Film Financing Suffers From Declining DVD Sales
April 29, 2009
- US home entertainment consumer spending off 4 pct in ‘08
- Lenders cutting film revenue projections
- DVD sell-through seen weakening more over next 5 years
- Lower DVD sales cause lenders to cut advance rates
By Sue Zeidler
LOS ANGELES, April 22 (Reuters) – As the credit crisis forces banks to scale back investments in Hollywood, a weak DVD market — long an industry growth driver — is adding to the challenges of getting films financed.
U.S. consumer spending on home entertainment fell 4 percent in 2008, in the first decline since the advent of the DVD, according to Bernstein Research analyst Michael Nathanson. DVD sales are estimated to have fallen 6 percent last year.
Operating margins at film studios, which have grown on the back of DVD sales for most of the decade, contracted 110 basis points in 2008, Nathanson wrote in a report on Wednesday.
He predicted demand for DVDs to fall further over the next five years as the maturing market slowly transitions to high-definition Blu-ray and digital distribution models, which offer lower profit per transaction.
Bankers say these trends are factoring into financing negotiations between lenders and studios, such as Time Warner Inc’s (TWX.N: Quote, Profile, Research) Warner Bros, Viacom Inc’s (VIAb.N: Quote, Profile, Research) Paramount, News Corp’s (NWSA.O: Quote, Profile, Research) Twentieth Century Fox, Sony Corp (6758.T: Quote, Profile, Research) and Walt Disney Co (DIS.N: Quote, Profile, Research).
“Consistent with the financial markets as a whole, film lenders and investors are taking a much more conservative approach to structuring deals then they previously had,” said Eileen Burke, principal of West End Capital and Advisory.
“If a company’s business plan relies on robust DVD revenues, it’s likely to be an area where lenders will haircut projections and their lending advance rates. It’s a part of the overall analysis you do when determining how much ‘lending currency’ is available for a particular deal,” she said.
From 2005 to 2008, hedge funds partnered with all the major banks from Merrill Lynch to Lehman Brothers to pour about $15 billion into films, financing studio “slates” of as many as a dozen movies at a time and collecting returns after the films were released or started generating DVD and TV revenue.
But after some box office duds and the credit freeze, most banks with the exception of JPMorgan (JPM.N: Quote, Profile, Research) have cut back in Hollywood.
“Every company in the industry is looking at the DVD market and how it affects it going forward. Some genres will be harder hit than others and certain companies will be harder hit than others. It will play a major factor in terms of financing,” said PriceWaterhouseCoopers Managing Director Ron Cushey.
Stephen Prough, founder of Salem Partners, which advises investors on how to maximize film investments, agrees.
“The decline of video revenue is something the industry will have to deal with. Economic expectations will have to be adjusted and production costs will have to come down,” he said, noting studios run “green-light” models to analyze releases.
After coming up with potential high and low box office ranges, video and TV revenue assumptions, studios determine whether a film has a good chance of turning a profit, he said.
“What’s happening now is that lower video estimates are going into those models, which means that you either don’t do a film, or have to do something on the cost side. The largest and most vulnerable line item is talent costs,” he said.
“Video is the largest source of revenue on a new release, accounting for about 40 percent, but new release video is off 25 percent from a year ago,” he said.
In the second half of 2007, for instance, a film yielding $100 million at the box office may have sold about 10 million DVD units in its first 12 to 18 months of release.
In the second half of 2008, a film of that stature may have sold only 7.5 million to 8 million units.
Some studios like The Weinstein Co and DreamWorks Studios, led by Steven Spielberg and Stacey Snider, are seeking financing. Others like Viacom’s Paramount ditched efforts to raise $450 million for a slate of films, and instead will co-finance on a picture-by-picture basis, after many of the big slate deals of recent years did not deliver as expected.
“It’s a different era from four years ago when people were clamoring to be in film deals. It’s kind of boiled down to some very professional folks who pay a lot of attention to the industry,” said Tom Adams, president and senior analyst with Adams Media Research.
(Editing by Matthew Lewis)
Scott Kirsner On New Media
April 27, 2009
CinemaTech’s Scott Kirsner sits down with HDFilmTools to talk about how the entertainment industry is changing for individual content creators.
Marketing Costs Erode Studio Profits
April 24, 2009
Although the industry is booming, the major film studios continue to struggle. Lower production costs have translated into a glut of supply. Because of this, the traditional barriers to entry are eroding. This hurts the studio model that for so long has relied on cost barriers to maintain control.
Increased supply means more competition to capture viewers. This is why the film studios have continued to produce less projects and focus on maximizing intellectual property. While this strategy appears to be working on the surface (ticket sales up 17.3% year-over-year, attendance up 15.6%), it has not translated in to profits at the box office. Increasing marketing costs have hurt the studios’ bottom line. While the MPAA reported a 20% decline in films produced from 2007-2008, the LA Times reported that the average marketing cost for a studio picture has increased to over $36 million.
Furthermore, ancillary revenues are drying up. Declining DVD sales are destroying the studios most important supplemental revenue source – one that often puts them in the black. The bottom line is that the same increases in competition that may hurt independent filmmakers are definitely hurting film studios. The competitive advantage for the independent filmmaker lies in profitability. Independent films have more control over keeping costs low to maximize returns for investors.
MPAA’s Dan Glickman On The Film Industry
April 22, 2009
While the television industry continues to suffer from a crumbling business model, more than ever, people are flocking to the movies. Take a look at Fox’s interview with Dan Glickman, Chairman of the MPAA.
2008 film industry statistics as reported by the MPAA
- The Domestic box office continued to grow in 2008, reaching $9.79 billion after a 1.7% gain.
- Worldwide box office reached another all-time high in 2008 at $28.1 billion, an increase of 5.2% over 2007.
- Domestic admissions dropped 2.6% in 2008, to 1.36 billion.
- The total number of films released domestically in 2008 was up 1.8%, to 610 films.
- In 2008, the average movie ticket price in the U.S. rose to $7.18, a 4.4% increase over 2007.
- The number of screens in the U.S. remain constant at just over 40,000 in 2008.
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The recent study completed by Ernst & Young shows the astounding impact of the adjusted 30% film tax credit in New York State. Some of the findings worth highlighting:
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- Film Industry spending on labor, facilities and vendors in those same periods increased from $940 million to over $1.8 billion (91.5%).
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- Discounting the $690 million in credits claimed, New York will generate approximately $2 billion in revenue.
Download Ernst & Young’s New York State Film Tax Credit Study
The study indicates that without the film tax credit program New York’s share of employment in the industry would continue to decline. Bottom line, the New York film tax credit has had an overwhelmingly positive impact, creating thousands of jobs and generating hundreds of millions for the State. Take a look at the charts below from the study.
