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.