The independent film business is broken. The entertainment banking business is broken. The global film markets are overly flooded with content. And most depressing of all, no one cares about your film…yet.
These polite truths illustrate how a shifting paradigm driven by innovation has concluded in negative results.
1. Technology – camera technology is moving faster than content innovation. Meaning, cheaper bottom line costs. Leading to increased supply of product. Resulting in a flooded global market place. Period.
2. Efficiency divided by cost – every industry, whether you wear a hard hat or hoodie to work, has been effected by the economic reality that efficiency has exponentially increased while wages have remained constant. While guilds & labor mandates do their darnedest to keep up with the changing economy – they are likened to governmental authorities working to enact legislation over a cause that has already pivoted.
3. Global markets – now that a filmmaker can digitally write, cast, crew, shoot, edit and release content, we aren’t too far away from one-click content submission uploading — all but collapsing the current international market places (see Avi Lerner’s discussion from the AFM panel in 2014).
The fragmentation (how many middle men does one industry need?) of each of these elements has caused the independent film business to become difficult to navigate, challenging to decipher and all but impossible to profit. The underlying assumption that the world needs 8,000 independent films (the projected release figure for 2014) is just one of many elements that have accelerated this downfall while technology drives costs down — allowing more and more filmmakers to enter the space. Today, if you can scrape together $50,000 you can produce a feature film that has some ability to reach audiences in the international film markets.
If the film business were (as the classic economic example states) an industry for the production & distribution of widgets, no economist would be able to determine why the business continues to function year over year. While the international film audience base continues to grow – do audiences really need 50+ Michael Madsen films per AFM?
Economics demands that with changing marketplaces any production (whether it be widgets or blockbusters) must pivot. Lowering budgets, casting talent for international recoupment and finding creative solutions for financing all detail the daily routines producers have become accustomed with. But what happens when all of these mandates are fulfilled and the film still fails to recoup? What is the pre-sales figures are inaccurate? What if the tax incentives come back light due to adjusted in-state spend? And what happens when the sagging indie box office figures all but evaporate?
These scenarios offer the most interesting look at how and why the film business is a stand-alone structure unlike any other. Even in these scenarios whereby economic profit is impossible — the product continues to not continue but to rise in production. The classic reveal that investors want to "rub elbows" and enjoy the sexy-appeal that comes along with film investing create an entirely new case study – again, unlike any other economic institution or investing class.
Recently, during a meeting at a top agency’s financing department, I caught myself finding it normal for the discussion to turn from profitability to the ancillary "benefits" of financing a film. Have we really reached a point in film investing where profitability isn’t a primary focus? Again, an economist would liken that to a hobby as opposed to an asset class investment segment — but the rules of economics appear not to apply.
Accepting the fact that profitability is a difficult threshold to achieve and that senior banks have shifted their lending parameters, producers need to continue finding ways to leverage soft equity (pre-sales, tax incentives, mezzanine, etc…) with a structured and beneficial approach to equity investors. Assuming your name isn’t Megan Ellison, you’ll need to find a way to protect your investors through a mix of granting first position against pre-sales, tax incentives and MG’s to said investors (through means of transparency and educating the investor on film financing). Meaning, if a film is set to recoup $100,000 in tax incentives, $200,000 in pre-sales and MG’s a producer is able to accurately and honestly project the return structure on the film — not rocket science but in an industry full of "strange" accounting practices — it goes a long way.
While the appetite for risk at entertainment banks has decreased, producers must wear multiple hats and problem-solve solutions to the age old problem of raising capital. It is no longer enough to simply have agency relationships or to have production expertise — one-trick producers will find difficulty in engaging in the ever-changing landscape that is now requiring capital (both resources and fundamental knowledge) to partake.
As these elements continually shift no one can fully predict the bottom line. Yet if producers remain grounded in the foundation of great filmmaking and sound financing — solid storytelling, proper casting and structured financing — positive results may arise. So while Netflix may shatter the AFM, sales agencies fade into distant memory and senior banks dart for the nearest exits, the foundation of the business will remain as close to the rules of economics as possible through the practice of keeping overhead low, utilizing strong cast and crew relationships and employing financing strategies that lead from development through sales.
Matthew Helderman is the founder of Beverly Hills-based Buffalo 8 Productions – a feature film & commercial production & post-production company; as well as BondIt – a speciality entertainment financing platform for media lending opportunities.
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