American Film Market 2011 conference: unofficial notes
Nov 4, 2011: Finance Conference notes part 2
11 AM: "Global Infrastructure Opportunities and New Distribution Models"
Notes by B. Hahne
The original blog location of these notes is: http://2011afm.blogspot.com
This is day 1 of a 5-day series, check back at the blog for more as the days go by.
Clarifications or pithy comments by the note-taker will generally appear in [square brackets like this].
These notes are copyright (c) 2011 by Bruce Hahne. Noncommercial, nonprofit redistribution and/or pointing people to the blog is permitted and encouraged.
Disclaimers: "Free notes, you get what you pay for!" There notes are a summary, not a transcript, and represent my best effort to capture the panel discussion plus Q&A. They also probably contain errors. I'm not in the film industry, nor am I affiliated with AFM / American Film Market or with any of the firms associated with the panelists.
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Moderator: Joe Chianese, SVP for Tax, Business Devpt., and Production Planning, Entertainment Partners
Panelists:
- Leon Clarance, CEO, Motion Picture Capital Ltd. UK. Specialty financier, subsidiary of Reliance. $15M to $60M funding range.
- Bill Fay, executive producer, was President of Production, Legendary Pictures.
- Mary Ann Hughes, VP of Film & TV Production Planning, Walt Disney. Looking for opportunities to reduce costs via incentives + finance.
- Bill Johnson, Partner with Inferno Entertainment, sales firm, also does finance.
- Andrew Matthews, President RKO Films.
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[This panel ended up not talking about "new distribution models" because the distribution guy wasn't able to make it. In general this panel was problematic because the panel moderator directed nearly all of his questions to specific individuals, which is boring and doesn't give different opinions, plus he directed the vast majority of the questions to only 3 of the 5 people on the panel, ignoring the one woman for at least the first half of the panel. But don't worry, there's no sexism in this industry, none at all. Hmm.]
JC: Leon, what's current state of global financing?
Leon: Starting to improve again. Some deals being announced.
Bill J: Where's the money today? Asset-rich nations, some wealthy individuals. Wall Street money less present right now, but there are always waves of money coming into this town.
Andrew: We're in discussions with a Russian billionaire. High net worth people are always there and the economy hasn't impacted them. Texas oil money, very project-specific, "agenda-driven".
JC: what's the profile of a typical equity investor today?
Leon: No such thing as a typical profile. Investors invest for various reason, sometimes financial, sometimes agendas, sometimes building capabilities in their own countries. First step is to understand what they want - if you just think they're there with money then the relationship won't work out.
JC: Investors interested in indy films, slates, what?
Leon: Wealthy individuals don't have $500M for a stake in a slate, but they'll do one picture. Or some want to do production companies, or they want to develop local capabilities.
Bill J: Understand who your [investor] audience is - if they have $100K it's a different conversation from if they're a corporation with $10M they want to invest. If you're working on your own then you need to focus on your own network of relationships. You might need to attach yourself to an organization to get the network of relationships that you need to organize your project. Producing is like herding squirrels, and if you're working with an organization of 8-9 people who can herd the squirrels for you, that's more workable than doing it solo.
JC: Leon, what about budgets under $15M?
Leon: Investor cares about break-even, need to understand this, that's the key determiner for whether to invest.
JC: What ROI is equity investor looking for?
Leon: Need to watch the tax elements of the deal. Investor gains in UK on this type of investment aren't taxed.
JC: King's Speech made $370M gross on $15M budget. Most of this $15M came from one fund.
JC: Andrew: Is presales market coming back?
Andrew: Recovering.
Bill J: There are lots of well-capitalized distributors internationally looking for products to compete with the big studio productions. Slick stuff with the production values of big-budget studios are must-haves. The strategy with the other stuff has been to "let it fall to the ground" and try to pick it up as cheap as possible. An experienced sales agent can help you here WRT pricing.
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JC: "Infrastructure opportunities". Image Nation and Abu Dabhi Film Fund being used a lot. Who is using this and why?
Bill J: Image Nation is ostensibly state-sponsored. The joint ventures they've made tend to be message-based, stuff with National Geographic etc.
JC: Bill F, What opportunities do you look for?
Bill F: what studios are in place, what cooperation can we get from the government. We want the right people [in country] on our side.
JC: Can you talk about _Paradise Lost_ done in Australia?
Bill F: We had an Australian director so we were able to push this as an Australian production. Then we went with Digital Domain, the SFX company in New S. Wales, wanted to build out its technology there. Paradise Lost is all motion-capture driven. Digital Domain taking an equity stake. Good crews in Australia, now also some of the best FX in the world. We're also shooting in Canada. [This is all Legendary Pictures]. Good benefits in Vancouver, Montreal, etc. Countries that follow this are shifting their incentives to track post-production and FX budgets.
JC: This is a point system in some places, right, like in UK you need 16 out of 32 points?
Bill F: Right, and sometimes you need to pad that in case you want to make a last-minute change. But people are definitely analyzing it point by point sometimes - "we'd like to have this DP, but maybe we should really go with this local DP [so that we get the points]". [DP = director of photography]
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Andrew: New Zealand method has been born - Peter Jackson's films have helped this. Countries should consider these incentives - the money spins in the economy with a multiplier effect. Systems weren't previously set up to handle studio productions, they were more for local [in-country?] productions, but if you go into a jurisdiction with a large enough project then you should negotiate with the authorities and see what they can do for you.
Bill J: Earlier in my career I found myself chasing incentive percentages. But sometimes it may be cheaper to shoot in Romania with zero incentives compared to chasing a 47% incentive somewhere else.
Bill F: And sometimes the cheapest place to make the movie isn't the RIGHT place to make the movie. Government problems, crew sucks, geography sucks, location needs a lot of money to make it look right, etc.
JC: Right, typically producers are running multiple budgets. What about creative control, where you go into a country that doesn't have tested VFX support, etc? 10 years ago everybody went to UK for primarily filming but ran back to the US for the VFX.
Bill F: Have the government behind you, something that gives you confidence it will work out. On big pictures, a large amount of the movie business is NOT taking place in L.A. The support companies [i.e. VFX et al] are chasing this industry trend. All major companies in L.A., even if we're contracting with an L.A. or California-based VFX firm, aren't having that work done in L.A. to a large extent. There are VFX firms opening up offices in Louisiana to chase the incentives.
JC: What do you see over the next year?
Mary Ann: Governments have to justify their spend on incentive programs, must show it's wisely spent. Certainly production incentives have been a game-changer in terms of where we send our productions. It's about jobs, for the governments. Louisiana, NY, New Mexico programs have been around for 8+ years. After 8-10 years governments tend to ask for studies to examine whether these programs have achieved their goals - did they create jobs? There will be drilldown and possibly pushback. You should look at the incentives as a partnership with the municipalities. Maybe you need a local education program to train up the locals. I favor doing a postmortem after each one of these productions. In January 2012 we may see some of these programs challenged.
JC: California Film Office has kept productions here but is competing with Louisiana, Michigan, New Mexico. Michigan put a cap in place under the new governor which limited the # of productions it attracted.
Mary Ann: That was a lot of different states. Louisiana: 2002 they set up the incentive system and at the time had nothing. They now have a crew base and an infrastructure - they have sound stages. You need these to make the program work. I'm heard that they + Georgia + NY are very busy with projects. California is feeling the impact of runaway productions. Even Jerry Brown, with the budget mess, realized we needed a 1-year extension on the California incentive program. Michigan: governor hit the pause button and that had an impact, they lost a lot of productions. But the new, slightly scaled down MI incentive system passed the state senate the other day and is headed for the house. 39 states have production incentives and a dozen countries have generous incentives. But at some point some of these jurisdictions might decide to pull out.
JC: How about states that show support vs. not? New Mexico governor has been hostile.
Mary Ann: Right, certainty matters, uncertainty sucks. NM did keep its 25% incentive with a $50M annual cap, where you can queue up for next year's funds. So NM is back in business, and they have facilities, they have strong crew.
JC: Do you see states coming back, not coming back?
Mary Ann: I'm actually working with Arizona on this right now. They let it expire and I'm working with them on draft legislation now. But can our (LA) film industry really sustain 39 different states all with incentive programs? I don't think there's enough content being filmed that we really need that many programs.
JC: What risks do producers take when shifting production venue?
Mary Ann: We started to see reduction in incentives just last year for the first time. Prior to that the programs were always growing. Some productions got caught by that. My advice is that you mitigate your risk, and the risk is from potential legislative change. If you're going into production in January when the legislatures come in to session, you could be in trouble - you should be having conversations to defend against your risk that the law changes when you're in the middle of filming in-state.
JC: What are good jurisdictions right now?
Mary Ann: Foreign countries have proven the ability to have sustainable programs. UK. Canada. Australia. The programs work and they're successful. Newer trend is some jurisdictions focusing on VFX. Australia increased its VFX incentive to 30% but left production incentive at 16.5%. Canada: most provinces have a specific VFX incentive that you can layer on top of the national incentive. Sometimes you can layer 50% incentives by layering national, province, and a separate VFX incentive.
Bill F: Exchange rate fluctuations can hit you here too.
JC: About co-productions, i.e. financial partners in other countries. China, Russia, India. Are these countries impacting your businesses?
Leon: Those countries are all very different in their utility to the project. China wants to build its own film infrastructure just like it wants to build its own everything. All 3 of those countries are relevant, and ties into the increasing importance of non-US market for this industry in general.
JC: Bill, what about China? Is the money available for non-Chinese producers to create non-China film products?
Bill F: Explosive box office growth influences everything else. China is a very serious market for us (Legendary Pictures). Over time I think this market will "loosen up" - we'll see more scripts approved. Lots of Chinese money from real estate and other businesses now looking to get into the media business. Goal with Legendary here was to do big-budget Legendary-style pictures which were germane to the Chinese market.
JC: How do the politics of China impact the business?
Bill F: The script has to be approved by the government. Not a predictable process. Might be some liberalization at some point.
Bill J: There's a lot of money in China looking for projects. We're looking for projects right now that could be partially filmed in China and that will pass censorship. You can't cast Chinese as the villains and you can't be too political.
JC: Re US Federal Govt incentives - incentivizing US jobs.
Andrew: Has anybody in this audience successfully accessed federal program X? [1 hand in 500-person audience.] How about program Y? [0 hands] How about program Z? [0 hands]
See this is my thesis, which is that these federal programs don't change INDEPENDENT filmmaker behavior, people might want to access them but they can't. These federal programs generally ARE usable by the big studios. The laws suggest that there's willingness at the federal level to support projects, but they should be rewritten to support independents. [There's an interesting 99%/1% commentary to be had here about US federal law being written to support large corporations and not small studios. One might even suspect that the major studios have just a few lobbyists who make sure that the laws are written to benefit themselves and not benefit potential smaller competitors. Please compare and contrast to the U.S. banking industry and submit your 8-page paper by Tuesday...]
JC: "Russia is the new China" - please comment.
Leon: Actually China is the new China. Russia is becoming a source of investment capital. I'm talking to a Russian family office interested in getting into the media space.
JC: Kazakistan, please comment. [Yes he's serious]
Bill J: Yes we found some investors there, we're going to shoot part of Arabian Nights there, also partly shoot it in China. Lots of oil and rare earths in Kazakistan, so there's money.
JC: India, please comment.
Leon: Local market in India is booming. A lot of post-production work is also shifting to India.
JC: Latin America and incentives. Can we see this location as a source of funding or other?
Andrew: Brazil, some money going into projects in Brazil that can be shot in Brazil. There's a new fund that started which will even engage in development [pre-production?] with you if your film can be shot in Brazil. Development money is normally hard to find.
Leon: It mirrors the general economy. BRIC nations are doing OK and there are funds there to support productions.
JC: Europe, please comment.
Leon: UK "enterprise investment scheme", some politics with EU central government, some changes to the law.
JC: New distribution models. VOD / Universal / Tower Heist fiasco. Are the distribution models changing?
Andrew M: Companies that do alternative programming are trying to develop alternative channels. Day-and-date releases don't seem to have reached the point where the deals are effective for everybody. Resistance on exhibitor [movie theater] side to digital releases. But indy films don't necessarily need a 3000-screen release like the studios do. People can experiment in the indy space and let it migrate into the studio space.
JC: What's driving distribution, the customer or the producer? Viacom is trying to cut out the middleman with direct streaming of Transformers - doing it themselves. Do consumers want this or is Viacom just doing it?
Andrew M: Barriers to digital distribution are coming down, so the major studios are likely to start distributing their own products. Consumer demand drives everything. Consumers want time and place independence. The middleman is no longer required due to technology. What's missing right now is a content aggregator that has the consumer go directly to the studio for the purchase.
JC: For each panelist, please give us your advice to the audience.
Leon: Know your customer, which isn't necessarily the content consumer. If you're looking for investment money then your customer is your investor. A Texas oil billionaire has different wants from some other type of investor.
Bill F: Careful analysis of worldwide incentives + availability. It's very rare that a major movie is made without substantial incentives today.
Mary Ann: To get the incentives you need to watch closely, watch for draft legislation.
Bill J: You're selling ideas, focus on ideas. [?? I don't think that advice is general enough, could you be even more nebulous please?]
Andrew: It [the ecosystem / economy] is getting better. Slowly, but getting better.
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Q&A time!
[As with the first panel of the day, many of the questioners were in jeans and seemed to be looking for ways to fund their sub-$1M budget film. The panel isn't really equipped to answer questions in that space, nor were they equipped to answer questions about alternate distribution mechanisms such as the ever-popular "how can I monetize just over the internet?", or variations on same.]
Q: Andrew M, how viable are hedge funds for $15M to $20M indy funding?
Andrew: they're largely out of the market. Looking at distressed asset deals now which will give them much higher returns than funding a film. A lot of them got badly burned in slate transactions from a few years ago. You might be able to get them with their 5% "alternate investment allocation" portion of their portfolios, but pretty tough.
Q: If we came to you looking for money, what would make you all give us a meeting?
Bill J: It's all about the script. We can't sit down with everybody with a script, of course.
Q: You missed Africa including S. Africa, why?
Andrew: We're looking at ZA for a project
Q: The trades have announced that the studios have committed to the cloud for future distribution. Can you comment on microbudget filmmaker and how they can use the cloud to distribute film?
Bill J: In general the market for small films is tough. If you're channel-flipping, why would somebody stop on your film, what gets their attention? It comes back to the idea.
Q: Re incentives, how about I have a film with one US character and one UK character, which country do I film in?
Bill F: You have to analyze the whole project, not just the incentives. How much you spend on your lead actor can influence which jurisdiction you film in.
Mary Ann: You don't know until you run the budget. We often run budgets for 4-6 locations.
Andrew: You need a good line producer with experience at this, who can run the different incentives and knows the crew costs in different locations.
Q: How to finance non-traditional filmmaking techniques, are there incentives?
JC: Read the Entertainment Partners guidebook that was on your chair. The high-level answer is that there are all types of incentives. If there aren't, then it boils down to "will this create jobs?"
Bill F: Re mocap + smart studios + etc, there are venues seeking to subsidize these types of productions.
Q: I'm working towards a $2M film funded with private equity funds. I feel that I should get some foreign presales, but that's very linked to the casting. How can I find out the foreign presales value of different cast members?
A: You need a good sales agent, talk to your agent.
Q: What factors determine whether a project becomes a must-have?
Bill J: Put on your distributor hat and think about who is the audience, how does your film compete with studio product? Genres that work include action, thriller, romance, romcom, scifi. Watch box office results, watch the competitive landscape.
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