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Pulling Out Of A Death Spiral

3/14/2014

4 Comments

 
Picture
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.


4 Comments
Strath Hamilton
3/17/2014 12:07:35 am

Dear Steve,

The problem is, your article came to the right conclusions for the wrong reasons with only the moral high ground for 'artistic films' as the solution, there's no correlation co-efficient for historic changes in our business, no supply chain analysis, no forward looking analysis of genre types and their rotation in pop culture, no accounting for viewing habits, technology, and a whole host of other reasons. Did you know for example as the cost of downloads increases, DVD is coming back in some territories?

You're proposing a very simple solution to a complicated problem. To be useful as a consultant to our industry you need to drill down into the data and suck up the trending elements.

Strath Hamilton
CEO TriCoast Worldwide

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Stephen Kerr link
3/17/2014 12:09:49 am

Strath,
I have now had some time to think about your response to my article, and while I agree with you that the factors affecting the industry are many; film distributors have no control over historic changes, supply chain problems, popular culture, shifting demographics, viewing habits, technology or most of the other issues that are affecting the way people consume filmed entertainment. What we DO have 100% absolute control over is what we choose to produce and distribute. As a distributor you choose what goes into the market and (hopefully) is eventually bought in Europe, Asia and the Americas.

Strath, if you think about it -- what you choose to buy from producers and then disseminate around the world is probably the only decision that you have complete control over. Whether your film is viewed on Netflix here in the USA by me, downloaded off a website in France by a teenager, or viewed on DVD by a Japanese grandmother, is not in your hands. No matter how we drill down to the analytical data underlying seismic shifts (like the one we had this morning!) to our industry; the fact remains that you have no control over most of them. Excepting one.

Stephen

Reply
Jed Daly
3/17/2014 12:29:38 am

Steve,
This is not only true in the independent sector, but in the mainstream sector (the majors) as well. There is far more competition for the consumer’s discretionary time than there was 10 years ago— we now have hundreds of hours of free backed up programing to watch on our DVR’s ...programing that is free and which we are already invested in from a story POV. There’s not reason to head out to the theater for mediocre films at the local cineplex.

The reason the majors have moved to “branded” entertainment is that non-branded entertainment is rarely financial viable. Sorry, but that’s true.

It has been coming for decades ...distribution is now a commodity, and the differentiating expertise’s are (1) creative and (2) marketing — making your brand stand out from the crowd. This either takes huge $$$, incredibly sophisticated target marketing or really creative social media presence.

Best,
Jed

Reply
Strath Hamilton link
3/17/2014 04:38:32 am

Stephen,
The primary choice for a distributor may be what we buy, but it is ( for those of us who are veterans) determined by the buyers we sell to in each territory. The first question we ask a buyer, when they step into the room at AFM, EFM, Cannes etc is "What's working for you in your territory?". We then 'drill down' with the buyers to find which of the titles we've sold them are performing and which are not. When we return home after the market, we put this information together and when we determine what genres of film have enough buyer support, we go out and acquire or with our creative teams we quickly make that type of film. It's ot rocket science. it's the meat and potatoes of show biz.

The predictive analysis on bigger theatrical films is much more complicated, it also almost always involves a brand name director and/or known talent. The one constant in our business is that audiences will go to see actors they know, perform in a genre they are known for. There are ways to hedge this bet. Buy a best selling book franchise for example -- you know you have a built in audience. Just ask Patrick Wachburger about his inspired work as a producer bringing the twilight Franchise to the screen.

Artistic films can be made much easier in Europe, with funds from multi-territory subsidy deals. These are not commercial enterprises but are cultural offerings from various countries and I don't think you can apply the same measuring stick of artistic or commercial success. If you can acquire and release them, great, in the US, as a genre, their commercial track record is spotty at best.

In the US, Artistic films are being made by forward thinking investors with an eye to cultural change. Would "12 Years a Slave" and "Fair Game" have gotten made without Bill Pohlad. or "American Hustle" and "Zero Dark Thirty" without Megan Ellison? Again these are films with another agenda other than commercial success -- cultural change. A far nobler cause, but in the long run it's difficult to run a business with dueling agendas.

That being said, all of us in the business are on the look out for the next great artistic filmmaker. Those filmmaker relationships are assets for our companies, it's a thrill to work with genius. And we trust, they will make films that stars will want to perform in, and people will want to go see.

Strath Hamilton
CEO TriCoast Worldwide
Culver City CA 90232

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    Stephen Kerr is president of BMC (Business Marketing Consultants), a subsidiary of Bel Age Medias. 

    He has 30 years experience in the media and entertainment industry. 

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