James D. Stern: “Making Smarter Movies” or “I Need the Eggs!” - Now What?

James D. Stern, Chairman & CEO of Endgame Entertainment and director of the films “Every Little Step,” “...So Goes the Nation,” and “The Year of the Yao.” Image courtesy Sony Pictures Classics.

Some of us aren’t so smart.  When I left school, I knew exactly what I wanted to do.  I immediately started working in theater in New York City.  I lived on a steady diet of MSG-laced Chinese food in a studio apartment on the Upper West Side about the size of this lectern.  Then I kicked around in the real world, eventually went to a fancy business school, and after graduating promptly refused to take any job that would have me - because all I could think about was producing and directing.
In other words, I needed the eggs.

Last year up here, Mark Gill delivered a pretty sobering argument that the sky is falling.  And a year later he looks pretty smart.

That wave of more than $15 billion dollars of slate capital from Wall Street from 2005 to 2008 left us with a torrent of movies. Thousands of films got made last year in a world that had room for just hundreds.

A friend describes this problem as a simple equation: Access to capital + low barriers to entry = glut of subprime movies.

Subprime?  Excess inventory?  Sounds like we’re upside-down on the mortgage and it’s time to mail in the keys.

An astonishing 9,293 films were submitted to Sundance last year.  Of those nearly 10,000, only 218 were screened.  Of the lucky handful to get bought, so far only three have been released theatrically.

It’s pretty obvious:  Indies are in a world of hurt.  When the financial crisis hit, any awards that independent films were winning suddenly were not enough to appease corporate paymasters, who in turn severely damaged labels like New Line, Warner Independent, Paramount Vantage, PictureHouse and so on.

With fewer U.S. distributors, financiers were badly burned when the financial crisis turned global, and foreign markets no longer could be relied on to mitigate the risk of not having U.S. distribution.  Those markets used to be the backstop of smaller films.  But they started choosing to run their own affordable domestic movies instead of independent American films.  And since those markets need big studio titles to drive ratings and ad revenues, what suffers is… the indie.
On top of that, a stronger dollar cuts foreign buying power, restricting the group of banks still willing to lend to independent producers.  This makes pre-sale financing, and gap financing, almost impossible to get.

So, in technical terms, the market for independent films really, really sucks!

This is all such depressing stuff.  But wait a minute!  Box office is up!  Isn’t it?

Not really.  Those statistics are obscured by the fact that there are two movie industries in this town that we tend to lump together.  The first one - studios - is by and large a vertically integrated business mostly concerned with film as part of a merchandising industry.  And the second - the focus of this conference - generally makes single-purpose films that we call independents.
Let’s compare apples to apples between the two sectors over the past two years.

From January through May 2008, four studio films grossed more than $100 million dollars.  This year, that number is eleven.  Almost triple.

Meanwhile, in the same period, the number of indies that grossed over $1 million dollars went from 16 to six.  Less than half.

OK, great.  Now I’ve basically one-upped Mark on pessimism.  But I still need the eggs… and now my head hurts.  Really hurts.  Like sitting-through-Land-of-the-Lost hurts!
But guess what?  Despite it all, I absolutely believe there’s not just hope, but huge opportunity out there.

That’s not to say I have the best track record as an Oracle.  Several years ago, I tried to hire a wonderful person I’d worked with before.  She was appreciative but said she had an offer to help start a company that would rent DVDs through the mail.  I said, “Are you insane?  That will never work!”  I couldn’t imagine people waiting two or three days to see a movie.

Uh… the next dinner’s on her.  The insane idea she described, called Netflix, has shipped not one but two billion disks, and raked in an $83 million dollar profit on $1.4 billion dollars in revenue last year.  They’ve got a gigantic database of what people like, and almost scary tools to predict what they’re going to want.

My original problem with the idea was that no one would wait for a movie in the mail.  Now they won’t have to:  The next big revenue source, I believe, will be streaming video.  It’ll give ADD types like me what we’re looking for: Impulse purchases!

With streaming, we’ll all have the biggest video store imaginable, crammed into our little TV remotes, enticing us every time we turn on the set to make an impulse buy.

As these services create real revenue - and according to a pretty thick 2009 Morgan Stanley report, it’s not far off - innovative, forward-looking companies like Netflix will be in the thick of it.  Not just with the content - but with the knowledge to connect it to the appropriate audience.  They won’t be alone.  VUDU, Hulu, Amazon, Apple, Time Warner, Comcast and others will join in.

Provided they actually pay us for our content in appropriate ways, these are the once and future friends of independent film.

All well and good.  But while we wait for this new revenue stream to lift our boats, it’s our job - in the words of William Faulkner - not just to survive, but prevail.

To survive, we need to pay careful attention to the fundamentals of business.

To prevail, we need to experiment to see what’s new that works.

A couple of weeks ago Variety ran an article about one of those experiments.  “Summer Hours” from IFC and “The Girlfriend Experience” from Magnolia were released simultaneously in theaters and on VOD. 

The numbers were solid for both - no evidence that either release cannibalized the other.

That doesn’t surprise me.  The truth is, people will always want to go to the movies, because normal folks, not just teenagers, need to get out of the house.  Nothing at home can match the communal experience of bon-bons and popcorn and the fat guy next to you hissing at the terrorists when they take Miley Cyrus hostage.  Hey, the other night I went to the ArcLight, and when the usher came out to start his spiel, the audience started chanting his name: “Dave, Dave, Dave!”  No way you’re getting that at home.  Unless of course you invite Dave over.

And then there’s IMAX and 3D to give local theaters two more distinct advantages.
Meanwhile, the home theater experience is getting better and cheaper.  This is good news.  Maybe once in a while, instead of loading the minivan, driving and parking, buying popcorn and tickets, a family might rather stay home one weekend, invite the kids’ friends over and pay, say, fifty bucks for a new release on opening night - in high def and 7.1.

Let’s say they make this decision for premium video on demand maybe six times a year.  At fifty bucks a pop - those are big numbers.

The point is, people will go to the theater.  People will watch at home.  And both are good for our business.

So yes, there’s hope.  Morgan Stanley says a new world of streaming content-on-demand will reach some level of critical mass - in two or three years.  My good friend Michael Barker at Sony Classics almost agrees.  Here’s what he says about a conversation shift he noticed in acquisition meetings at Cannes this year:

“In the past, the meetings have been completely about the films.  This year, most of the conversations were about new technologies, and where’s the new revenue that’s going to replace DVD?  It’s really about where we are three to four years from now.”

Morgan Stanley says two to three. Barker says three to four.  Either way, by then Mitt Romney will be running against Sarah Palin for the Republican nomination!

What do we do now?  Here’s a suggestion.

Remember Herschel Walker?  He wasn’t just any football player.  He won the Heisman Trophy.  One time, a team traded eleven players to get him.  He did 1,000 pushups and 3,000 situps every day.  And boy, you could tell just by looking at him.  No one messed with Herschel.

One year with the Dallas Cowboys he got this crazy idea for off-season training.  He asked the Ft. Worth Ballet Company if he could dance with them.

The mental image of this massive guy decked out in ballet gear made some people snicker.  (Out of earshot, of course.)  After all, this was 20 years before Dwayne Johnson did “The Gameplan.”  But Herschel stuck with it, worked hard and got pretty good.  Even The New York Times was impressed.

But that’s not why he did it.  He did it for football.  This chiseled Greek statue of a man told his coach he did it because, “I have to use a completely different set of muscles when I dance.”

We’ve got to be willing to build a different set of muscles in this business.  The way we operate is being dissected and reassembled in front of our eyes. The other day, my friend Glen Basner told me that everything we’ve learned about financing films over the last 15 years we have to forget.  Which of course is uncomfortable, but it’s a window of opportunity to develop the muscles we’re going to need to dance this new dance in the coming years.

To accomplish that, I believe there are three hard rules that we, as independent filmmakers, need to obey.

continued on page two

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James D. Stern’s keynote speech in LA:

	On the money.
	Off the mark.
	Nobody knows anything.

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