Top Five Film Financing Problems

New York City filmmaker Ted Hope posted a fantastic blog (or utterly depressing depending on how you look at it) last month titled 30 American Independent Film Problems/Concerns.  The list below contains the top five as they relate to independent film financing.

1. Too many films available and being distributed to allow films to stay in one theater for very long, making it more difficult to develop a word of mouth audience.
2. Reliance on large marketing spend release model restricts content to broad subjects (which decreases films’ distinction in marketplace) and reduces ability to focus on pre-aggregated niche audiences.
3. Collapse of International sales markets requires reduced budgets for filmmakers, and thus resulting in limiting content.
4. Collapse of US acquisition market requires reduced budgets for filmmakers, and thus resulting in limiting content.
5. Bootleggers have developed a platform that allows audiences to simply download whatever they want where ever they want whenever they want — something that the film industry has yet to do.  (This is a contributing factor in the demise of the DVD market – something that pushed many independent films in the black.)

Film Financing Suffers From Declining DVD Sales

• 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)

MPAA’s Dan Glickman On The Film Industry

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.

Related Posts

• Film industry statistics for 2009: total spending, box office and home video numbers

Wall Street’s Hollywood Woes

Banks and hedge funds withdraw billions of dollars from Hollywood deals, opening the door to discounts of 30 – 70% for film investors.

LOS ANGELES (Reuters) — The financial crisis is forcing Wall Street banks and hedge funds to pull out of billions of dollars worth of film deals, opening the door for specialty investors to scoop up Hollywood assets at discount prices.

From 2005 to 2008, hedge funds partnered with all the major banks from Merrill Lynch to Lehman Brothers to pump an estimated $15 billion into films, taking on risks formerly absorbed by studios like Sony Pictures and News Corp’s 20th Century Fox in return for a share of profits.

Typically, investors help finance “slates” of as many as a dozen movies and collect their returns after the films are released, or start to generate DVD and television revenue, which could be years from their initial investment.

But after some box office duds, such as Tom Cruise’s “Lions for Lambs,” and the credit freeze, most banks – with the exception of JPMorgan – have reduced their presence in Hollywood. Some are trying to sell off their positions in slate deals for discounts of 30% to 70%.

“Because of the credit crisis, banks and hedge funds have been writing down securities, including those backed by film assets, and are willing to sell them at lower prices,” said Stephen Prough, founder of Salem Partners, which advises investors on how to maximize film investments.

Prough and others cited strong interest and deep pockets for movie assets at current, reasonable prices from seasoned entertainment investors who specialize in the industry, know it well and take a longer-term view on returns.

For example, Content Partners LLC backed by Mark Cuban and Todd Wagner is a pioneer in acquiring films in the secondary market from hedge funds, private equity firms and banks.

“Not only are we buying from financial sellers but we’re also looking at transactions for the first time with studios and networks for participation in TV shows and film profits,” said Content Partners President Steven Kram.

“We’ve already purchased 34 films and over 200 hours of television. We can provide a new source of financing for studios and networks who are being squeezed for every penny.”

Another investor swooping in on slates of movie deals in Hollywood is David Molner, managing director of Beverly Hills, California-based Screen Capital International.

“I’m five times as busy as I used to be. We launched a $500 million fund that is financing the acquisition of assets in studio slate deals,” said Molner. “We are taking the participants in finance deals out of their capital positions in studio slate deals.”

Fewer films

With these deals, many studios have enough financing to make movies through 2010 and are cutting costs while waiting out the credit freeze to thaw before seeking further funding.

Nonetheless, the number of films released by major studios are expected to continue to decrease to correct an oversupplied market. Less than 200 films are slated to hit theaters in 2009, down from about 219 major studio releases in 2008 and 236 in 2007, according to industry estimates.

“There was too much money and too many films. The market couldn’t sustain it and the competition was too great to provide the returns the equity and hedge funds were looking for,” said PriceWaterhouseCoopers Managing Director Ron Cushey.

Some studios like The Weinstein Co and DreamWorks Studios, led by Steven Spielberg and Stacey Snider, are seeking financing.

Others like Viacom Inc’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.

In some cases, investors racked up hundreds of millions of dollars in losses and complained the studios tilted terms to keep sure-fire hit movies out of the slates.

Moody’s Investors Services analysts Neil Begley said about $80 million in debt tied to Paramount’s so-called Melrose I slate, covering films released from 2003 to 2005, including “Get Rich or Die Tryin,”‘ may soon default.

“Based on the expected cash flows for the film assets, the Class A notes will not be paid in full by their legal final maturity,” said Begley. Paramount declined to comment.

Bankers told Reuters that investors in Paramount’s subsequent Melrose II film slate, with titles like “Blades of Glory,” are now unloading their stakes.

“There are numerous film securitization deals being shopped around right now,” said Ken Schapiro, managing partner at media investment firm Qualia Capital. He declined to say which deals his firm was exploring.

Other studios like Sony Pictures adjusted terms of their revenue-sharing agreements after films in a $600 million slate deal called Gun Hill Road I underperformed.

The next big round of financing for Hollywood will likely come from overseas or via deals that are backed by assets, such as film libraries, to minimize risk, bankers say.

Prough cited one situation where a studio’s film assets were worth much less than the $500 million it had raised in a private equity financing. “Eventually, they either have to find new money to keep going or sell the assets to get investors their money back,” he said.

Independent film and television studio Lions Gate Entertainment Corp has attracted interest from activist investor Carl Icahn, who raised his stake in the company to 14.28% even after it reported disappointing earnings and underperforming films.

Molner, Schapiro and Prough all said film assets generate good returns over the long term.

“The good thing about investing in film is that you have an asset that continues to generate revenue on pay TV, free TV and in every country around the world,” Schapiro said.

Sundance: 2009′s Industry Indicator

The Nation’s most important market for independent film has officially kicked off.  With a struggling economy, this year’s Sundance Film Festival will be a significant indicator of industry trends in 2009.  Though festival submissions have remained steady with over 9,000 feature and short films, festival director Geoffrey Gilmore estimates acquisitions to plunge 66% from $45 million spent in 2007 to only $15 million in 2009.  “I know it’s going to be a difficult year for the festival” says Gilmore, “Buyers just aren’t in the mood to take a gamble…”.  Guy Stodel, Paramount Vantage’s executive vice president of production and acquisitions, sums up the buyer mindset when he told the Wall Street Journal, “You can get emotional about a film and want to buy it because it moves you, but that doesn’t translate to getting an audience on a Friday night.”

Adding fuel to the fire, Studios are in the process of slimming down – several indie distributors are now out of the game.  Last year, Warner Bros. closed Warner Independent and Picturehouse, as well as merging New Line Cinema into its main operations – Viacom followed suit with Paramount Vantage, as did Weinstein Co.  The players that still exist, such as Fox Searchlight, Focus Features and Lionsgate Films, are shifting their models, buying fewer films on the open market and producing more of their own.  In addition to a tough economic environment, this is likely prompted by a year of box office busts from last year’s most buzzed about films, Hamlet 2, American Teen, and Choke.

However, in the midst of an economic recession, Studio meltdowns, and a looming SAG strike, it is not all doom and gloom.  “The appetite for ambitious art films is healthier than many assume…I don’t think we’re in a period where people don’t want to see serious drama.” says Rick Klubeck of UTA.  I believe that in 2009 a beautiful sickness will take over the business and infect the minds of artists and executives that I will aptly call “The Slumdog Affect”.  Studios will embrace cost-cutting measures to lower overhead and sustain profitability, and though the circumstances by which this is forced are unfortunate, the collateral affect is opportunity.  David Carr of The New York Times said it best, “Part of the reason so many great movies come from outside the studio apparatus is that the lack of big shooting budgets and “help” from the people signing the checks forces filmmakers to innovate. Ultimately, you can’t manufacture cinematic excellence; you can only enable it.”

____________________________________

More on Sundance Film Festival 2009:

• It’s Definitely a Buyer’s Market – LA Times
• Sundance to Screen a Leaner, Quieter Festival – Salt Lake Tribune
• Slowdown at Sundance? – Wall Street Journal
• At Sundance, ‘Slumdog’ Casts a Long Shadow – NY Times
  

2009: The Outlook

A couple months ago I wrote a blog titled The CEO Filmmaker.  In the blog I spoke about the importance of filmmakers having a better understanding of film investors’ needs.  I believe it is imperative that all filmmakers, especially those actively seeking investment, keep a close eye on what is happening in the economy and the financial markets.  Though we are not all Wall Street traders, we are all impacted by the performance of the stock market.  In 2008, the majority of investors experienced substantial losses in their net-worth.  Film, often viewed as a recession resistant investment class, was unable to escape the recession of 2008.

I firmly believe 2009 will be a far better year than 2008.  That being said, I do not believe that we are in for a massive bull market.  As unemployment remains high, wages and prices will continue to drop, fueling further deterioration in consumer spending and business investment.  Risk tolerance will remain low, presenting speculative investment classes like film with an uphill battle.

My advice to you – keep your spirits high and focus undeterred.  Sentiment has been overwhelmingly negative during the past few months, but is important to note that this economy is nowhere near another Great Depression.  Between late 1929 and 1933 inflation-adjusted G.D.P. fell by over 30 percent, industrial production tumbled 47 percent, and the unemployment rate hit 25 percent.  The Great Depression amounted to more than 10 times the G.D.P. lost compared to all other recessions of the 20th century combined.  The government was not behind the problem then… but they are now.

Need Money? Follow The Formula

Investors are looking for one thing, money…  Ironically, you as the filmmaker are after that same thing – just a bit earlier in the cycle.  However, money to you serves only as the means to an end.  What you really want is to tell a story.  In order to do that, I advise that you follow the formula:
Originality + A-list + Marketability = Investment.  If any one of those three components are missing, your chances of raising equity investment is substantially lower.

• Originality – Do you tell a moving story with compelling characters?
• A-list – Doesn’t necessarily have to be A-list, but a proven moneymaker is a plus.
• Marketability – Will people want to see your film, why?

AFM 2008: Pitch Me!

AFM’s 2008 Pitch Me! seminar was a jam-packed three hour live pitch event conducted by a panel of experts including Shelby Stone, Caroline Baron, and Peggy Rajski.  Though the panels did disagree on some issues, there were a few resounding points:

1. Focus on the core concept and forget about extraneous details.
2. The first line of your pitch should paint a picture of the story – “Tell me what I’m watching.”
3. Explain what attracted you to the story and what compels you to tell it.
4. Don’t focus on staying on script, focus on staying present with the individual(s) that you are pitching – don’t talk at people, talk with people.
5. Keep it under 3 minutes.  Get rid of the extraneous and get to the essence – the audiences emotional attachment with the characters.  A pitch good pitch sparks conversation and keeps the individual(s) wanting to know more.

The three panelists also expressed some of their own opinions.

Shelby Stone:

• A pitch is like going on a date, you find out about them before hand and when you are in the room you engage in a conversation with them.
• When comparing your film, compare it to another film not another individual.  “My film has a Pulp Fiction feel” not “My film has a Tarentino feel”.
• Do not express a broad range of numbers for a films budget, say what you can make if for – “I can shoot it for 1.5″.
• Supporting characters: mention them only in relation to their role in the main character’s evolution.
• Focus on no more than 4 characters.

Caroline Baron:

• In many situations you are not pitching to the decision maker.  So, you need to get the support of the person you are pitching.
• Only use a name when you are describing a character in your film – “They have a gritty and warn look, like a Clint Eastwood.”

Peggy Rajski:

• Create a great opening line – bait the hook.  Tell the whole story in one line without telling the whole story.
• Know your own personal style and make it work for the benefit of your pitch.
• Set up the other people in the room who you are pitching with.
• Don’t use industry lingo.
• Talk about story, not structure.  Do not focus on why characters make choices, focus on how those choices effect the overall story.
• Generally, you shouldn’t have to address who the audience is in a pitch.  Good pitches make the audience clear without specifically addressing it.
• You are not going to make anyone buy something they don’t want – there is power to be drawn from that.

If you are having a difficult time coming up with a great pitch, try doing a free assiociation excercise.  Grab a pen and a paper and write down a buch of different words that pertain to your story.  When you are finished, pick three or four words that sum up your story and craft your pitch around them.

The 2008 American Film Market

The 2008 American Film Market kicks into high gear this week with a total of 1,022 films on offer – an AFM record.  Expectations for AFM have diminished due to the struggling global economy, and with the glut of films available this year, AFM is a definitive buyer’s market.  With slowing DVD sales, film investors and distributors are placing far more importance on theatrical releases.  The value proposition between good and great films wanes more heavily on the decision making process than it has in previous years.  Without a significant difference, decisions will be made based upon where film distribution companies can make the best deal.

Sceneclips will be covering the American Film Market all week.  We will recap AFM’s seminars and conferences, delivering the key points and important issues.  Stay tuned to Sceneclips!

Film Investing: The Outperfoming Sector

The Film Industry has historically been recession resistant, and it is apparent that this economic downturn is no different. As evidenced by two hedge funds, Grosvenor Park and Aramid Capital, the film sector does not necessarily correlate with what is going on in the overall markets.  Grosvenor Park and Aramid Capital are among the few hedge funds that are not experiencing investor redemptions during a time when many will go under. Since 2005, hedge funds have invested about $15 billion in the motion picture industry.  Tax credits and foreign presale distribution deals have not only guaranteed that investors recover their principal, they have proven that generating double digit returns from financing independent films is not an unrealistic expectation.  Our thanks to Julia Boorstin at CNBC for pointing this out in her article Hollywood’s Un-Risky Business. Visit CNBC to watch Julia’s coverage on The Call.

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