Independent Film Finance & Distribution

On May 4, 2009, the New York chapter of the Institute for International Film Financing (IIFF) hosted a Town Hall Meeting addressing current issues relating to independent film finance and film distribution. This time the panel of experts included: longtime theatrical distributor Wendy Lidell (International Film Circuit, Inc.), independent documentary distributor Richard Lorber, (Lorber HT Digital), entertainment attorney Steven Beer (Greenberg Taurig), and online documentary distributor Andrew Mer (Snag Films), moderated by David Rosen.

Lidell opened her presentation by acknowledging that notwithstanding the technological shifts in the areas of production, distribution, and media PR, theatrical exhibition is still the best way to brand a film. Just like has been experienced in the music business, the old model is broken and everyone is searching to understand or build a new working model for independent film distribution. For example, Wayne Wang’s “Princess of Nebraska” eschewed theatrical distribution with a direct to digital release, even though it enjoyed the laurel of a New York Times review.

Noting that 15 years ago, 150 films were submitted to Sundance, last year the number was more like 9000, of which about 200 were selected. Back when the existing film distribution model first was developed during the 1980s, ancillary distribution essentially consisted of VHS and 12 channel cable outlets. At that time, the price point for rental video sales was about $79.99 per unit. Today, there is a much lower price point for ancillary dvd or download revenue. Under the traditional distribution model, distributors typically take a 20-25% share, but also incur promotional expenses off the top that may result in no actual back-end money to the producer. In contrast, Lorber’s current typical distribution deal calls for a 50/50 net revenue share across all media.

Lidell noted the continued decline in newspaper readership has led to a diminution of the impact of print reviews. Further, many advertising budgets have been displaced away from traditional print and television advertising campaigns. If a project is critic driven, it is important to try to get a review from the most prestigious source possible (typically a New York Times review). From a public relations and marketing perspective, an “adopt a critic” strategy was suggested by Lorber as an alternative to chasing an New York Times review, where a producer would seek to hire a reviewer to write favorable copy that could be used as part of the project’s publicity materials. Online opinion site such as Rotten Tomatoes and MetaCritic also provide potentially useful feedback on audience response to a film.

Lorber stated that theatrical exhibition is no longer a loss leader, but now more of a loss follower, as it no longer necessarily represents the first film distribution window. Unlike the traditional film distribution model consisting of more or less exclusive release “windows” (i.e., theatrical, home video, pay-per-view, non-theatrical, pay cable, basic cable and broadcast tv, etc.), he characterized the present distribution situation as more like a kaleidoscopic mix of shards of glass (representing the myriad ways of exhibiting/delivering content, simultaneously and overlapping).

In his view, the explosion of cable channels saved the tv syndication business, even as home video saved the theatrical business by pouring new money into the industry.  Although dvds similarly revitalized the home video market, he expressed pessimism regarding the prospect for another “silver bullet” solution to save the film business. Instead, he indicated that it appears the future lies in a kind of monetization “cocktail” combining different revenue sources, including such innovations as micro payment streams.

Although the primacy of traditional theatrical exhibition may be waning, the prohibitive expense and overcrowded surplus of new content each year has led to a rise in “destination events,” including guerrilla screenings in non-traditional venues. Even though many people now have the capability and desire to screen films privately in home theater settings, the human need for community will likely continue to bring people together “around the campfire” to enjoy films in public settings.

Mer’s company, SnagFilms provides a free online streaming platform for documentary films, supported by paid advertising. He recognized the strong expectation of “freemium” content on the web, which is monetizable when supported by advertising, such as a pre-roll of 15 second ads in front of otherwise free content. SnagFilms aims to pursue what Mer calls the “double bottom line,” seeking to accomplish the filmmakers’ goals (e.g., to promote an issue), along with achieving recoupment and profit to investors.

Beer commented that there is currently a trend toward a much greater user-managed culture for independent film distribution. Digital rights, formerly a throw-in, have become increasingly primary deal points in a distribution deal. Buyers for digital content include aggregators and sub-aggregators, however, digital rights revenues are small, typically less than $.25 per view. Content generators would be advised to be careful to limit the term of any exclusivity provision (e.g., “in perpetuity”), as new technology and changes in viewer usage may greatly impact the monetization of digital content.

Independent film finance and distribution is undergoing rapid and far-reaching change, and it is important to look forward toward the future as viewing habits and media continue to evolve into a new model.

Michael
WinGateFilms
www.wingatefilms

IIFF NYC Town Hall Meeting – 3/23/09 (Part Two)

This is a continuation of the review of the March 23rd meeting of the New York Metro Chapter of the Institute for International Film Financing (IIFF) with entertainment attorney Bianca Bezdek, Esq., producers Larry Meistrich and Ted Hope, independent filmmaker Kimi Takesue, and moderator David Rosen. Hope’s Truly Free Film blog is worth checking out.

Pitching is an art, not a science. Bezdek advised the value of underselling, then over-delivering. Meistrich indicated that pitches to professional producers ought to be different from pitches to money men (most of whom do not know how to evaluate the viability of film projects). Hope observed that money people are often greatly concerned about avoiding looking foolish. Bear in mind that the objective of a pitch is merely to get someone to read the script, not to close a potential investor.

The panel was divided on whether so-called “sport investors” who invest in films for non-financial intangibles such as status (i.e., to rub shoulders with celebrities, etc.) are still on the scene. In dealing with a situation where a potential film investor’s commitment is contingent upon attaching name talent or other commercial element, the panel advised “calling their bluff” by proposing to have the investor put his money in excrow, releasable upon the fulfillment of the agreed upon condition. If the film investor is serious, an escrow commitment increases the chance that name talent can be recruited to attach to the project.

A key factor to raise money for independent films is attaching a commercial element to the project. Up front assets for a project typically may include a great script and one or more known and marketable actors. With either or both, it may be possibly to interest a great director with a reputation for being able to execute a saleable film. Once one or more commercial elements is attached, a producer may be able to interest a sales agent who may be able to suggest other possible attachments. Of these various elements (script, actor(s), director), the onscreen talent is often the most quantifiable element for financing purposes. Bezdek mentioned that if a well-connected casting director can be brought on board at a modest fee (perhaps as low as $3k or less) on the strength of the script, it may be easier to attach name talent.

Notwithstanding the importance of considering financial commercial considerations in formulating a workable strategy to raise film financing, Kimi Takesue provided an inspiring counterpoint supporting an artist’s compulsion to create art independent of commercial considerations. She described going out on her own and shooting some test footage of powerful human moments as an exercise, and then pulling those pieces together into a short film, “Suspended” which was selected this year at Sundance and Rotterdam, as well as at New Directors/New Films in NYC. The value of those top level festival laurels is that her short film will open further doors for her with producers and potential investors.

Hope opined that film festivals are now more about trying to connect with your target audience, than about trying to find a film distributor. Fewer and fewer films are selling each year at Sundance, Toronto, etc. Festivals remain an excellent marketing/public relations oppportunity, as the festival itself also has an interest in driving traffic to screenings.

Meistrich noted that there are about 200 theatrical release slots each year, and that about 190 of these slots are filled by ”professional” (i.e., major studio or mini-studio) films. He analogized the situation to professional sports, indicating that an independent filmmaker needs to be a “top draft pick” to have any chance of getting an independent film released theatrically.

Consequently, Meistrich recommended a film distribution strategy of marketing to a niche audience, always striving to make product and selling it to get money back to investors and to underwrite a lifestyle of making films. Delivering content online is the emerging growth vector for distributing product; costs are low and the problem of collecting from film exhibitors is avoided.

Michael
WinGateFilms
www.wingatefilms

IIFF NYC Town Hall Meeting – 3/23/09 (Part One)

On March 23, 2009, the New York City chapter of the Institute for International Film Financing (IIFF) held a Town Hall Meeting at the School for Visual Arts on the topic of “Financing Your First Feature Film.” Once again, media consultant, David Rosen hosted a distingushed panel consisting of the following film industry experts: high-powered entertainment attorney, Bianca Bezdek, Esq.; producer/distributor, Larry Meistrich (NEHST); producer, Ted Hope (This Is That Productions); and independent filmmaker, Kimi Takesue.

Ted Hope mentioned his perception that in LA, more than NY, entertainment attorneys may be more willing to be compensated by a percentage on the back end, as many independent filmmakers may have difficulty budgeting payment of traditional legal fees when raising financing. Larry Meistrich emphasized the critical nature of utilizing a qualified attorney to prepare a private placement memorandum (PPM) to solicit investment from “accredited investor” (over $1.2 million net worth, or at least $250,000 per year income in last two years)participants. Bianca Bezdek, Esq. advised that soliciting investment in a film constitutes issuing a financial security, subject to state “Blue Sky” laws and federal securities regulations, hence the need for retaining a qualified attorney to prepare the offering.

Bezdek suggested a strategy of setting up three levels of companies. The top tier company is utilized as a development vehicle; the middle tier company serves as an investment vehicle; and the bottom tier company functions as the production vehicle. A savvy investor will want to see chain of title in the creative property pass into the investment vehicle.

Meistrich stated that so-called “1-off” (single project) film financing is no longer particularly viable, and proposed the innovative strategy of “selling a piece of you” for filmmakers to offer percentage participation (e.g., 10%) in one’s future career development as a financial incentive to potential investors. Most first films lose money, so that if a burgeoning writer/director manages to get signed for further projects on the strength of a first effort, it may be fair to offer participation (or at least “make whole” protection) to investor(s) willing to take a risk on an undiscovered talent.

Hope provided the practical advice that it may be preferable to negotiate business terms and put them in writing up front at a time when the parties are both enthused and getting along, to protect against disputes when problems arise. As an independent filmmaker, Kimi Takesue recommended finding a way to connect directly with investors, to be able to impart one’s passion in the project. Meistrich offered the sobering counterpoint to advise that passion or sacrifice are essentially meaningless to a sophisticated investor, who is only interested in whether investing makes good business sense.

Meistrich characterized raising money for independent films as “begging for a living,” and recommended compiling a list of potential investor prospects three levels deep (i.e., friends of friends, etc.). Within the last 45 days, he indicated that a lot of investors “have their money on the sidelines,” the downturn in traditional investments such as the capital stock or real estate markets increasing interest in alternative investment opportunities.

The panel provided a strong ”wake-up call” to filmmakers to really do their homework to determine why an investor should want to invest in their film, and how the film could be marketed. Hope emphasized that a filmmaker needs to make completion of one’s film project seem “inevitable,” by identifying your audience and figuring out how to reach your audience. He mentioned with the recent plummeting of the domestic distribution market, and the 40% drop in the foreign sales market, that films in the $10 million budget range are finding it increasingly difficult to raise money. Conversely, small indie film projects with low (under $500,000) budgets, perhaps as low as $200,000, may be more attractive possible investments, as recoupment is less inherently risky.

In raising money from potential investors, Bezdek emphasized that “pitch is everything,”  and shared the rare anecdotal story of a client who literally got a $1 million commitment from an investor on a pitch alone. One should keep in mind the “Three Cs of Lending”: Collateral, Creditworthiness, and Character. The last of these (Character) borrower characteristics is an element that should come through in delivery of the pitch.

Michael
WinGateFilms
www.wingatefilms

IIFF NYC Town Hall Meeting – 2/2/09

On February 2nd, the New York City Chapter of the Institute for International Film Financing (IIFF) kicked off 2009 with a Town Hall Meeting entitled “Innovative Strategies in Challenging Times.” The distinguished panel moderated by David Rosen included: John Hadity (PGA East), Adam Elend (CBS Interactive), Ezra Doner, Esq. (Herrick, Feinstein LLP), and Sandra Schulberg (IFP Founder).

John Hadity had just returned from this year’s Sundance Film Festival, and reported that attendance was down significantly, especially among the financial community. Private capital, rather than commercial lending institutions, is where potential film investors maybe found in the current market. There is a strong conservative trend in film financing where the big question is “what are the chances of losing my investment?”

Representatives from about 9 states and 6 countries participated in a panel at Sundance about their respective film tax incentive programs. Although foreign film tax credits have been generally stable, there has been increased concern about the solvency of many state programs. Michigan’s lack of cash is a major concern, notwithstanding that state’s high film tax incentive rate. New York State’s 30% credit back program needs allocation of additional funds, as the nearly $515 million earmarked for 2007 through 2013 is already locked in existing and pending projects.

In other states, Connecticut recently revitalized their transferrable film tax credit after-market by legislative changes authorizing sale of film tax credits to insurance companies. Pennsylvania’s 25% film tax credit program is in its second year of implementation with $75 million available for qualified projects. Ernst & Young has been compiling reports for various state film tax incentive programs, and have concluded generally that for every $1 spent in tax credits, there is a value of $1.50 to the state in economic development.

Transferrable credits are probably more viable in the long term, even though refundable credits may be more desirable (representing hard cash return). Unfortunately, a number of state programs may not have cash available to be distributed when the time comes.

Adam Elend sold his internet distribution company taking a position heading up CBS Interactive. According to Elend, YouTube is still the best platform on the Web for social networking for video, as MySpace is for music.

YouTube Insights provides valuable web analytics, and YouTube also provides advertising programs to assist filmmakers to increase traffic to one’s video channel. The Playstation 3 also now provides online access to YouTube content, even as XBox Live carries Netflix streaming video access.

Filmmakers may also benefit from the use of Google Ads, Google Gadget Ads, and the Google Content Network (GCN). Google Gadget Ads are a widget pay service that charges about $2-3/1000 impressions.

Ezra Doner, Esq. discussed that the cost of advertising has been the main bottleneck in film financing and film distribution, and noted that the pre-sale model has not really been working well at the moment. Banks only want to lend you “your own money” (i.e., expected income stream), particularly in light of the serious loan default environment. These days, Doner suggested that it is probably easier to finance (and sell) a $2 million film, than a $5 million film, as recoupment may be more reasonably anticipated by pre-selling 10 major territories with less overall exposure.

According to Doner, financing a film project is analogous to financing a shopping mall. As a developer purchases the land, a producer acquires the underlying creative property. Both types of projects require a design and marketing phase. A mall project seeks to arrange “anchor tenants” (i.e., large retailers) to lock in long term leases, similar to a film producer’s pre-sale of major territories. Once anchor tenants (or major territories) have committed financial obligations, it is easier to attract smaller stores (or smaller territories) to be incorporate into a collateral package to show private investors and/or commercial lendors.

Sandra Schulberg, founding president of the Independent Feature Project (IFP), commented that although production and distribution costs have been coming down, that advertising costs keep going up. One challenge for independent filmmakers is to try to get private investors to “cash flow” their investment to avoid having to go to banks, with the attendant need to procure a completion bond.

Interestingly, sometimes the “overbudget issue” is driven by project enhancement concerns. If a project turns out particularly well, the producer may feel strongly about trying to go back to the original investors for an additional modest amount to fund enhancement of the film (e.g., to commission better music, etc.).

Schulberg recommended trying to include a “gross corridor” provision in the investor agreement which slows down recoupment slightly, but allows the production company to continue to function while trying to market and sell the finished film. As a practical matter, investors are not “living on” their investment, however, many indie filmmakers are eking out an existence and may “need to keep the lights on.” For example, a 10% gross corridor would provide that $1 of every $10 received from sales would pass through to the production company to permit it to continue to function, with $9 flowing back to the investors as recoupment. 

Former Wired editor, Kevin Kelly’s piece, “1000 True Fans” is an excellent articulation of a potentially successful Long Tail Marketing strategy for independent artists and filmmakers. John Scalzi’s blog, “The Problem With 1000 True Fans”  presents some counter points.

Reportedly, out of 5760 short films were submitted to Sundance this year, only 96 shorts actually screened at the premier festival.

Michael
WinGateFilms
www.wingatefilms

IIFF NYC Town Hall Meeting – 11/17/08

On November 17, 2008, the New York City Chapter of the Institute for International Film Financing (IIFF) held a Town Hall Meeting to discuss film financing topics. The panel moderated by David Rosen included Dan Cogan (Impact Partners), Judith Helfand (Chicken & Egg Pictures), Slava Rubin (IndieGoGo), David Davoli, Esq., and Jared Moshe (Sidetrack Films).

Dan Cogan remarked that with the passing of indie film distributors ThinkFilm, Warner Independent Pictures, Paramount Vantage, etc., the days of theatrical distribution for low budget indie features is just about over. Realistic monetizable distribution is primarily currently achievable through tv, dvd, and internet download sales. Efforts to build online community for serious film may find Ted Hope’s Truly Free Film blog useful.

Jared Moshe shared the insight that potential corporate film sponsors tend to get more excited about giving money for marketing P&A, than for production itself. It is important to reach out to brands as soon as the rough cut is ready. For corporations, it is about how your film fits into their marketing initiatives.

Judith Helfand recounted that many foundations are required to give away 5% of their assets each year. Of course, although foundations are loathe to fund film projects, indie doc-makers may be heartened to learn that many non-profits may be more open to funding outreach marketing efforts to educate their target audience about the social issues important to the organization.

Slava Rubin, founder of IndieGoGo, talked about “groundsourcing” as a way to pursue funding through building community around your fim project. IndieGoGo has various DIWO (do-it-with-others) tools available online to assist independent filmmakers pursuing grass roots fundraising. For supplemental fundraising through IndieGoGo directly, IGG charges a 9% fee.

David Davoli, Esq. explained that the relatively recent (prior to the current financial crisis) excess liquidity led to a glut of film product clogging distribution. What this meant was that many films were made that should not have been made, due to the eagerness of private equity investors to try to take advantage of perceived opportunities to profit from independent films. As a practical matter, legal defect in chain of title of the underlying creative property was cited as near the top reason for distribution delivery problems. The recently settled “Watchmen” litigation between Warner Brothers and 20th Century Fox is a high profile example.

A typical equity mix for investment in an independent film was cited as ranging as follows (varying from project to project): 20-30% equity, 30-50% tax credits, 20-30% pre-sales, and 10-20% gap or supergap financing. It is recommended to put money received in escrow until all funding is raised. A completion bond will typically be required if any bank financing is involved. Gap financing to enable completion of a project often follows the “last money in, first money out” preference.

Recently, international financing has become much more important in the mix. International sales and home video is the source of most expected revenues. A good business model always starts with a distribution plan. As a hint, don’t make a North American distribution deal if you want to pursue a festival run, as many festivals will not accept a film in competition that already has a distribution deal in place.

Michael
WinGateFilms
www.wingatefilms

Alternative Distribution – IFP Independent Filmmaker Conference

For the second year in a row, WinGateFilms attended the 2008 Independent Filmmaker Conference  as part of Independent Film Week run by IFP-NY (www.ifp.org). In particular, the programs on September 17th addressed the common theme of Alternative Distribution.

Consumer viewing habits are changing, as evidenced by the rise in video sharing sites such as Meta Cafe, Bebo, Vimeo, and others. Tube Mogul is a free service aggregating release to multiple videosharing sites and providing analytics to track viewership.

People want their viewing content from everywhere, not just through the traditional distribution formats. However, as recognized by “Long Tail” marketing economics, they also want their content “curated” to some extent, to separate the wheat from the chaff.

Sundance Channel uses its free video on demand platform to help build its channel audience. The interesting thing is that free online availability of content does not seem to be supplanting DVD sales. In fact, indie producers and distributors have reported bump in DVD sales/reorders due to YouTube “pop.”

“The Cult of Sincerity” actually had its feature world premiere on YouTube. Director Adam Browne emphasized the importance of developing an ongoing conversation with one’s audience through online release and social marketing techniques. It is also important to be reviewed or featured by opinion leaders, ranging from a New York Times review to online sites such as BoingBoing, Propeller, Reddit, etc.

Corporate sponsorship branding is an emerging strategy focused on associating a specific company product or service with distribution of a film project. For example, YouTube has partner programs that pay for films, but require huge viewship to be meaningfully monetized. Ballpark rates paid for online ad content are about $10-15 for every 1000 views.

Gary Huswit’s niche documentary, “Helvetica” raised money selling $75k in promotional t-shirts and posters to its core niche audience of graphic designers before its festival premiere at South By Southwest Film Festival. Huswit championed the idea (esp. for doc makers) of having your audience finance your film, partially through pre-order sales. Helvetica ultimately built a 30,000 name email list, toured 100 cities in 25 countries (over  months), and sold about 300 copies of educational market DVDs at $350 each (later dropping the price to $225 after a year). 

Word of mouth and playability of the film is paramount. Regardless of whether a movie is being offered for free, or trying to charge for download, DVD, or ticket, the important thing is to figure out how to get people to care enough to want to see the movie at all.

A good review in the NY Times, LA Times, and/or Chicago Sun Times is desirable, but more is needed to really launch a successful indie film theatrically. On the other hand, a bad review from one of these primary opinion leaders can kill a film’s theatrical release.

Lance Weiler, director of the indie success, “Head Space” and founder of The Workbook Project, discussed his interest in the move from a competitive to a collaborative model of filmmaking. Weiler considers himself more a story architect than a filmmaker, as he has been successful designing and implementing a trans-media strategy to deliver content for a project ranging from graphic novelization, gaming, live event, as well as film, and in creating other revenue streams around the offering of free content to generate an audience following.

Ira Deutchman, President and CEO of Emerging Pictures (which also owns the Landmark Theatres digital exhibition chain) spoke about how feature films face the challenge of recreating a fan base from scratch each time out, unless the filmmaker can achieve some kind of branding (similar to the branding of bands in the music arena) to connect directly with one’s core audience. Perhaps the best know example of this in the indie film world is Tyler Perry.

It is worth noting also that “baby boomers” are the fastest growing online viewer segment; although their numbers are relatively low, they are growing rapidly. Not surprisingly (but to the dismay of corporate management), high viewership can be found during so-called “working hours.” Video “snacking” is an emerging viewership trend with audiences drawn to watch shorter programming than the traditional 30-60 minute long television programs or longer feature film runtimes.

Michael
WinGateFilms
www.wingatefilms

Karin Chien on Independent Film Distribution – Part 2

This is a fourth continuation of WinGateFilms’ coverage of Karin Chien’s Filmmaking Outside the Box: Smart Strategies for Independent Producing workshop, focusing on independent film distribution. This final installment deals with Karin’s comments regarding the emerging face of independent film distribution.

Although it has become increasingly more common for independent filmmakers to pursue self-distribution, in whole or in part, Karin mentioned that even a partial strategy of DIY theatrical release while selling off ancillary rights is essentially a year of full-time commitment for an indie producer. That sort of time commitment is generally less attractive to most indie directors, who would rather spend that next year (or more) preparing to shoot their next film.

The major self-distribution choices range from a complete DIY approach to entering into a distribution service deal, which essentially consists of hiring a distributor (as opposed to selling the film to a distributor). For example, paying a $50k fee to Todd Wagner and Mark Cuban’s “Truly Indie” program (www.trulyindie.com) will secure limited theatrical release for one week in at least five markets in 2929 Entertainment’s Landmark Theaters.

Karin mentioned another hybrid alternative that she has used successfully, a modified service deal with a distributor, hiring someone to book the film and hiring a publicist, while pursuing DIY advertising/marketing/print efforts. The last option for an independent filmmaker for theatrical release is the practice of “4-walling,” essentially renting out a theater covering the “house nut” (i.e., fixed costs of the exhibitor’s screen). 4-walling for a week long run on a single screen can easily run $15-20k in major markets.

For DIY DVD distribution, Amazon.com has a DVD production tool known as CreateSpace (www.createspace.com), which essentially incorporates the print-to-order model developed in the book publishing industry. The filmmaker still does marketing and advertising, but has the option of directing purchasers to buy online from CreateSpace through www.amazon.com, or ordering bulk copies for the filmmaker to sell directly from his own website, etc.

The current trend is away from the traditional distribution model where theatrical revenues are generally loss-leaders intended to drive up the value of ancillary outlet releases, with a concomitant loss of producer control. The new models of distribution, especially through the internet, have different challenges to overcome. First, the new models are not yet monetized beyond some atypical, anecdotal success stories.

Niche audiences are lower than the numbers needed to make traditional distribution release profitable, however, Chris Anderson’s “Long Tail” theory suggests that targeted marketing specifically designed to reach these niche audiences can result in positive ROI over the long haul. Some producers have found that innovative strategies such high profile partnerships with sponsors and viral marketing are needed to help drive niche audience and internet sales.

With regard to short films, Karin opined that the 2 most important shorts festivals are the Clermont-Ferrand Short Film Festival (www.clermont-filmfest.com) held in France in early February and the Palm Springs International ShortFest (www.psfilmfest.org) held in California in last August. She also mentioned that festival strategy (i.e., “protecting your premiere”) is much less critical for short films. Recently, shorts have become increasingly monetized on the internet through sites such as Atom Films (www.atom.com) and iTunes (www.apple.com/itunes).

Looking toward the future, Karin forecast that the theatrical market appears to be developing toward the direction of event spectacle films, as traditional theatrical release is becoming prohibitively expensive. Clearly, the spate of high-budget action tent-pole films this summer would appear to support this prognosis.

In conclusion, Karin shared the personal observation that, although deciding on what projects to get involved as a producer must always make sense from artistic and business perspectives, in retrospect the best decisions she has made on what films to produce have been made on a visceral level from a “gut check.”

Michael
WinGateFilms
www.wingatefilms

Karin Chien on Independent Film Distribution – Part 1

This is a third continuation of WinGateFilms’ coverage of Karin Chien’s Filmmaking Outside the Box: Smart Strategies for Independent Producing workshop, focusing on independent film distribution. Karin’s presentation concluded with a comparison of the traditional distribution model with the emerging, changing digital and DIY distribution landscape.

Those closely following the film industry are aware of the current distribution crisis evidenced by Warner Brothers’ virtual folding of indie distribution divisions Picturehouse (a joint venture of New Line Cinema and HBO Films) and Warner Independent, the massive layoffs and reabsorption of New Line Cinema and Paramount Vantage, and the financial woes of ThinkFilm, to name a few examples.1 It used to be the case that about 7 films would open each weekend; today maybe 15 films are competing to open each weekend domestically.

The traditional distribution model is still relevant, though the future of film distribution is rapidly evolving.2 Under the traditional model, a feature film is exploited in different outlet media in progressive “windows” of release (e.g., theatrical, non-theatrical, DVD, pay-per-view, premium cable, and free tv/basic cable). In a typical traditional distribution deal, the distributor applies cross-collateralization of revenues and expenses against each of these windows (e.g., losses from theatrical release are balanced against profits from DVD release before net profits are payable to the filmmaker).

Theatrical release, while highly coveted both as a badge of accomplishment and as a boost to PR and marketing, is generally a loss leader due to the difficulty of recouping against high P&A (prints & advertising) costs. In contrast, DVD sales are often highly profitable on a per unit basis. Some independent filmmakers have experienced success in the traditional model with pursuing DIY domestic theatrical strategies, coupled with selling off ancillary rights separately. Other films experienced good results through platform release, i.e., opening first in limited release (such as NYC and LA), then adding other cities and opening wide as audience demand supported spending additional P&A monies spread out throughout the release period.

The emergence of digital outlets has led to the rise of digital aggregators, collapsed windows, reversed windows, and more DIY options for filmmakers. Aggregators provide an internet marketing portal through outlets such as Shorts International (www.britshorts.com), iTunes downloads, video-on-demand (VOD) (e.g., www.vudu.com), and streaming content through advertising supported free online tv (e.g., www.joost.com and www.jaman.com) and Netflix.

Collapsed windows is a strategy for distributors to reduce the risk of theatrical release by combining marketing efforts to support, for example, day-and-date release of films in theaters and VOD (or simultaneous release on VOD and DVD) on the same day. IFC Films’ First Take program was launched in 2006, combining limited theatrical release with VOD availability the same day.

The latest current trend is reversed distribution windows, such as HBO Films first releasing a project on pay cable, then subsequently arranging theatrical release powered by the pay tv premiere. Mark Cuban’s HDNet Movies is another example of an outlet utilizing collapsed or reversed distribution windows strategy.

Michael
WinGateFilms
www.wingatefilms

1 Mark Gill’s recent address at the 2008 L.A. Film Festival Financing Conference, “Yes, The Sky Really Is Falling” eloquently expressed the difficulties facing independent filmmakers seeking distribution for films. (For full text of Mark’s remarks, go to: www.indiewire.com/biz/2008/06/irst_person_fil.html).

2 The annual Focus 2008: World Film Market Trends report prepared in connection with the Marches du Cannes can be downloaded conveniently (along with past annual reports) free at: www.obs.coe.int/online_publication/reports/focus2008.html.

Karin Chien on Independent Producing, Part 3

This is a second continuation of WinGateFilms’ coverage of Karin Chien’s Filmmaking Outside the Box: Smart Strategies for Independent Producing workshop.

Deal-making for independent films revolves around financing and distribution/sales/marketing. The basic practical question is “what is going to incentivize an investor/vendor/talent/crew to give you what you want/need as a producer?”

For a “1-off” (solo) film, the most common financing vehicle is to establish a limited liability company (LLC) and sell non-equity membership shares to accredited investors. Typically, investors will be offered first position lien recoupment from gross revenues with an additional percentage return (10-20%) before net profits are calculated. Investors generally receive recoupment pro rata according to their proportionate share, at the same time as other investors in the same class.

After recoupment, the typical deal apportions net profits 50/50 to the pool of investors and to the producers. The 50% of net profits apportioned to the producers constitute 100 producers’ net profit points. Karin recommends to leave at least 10 producers’ net profit points unallocated in the beginning so they can be given away later during the development phase.

First lien position is extremely important because these will be the only people that may be recouped if the film does not generate profit. Sometimes, a producer may be forced to give up first lien position to investors providing finishing funds according to the “last money in, first money out” principle.

Unfortunately, even if principal photography (and maybe even post-production) has been completed, meeting delivery requirements for distributors can easily run $150,000 for an independent feature.

The bad news is that a finishing funds investor often knows that they have the producer in an untenable position because without being able to meet deliverables, the money spent on the film may never be recovered, much less any profit. The good news is that for many distributors, the specific requirements of the delivery schedule may be negotiable.

For example, it may be possible to get the distributor to add the production company as an additional insured to the distributor’s errors and omission (E&O) policy, thus saving about $12k.

Because the statistical chances of financial success for an independent film are extremely low (1 out of 1000), a producer often needs to brainstorm additional deal-sweeteners to entice investors. Being credited as a producer or executive producer is quite common, and a producer can sometimes offer invitations to set during principal photography (with advance notice to the production team, etc.).

Retaining creative control essentially rules out financing from studios or studio distributors, as they will want significant control over the film.

Michael
WinGateFilms
www.wingatefilms

Karin Chien on Independent Producing, Part Two

This is a further continuation of WinGateFilms’ coverage of Karin Chien’s Filmmaking Outside the Box: Smart Strategies for Independent Producing workshop.

In determining the budget for a film, a producer needs to develop 3 different budgets: one for the script as written, one reflecting the sales potential the film can sustain in the marketplace, and one recognizing the amount of financing the producer can raise. Each of these 3 budgets will likely vary widely from each other, but must be brought as close as possible in order for it to make sense to proceed to produce the project.

A line producer who knows all the relevant costs for talent, crew, equipment and locations breaks down a script. Preparation of a line item budget for an indie feature typically costs around $5,000, and can run 30-40 pages. By comparison, on a studio picture the line item budget can run 400 pages. Even at scale rates, SAG actors typically cost $1,000 per actor per day.

Critical to preparing the physical production budget is prioritizing creation needs relating to elements such as: attachment of above-the-line talent, choice of shooting format, location requirements, need for special effects and/or digital intermediate post, level of spectacle, music licensing requirements, “execution dependent” need for directing talent, etc.

Although Karin has had success shooting on 35mm film on a limited $1 million budget, such a shooting format choice requires shifting priorities on other key elements. For example, post-production utilizing digital intermediate processing of 35mm stock typically adds about $150k to the budget. Karin mentioned that she has had to reduce in other areas, such as paying a low $170 day rate for key crew personnel to stay within a $1 million budget.

Virtually all first time filmmaker funding comes from so-called “friend and family” money. At best, it may be possible to raise some private equity financing. Financing options such as international pre-sales or co-productions, or bank financing are generally only available to filmmakers with a track record of successful films.

Ways to bring these different budget numbers together include strategies such as rewriting the script to fit producible resources, adding “above-the-line” value by attaching bankable stars, bringing on another producer who can raise additional funds, and increasing the timeline to shoot the film. As a practical matter, a producer somehow “always needs 10% more money than budgeted.”

Hiring crew with shared aesthetics, enthusiasm for the project, the requisite skills and talent, and the ability to work within the budgetary constraints is as important as finding the right producing partners, director, and cast. Hiring local department heads, when possible, potentially increases the resources and contacts available to the project. Karin emphasized that she has learned to never hire crew positions based solely on credits of past projects; she considers it important to tailor the crew to the director’s personality.

According to Karin, “90% of a producer’s job is hiring the right people.” Filmmaking is easy, personalities are difficult.

Michael
WinGateFilms
www.wingatefilms