Network Television’s Declining Health

How do the Networks address the rapid surge in consumption when advertising is not keeping up?  With a multitude of viewing options and increasing competition, the years when networks could rely on ad revenues from a broad reach to justify high production costs are now gone.  The ultimate solution will no doubt fundamentally change the current business model.  KCRW’s The Business had an interesting segment on last weeks program with Producer Neal Baer about “the end of an era”.  Neal Baer was one of the original writers and producers of ER and is currently an executive producer of Law & Order SVU – have a listen.

Neal Baer on The Business (13:05)

 

 

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.

The Struggling Studio System

Scott Kirsner of CinemaTech wrote a great blog a few days ago about the struggling state of the studios.  As the migration of viewers and content to the Internet continues, studios are clamoring to figure out how to best monetize new media’s many distribution channels.  In his blog, Scott writes:

“I’m very confident about digital media’s ability to support individual creators, doing the kind of work they want to do, often on tightly-constrained budgets. (Constraints = inventiveness, right?)  I’m less confident that it will support the same gargantuan, diversified companies that raked in the big bucks in the days when there were only four TV networks, six movies released every weekend, a dozen important records issued on Tuesday.”

I agree with Scott completely.  In 2008, box office revenues hit an industry record of $9.6 billion and studios still lost money.  In their biggest year ever, studios did not profit.  With costs continuing to rise, declining margins will force the slow moving studios out of business…  That is unless they get a government bailout.

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.”

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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
  

The Evolution of Netflix

Netflix is aggressively positioning itself to become a leader in online video.  Strategic Partnerships with Microsoft’s Xbox, Starz, and the Roku player are expanding the platforms by which the Company’s content reaches subscribers.  As consumer viewing habits continue to change, Netflix’s streaming initiative provides these subscribers with options.  By embracing more avenues for content delivery, Netflix aims to increase the Company’s value proposition.  However, as the Company shifts focus from DVD to New Media, they seem to have forgotten one critical element… a business model.

Streaming service is currently a loss leader for Netflix.  As in the initiative continues to gain traction, it also continues to rack up costs.  Netflix needs to quickly implement a viable business model to turn this loss leader in to a money maker as it rapidly encroaches on a new breed of competition from companies like Hulu and the recently launched TV.com.  However, it is early in the game and Netflix is taking the right steps.  They have a number of options to generate revenues – from creating a streaming subscription, to revenue sharing, to advertising.

Perhaps the largest problem lies in the content itself.  With only 15% of the Company’s DVD inventory available for streaming, content is a major obstacle.  Netflix online success is hinged on movie studios providing the Company with distribution rights.  Joint partnerships like Hulu and TV.com have allowed Studios to keep all of the money.  Convincing them to grant rights is a difficult battle in which the terms will likely favor the studios.  The Xbox deals of the world are key in providing Netflix with leverage.  Because of this, I believe you will see more of those types of deals.  (Neftlix recently announced partnerships with television makers Vizio and LG at CES in Las Vegas.)

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.

The Freedom of Thought

One of Sceneclips’ primary goals is to change the way that filmmakers think.  Filmmakers are inherently entrepreneurs, each film marking the creation of a new business.  We wish to help filmmakers raise funding by exercising that which is their core competency, creativity.  It is the freedom of thought that provides endless opportunity.

Scott Macaulay, Editor of Filmmaker Magazine wrote a great piece in the Fall 2008 Editor’s Letter that I would like to share with you.

“We are in a new world, and whether that world is a temporary one marked by economic recession and, for film, a muddling through to more efficient new revenue models or, whether it is, as may be more likely, a lost decade during which the production and distribution paradigms of independent filmmaking are radically reshaped, new thinking will be required to survive.  Those who do make it will not be the richest or the most established but rather, the most creative, nimble and free in their thinking.  Those who are able to conceive of the new world will be the first to arrive there.”

The Most Important People In The Business

“The most important people in the film business, by far, are the assistants.  Revere them.  Befriend them.  Treat them with unadulterated respect.  Know their names and make them your ally.“

These words were taken from a preview chapter of the upcoming book The Tactical Toobelt for Screenwriters by accomplished producer, author and speaker, Gary W. Goldstein.  The chapter entitled The Assistant… Your Most Valuable Asset, delivers a wealth of information about how to make yourself known in the industry.

Perform Due Diligence

• Know as much as you can about the person and company you are calling – research the assistant’s name, employer, films, clients, and interests

Empower The Assistant

• The assistant is the gatekeeper – approach them as if they are your objective
• Assistants are privy to shocking amounts of information – seek their opinion, assistance, answers, & knowledge
• Direct your screenplay to the assistant, not their boss

Communicate Effectively

• Assistants field over 100 calls a day – always ask if it is a good time to speak
• The ideal time to call an assistant is at or shortly after 1pm – stress levels are lower and engagement is higher when their boss is at lunch
• Volunteer to email the assistant your contact info – in exchange you will get theirs
• Be kind and respectful… make them smile

The Tactical Toolbelt For Screenwriters: How To Market & Grow Your Passion As A Career will be available digitally early next year.  Visit Gary’s website to download the full preview chapter: The Assistant… Your Most Valuable Asset.

Innovative Film Marketing Tactics

Weather you are writing a treatment, crafting your pitch, or establishing your print and advertising campaign, David Meerman Scott will improve how your market your content.  While David does not directly target filmmakers in this presentation, his concepts and ideas will change the way you think.

Walk The Walk

I find it quite amazing how many crappy companies there are in this industry claiming to provide a valuable service to their members.  I HATE the term member.  Maybe it has to do with my non-conforming personality, maybe.  But I am fairly certain it has far more to do with the fact that the majority of these companies suck, and every time I hear about their memberships I think great, which way are they trying to screw me now?  I loathe the fact that Sceneclips uses the word member.  I am trying to think of another phrase or way of marketing it.  Sceneclips is not the average film industry network.  I will absolutely not stand for anything that compromises the integrity of our brand.  Thoughts? – post a comment or shoot me an email.

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