There are two ways to price and sell products at market:

• One is the MARGIN method.
  • The Margin method is usually based on a scarcity; either of product (even if artificial, like diamonds) or of consumers. The margin method is how Apple has typically pursued its business. Make the product at as high a level as you can, understand that your constituency will be a smaller and more loyal body of fans, and make money on the wide “margin” between costs of production and the price paid by consumers.
• The other is the VOLUME method.
  • The Volume method, then, is usually based on a high availability, essentially, of both product and desiring consumers. When Blu-Ray players were introduced at $500 to $1,000, they were scarce, and only wealthy early-adopters could or would pay that much. But there was more margin in each sale. Now it is possible to acquire a Blu-Ray player for as low as $79.95, moving it into the reach of most. Many technology products enter the market this way, following a path through early-adopters to the wide consumption landscape. Under this volume method, the product is priced at about as low as it can get, intending to saturate the market at a level that is always aiming at “everybody.”

Until the advent of DVDs, motion pictures for home viewing used both of these methods. If a movie had a high potential to sell a lot of units (if it was for “everyone,” like E.T.), then the VHS cassette would be priced at something under $24.95, and often as low as $14.95, maybe after a MacDonald’s or Pepsi partner rebate or the like This pricing was called SELL-THROUGH (or Sell-Thru). Other titles would be priced from about $59.95 to as high as $112.95, with the average pricing for quality titles around $100 around the time that DVD was introduced. These titles were priced for RENTAL, and for the collector who had to have that title and was willing to pay up to own it.

So, some films were treated as Margin titles (Rental), and some as volume titles (Sell-Thru), according to the necessary and reasonable analysis of the size of the market for the movie itself. This pricing methodology brought a broad range of quality films of all types within the consumption grasp of a wide cross-section of the film-loving public. Sell-Thru blockbuster status was highly desirable, but everyone knew that every film was not a blockbuster, so many films used the margin method to maintain profitability.

Enter DVD

Now, when DVDs entered the marketplace, a decision was made that DVDs would sell for a price that would be focused on Sell-Thru, and a “most-favored nations” pricing deal was struck which said that all parties would get the same DVD for the same wholesale price. Now, these decisions caused a boom in DVD consumption, and a growth curve for the business that solidified the lead home entertainment already had won over box office and ancillary markets. This growth curve was accelerated by big box stores, the WalMarts and Costcos of the world, using DVDs as doorbusters, as loss leaders to get folks inside their cavernous confines so they could sell them something else. These tactics, driven as they were by something other than a pure love for movies, and other than a pure desire to make movies more profitable overall, exerted further downward pressure on the retail prices for DVDs, further lowering consumers’ expectations of what a movie should sell for.

Now, a little more than ten years after, and in the midst of a recession, some of the chickens of these “blockbuster-oriented” decisions are coming home to roost. Independent movies, made for smaller, more focused, and discerning audiences, whether consumed in theaters or on DVD, on television or VOD, are not a commodity product that can be priced in the same exact way as a blockbuster entertainment. Allowing the WalMarting and RedBoxing of Independent movies that have been, essentially, hand-made for these niche audiences have the strong potential to kill them slowly (or maybe quickly). The WalMartization of DVD was a big contributor in the Dreamworks near-total demise, when shipping too many copies of a Shrek DVD came home to roost when WalMart and others shipped back millions of unsold copies.

This across the board pricing scheme, along with WalMart and RedBox are devaluing the movie proposition overall, and are creating expectations in the mind of the consumer that all products are alike, when they are not all alike. Great foreign films, great independent American films should be marketed and sold like the fine wine and artisan foods they are. Consumers of these films are hungry for the emotional nourishment, the mental nourishment, the soul nourishment that cannot be found in blockbuster films that have had the corners and spikes of individuality rounded off in committee meetings. Just as these consumers pay a little bit more for organic comestibles that they believe are crucial to their health and welfare, they should be willing to pay a little bit more for these other elements of their emotional and intellectual well-being.

Indie Retraction

When I look at the landscape, I see where studios have snatched up independent distributors, and now are in the process of choking off whatever remaining life most of them have. It could be described as necessitated by, caused by, or the result of the recession, but, if they had wanted to take these nuisance smaller players off the street, they could not have found a more effective way. Now, I don’t for a minute think that this was the idea ten or fifteen years ago when these indie units were snapped up, nor do I think it’s the idea now, but it could not have worked out more like this if they had engineered it. Independent films, their distributors and their consumers have entered a complex vortex.

I know this is a delicate, and even a difficult proposition to contemplate. I am not even sure how it could be approached, getting distributors of indie product to re-introduce highly differentiated pricing commensurate with the product and commensurate with its market. But I know one place that can start to deal with this. Having written about Producer Controlled Releases lately, however, I am drawing a connection between life-blood and cost and pricing at market. Maintain your margins.

Do The Math

Calculating and understanding your margins is important. And, I am now saying that these releases have to be priced and price-maintained such that the margins are sufficient for each Producer-Controlled Release, and sufficient time and effort need to be expended to maintain the value of the proposition between producers and their consumers, between distributors and their consumers, such that consumers are educated to an understanding that they are buying artisan product, unique product, exceptional product, and just as they willingly plunk down for their iPhone, their audiophile system, their artisanal bread, they need to be ready to pay for the unique experience of viewing and owning one of these films.

Here is a down and dirty calculation of how the differing SRPs can affect the Profitability of a title, given a set unit sales level. Maybe next time I will show how you can even lose unit sales and still make more money. Now, don’t anticipate that the calcs for COG, Marketing and Returns are exactly right; they are just illustrations, as is the Distrib Split.

Indie Opportunity

Over the years, whenever I have seen one of these retractions in Indie distribution, I have always also seen opportunity. I think this is one of those points of opportunity, as I do not believe that the consumer interest in this product has waned at all.

I would love to know what others think about this…
FilmProfit
Onward and Upward

I tried to embed it in this page, but got challenged, so If you want to listen to it, go here:

http://www.blogtalkradio.com/InsideUrbanHollywood/2009/10/13/Inside-Urban-Hollywood-with-Host-Tanya-Kersey

If you can make it through it, I hope you find it interesting.

There were a lot of folks in line to ask questions we couldn’t get to. I guess I gassed on too much, but we are planning on doing it again after the turn of the year, and just take a lot of questions.

Onward and Upward,
Jeffrey Hardy

We have come a long way from 1971, when the makers of Billy Jack took their orphan film on the road after a succession of studios abandoned it. The box office of the film eventually reached $40 million. It supposedly still ranks as one of the all-time 100 box office hits ( inflation-adjusted).

In the same year was also birthed Sweet Sweetback’s Baadasssss Song, a film that was written, directed, produced, edited, starred-in (doing his own stunts, too), scored, and then released by hand by Melvin Van Peebles. Carried from theater to theater, a starved constituency embraced the film, its ideas, its attitude, and its moxie. Who woulda known? 

What I mean is, who ever knows? Who actually knows when a film will strike a chord? Both of these films found their success after being rejected by “the man,” the distribution complex. Now, I don’t believe in “them” and “us,” or “the man” and us, but I do believe that innovation happens in garages, no matter the product line. And independent filmmakers are the garage-tinkerers of the film business, making the things that others find hard to believe in, no matter how many times they are shown that “not believing” is a big mistake.

The core of the business is structured around “not believing.”

• Not believing that a film has an audience
• Not believing that home video will do anything but destroy their business (When it really more than doubled it)
• Not believing that anyone could be so silly as to want to watch anything on a phone, for god’s sakes!
• And so on…

And not believing now is even more a priority, with money for slates, money for release in tight supply. Not believing is also a convenient way to avoid all the trouble and heartache and work it will take to make any film the success it is capable of being. It takes that leap of faith and then it takes work and marketing money. It is hard for a distributor to acquire your film. They and their investors are wary. It will cost money to release your film. So, they might want to dismiss your film more than embrace it, as embracing it means toil and trouble that feels risky to them. So, they rely on…

Deal Structures That Devalue Your Film (To You)

This is all about access to market. You want it, they have it. They decide if you get it and set the price for that. This analysis of the market structure has no value judgment, but is meant to strip away the fluff from the press releases, the stroking, the hand-holding solicitation, and look at it clearly. The conventional film distribution deal is tilted away from you, the initial rights owner, and toward the acquiring (rights-seeker). In this way:

• Last money in is first money out.
  • This means that production investors receive their money after the last investors in (distribution company) get their money back and after they secure their profits.
    • Thus, the investors who take the least risk (investing in a film when it can be seen, and is no longer just stacks of paper and dreams and pitching with hand-waving) are telling you that they are taking the most risk. Is it true that drilling for oil is the biggest risk, or is it picking the gas up in a truck to take to market that’s the biggest risk. What’s the difference here?
  • The structure also protects his (the last guy’s) investment, by holding all subsequent markets hostage until he turns a profit.
  • And because he is holding the entire stream of markets in his hand, he has little incentive to meter or really manage his marketing spending, and in fact is incented to overspend to ensure his potential return because…
• The major aftermarket value is shared unequally.
  • Home entertainment (primarily DVD) is hands down the driver of the cash value of feature film entertainment. Ranging from 50-60% of a film’s domestic returns to a distributor (and less, but still very significant offshore), producers share in this income at a 20% royalty.
    • I won’t talk about the fact that some distributors can use controlled home video entities to drop the share further…
• And from there, the terms don’t get better.

Can We Illustrate It?

Now, there are some intervening calculations that are not in here, Distributor/Exhibitor Splits, some distribution fees, and more, but this is less about showing every step of a deal and more about where and how money is really made. Overcoming deal points and controlling costs should be the targets in your strategy (of course along with making one dang good film, but that goes without saying). So, reducing the cost of marketing wins in lower costs, but it increases ROI because your investment is lower by that amount. The single most dangerous number on this sheet, then, is the Prints & Ads. I face this every day when I am doing Projections of Potential Income

What’s The Upshot?

Theatrical release, except in extreme cases, is a loss leader. (What’s a loss-leader — You go into Walgreens to buy the tube of toothpaste on special for $.50. They expect you to help them turn a profit by buying a candy bar, and vitamins and bandaids and a cheap pair of flip-flops, all with a higher mark-up. The tube of toothpaste is the loss-leader). It is only by controlling costs and getting to your consumers simultaneously that you beat that part of the equation, along with overcoming onerous fee terms.

Theatrical release may seem to you and even your investors to be the reason for a film’s success. It can be, but in a really twisted way. It is a marketing platform for the rest of the film’s life, and only in rare cases is more than a loss-leader.

So, the film distributor has little incentive to control spending in theatrical marketing (effectively subsidizing box office even more to a not for profit level). They are incented to overspend as “aftermarket protection,” to ensure the market awareness of the film when it hits DVD.

Now, because they will take this marketing money (and profits) back from the proceeds of the film, they are not giving your film money, they are loaning it money and using the film itself as collateral (the hostage). So, they are not really using their money, they, ultimately, are using your money to market the film. And they are going to keep the majority of the biggest market as the ransom for taking the “risk” on your baby. Based on these terms, I usually think a little skeptically about all the talk of “passion” and “love” and effusive praise. These may be real, but the deal is also real, and, like a pre-nup, it controls who gets to sleep in the big bedroom. In this marriage, you always sleep in the guest room or on the couch, even if its a real nice guest room or real nice couch. This love, this passion that is spoken of, ultimately, is a commercial relationship, and its purpose is to make the distributor money. It gotta hasta make ‘em money.  

How Do You Beat This?

There are several ways.

• Hit the lottery at a film festival and sell your film for a multiple of its negative cost based on wowing them. You believe in dreams, don’t you? That’s why you made your film. But this is a dream, and the chute to riches and fame is narrow with a lot of folks shoving to get in it.
• Negotiate better terms in your deals while all else stays the same. Pretty good luck on that.  
• Take the bull by the horns, take your faith to the table and control your own release. Go directly to your market, work hard and bring the odds down to something like business, not without risk, but much much better than lottery odds.

This Is A Risk Reduction Strategy

Whoa! We just made a really big leap here…

Yeah, but it is definitely a risk-reduction strategy to be prepared to engage significantly in the release of your own film. A woman with choices is a woman of strength. Make plans, create choices for yourself and reduce risk, make your own downside protection. A little further on why:

In my practice, over the years, I have identified Six Key Risk Points in the life of your film.

1. One of them is gaining distribution at reasonable terms.
   • That’s one, but it has two parts, and those parts need to be in alignment, or it’s nearly certain you’re headed for a fall, or your god is gonna have to come and save you.
   • If you do get the distribution, what will the terms be? Some of the most successful films have had terms that limited the financial participation of the producers and original investors who took the big leap of risk. History is littered with lawsuits that seek to recover profits… This isn’t about bashing distributors. It is just about business.
2. The next risk point is the film being properly marketed.
   • Most people believe that it is a distributor’s job to do this really, really well. But many things can get in the way of this, including a handsomer film with a better walk coming in the room or some other distraction, a change of executives at the distributor, even on this film that they love, an inherent inability to understand the audience and how to get to them. So many things can intervene.
   • And these are problems in the best of times. We are not in the best of times. 
   • You already have to be prepared to discuss your audience, and be ready to offer great ways to get to them in order to get a deal, to get the attention of a distracted and stressed-out distributor. You are already on the road to freedom, when you study your audience and devise a real-world strategy to get to them economically.

In the hands of a conventional distributor, the parallel of conventional wisdom would be that both of those risk points are taken off of the table. If your film is more than your fever-dream fantasy, if it is more a Sweet Sweetback…more of a Billy Jack…more of a My Big Fat Greek Wedding…more of an Illusionist, more of a Manna From Heaven, more of a Memento, more of a Passion of the Christ, or more of an Anvil!, The Story of Anvil, or more of a Metallica: Some Kind of Monster, then it is suited for a Producer-Controlled Release. A Service Deal. All of these films, some out of necessity or rejection, and some consciously, used Service Deals and controlled the release of their films, pursuing a route of profit to them and their investors.

There can be risks to this strategy, too. It also may not be a strategy you have the stomach for; or you may not be able to mount and manage the small enterprise it requires, but I know that smart investors seek all the protection they can get, and this can be structured as a min/max deal that gives you all the strategy alternatives you might seek, and leads you onto a path of reducing yours and your investor’s risk, and onto the path of profitability. It is really dependent on what you want to be doing with your life, with your time, and with your films.

I help filmmakers understand the nature of this as a choice a lot. It is not for everyone, but it is for a producer who has the guts, the stamina, the savvy and the eye on profitability and risk reduction.

With all of the thinking about this topic, the work we have done on it, and the detailed work we have done for clients, we have come to the conclusion that Producer-Controlled Release, our term for it, both describes it better than pevious terms, and gets at the heart of its facility and describes its responsibilities.  

Thanks.
FilmProfit
Onward and Upward

What The Heck Is The Thru-Line and Why Is Every Film A Marketing Problem Challenge and Opportunity?

***I am updating this article, particularly after a discussion with a client that tweaked my thinking on using the word “problem.” Every time I used it, I found myself explaining it, and he was right. Thanks to Anre Garrett!

Announcement, first: I will be giving a morning seminar and moderating an afternoon series of panels in Portland, Oregon for OMPA and OPA (you can learn more here: http://www.eventbrite.com/event/303648220) called NW Film Financing, OMPA/OPA’s Independent Filmmaker’s Workshop Series.

Many new and even highly experienced filmmakers arrive at our door trying to think about all parts of a business plan at once, worried about the research (worried about what to research), worried about how to describe the process, planning to deliver a detailed schedule of their production activities, trying to make their own stab at projecting the value of their film, and worrying about all kinds of deal questions, their festival strategy, selling DVDs on the Internet, selling downloads to phones in China, you name it, a stew of boiling ideas and decisions. I sometimes call this state of affairs “all trains arriving on all tracks simultaneously.”

But how do we stop and schedule the trains? One of the biggest contributors to overwhelm in decision-making and clear action is simply trying to make too many decisions simultaneously.

A Good Way To Overcome This – Remember Why You Are Here

Every film has a driving force in its idea. The industry likes to call it the concept. They love to reduce things to a few pithy words that seem to mash two or three ideas together and make a film rank high on a “cool” meter. The fact of the matter is, some films take contemplation, some films encourage involvement. There are many kinds of films that are viable for many kinds of film fans. Some are even for people who are almost never fans of films, or are very wary of films. Some elements of the Christian audience fit this profile for example.

Remember Why You Are Here, Above All – The Thru-Line

When a film is conceived, there is an audience for it within the story’s conception. Some think it’s dirty to contemplate your consumer, but even if the perfect consumer of your story is someone just like you, is (OMG) YOU, that’s an audience too (no matter how unique and unreachable and above it all you think you are). I once had a Thanksgiving dinner where one of the older guests, an ex-hippie mom who had raised two very nice geek sons who were into all the latest gadgets and technology, even working in technology, and she said she was unreachable, as she didn’t have a TV, and wasn’t susceptible or identifiable to marketing. Well, if she reads Mother Jones, or even her local co-op newspaper, somebody has targeted her and is trying to reach her with messages. I think she hated me for saying all that. She was just the right kind of person to get a What The #$*! Do We Know?! message from the granola, co-op, whole foods type marketers that worked on that film. She probably did get more than one message.

Another little anecdote, Paula Silver told me she was hired to help galvanize the audience for My Big Fat Greek Wedding, and her first job was to go to Seattle to a Greek dancing convention, where she gave out every shirt she had printed up, and told the dancers that they needed to support this film, or “it would be another 20 years until you get a film about Greeks.” That was the start of the avalanche for the film. Constituency. Films like this are built on constituencies.

Anyhow, back to the thought: I call the line from the conception of the story to the ultimate consumption, the Thru-Line (trademark, service mark, copyright, intellectual property!!) The Thru-Line is what will always return you to why you are even here anyhow. When you are pitching your film and its reasons for being to an investor, your Thru-Line is what you are asking them to partner with you on. When you are lining up actors and production personnel, you are asking them to get aboard and help you attain the vision that delivers your Thru-Line. When you are presenting your film to a festival, or to a distributor, you are asking them to get aboard and help you bring your film to the audience, achieve the fullest expression of the Thru-Line.

Why Does The Thru-Line Exist, Then?

The Thru-Line is your direct connection to your audience, why you are even making the film. It can be sublime, sharing a meditation on the most metaphysical of concepts in a documentary or a filmed tone-poem, or it can be a ridiculously funny and bloody zombie romp, or it can be a quiet look into the emotional needs of a woman uprooted from her homeland and dropped into an alien farm town halfway around the world. And I have enjoyed working on all of the above.

Every Film Is A Sizing Problem Challenge – Then It’s A Marketing Problem Challenge and Opportunity

What do I mean by that? I don’t mean that marketing, advertising, is at the heart of your endeavor, but I do mean that communicating the existence of your film to your natural audience is as important as making the dang film in the first place. So, thinking long and hard about who your audience is, how to describe them, why they even want to see your film, or they need to, is a crucial first step.

Unfortunately, this business (making a film) usually costs some kind of money. And often the story requires enough money that a couple of friends just can’t do it out of their wallets, even if their wallets are middle-class, or above middle-class.

So, unless you can do the whole thing on your own allowance, you will need financial partners. Knowing who your audience is, and being able to clearly articulate who they are, and why they want to see your film is part of bringing those financial partners on board. Knowing who your audience is can also help you size that audience in some reasonable fashion.

Celibate Goths may be a pretty small group, but you can look for them and their friends and try to find out how many there are, and how they communicate, and get a feeling for whether they can help support your ten million dollar movie or not. If not, then you need to either determine how to crossover, or how to trim your budget by five or ten bucks. This is “Sizing.” Now, when you do this a lot, sizing becomes easier, and you can get a feel for it, but there are no absolute “facts” out there, and you just might uncover the surprising and wonderful fact that Celibate Goths are all on one Twitter channel, and that there are forty five million of them, and they all use VOD extensively every day because of something they got in a tweet, so your job is easy, and a $10 million negative cost is easy to deal with. But the key thing in this paragraph is that “there are no facts.” Everybody in this risky business of filmmaking and delivery wants to feel secure, so they grab at “facts” and spout them repeatedly, to gain and retain comfort, and to provide it to others.

Here’s a fact:

In a recent New Yorker article on the new Julia Roberts and Clive Owen international spy dalliance romp in the hay, the author says that “Today, the film industry considers adult-oriented drama a small target, and one that is getting smaller. Middle-aged Americans don’t go to the movies; young adults and teen-agers do, and they prefer action to talk…”

There are actually several facts stated in this small excerpt, a. what the movie industry considers a viable target audience (probably based on the “4 quadrant” theory – men, women, above age 25, below age 25) b. who goes to movies (and who doesn’t) c. and what they love in a film (and don’t love)

Let me show you a countervailing couple of facts:

1. The audience opening weekend for Gran Torino was 45%+ 50 years old and older. The audience for The Unborn the same weekend was more than 40% under 18.
2. Gran Torino achieved $143 million US gross, and The Unborn achieved $42 million US gross.
3. Gran Torino had 52% highly satisfied female attendees opening weekend and The Unborn had 56% very unsatisfied female attendees opening weekend.

1, 2 and 3 are much closer to facts than the facts (a, b, c) in the quote above.

The secret is, (whisper) the audience is aging, and, frankly, the MPAA is trying to hide that, or, at least I think they are. Up until 2005, they reported age and attendance figures by slices like this:

12-15
16-20
21-24
25-29
30-39
40-49
50-59
60+

Starting in 2006, they began reporting it like this:

12-24
25-29
30-39
40-49
50-59
60+

Now, read below, and you might wonder, like I do, if they are trying to plaster over a crack in reality.

• In 1990, the percent of moviegoers above the age of 30 was 37%.
• In 2000, the percent of moviegoers above the age of 30 was 42%.
• In 2006, the percent of moviegoers above the age of 30 was 51%.

The audience is aging, and has been since at least the mid 90’s. I have been covering it that long, sad to say, or happy to say. But these are facts.

• In 1990, the percent of moviegoers above the age of 40 was 17%.
• In 2000, the percent of moviegoers above the age of 40 was 24%.
• In 2006, the percent of moviegoers above the age of 40 was 33%.

When a segment of the audience nearly doubles its hold on a marketplace (those above age 40), this is significant. But even these facts are also “facts.” When you start to analyze frequent moviegoers, you get a different, but not radically different slant on the situation. As would be anticipated, you lose a few points when looking at frequent moviegoers in the upper age groups. They have a lot more discretion, a lot more money, a lot more decision freedom, and a lot more they like to do.

And don’t even get me talking about online presence and other facts areas like that. What many people think are facts are actually just crap to talk about.

The point is, facts are closer to facts, and what is often taken as “received wisdom” like the statement from the New Yorker article is nothing but water-cooler talk, in light of real facts.

That’s why what you hear in the halls of AFM might be far from a fact, and just one piece of anecdotal information handed around ten times before it got to you, all massaged into a soft little tidbit.

Facts are actually better.

Every Film Is A Marketing Problem Challenge and Opportunity

I see every film as a marketing problem (Read: problem as task) challenge and opportunity, but that is really broken down into:

1. An audience identification task
2. An audience sizing task
3. An audience hangout identification task 
4. An audience message preference identification task
   1. An audience position in the flow of information
5. A scoping out of the cost of messaging the audience task
6. Identification as to whether all this will support the ostensible negative cost, or investment.
7. Go/No Go – or redesign…

Unless these things are at least reasonably and satisfactorily answered in some way, it is hard, I believe, to begin to think really clearly about what the model for your film’s life could be.

Oh and by the way, the Julia Roberts film opened this weekend, with a 60% female audience, and almost 50% aged 50 and above. Both males and females were generally dissatisfied, and older audience members the most dissatisfied.

Maybe next time I will talk about finding a model for your film, a crucial step in forming your business plan.

Thanks!
FilmProfit
Onward and Upward!

But the key issue is that, in looking back over the history of the movie business, at each crunch juncture there was also significant opportunity knocking on the door. At each of these points of crunch or change, those who reached out for the future caught a wave and transformed the business. All of the primary junctures in the business of filmed entertainment have been driven by technological advancement, some in production, but more in delivery. We are moving further and further from the appointment with entertainment and more toward the finding and accessing of entertainment. Appointments will always hold their mystique and audience, but the bulk of entertainment as we go forward will not be by appointment but “On-demand.”

New Technologies Create Consumer Choice

These waves have come faster over the last thirty years. A new technology does not any longer have two decades of free elbow-room. Based on DVD, with a ten year growth curve, new technologies may have a decade in which to run free, and then things will swing in a new direction. Contemplating this cycle speeding up can spin the head, but it will most likely speed up and proliferate. But key is the fact that new technologies offer new choices and freedom for consumers, certainly shown by the embrace of VHS and then DVD, and now we are on the cusp of VOD (Video On Demand) in all its myriad forms. On Demand describes the relationship filmed entertainment (filmed information) will have with consumers. They will have more choice, more ways to access that choice, and they will enjoy their choices.

Now, most large organizations are focused on building fences around their operations and fighting down competition, holding tight to their assets and charging as much for admission as the market will bear.

Rump organizations, start-ups, new producers are just looking for an outlet, any outlet. They are part of the competition. They want access to consumers, and they often see the large organizations as their path to those consumers. But new technology blurs those relationships, and producers can be distributors now. Even Rupert Murdoch looked at production and distribution gear and technology and predicted that there could easily come a day that the studios would be obsolete, producers would not need them for consumer access.

Double-Whammy Time

Is this missive a recipe or a specific plan for going through the double-whammy times we find ourselves in? What do I mean by “double-whammy?” We have truckloads of new technology choices, from mobile delivery capabilities to set-top boxes about to deliver ultimate choice straight from the Internet to the TV. This is opportunity. And it is disruption for standard business. This is one of the whammies, the disruption. Disruption causes job loss and changes in business. Look at the music business over the last ten years for a lesson in disruption. The other whammy is the financial contraction we find ourselves in; a loss of trust in the system. And the last eight years have been nothing, if not a steady chipping away at the foundations of trust. Now, finally, the financial system has stopped to look at its own foundations and found them less than solid. What in this house of mirrors do we now truly trust, and what do we jettison as distrustful. This is a contraction. And this stopping to examine and probe further has brought us all closer and closer to a halt, fearful we cannot expand because our previous expansion was not based completely on reality. The jig is up, in other words, and now we are left with a mess to clean up, like after a frat-house party held in a crumbling old mansion.

Who Has A Plan?

So, again, is this missive a recipe or a specific plan for going through the double-whammy times we find ourselves in? Well, no, but there are a couple of ideas that I have been working on as I watch the theatrical business wobble and falter, not only for good independent films but for bigger films by highly experienced and big-ticket filmmakers. It derives from my belief that every film is, ultimately, a marketing problem. The theatrical exhibition business is, largely, a marketing platform for a film’s follow-on delivery systems. With DVD being worth near 3 times theatrical exhibition, this is not hard to figure out. DVD is not growing, but it is still big. With 239 million DVD players sold in the US in the last ten years, if they were all still working, would provide two for every household among the 112 million US households. We have, in reality, greater than 90 percent DVD-player penetration. Over the last eleven years, since inception, 9.52 billion DVDs have been sold. 1.6 billion of those were sold in 2007, and in the first half of 2008, another 660 million were sold (about 10 million more than in the first half of 2007). We definitely are in a contraction, though, and so is DVD, with sell-through and rental both down in the upper single digits last year.

Technology Can Turn The Tables

But there are still a lot of DVDs to be sold. Rump players are less focused on the giant plays, and more on finding their own niche of customers. And new technology offers us ways to break through and market niche filmed entertainment to consumers without the fantastic expense of a theatrical release that can weigh down the Return on Investment. This is true for horror films as much as it is for art house dramas. Overcoming the marketing gap for these films is an issue I have been working on a good deal in the last six months. I think there are very interesting ways to overcome it, but each film needs its own individual strategy.

In this time of double-whammy, can we find our way to embrace innovation and technology and deliver? Can we find opportunity. I think the effective business plans of these next several years will focus more on self-reliance, on being thoughtful about the path from concept to audience, and I think the next several years will embrace change and they will embrace the increasing interconnectedness of the world.

Within this I see nothing but opportunity. Opportunity for those who can innovate in their content, innovate in their approach to delivery, and innovate in their marketing, to build and grow businesses and careers.

And Don’t Forget The Power of Honesty and Trust-Building In All Endeavors

This missive is, actually, a call to embrace the opportunity within these momentous changes, and to embrace the opportunity to build a system of trust in all of our endeavors. We can all contribute to an atmosphere of trust in our business and in our lives, and if we do it in ours, we encourage others and demand that others do it in theirs.

I think there are many more Miramaxes to be born, though they may start looking more like Social Networking, or something else we might not even know yet. I think there are more delivery technologies to be innovated, more marketing approaches to be tried, and more businesses to be built, they just may not look like all of the other old businesses…

Onward and Upward
Jeffrey Hardy

Efficiency

One of the key items I always want to think about when first approaching the idea of a fund is EFFICIENCY. What do I mean by efficiency? First, I like to see if there are similarities among the films anticipated to be on the slate of projects, or similarities in approach. They could all be animations, or they could all be below $20 million, with some at $5M, some at $10m budgets, and so on. They could all be dramas or all very indie projects.

It may be that clustering projects can allow us to also cluster comparable films studying, and even cluster the projections that would drive the cash flow spreadsheet. As well, clustering can allow us to reduce the work in the business plan, in the audience analysis and description, and in other areas. This does not mean that it is bad not to have clusters, but just to illustrate that my approach is to try to find efficiency, which will be to your benefit when we are developing a plan for your work.

Clarity In Communications

Our next, most crucial element is to focus on what will bring clarity also to your team communications and to your communications with potential partners and investors. Simplification and efficiency are also aids there, but, in truth, this is a complex business and it sometimes takes a bit of time and talking to turn the complex into something that all can understand. The main thing to know is that clarity is one of our primary goals in all the work we do for you.

Development and Production Companies

Is It Necessary To Have Two Companies, One Development and One Production

I won’t be trying to answer the legal ramifications of these issues, but more the business planning issues, and how they impact what we do for you, including the financial modeling.

In some cases, more efficiency can be achieved in planning to embed the development costs for a project right in the budget of each project, eliminating the need for a development company as a separate entity, or overarching entity. This is sometimes hard for folks to see how it works, whichever way we go. But, to simplify this decision, if the costs of development are all embedded in the projects, you are essentially saying that you don’t need cash to run operations until a film or package of films is funded. If, however, a producer needs money to be able to pursue the business of the development, from scripts, to office, to staff, to travel, etc., then it would seem to necessitate either a side letter (and I won’t explain that either, but let your lawyer explain if it works for you) or a development company would be the approach.

Some of the issues to think about for this development company that could be helpful to you:

–Will it develop films that do not go to production, get flipped (developing it and selling it off to someone else), go into turnaround (the company decides to quit pursuing it and sells it to another company), or abandoned (just drop it)?

–Will it develop films that go into co-productions?

Will it develop films that are fully funded and managed by the development fund?

–Will the development company take a management scrape on the production fund?

–How will the development company share in the proceeds of the production fund, fully, or in part?

These and other issues being thought out a little bit up front can aid in getting your company faster to market and help simplify the management of your activities.

Financial Modeling

So, the early decision tree and how you pass down through the series of decisions that need to be made can really aid in clarifying the activities of the company and the most efficient way to get to your goals of funding and doing the business of the company you want to pursue.

I find that all of the key decisions of a company wind up in the financials. This is not to say that a company is numbers, but is to say that the numbers illustrate a plan for reality and the pursuit of all of your activities. Financial folks, too, are used to looking into numbers to find out how things will work. So, an excellent business plan that talks about the activities of the company, the people, the issues and the plan to execute on them, is crucial, but the numbers will tell the story of the opportunity, and, though they are not remotely a crystal ball, they enable one to dig into the potential and see how it plays out.

The way different kinds of films will perform in the marketplace and the timing of releases in conjunction with production are totally different on an animated film compared to a low-budget indie. As well, the timing of market incomes, from domestic theatrical to television, to all of the foreign markets and everything in between, are different for each type of film. So, a cash flow is like looking at a photograph of the activities of the company, as opposed to just reading about it.

Anything we can do to create efficiency in the work we do for your company and your projects we consider to be good work, which comes out to the benefit of all of us. We can get you to market faster, with less fuss, and with a solid plan. Most of our clients are happy with that.

For anyone contemplating a company slate, I hope this is helpful.

Onward and Upward
Jeffrey Hardy

SEC. 181 TREATMENT OF CERTAIN QUALIFIED FILM AND TELEVISION PRODUCTIONS.

(a)Election To Treat Costs as Expenses.–

(1) In general.–A taxpayer may elect to treat the cost of any qualified film or television production as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction.

Source: http://www.taxalmanac.org/index.php/Sec._181._Treatment_of_Certain_Qualified_Film_and_Television_Productions

Attorney, Jeffery C. Foy (a client) has sent me his general thoughts regarding Section 181. He says that under the expanded and extended Section 181 “Many more films are now eligible for the section 181 incentive, including many films now in production which did not meet the cost limits requirements in effect until last week’s amendments to section 181. Many slate financing arrangements between studios and film funds will benefit from the removal of the production cost limits.

The crippling uncertainties about development costs, financing costs, bond costs, and participations and residuals being swept up into the calculation of production cost limits have evaporated.

The doors to the incentive have been opened to the major and mini studios who produce medium, high and ultra-high costs films. However, the amount they can deduct under section 181 is limited to the $15/20M caps.

“Sadly, the changes to section 181 do not remove any of the real impediments facing independent producers who wish to use the incentive. Locating willing investors with the right tax profile is very challenging for the average independent. Studios and film funds have a distinct advantage because large film funds require the efforts of many professionals – fund organizers, investment advisors, banks, hedge fund managers, private equity firm principals, and others –who have a stake in the successful formation and operation of the financing arrangement and insider relationships that let them identify desirable investor prospects.

Source: Jeffery C. Foy http://www.cfoyesq.com/Section181.php”>http://www.cfoyesq.com/Section181.php”>http://www.cfoyesq.com/Section181.php

SECTION 199: THE PRODUCTION ACTIVITIES DEDUCTION

“The Section 199 phased-in deduction for domestic producers has increased to 6% from 2007 through 2009, and will jump to 9% thereafter. It has an impact on a wide range of businesses, including U.S. manufacturing, production, growth, or extraction of tangible personal property, software development, and music recording; U.S. production of movies, television and video; U.S. production of electricity, natural gas and water; U.S. construction or substantial renovation of real property; and U.S. performance of engineering and architectural services.”

Source: http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Tax/Business/PRDOVR~PC-186490/PC-186490.jsp

Mr. Foy further says that: “In general, I believe the changes will have more impact on studios, ministudios and slate financiers than independent producers. Everything said here, must of course, be understood against the backdrop of great uncertainty about the effects of the global credit crisis and economic instability…”

TREATING LOCALE AND STATE REBATES IN OUR PROJECTIONS

In the course of our work here at FilmProfit, we do not incorporate elements of Section 181 or 199. As Mr. Foy has said, even for investors who could qualify, the qualification for each individual taxpayer is so individual, and the level of their participation makes it hard to model and have it make real-world sense.

But, we do regularly treat locale-based rebates on production expense within our projections models, and, by extension, within cash flows for slates of films. These locale-based rebates can be pretty clearly estimated by collaborating with an experienced Production Manager who has “broken down” and budgeted the film in question.

In the case of a state like Michigan, which offers a 40% rebate; or Louisiana, which offers a 25% rebate, among many that are now available across the U.S, we can effectively identify what portion of the budget will most likely qualify for one, or multiple states, and then the rebate amount for each locale qualified in. Of course, we need certainty that the film will be produced in the locale, so that we are presenting reasonably achievable scenarios.

This is then illustrated in the Summarized Flow of Funds, and can be calculated in conjunction with the investor waterfall. These additions to our Projections of Potential Income can aid a producer in communicating clearly to a prospective investor how the entire production fares under the tax rebates, and how an individual investor at a certain level would fare. This all makes it easy to illustrate the impact on the investment.

Hopefully this helps shed light. Onward and Upward
Jeffrey Hardy

So, our intent is to focus our website on providing you samples of our reports that help you visualize what we can do for you. As well, we will focus on trying to provide you with the easiest way to navigate around our site and find the information you need. We look forward to hearing from you about how well we are informing you, as well as hearing about your project(s) and how we might be able to help you. Like we have helped Mark Stouffer on three projects.

“Jeffrey, With the great help of your thorough and well-researched financial data, I have raised $5.6 million in production funding from private investors, and I am currently using your data to raise an additional $7 million for new features.”

Mark Stouffer, Producer, Diamond Dog Caper

Although we have endeavored to work out all the kinks, there may still be a few. Thank you for your patience, and if you find anything horribly broken, and feel inclined to take time to tell us through our contact form to the left, we’d appreciate it greatly!