type printing technique was invented in the early thirteenth century during the Goryeo Dynasty.  In the West, the invention of an improved movable type mechanical printing technology has been credited to the German printer Johannes Gutenberg in 1450.  So, for approximately five centuries we have been consuming our entertainment and information from books.  Movies have been around for just about 100 years and television for less than 60. 

Emailing and texting has been with us for less than 20 years, but in that time we have been transformed.  Long-form entertainment and information consumption has been replaced with the staccato rhythm of Tweets, YouTube videos and Snapchats.  I myself am finding it harder and harder to sit down for two hours with a good book or a classic film without feeling the need to check my email or the 12 texts that came in on my phone. 

This affects every one of us in the entertainment and educational sectors.  People have changed the way they consume the content we create and we have had to change the way we make it, sell it, and ship it to them. 

And, this is just the beginning.    

Whether we want to admit it or not film making and film distribution is a competition.  A competition for money, a competition for resources, and a competition for the attention of the public.  Most of us who have been in the trenches convincing investors, cajoling actors and directors, corralling production resources, and coercing distributors to hustle for our films, know that this is a dog-eat-dog, competitive business. 

Winning at the game of filmmaking is something like winning the lottery.  The odds are only slightly better.

The good news is that there is a lot that we can do to improve the odds significantly in your favor.  I don’t like to waste my time, or that of my team, my investors or anyone else, so I like to stack the deck in my favor before ever pitching a project.  By ‘stacking the deck’ I mean lining up all the resources before you talk to your first investor about your film project.

The following is a list of five things that you can do to greatly increase your chance of success:

1.      Get advice from the smartest people that you know in show business.  Talk to film distributors and foreign sales agents first about your concept before you even write the script.  Once you have gotten all of their input on the genre, characters, location and plot, then go talk to other producers, casting, production veterans, screenwriters, and actors before completing your first version of the script.  If you already have a script you need to go through the same process to vet the premise and allow others to shoot holes in your grand design.  Avoid getting feedback from friends and family members who will only tell you what you want to hear. 
Making movies that people want to watch starts with talking to experts.

2.      Once you have vetted your script and polished it to a shine, now build your team.  Unfortunately, most producers pick team members that will (A) Work for free (insert % here), (B) Will not challenge them in the room, and (C) Agree that they (the producer) is, if not God Himself, very near to him.  So what you have ends up looking more like a personality cult than a production company.   Don’t do that.  Choose the most powerful, dynamic and connected people that you can find.  If you have money pay them, if you don’t, elevate them to the same status that you enjoy… and give them the respect that they deserve.  Remember – you, and your project, are only as good as your team.

3.      Bring gravitas to your picture.  Gravitas could be in the form of Martin Scorsese, Tom Hanks, Mark Cuban, Sandra Bullock, Spike Lee, or His Holiness the Dalai Lama – but it better be someone who brings some serious weight to your project.  Because without gravitas you are just another wannabe producer with a script.  Remember – the title of this article is Winning Before You Show Up, not Show Up And Pray For the Best.  Bring enough gravitas to your picture and it gets made.   No one in our business ever turned down a meeting with  JJ Abrams, Stephen Spielberg, Oprah Winfrey or Catherine Zeta Jones. 
The more power you bring to the project the higher your chance of success.

4.      Line up your distribution early.  Wouldn’t you agree that producers with studio output deals get their films green-lit and into production faster than those who do not?  Producers with a domestic (North American) distribution partner, plus P&A money committed to their project also tend to get their movies made.  Producers who have strong foreign sales relationships and can get their films pre-sold at Cannes, AFM, Sundance, Toronto, and EFM/Berlin get their movies financed and into production.  Producers who have none of these things mostly sit around and talk about how they want to make movies.   Distribution deals get movies financed and made. 

5.      Have a reputation for taking care of your investors, your cast, your crew and your distributor.  If your film projects are not getting funded then maybe it is time to look in the mirror and ask if you are a good investment.  A bad reputation in the film industry follows someone around like stink on a skunk.  If making your next movie ever becomes more important than taking care of the people who helped you get here, and believed in you in the past, then maybe it is time to get out of the business and go open a restaurant.
Take care of people on the way up and they will  be there for you now.

Winning Before You Show Up is all about knowing your business, having the right team, bringing gravitas to your project, lining up distribution, and lastly… being the kind of person that others will trust with their money, their time and their talent. 

 In the film industry we are constantly put in the position of having to manage someone else's expectations.  Producers have to manage the expectations of their sometimes pessimistic financial backers; sales agents have to manage the expectations of the often overly optimistic producers; and the publicists, foreign buyers and legions of sub-distributors have to manage the expectations of the fee dependent sales agents. 
 
‘Managing expectations is a vastly underutilized skill, in my opinion. Not everyone does it, but maybe if more did, we could avoid a lot of the day-to-day drama that goes on in every business.’1

Producers have to live, breathe and eat the films that they make; often having to live with their creations from cradle to (hopefully not) the grave.  Epidemic to the profession is a tendency to believe one’s own press.  As a producer you have to believe.  Believe that you will make money for your investors; believe that you will make a good (if not great) film; believe that you can bring the project in on time and on budget; and believe that people will want to watch your masterpiece when it is done.  But a producer has to manage their own expectations for a production, as well as others.

What many producers sometimes fail to understand is this: What the world entertainment markets are willing to pay for a film or television show has very little to do with what the budget was to make it, or how long one labored to get the project made. To the television/cable, online, DVD, and theatrical exhibitors a film/program is just another slot in their schedule.  Most producers and financiers need to manage their own expectations about how long it will take to realize an ROI on their fully finished productions.   
 
“One of the best ways to manage expectations is to make sure you communicate with everyone on a frequent basis. In the early stages of a new project or as a key milestone or deadline approaches, you may want to even over-communicate…  By holding frequent check-ins throughout the course of a project, you also have the chance to provide real-time status updates and manage any delays, risks, or blockers. When you're proactively honest and transparent in your communication, you have room to put a Plan B in place, if needed, or the flexibility of making new decisions as you move toward the finish line. Being honest about a delay is a thousand times better than promising to deliver and then missing your deadline.”1

Distributors and sales agents are a more sanguine lot.  They can afford to be picky and usually will not distribute a film unless they sincerely believe that they can sell it… but even they are always working on a hunch.  They have to anticipate the appetite of the buyers at film markets spread from Los Angeles to Berlin to Hong Kong, often six months to a year in advance.  Who knows what the Australians, Germans or Chinese will be looking for next winter?  What was hot at the last market may be as dead as a doornail the next.  Films and television programming follow the laws of supply and demand just like any other consumable commodity. 

Producers and creatives alike need to be more realistic about their expectations and should conduct proper research prior to greenlighting any project, and not pin all of their 'Hail Mary' hopes on the distributor.  Learn directly from the distributor what foreign buyers are saying in those Cannes and AFM bunkers before you shoot that heartfelt film about a vampire transvestite with Asperger's.  Discover what films are succeeding in the VOD space by talking to the aggregators. Meticulously keep aware of the latest industry trade winds so you're not caught with a genre trend that ended a year ago.  If your direct discussions with a broadcaster or home video connection tell you that cable TV and DVD is a brutal sale these days, don't be afraid to LOWER projections on your film business plan (or even zero a media or territory out where warranted).  You don't have to constrain your originality - just don't back yourself into a financial corner with insanely unachievable expectations. 

While honesty is the best policy…one can be too honest with those dependent on you.  A producer telling the investor that he or she will possibly lose all their money – is usually not going to be productive.  A distributor telling a producer that their film is a derivative pile of horse pucky is probably not a smart move.  A foreign territory movie buyer telling a sales agent that no one in their country gives a damn about a kid in Kansas and his dog… is probably not a good relationship builder.  So, we use discretion, and diplomacy/tact. There are a lot of delicate and blustery egos in the entertainment industry.  Since motion pictures and television programming are consumable entertainment, if we were always, brutally honest with each other, very few of our movies and serial television programs would ever get made. 
 
“A huge piece of managing expectations is the actual expectation, right? You have to be comfortable that the expectations are realistic and achievable. If they're not, you can--and should--push back. The key here is pushing back in a way that balances the organization's needs and the team's abilities. Being open about what can be delivered and what the plan is to bring in the rest can go a long way towards instilling confidence and getting the go-ahead. If you can nail the fine art of pushback, you've won half the battle of managing expectations successfully.”1

Managing expectations is what we must do to get films, documentaries and television programs made, distributed, and seen by an audience.  And managing expectations is all about communications.  As a business consultant to the entertainment industry, I constantly have to assess, interpret and manage the expectations of my clients.  This means that I have to listen carefully to what they are saying and then find the best way to help them achieve their goals.  I can be brutally honest when I have to be, but most often I find that a deft touch works best with the majority of my clients. 

Uncovering the true expectations of the other person or organization is key to meeting their needs.  Sometimes they are unsure, or simply do not know what outcome to expect.  Vague goals such as “make money” or “get on air” or “tell an interesting story” don’t help you very much.  You need to dig deeper to find out what is driving the motivation to make this film, at this budget, with this cast – now.  

Because you can’t very well manage expectations unless you know what they are. 
 
A special thanks to Larry Goebel, Keith Birkfeld and Lise Romanoff in the writing of this article.
1Managing Expectations: The Most Underrated Leadership Skill
 By Janine Popick, March 2014, Inc.

Will Rogers said, “Even if you're on the right track, you'll get run over if you just sit there.”

No film or television distribution company can afford to just keep putting one foot in front of the other and hope to survive this chaotic business.  You need to move.  Which direction to jump is another question.

It seems that most film distributors and sales agents are moving in one of four directions.  Some that I know are moving ‘upstream’, that means that they are helping to finance films earlier than ever before.  Some at the script stage.  They are doing this to secure the long term distribution rights to films by producers that they know and trust.  Also, many distributors were once (and still are) movie producers in their own right, and this is a comfortable path for their companies to take.  By supplying production, or finishing funds for films, the distributor secures the distribution rights, gets executive producer credit and often back end participation (if any).  It is a smart move if you can afford it, but it takes deep pockets to do this.

Another large group of distributors are moving ‘downstream’, that is, they are developing channels of distribution to sell films directly to the consumer, be it via Hulu, YouTube, etc. or their own internet portals. These film distributors see the benefit of bypassing the traditional markets to go directly to the end user.  They still attend all the major film markets, mostly to acquire product and cement international relationships, but they are not there to necessarily sell films to the foreign buyers.   Most of these distributors have deep catalogs in specific genres; perhaps horror, sci fi, Christian/family, classic movies/TV, or documentaries.  The problem with the move ‘downstream’ is that revenues have not yet caught up with the costs.  You need to have staying power to build a brand and hold out until the consumers finds your channel(s) and are willing to pay for the convenience.

The third way that I see distributors jumping is (in keeping with the stream theme) to the left or right bank of this business.  On the left bank (Rive Gauche) is the vertical integration model.  In this model the sales agent, turned full service distributor, acquires all rights to the films they sell, both foreign and domestic… or they simply buy some films outright.  The distributor handles everything, including television, HBO/Showtime/Cinemax, RedBox, Amazon, Netflix, foreign sales at the markets, and even DVD.  This is what I call soup to nuts distribution.  All markets, all mediums, all world.  In the vertical integration model the distributor also handles the theatrical release of the movie (if any).  Many distributors have found the financial rewards of doing day and date releases for their films. It is a way to get better exposure for their movies to foreign buyers, and to potentially hit a home run in North America. 

The fourth jump out of the typical sales channel is to the right (Rive Droite). In this move the foreign sales agent or distributor chooses to partner up with other compatible film and television distributors, sales agents, producers, or even their biggest customers, into something of a coalition. In some cases they simply merge.  Many of these companies have downsized as much as they possibly can and some have even given up their fine offices in favor of working out of their homes.  Gone are the big staff and acquisition team, in favor of a more streamlined operation.  These companies have been living off of market fees and meager commissions (sometimes for years) but have now seen the wisdom of creating a partnership with other companies that provide a synergistic service to the industry.  This is taking advantage of the power of long term relationships and segmenting the channels of distribution.  We see this most often in the digital distribution space, where a US company will partner with a European company, or perhaps a Chinese company, to gain market access and create a supply chain that both companies need.  There is often strength in numbers and no independent sales company can be all things to all people.  But, by partnering up with companies of common interest, you can complete a loop that benefits the producers, the buyers and the consumers. 

Will Rogers was right. You can’t just sit down on the tracks and wait for the money train to run you over.  Every company in this industry has to be on the move.  Some are moving upstream, some are moving downstream, some are jumping to the right and some are jumping to the left… and unfortunately, some will be road kill. 

Which way are you moving?   

rel·e·vance
noun: The condition of being relevant, or connected with the matter at hand. Meaningful.   from Medieval Latin relevans , from Latin relevāre  to lighten, from re-  + levāre  to raise, relieve

It does not matter whether you entertain the masses with major motion pictures; pump oil out of the ground to fuel our economy; or save people’s lives on the operating table; we are all searching for relevance in this world.  The best and the brightest of us, most of all.

For 26 years I have worked with some of the smartest, most talented and very, very accomplished human beings on the planet.  My firm buys and sells media companies and I have had the fortune to know the men and women who started them, grew them and made them such a success that others wished to own them.  I have been fortunate indeed.

That is why I wanted to write this blog, it is about how each of us is searching for relevance. 

It does not matter if you have a fine home in the hills, drive the latest model luxury car, and have a ski chalet in the mountains… if you are unsure of your relevancy on this planet, you will be discontent.  Accumulating nice things does not give you the satisfaction of feeling accomplished.  More often than not our possessions just make us feel trapped.

Angelina Jolie, a woman who gives away more than one third of her enormous income to the poor, was being interviewed on television recently, and she said; “I am paid a ridiculous amount of money for what I do. Why shouldn’t I give it those less fortunate than me.”  She, the highest paid actress on the planet, is still searching for relevancy in this life. 

Like myself, many of my client’s have never made millions of dollars, but they have built good and stable companies that employ talented, hard working people.  They help creative people reach their potential by bringing their artistic talents to an audience – whether it be on the stage, on film, on the internet/ television, or even between the pages of a book.  These people are the backbone of the communications industry.  They develop, nurture and promote the most talented writers, directors, artists, filmmakers, singers and actors that they can find and risk their money and time so that the world can know their art.

It is an old and noble profession.  We are the impresarios of our age.

Why is it then that so many of my friends and clients, especially those in their late 50’s and 60’s, seem so discontent with their accomplishments?  They have what many would deem “interesting lives”.  They lunch with actors and writers; they strut their stuff on La Croisette in Cannes; they have interesting conversations about creating books, films, music, art and stage plays with people who know how? 

So, what is the source of their malaise?

It all comes back to feeling relevant. Most publishers, record producers, movie makers, playhouse owners and even television executives that I know want, more than anything, to make something important that will last beyond their lifetime.  A lot of that entertainment is basically 'pop culture'.  It is created for a purpose, consumed and quickly forgotten.  Most entertainment companies create pop culture.  Sometimes, if we do it right, even inexpensive pop culture movies, music and literature becomes art.  Think Berry Gordy’s Motown music of the ‘60s, Saturday Night Live, John Carpenter’s Christine or anything from the pen of Stan Lee.  Pop culture can become iconic culture.   

It is that search for relevance that drives even successful pop culture purveyors to strive to make and disseminate better quality, artistic entertainment… they don’t just want to make a buck, they actually want to make a difference.  Touch people’s lives.  Move the world. 

I once asked a real estate developer of storage garages and industrial buildings why his home was so finely ornate, and he answered, “Stephen, I just wanted to build something of quality, not something for the lowest cost per square foot.”  I understood completely.

The search for relevance is the search for meaning in this life.  Our own little corner of immortality.  We are fortunate to have the opportunity to create and promote art, literature, films, music, games and other artistic endeavors.  We actually do get a chance to touch lives and move the world. 

If we do it right.

My firm is all about helping companies build and realize their highest value; whether it is in film, television, music, video games, publishing or online.  As you get ready to go to Cannes I want you to think about what makes your company valuable and consider what you can do to enhance that value as you do your work of buying and selling films.

The single, most important thing that you should think about as you prepare for Cannes is...

What is our brand? 

Many companies go from show to show, building their catalog and selling territories without really giving much thought to their overall company image or “brand”.  But your company needs a brand; it needs to be known for something more than just an eclectic collection of films.  That in fact is what a lot of the foreign sales companies have become:  A mixed assortment of movies and documentaries.  You cannot discern much of a plan or corporate image from their list of titles, accumulated over the years.  Most were picked up because they were priced right and expedient, and the acquisition team knew that they could sell them to a certain number of buyers.  Not much thought was given to how this or that title fits into the overall company “brand” or how a title will enhance the value of the corporation as a whole.  It often gets down to price, terms and sell-ability.  Deal done. 

But that is not the end of the deal.  That title will become part of your company’s long term identity.  You know the phrase “you are what you eat,” well… you are what you sell. 

Building your corporate brand is crucial to the long term successful growth and financial health of your company.  What are you known for?  Why do buyers want the films that you take to market?  When you want to recruit top talent to your team, why do they want to work for your company? 

I started my career at the Walt Disney Company.   Arguably, the most brand conscious corporation in the entertainment industry.  We were always fastidious about building, enhancing and protecting our brand.

You need to do the same. 

Buying and selling films is just as much about personal relationships as it is about marketing entertainment properties.   Often films are picked up from this producer or that one because you sold their last film and may want their next one.  But how does that help your company?  Ten years from now will you look back and be really glad that you acquired and sold that film, or will it just be another brick in the wall?    

Build your brand.  They are not bricks.  Acquire only films that will enhance the overall value of your company and give you a catalog of titles that others would admire and wish they had acquired. 

It does not matter if you have the best collection of creature features, Anime, romantic comedies, rock docs, international spy thrillers… or kid vid.  Be known for something.

A lot of people talk about branding, but few companies in our business are really serious about it.  As you get ready to embark for France, think about your long term objectives and what you want your company to be known for, and do not compromise on that vision.

Poll underscores the fact that unlike in U.S., most global viewers prefer live television.
Almost 90% of viewers prefer watching live television, although other modes of consumption, including streaming or downloading from a computer (27%), streaming from the Internet to TV (16%), using a DVR or other recording device (16%), and via mobile device (11%), are gaining in popularity, according to new data from research firm Ipsos.

The survey of 15,551 adults in 20 countries (including the United States) conducted Feb. 4 and Feb. 18, 2013, found that traditional ‘live’ TV watching is more popular (91%) among older respondents ages 50-64, compared with those younger/middle age 35-49 (88%) and under 35 (81%).

Indeed, watching TV programming on computer and laptop is most popular (35%) among respondents under 35 — a percentage that diminishes as viewers’ ages 35-49 (25%) and 50-64 (17%) increase.

Streaming TV content from the Internet was preferred by 20% of respondents under 35; 16% among respondents 35-49; and 11% among the 50-64 demo. The percentages fall even further watching TV on mobile devices. About 15% of respondents under 35 watch TV on a portable device; 10% among the 35-49 demo; and 5% among those 50-64.

Using a DVR or other recording device is most popular with those 50-64 (18%) compared with 35-64 (16%) and under 35 (15%).

Countries whose residents are most likely to choose watching live TV programming include France (93%), Spain (93%), Germany (92%), Turkey (90%), Argentina (89%), Sweden (89%) and Australia (89%).

Those rounding out the middle of the pack are from Brazil (89%), Italy (89%), South Korea (87%), Great Britain (83%), Mexico (82%), Poland (82%) and India (82%).

Those least likely to watch TV programming live are from Japan (82%), Russia (81%), South Africa (81%), U.S. (81%), China (80%) and Canada (77%).

The results seem to support a recent Rentrak Corp. study that found that nearly 67% of primetime network viewing occurs three days after a show’s initial broadcast.

Watching TV on computer or laptop was chosen most often by respondents from China (52%), Russia (43%), Turkey (42%), India (40%), Sweden (35%), South Korea (31%) and Great Britain (29%).

Less inclined are respondents from Poland (27%), South Africa (26%), Canada (26%), Germany (24%), Mexico (24%), Spain (23%) and Brazil (21%).

Respondents from Argentina (20%), the U.S. (20%), Australia (19%), Italy (17%), Japan (14%) and France (12%) is least likely to watch TV on a computer or laptop.

Streaming from the Internet to TV is most popular among respondents in Turkey (44%), Russia (36%), China (33%), South Korea (25%), India (23%), Sweden (19%) and Great Britain (17%).

Those in the middle of the pack are from Canada (17%), the U.S. (17%), Brazil (15%), Mexico (13%), Spain (12%), Italy (11%) and Australia (10%).

Respondents from South Africa (9%), Argentina (9%), Poland (7%), Germany (5%), France (5%), and Japan (3%) are least likely to choose streaming from Internet to TV.

Respondents most likely to use a DVR or other recording device hail from Japan (45%), the U.S. (40%), Canada (32%), Great Britain (31%), South Africa (27%) and Australia (25%).

Those in the middle of the pack are from Poland (18%), India (16%), Germany (11%), France (11%), China (10%), Mexico (9%) and Sweden (8%).

Respondents from Turkey (7%), Brazil (7%), Spain (7%), Italy (7%), Argentina (6%), South Korea (5%) and Russia (4%) are least likely to use a DVR or other recording devices.

Finally, watching TV programming on mobile device is most popular in South Korea (26%), China (25%), India (21%), Turkey (20%), Mexico (13%), Great Britain (12%) and Sweden (12%). And less so in the U.S. (10%), Australia (9%), Spain (9%), Brazil (8%), Canada (7%), South Africa (7%) and Italy (7%).

Least likely to watch TV on mobile device were respondents from Argentina (7%), Japan (6%), Poland (5%), Russia (5%), Germany (4%) and France (4%).

If you want to buy or sell all the rights to a film, you do not have to call an appraisal company to arrive at a fairly accurate value of the property.

My firm has been valuing film and television (intellectual) properties for more than 25 years and we have also studied the valuation techniques of many other firms as well, and for the most part, it comes down to “apples to apples”.

Step One
Break down the film, or films, by director, star(s), genre, original box office (or DVD) revenue and foreign/domestic exposure. 

Step Two
Contact other producers or distributors with similar genre films (with the same director/stars if possible) in their library.  These are called “comps”.  Find out how those films have performed over their lifetime.   You might be surprised how forthcoming most rights holders are with this information, they have nothing to hide and often gain valuable information about their own films in the bargain.

Step Three
Our firm gives each film in a library a rating (1 Worst – 4 Best) depending on the film’s past financial performance, the presence of known “movie stars”, the age of the film, and the film’s director, producer and debut reviews.   We total the points for each of these factors and create an average (Example: 2.3).  

Researching the past sale price of similar films is a bit tricky, but there is a lot of published and unpublished information about past film sales available on the internet.  Again, it is wise to turn to your friendly competitors and other rights holders.  You will probably find, as we do, that you can develop a consensus of thought about any particular film based on its genre, star and director.  So, if the consensus, general market value of films of a similar nature is $10,000, then you apply your multiple (for example purposes only: 2.3). 
Gross Value $23,000.

Step Four
Applying a discount.  You may need to discount the film’s value based on many possible factors; among them are the number of territories sold/unsold (and currently still under contract), the availability of clear chain-of-title information, and the quality of the original print.  If the print has not been digitized and is not in high definition (standard def), then that becomes a factor too.  We add up the discounts and apply them.  It usually comes in at .50 to .80.  This is your discount rate.  For example purposes only, let’s assume that we have created a discount of .67.  We multiply our film’s gross value of $23,000 times .67 to arrive at a Fair Market Value of $15,410.

That is a very accurate assessment of the value of this property.    

You may be wondering why we first create a rating point system and apply it to an average industry consensus of similar films, and then discount that gross value to arrive at a Fair Market Value.  We do this to make sure that we are treating each film fairly and accurately.  Just because a similar Kevin Sorbo or Mark Harmon picture sold for $22,500 in 2006, that does not mean that's what your film is worth;  you will need to rate all of the elements of the film and apply any discounts to be accurate.  

The days when DVD was king are over, and films today are very much valued on their digital distribution rights value.  If those rights, or elements, are not available, then the value can fall to the floor. 

We understand that this is not a cookie cutter valuation method, but it forces you to look at all the positive and negative aspects of a film and apply a numerical value to them.   I promise you that if you use this process you will feel that you have a handle on the true market value of the property. 

If you need any help with this process, or would like us to do it for your company, please do not hesitate to contact us. 

Recently, I was representing the seller of a very nice business to a qualified and strategic buyer.  My client wanted to sell his business at a fair market price, the buyer was highly motivated to buy my client specifically, and had the money to do so. 

It should have been a marriage made in heaven.  

In this case I was representing the seller, so it was not my place to give M&A etiquette advice to the buyer.  So often, I watch buyers and sometimes sellers shoot themselves in the foot when a deal was there on the table that both sides could agree to.  I have been personally involved in closing the sale of 56 different businesses over the past 25 years and been party to dozens that did not close, for one reason or another.  Often, the buyer and seller had the transaction in their grasp, only to watch it slip away due to ego, self-interest, or just plain misunderstandings.  As an intermediary it is my job to guide both the buyer and seller to a place of mutual agreement, and then get it in writing. 

That is easier said than done.

The biggest mistake that I see buyers make is thinking that they are somehow superior to the seller because they are buying his/her company, and not the other way around.  It’s called hubris.  I’m invading your country and I have a bigger army, therefore you should listen to me. 

Go tell it to the Spartans, Persia. 

My advice to even very large acquirers is to humble themselves, listen carefully to what the seller is saying to them and find a way to meet his or her needs, at a price and terms that you can afford.   It is my contention that when you are dealing with even a modestly motivated seller and a financially qualified buyer, that every deal can get done… somehow. 

Even when the buyer and seller are seemingly miles apart in their valuation of the company, there are often missed “bridges of opportunity” that will span that chasm and eventually satisfy both parties.  One of those bridges of opportunity is discussing the seller’s aspirations after he/she sells the company.  Maybe they want to make films, or direct, or do charitable work.  The buyer should be sensitive to that and see if they can make that part of the compensation package.  The other is looking at the tax consequences of the sale on the seller and finding ways to mitigate the large tax bill they could be facing, perhaps by stretching out payments or reclassifying compensation.  Another bridge is looking at the seller’s skills/experience and employing them for years to come – to the benefit of the combined companies.  Often overlooked by the buyer is that fact that the largest assets they are acquiring are the knowledge and relationships of the seller. 

Even when the buyer and seller like each other and fully agree that a merger/acquisition would be in the best interest of both parties, there are always cross currents that can tear any well intentioned deal to pieces.  Deal killer lawyers, voodoo accounting, disgruntled executives/wives/employees, undisclosed liabilities and legal entanglements, and even the health of the key players… can all derail even the best of transactions. 

It should also be noted that time kills all deals.  If the buyer takes months analyzing the seller's financial statements, cannot seem to figure out the seller's business, and also does not keep in communication with the seller or their agent; then you can probably kiss this one goodbye.  Sellers have no patience for wishy-washy buyers. 

The definition of Fair Market Value is: A price, based on what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller.  When neither is under any compulsion to buy or sell.

If the seller is under no compulsion to sell, then it is the buyer's burden to prove to them that it is in their best interest to do so.  If the seller is 66 years old, has no heirs in the business, and has had health issues, then he is under obvious personal compulsions to sell.  If the seller is 46, has family in the front office, and is in the prime of health… then his motivation may be… different.  That does not mean they do not exist.  Every company can be purchased for the right price under the right conditions.

It is incumbent on the suitor to find the tipping point that motivates the seller to act.  And it isn’t always money.  Often the seller’s company has been constrained for years by its lack of capital, and could benefit from the suitor's greater access to cash.  Or access to markets.  Perhaps the seller has other goals and aspirations outside of the company that are going unfulfilled because they feel trapped by their commitment to their business/family/employees.  Often the seller is simply bored running their small company, day in and day out, and would welcome to chance to play in bigger pastures. 

If after fully analyzing the seller's business, considering all the synergies of combining the companies and making the very best offer that one can, the two sides are still far apart... you might want to consider buying less than 100% of the target company.  Remember that 51% control gets you just as much as owning 100%.  There are dozens of ways to meet the seller's expectations without having to walk away from the deal.  Assuming of course that the seller is a reasonable person and actually wants to sell.

While it is true that it almost always comes down to money.  Money is never the only issue and even the price paid for the business can take a back seat to the transaction when the buyer and seller sit down and really listens to what each other needs.

The independent movie distribution business is in something of a death spiral.  You know the one, where the fighter plane is in a flat spin, hurtling towards the earth.  With hands over our mouths we watch the intrepid pilot struggle with the controls to break out of the spin and regain control over his airplane before it smashes into the ground. 

Yeah, like that.

The death spiral that we are in is not nearly as dramatic, but it is real all the same.  Movie company X makes two films: One a $80,000 slasher film with no name actors, a predictable and derivative plot with lots of blood; the second is a $800,000 lovely, coming of age story, with recognizable actors, and some real production values. Movie production company X gives both films to their distributor.  Distributor takes both to the markets, getting MG’s for many of the major territories.  They generate $100,000 for the crappy little slasher movie and $250,000 for the coming of age story.  Having lost a bundle on the coming of age story, and having made money on the slasher film, which kind of film do you think the filmmaker will opt for next?

Although the decline of revenue for the average indie film has been occurring for awhile, it basically came to a grinding stop overseas in 2013, for the vast majority of recently-produced feature films, which did not have any theatrical exposure. Why? Consumers no longer rent DVDs in any great numbers -- with the exception of Redbox here in the U.S. (and Redbox does not exist overseas.) Kiosks exist in certain foreign territories but not for video rental—only sell through. Unfortunately, unless you have a film which has been released theatrically and/or has a well-known cast, or great audience pre-awareness, very few consumers still purchase hard copies of independent films, unless they’re in the $5 discount bin at Wal-Mart.

I suppose that we are all hoping to be the next Jason Blum. 

Since Blum, 45, hit big with Paranormal Activity in 2007, his "microbudget" model has upended the horror movie business. That film, which Blum discovered and pushed after filmmaker Oren Peli made it for $15,000, grossed $193 million worldwide and has spawned four sequels for Paramount.  Studios, faced with increased pressure to cut bloat and release more profitable films, salivate over the three franchises Blum has launched in the past four years: Insidious (a $1.5 million price tag) grossed $97 million worldwide; Sinister ($3 million) grossed $77.7 million; and The Purge ($3 million) grossed $89.3 million. The Hollywood Reporter 2/27/14

Since those financial successes even Blum and his distribution partner Universal have struggled to find a market for the low budget horror/thrillers he is turning out with regularity. Like Roger Corman, or Ed Wood before him, Blum is a victim of his own success. A success that gets harder and harder to sustain. 

When the overseas film buyers are not paying that much more for good films, as they are for crappy films, how do the producer and sales agent break out of the flat spin, and regain control over their flight? 

Answer: Stop buying bad, meaningless films that just bring the market value down on all films. 

Here’s your dilemma: You’re probably not very proud of the “art” that you have to peddle these days, but, you can’t sell from an empty cart either.  Your distribution company has to acquire films that they can make a profit on.  That brings up another problem.  At the bottom… the commissions are so low as to make it hardly worthwhile.  Even if you’re charging 15% - 25%, on a total buy of $100,000 that does not cover your cost of attending AFM, EFM, Filmart, Cannes and all the other shows that you have to be at to do your job.

The obvious solution for all film distributors is access to more capital. Better capitalization gives distributors the ability to pass on the truly bad films and concentrate on the better ones.  Filmmakers rely on the foreign distributors to be able to raise up to 60% of a film’s production budget from offshore buyers.  But when your new releases look just like everyone else’s, all you get is minimum buys. 

The demarcation line is no longer is it a good movie or a bad movie, it’s “is it commercial”.  A North American theatrical release, even as low as 150 screens, will give any film a big lift overseas.  It gets reviews, it gets press, its gets access to film festivals and more.  Or as one veteran sales agent put it to me, “…since very few genre films are being pre-sold, buyers are waiting to see the final film before making a decision. At this point, they simply do not care what the budget of the film is compared even to obviously smaller budget films in the same genre. As one buyer told me recently, “I don’t care if the producers spent $1,000,000 or $100,000 on the budget of a film. It’s not my problem. If it’s not going to be released theatrically, or have an obvious television sale, one particular film is worth virtually the same to me as another – regardless of the budget.” Simply said, the current marketplace is not rewarding better production values in films – unless they’re released theatrically.”

That is of course the impetus behind so many day-and-date releases in conjunction with Netflix, Redbox, Amazon, Blockbuster and others. It gives your film credibility.  Note however that foreign buyers are now savvy to the game of limited US theatrical releases and will ask how many screens, what the P&A spend was, and what the US audience numbers were. Just because you “four-wall” the film in 5 or 6 cities, that does not a theatrical release make.

I’ve financed films before and I know how hard it is.  There is just no substitution for a great story, backed by a well thought out distribution plan, with P&A money to support it… and that’s what gets films made, into theaters, and into our DVD collections. 

You can’t sustain a restaurant selling bad food, you can’t sustain a retail store selling bad merchandise and you can’t sustain a distribution business selling bad films. Sooner or later the customers will simply stop coming.

There is a major consolidation of film and television distribution taking place – being brought on by the loss of disk revenue, challenges of digital distribution, and the growing problem of collecting money owed from customers.  Let’s face it, foreign distribution is not what it once was; there are new players, new technologies and new financial hurdles that every film &TV distributor has to be concerned about.  Even if you have good films/shows, you're probably not getting the sales out of them that you once enjoyed. Not to put too fine a point on it, there are just too many foreign sales organizations chasing too few good films.  And, too few foreign buyers that actually pay their bills on time. You go to MIP, you go to AFM, you go to EFM, and what do you have to show for it?

Paper and promises. 

If you ask the other foreign sales agents... they will put on a brave face and tell you that they are doing just great, and point out the one or two films that they are actually getting decent MG's on.  But at its core they know that the market is rotten.  Whole catalogs of past films are going unsold in major territories and too few company owners are looking at the underlying reasons. 

It all comes down to the law of supply and demand.  Demand has fallen off in almost every major foreign (and domestic) territory, while the supply of low budget flops and unscripted pabulum just keeps coming.  So, what happens when supply (of even bad entertainment) does not abate, and demand falls through the floor?  Prices evaporate and companies crumble, that’s what.  It's happening, right now, all over the industry, and all over the world.

Those companies that have the financial resources should be looking to buy up their competitors, and grow their companies in the process.  The entire industry would benefit from shrinking the some 200 foreign sales companies down to less than 100.  Those surviving companies would have better market reach, better film catalogs (by dumping the junk) and more power with the film buyers. 

Your firm may have had an excellent EFM, and I hope that you did, but that does not change the fundamental weakness in the current film distribution marketplace.  We saw it last year at MIP; we saw it at AFM; we saw it at NATPE; and we just saw it again at EFM.  Consolidation is the only solution to a chaotic marketplace.  We need fewer, stronger, better financed distributors, able to purchase quality films, and let the flotsam and jetsam sink to the bottom, where they belong. 

There is no industry more populated with wide eyed optimists than the entertainment industry.  We are a hit driven business and we can always convince ourselves that the next movie, the next documentary or the next television serial will be the one that makes everything alright.  Is it getting harder and harder to believe that old yarn?

Have we learned nothing from what happened in the music industry and more recently the book industry?  Those companies that acted early, with dispatch, have survived; while hundreds of their slow reacting competitors have disappeared.  Both of those industries have gone through a major upheaval that the film industry is just now waking up to.  Filmed entertainment is a commodity, just like every other consumer good.  It obeys the laws of supply and demand slavishly, and the companies that are smart and are aggressively doing something about their situation are going to be the winners. 

There is no "business as usual" in the film industry anymore.  The game has fundamentally changed and the players will soon be dwindling down to the few. .  It's not about getting by in 2014, it's about still being in business in 2016.  Ask yourself, with honesty and clarity, if your company has the staying power, and is taking the necessary steps to survive the challenges that are wracking havoc in the film industry

If the answer to this question is "no" or "I'm not sure", let’s get together and see what we can do about that.

Stephen J. Kerr
President
Business Marketing Consultants

  7 Jan, 2014 By: Thomas K. Arnold

  Consumer spending on home entertainment finished the year essentially flat with the previous year, with a total of $18.2 billion spent in 2013 on packaged media (Blu-ray Disc and DVD) and the various incarnations of electronic delivery.

That’s up less than 1% from total consumer spending in 2012.

Disc purchases for the year were down 8% to $7.78 billion, from $8.47 billion in 2012, according to numbers provided by the studios and key retailers and released Jan. 7 by DEG: The Digital Entertainment Group. Even the generally robust fourth quarter witnessed a 9.3% decline in spending, to $2.77 billion, although observers attribute this to massive discounting around the Thanksgiving holiday, with DVDs as well as Blu-ray Discs widely available for a few dollars. (DEG did not provide unit sales this year.)

DVD sales continued their steady decline, while Blu-ray Disc sales, after a slight drop in the third quarter, finished 2013 5% ahead of 2012.

But a steep increase on the digital side saved the day, with total consumer spending on digital content up 23.9% to $6.46 billion, from 2012’s $5.22 billion. Leading the charge was electronic sellthrough (EST), now rebranded as Digital HD, which saw a 47.1% increase in consumer spending to surpass $1 billion for the first time ever. According to DEG, consumers shelled out $1.19 billion buying movies and TV shows digitally in 2013, up from $808.42 million in 2012.

Driving Digital HD sales was the policy adopted by most studios during 2013 of releasing new titles two weeks earlier than their disc or VOD release — a policy change Universal Studios Home Entertainment president Craig Kornblau calls “a game changer.” Further boosting Digital HD sales was a dip in pricing and much greater availability, thanks to new platforms such as Comcast’s digital movie storefront, launched in November, and Target Ticket, a digital store that was opened in September by the nation’s No. 2 discount retailer, Target Corp. — as well as new media hub consoles such as Microsoft’s Xbox One and Sony’s PlaysStation 4, both of which hit the market in November.

Digital HD wasn’t the only digital component to post significant growth in 2013. Consumer spending on VOD was up 4.8% to $2.11 billion, from $2.01 billion in 2012, while subscription streaming — a market segment led by Netflix — rose an estimated 32.1% to $3.16 billion, from $2.39 billion in 2012.

The year-end DEG report also found that:

• The number of Blu-ray homes continues to grow, with total household penetration of all Blu-ray-compatible devices (including BD set-top players, PlayStation machines and HTiBs) now at more than 72 million U.S. homes.

• There are now more than 15 million UltraViolet accounts, thanks in large part to support from most major retailers.

• Consumers bought more than 38 million HDTVs in 2013. HDTV penetration is now at more than 96 million U.S. households, according to numbers compiled by DEG from retail tracking sources.

• Traditional physical rental continued to decline in the double digits. Rental revenue at brick-and-mortar stores fell 14.3% during 2013 to $1.04 billion, from $1.22 billion in 2012 — not surprising, given the fact that by the end of the year the 300 remaining Blockbuster Video stores had nearly all closed. Meanwhile, subscription rental, again mostly through Netflix, was down 19% to $1.02 billion, from $1.26 billion the year before.

• Kiosk activity, dominated by Redbox, was flat, coming in at an estimated $1.92 billion, a slight drop of 1% from $1.94 billion in 2012.

Regret over things that we could have done, would have done and even should have done… is useless.

My girlfriend, Lorrie Fisher, is a psychologist and a very wise woman.  One of the important things that I have learned from her is how to let go of regret.  What I learned from Lorrie was this:  Given the decisions that I have made over the past 35 years of my career, if I were to go back in time to each of those decisions – armed with no more information or resources that I had at the time… could I, would I or even should I have made any other decision?  The answer has come back to me again and again, probably not. 

A lot of my media creation and distribution clients are struggling right now.  The media industry that I work in is in such disarray that many companies that formerly had a strong position in their relative niche are struggling to find a foothold in a market that is built on the shifting sands of technology and time.  Many of my current and former clients have had to totally reinvent themselves.  Some have actually left the DVD, television or movie industry for greener pastures.  Others have so totally transformed their business as to make it unrecognizable from its former structure.  Gone are warehouses, in-house sales teams, acquisition pros prowling the media festivals and specializations that made them a lot of money in the past.  Replacing that are internet sales, independent contractors, global content alliances and multi-discipline distribution strategies.    

Veteran filmmakers and directors have had to resort to crowd funding, day and date VOD/Netflix releases and foreign pre-sales to get their films made.  Gone are the days when they walked into Warner Bros, Paramount or Universal and got the money to make their movie. 

So what?

If the sands of technology and time are shifting under your feet… learn to surf.  There is no point in holding on to the past wishing that things could be, would be, or should be… different.  

I suggest to you that there has never been a better time to be a content creator or a media distributor.  With the loss of the iron grip the TV networks and big movie studios had over what people see, there has come a brave new world where creators are free to make filmed entertainment and educational content that they can sell directly to people without anyone telling them what they can or cannot do.  The consumer now decides what they want to see and what they will pay for.  If you make programs and movies that people want to see then you make money.

To quote Carly Simon, “…these are the good old days.”

Hollywood filmmakers do not have a great track record with investors.  That’s why so many producers have to lean on state and foreign film incentives, pre-sells and gap financing to get their movies made.   If producers put their financiers’ need for a return on their investment above their own all powerful need to get their movies made, they would probably go about the filmmaking process differently.

The problem, as I see it, is not that motion picture producers are unethical or uncaring about whether their movies make money or not.  Quite opposite.  They care passionately that their films are critical and box office successes.  In there lies the problem.  Self delusion.  Most of the film packages that we see have no hope of making money for their investors when you consider the budget, the lead cast, the genre, the cost of P&A, and the theatrical market for the film. 

You see, filmmakers are storytellers, and they get caught up in their own web of telling stories for a living.  They forget the fact that… at a budget of $8 million, with washed up television actors as the leads, in a rehashed urban crime plot – that offers nothing new or original… they are probably already $7 million over budget. 

Film investors want to see their name up on the screen in the Executive Producer credits, they want to be on the set laughing it up with the cast and crew -- and they want to be part of the whole Hollywood mystique. 

What they don’t want is to lose all their money.

Filmmakers need to be better stewards of investors’ capital.  They should treat every dollar as if it were our own, and only make movies that are truly original and have a high probability of making money.  Self delusion benefits no one.  Right size your budget for the genre, cast and market potential of your film.  There is no shame making a film for $800,000, instead of $8 million if the market potential is only $1 or $2 million.  Before proceeding, ask yourself, “Would I put my own (or my Mom's) money into this film?”  Only proceed if the answer is a resounding, “YES!”

In today’s entertainment marketplace, when it comes to making money by making movies there seems to be two preferable ways to go about it.  One, make your film for the least amount that you can… or two… go for the big score. 

On the low end, you might want to consider making your film, non-union in a tax incentive state for under $2 million.  You use gifted amateurs, non-SAG actors and one veteran television star (who is just happy to be working). Then, if it is actually a good film, you can sell your movie to foreign distributors for $500,000, Netflix for $200,000, Video On Demand for $300,000, Redbox for $200,000, Pay Cable (HBO/Cinemax/Starz) for $50,000, and then free television for another $50,000.  If you can get a 25% tax credit from an incentive friendly state, then you are in the black.  No theatrical release, very little P&A spend and no shelping around from film festival to film festival praying that someone buys your movie.  

Scenario two, you raise $10 to $20 million and make a really, really great film, with an original concept,  a couple of big name movie stars, special effects,  an award winning director and all SAG, DGA, WGA, IA trappings.  You will then of course need either a major studio to buy (or distribute) your film – or $25 million in P&A to self distribute.  This path takes a lot of cash, whether it comes from you, investors or loans to pull off.  It is high risk but the rewards are big if you succeed.  Think of it as swinging for the fences.

What is not working very well right now is the $3 million to $8 million budgeted films that have no major stars, no distribution or P&A money.  You can’t make enough in foreign pre-sales to offset the cost of the film and unless you have a big name star in your pocket (think Matthew McConneghey, Brad Pitt, or Charliez Theorn) you won’t see big MG’s.  The domestic and foreign distributors only care about who’s in your movie.  They don’t care that you have a brilliant script, they don’t care that you have a great director, they don’t care that you have a killer marketing plan… they buy 90% based on cast. And a little on the concept.  You could put big name actors in a dreary urban drama and they would still pass.

So, don’t get caught in the middle with a film that doesn’t have the horses to win the box office race.  Consider the fast, inexpensive film… or go for it all.

A recent meeting with Larry Goebel at Imagination Worldwide, a successful foreign distributor, revealed an interesting problem: What do you do when the international film buyers don’t know themselves what their entertainment consumers want?  Larry offered them family films, horror films, dramas, comedies and thrillers… trying to get them to buy his films for their territory.  Frustrated by the buyer’s lack of commitment, Larry finally asked, “So what are you looking for.”  The answer came back a very puzzling, “Give me something that I can sell.”  Well… that was helpful.

Obviously, the major Hollywood studios have the same problem.  They don’t know what the customer wants to see.  The well publicized line up of box office failures this summer proves that no one, even if you are Sony, Paramount, Fox, Universal or Disney know much about what the consumer wants.  Big stars, big special effects and big sound does not a movie make. 

The international film buyers really do know what they want, it’s what they always want:  Good stories, well told.  Stories that have depth and meaning, stories that are well acted, stories that make people care, and want to go to the movies.   The accountants and lawyers took over the big motion picture studios long ago, they are not run by great storytellers anymore – they are pabulum servers with a really big spoon.  

So, it falls to the independent filmmakers to deliver to the world good stories, well told.  If they too pander to the lowest common denominator, the way the studios have, well… I guess there’s always a book.  

I was struck today with the incongruity and yet inter-connectivity of  two separate articles regarding financial security in America.  The first one was from the Associated Press, rebroadcast through the Huffington Post, titled 80 Percent Of U.S. Adults Face Near-Poverty, Unemployment: Survey wherein it states that “Four out of 5 U.S. adults struggle with joblessness, near-poverty or reliance on welfare for at least parts of their lives, a sign of deteriorating economic security and an elusive American dream.”  http://huff.to/11omSe1

The second article from ABC News was titled: Study Finds Only 28 Percent of Millionaires Think They're Rich, wherein they state “According to a study from investment bank UBS, entitled "What is Wealthy?," 40 percent of those with $5 million in investable assets said they didn't feel they were rich. And only 28 percent of investors who had between $1 and $5 million in investable assets viewed themselves as rich.”  http://abcn.ws/12VOe97

I simply cannot view both of these studies about the state of the American condition without comment.  The first one deals with one level of insecurity, as in – I cannot make my mortgage payment, fix my car or pay for my child’s education; and the second one deals with a different level of insecurity, as in, I have all the comfort that I need… but my neighbor has three houses, five cars and a more beautiful wife.  Both are insecure conditions to that person. 

I live in Beverly Hills, California where it is very easy to understand the attitude of people who don’t think that they are rich, even though they have a few million dollars in the bank.  In my neighborhood you can throw a ball in any direction and hit someone who has more money, cars, homes, women and stuff than you do.  At the same time I wonder how some of my neighbors are getting by when they have not made a movie in three years and have no visible form of income to support themselves or their family.  "The Lord (read – entertainment industry) giveth and the Lord hath taken away, blessed be the name of the Lord. [Job 1:21]"

My point is that poverty is still a real possibility for all of us.  You may be flying high today and they may be repossessing your Lamborghini tomorrow.  What the 40% of millionaires that have $5 million in investable assets know is that it could all disappear tomorrow.  You can’t allow yourself to become complacent.  If you don’t stay hungry, you don’t stay rich for long. 

 If you are a producer and you want to make money, I would encourage you to look at creating serial television programming over creating motion pictures. 

Do it.  Do it now!

Netflix, Hulu, Amazon, HBO, Showtime and the multitude of other pay services are crying for brilliant series right now, not movies.  They have found that dramatic and comedic TV series hook their users in longer and give them a reason to come back again and again for more.  If you scan the current Netfilx offerings and don’t see a movie that interests you, or that you have already seen, you may turn the television off , or worse, go to another service. However, if you’re seven episodes into Lie To Me, House of Cards or Game of Thrones, you’re going to probably sit down and watch more. 

There is another, more pervasive issue going on here:  People are losing their ability to focus their attention for more than about 20 minutes at a time.  Our young people are the first "YouTube Generation". A generation that has consumed a great deal of their entertainment in one to two minute bursts.  A 22 minute sitcom is an eternity to them.  Working adults have such over impacted lives with their  jobs, kids, sports, hobbies, games and other attention grabbers that sitting down to watch a two hour movie is not a pleasure -- it is a chore. 

When our news is consumed in the length of 140 character Twitter feeds, what do we expect?  http://bit.ly/15zpFRq

It is interesting how motion pictures were once the place to be for top flight producers, writers, directors and stars.  That has changed.  Movies just don’t hold an audience as well as a well crafted series will and the networks and pay cable channels are throwing millions and some of their biggest stars into them.  It is no wonder -- worldwide syndication revenue can be in the hundreds of millions for a really successful series. 

I recently met with the CEO of a major international media company.  I asked him what they were acquiring for 2014 and he said, “Dramatic, high concept television series.”  Movies were not a priority on his list.

If you have a great dramatic television concept and you are looking for funding.  Call me!

 When you create entertainment productions you need to think well beyond the borders of Los Angeles, or California… or North America for that matter.  You should consider how to make people laugh, or cry or stand up and cheer in China, Poland, Brazil or New Zealand. 

I recently had lunch with the owner of a Russian television network who is summering here in Los Angeles, soaking up more than our sunshine, he is here on a hunt for content that will entertain and delight his viewers back in Mother Russia.  For God only knows what reason, the rest of the world looks to “Hollywood” to help fill their lonely hours.  We Americans may no longer dominate the world car market, computer chips or appliances… but we still are seen as the “center of the universe” when it comes to creating and marketing entertainment. 

Never mind that a lot of the best known American television shows are often just copies of their British predecessors, or that most of what Hollywood turns out is simply drivel… it is still better drivel than they are making elsewhere. 

We (the American entertainment industry) are still very good at our jobs.  We know how to conceive, produce and disseminate programming that the rest of the world likes to see.  So, when you’re planning your next pilot, series or movie… think about people in the Philippines, Korea, Spain and Argentina.
What do you think they would like to see? 

For they are your audience too.

Being in the film finance business, I hate to write about the many ways that film financiers can get reamed.   Just to make sure that I was not using the word “reamed” in an inappropriate or sexual way, I looked up the definition.  Besides it meaning to be bored or cored out, it also means to have the juice squeezed out of fruit with a reamer.  
That seems appropriate.

This blog was greatly influenced by a conversation that I had a few days ago with the vice-president of  one of the major film, television and home entertainment distributors.  I wanted his opinion on the merits of having a theatrical P&A fund at his disposal, for acquiring and distributing motion pictures.  He said to me, “Stephen, we don’t need to have a P&A fund.  There are so many movies made with “A list” actors that have no distribution – which we can pick up for pennies on the dollar.  Some of those completely finished films had budgets of $10 or even $20 million, and we can acquire them for less than $2 million.  We know that the maximum revenue that we’ll be able to generate out of films like that is probably only $5 to $6 million, but that’s a great pay day for us”. 

My blood ran a little cold at those words.  He was saying that he could pick up a $20 million production for 10% of the cost to make it?  That probably means that the investors aren’t going to see a penny of their money back.  It just reminded me again that the key to success in the motion picture industry is distribution – not production.  As long term executive from the motion picture industry recently said to me.  "The studio bosses take the distribution guys out to dinner, because they’re the only ones on the lot that make them money… everyone else is an expense". 

Before anyone invests in a motion picture, they need to ask how the film is going to be distributed and what those deals look like.  A truly wonderful film can (and probably will) lose money if the distribution plan is poor; while a really bad film can actually make money, simply because it was well positioned and smartly marketed.  Never overlook the importance of marketing.  Once again, distribution trumps creativity.  Don’t let your emotions overtake your judgment, because it is not a great script, or A list actors that make you money – it is box office brilliance.   

No matter whether your company gained or lost in 2012 you probably need to tighten up that flabby bookkeeping, shape up those bulging business records and pump up your net margin.

Unfortunately, just like exercise…getting your business in top form takes hard work.  Are your intellectual property rights well protected, are your accounting standards being followed, is your ship of state leaking cash?  Maybe this is the year to shed some unwanted IP baggage, toxic employees or inventory? Get rid of a costly distribution relationship, dump  non-performing properties, shed those high interest notes, beef up your marketing program and get your assets working again. 

Getting a business valuation done is a lot like getting on the scale.  You might not want to know what you weigh, but if you don’t look now, you’ll never know if your program is working.  We recommend to all our clients that they get a business valuation done every five years, to know where they are at now, and how they can improve the picture next year. 

Think of Business Marketing Consultants as your personal trainer as you work your company back into shape.   We will design a custom program that can help your management team tackle problem areas that may have been hanging on for years.  If you need capital…we can get it.  If you need to make acquisitions…we’ve got them.  If you need to get your debt down and your margins up…we’re on top of that too.  Sometimes we all need a personal trainer to get us back on the right track.  Count on BMC, we're here to help.