American Film Market 2011 conference: unofficial notes
Nov 4, 2011: Finance Conference notes part 1
9 AM: "Current Issues in the Production, Financing and Distribution of Independent Film"
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.
Moderator: Steve Fayne, Akin Gump Strauss Hauer & Feld
- Robert Hayward, COO, Summit Entertainment (major independent studio - Twilight and StepUp series)
- Patrick Russo, Principal, The Salter Group (entertainment law / finance)
- Doug Hansen, President, Endgame Entertainment (P&A firm) MBA: UCLA
- Ashok Amritraj, Producer / Executive producer of >300 films. CEO of Hyde Park Entertainment, "India's ambassador to Hollywood"
- Jared Underwood, SVP and Group Manager for Entertainment, Comerica. Specialty finance group which has financed 800 films "with zero losses". Twilight, Gods & Monsters... MBA from USC.
SF: We just closed a small independent film with 33 separate sources of finance, which was insane. The senior debt closed 2 days AFTER principle photography was done, so making payroll was a day to day scramble. Is this where we are post-2008, is it this hard to finance independent film?
Jared: 33 sources is excessive, though it tells me there's a lot of ways to finance a film. Tax credits, merchandising, subsidies, product placement, split up the rights, etc. If you need 33 forms of finance then maybe you need to ask if you want to be making movies... but if it's your only way then maybe you have to do it.
SF: Used to be able to finance a film directly out of presales, can you do this today?
Ashok: That's not happening anymore. Buyers are sophisticated. Every movie needs some presales, some "soft money", some equity. If you think you can just play with other people's money and not put up any equity, you're mistaken.
Patrick to audience: how many people here are independent producers? [many hands]
How many of you would do your film even if you had to get 33 sources of funds? [same number of hands]
Ashok: I still don't think you can fund just through presales, you need equity.
Jared: Agree. But if you have a good film with some stars in it then the presales market is still good IMHO. You won't need as much other funding.
Robert: There are still sources who can finance these films: Lions Gate, Relativity Media, some high-wealth individuals. It's about having the right project. Our concern with one deal we're doing is there are too many sources of financing attached - it's a pain to work through all those deals. Also I agree the presale market is healthy right now.
Doug: The problem isn't money, the problem is quality content.
SF: With decline of DVD market and rise of digital distribution of films, where is this going? How do we get digital revenue that might not be there yet, and how do we shift away from film prints to digital for cinematic distribution?
Robert: We're seeing a dropoff in TV from foreign buyers. Seeing decline of DVD, that's continuing this year. VOD uptick. Subscription VOD is coming - that's exciting. VOD has different cost structures compared to traditional rental. One iTunes turn is worth 3 turns at Blockbuster for us. Some territories are going largely theatrical: Korea, Spain. Presale still strong, various territories are going into overages [this is good] and making money. In terms of killing physical 35mm film, now you have "virtual print fees" which are more expensive than printing to 35mm film, so no savings at this point. And if you're playing on 3 screens in one multiplex then you need to pay your virtual print fees 3x. Essentially here we're paying off the conversion costs of the theaters - maybe this will go away in 10 years.
Ashok: BTW Robert is the only guy who ever got an overage from Mongolia.
Robert: Yeah we couldn't decide if we should cash the check or frame it.
Patrick: People tend to treat DVD performance as a proxy for overall film performance, which is wrong. N. America, total home entertainment (most broad category): $12.3B, down only 2.1% compared to last year. Sell-thru is down 13% and that includes electronic sell-thru. Blu-ray up 58% Q3. The drag down is traditional DVD, consumers aren't buying them, they're buying Blu-rays. Rental is up 4 or 5%. Digital in all forms up 32%, $2.2B, driven by subscriptions/streaming. So you need to look at the elements of the industry. Rightholders are actively managing their rights to track changes in consumer behavior. We've seen a slight UPtick in average ultimate returns ("ultimates") recently. You have to track what the consumer wants.
SF: So you're comfortable with the situation?
Patrick: we forecast and we track what's going on, lots of moving parts.
Jared: The banks are still nervous. More conservative view.
Patrick: large institutional capital: lots of interest and activity in OWNING content, particularly in last 12-18 months, volume of deals, M&A activity. Longer-term investors believe there's longer-term value in owning content.
Doug: Buyers are buying bulk libraries, things like 10K titles at once. The issue isn't "I want this particular film to be seen", it's "we want the library".
Patrick: current situation somewhat similar to late 1990's growth of non-US distribution, with electronic distribution. We have a client with $0 electronic distro last year, this year it's $3M, next year projected $6M and $3M of that is already in place.
SF: Does the electronic distribution impact windows further out, like cable?
Patrick: Too early to tell. The studios traditionally want to frontload the revenues, push the commodity stuff like Redbox out to as late as possible. How will broadcasters react to content that's been sold in so many other venues first before it hits the broadcasters? Different bcasters are taking different position. Some take a hard line, but some love to say "first time on TV!" Strategic chess game.
Robert: Window complications. Huge issue with HBO about what we can do pre-window, post-window, etc.
SF: How about exhibitor pushback for premium VOD? [Tower Heist fiasco - see the news]
Robert: We're staying out of that. We should support the exhibitors [movie theaters], don't want to sabotage this, it's a big market. 60-day window shift for premium VOD I thought that makes no sense, who's going to pay $30 for premium VOD if I can wait 30 more days and get the regular product.
SF: In the past each technology advance was fought by the industry - Betamax etc. Yet today each advance seems to be greeted with open arms [Oh really? Anybody looked at how content owners blocked the ability of Google TV to play a wide variety of internet-resident content in 2010?] Have we gone too far?
Ashok: Don't think so. Movies are costing more and people are looking for more revenue streams, so trying to figure out the electronic revenue.
Jared: If there's a new way to watch a movie then people are going to try it. The question is whether the content owners will support that.
Patrick: The studios have learned from the music industry: you can't restrict consumer access to the content. If the studios don't evolve with human behavior, then consumers will steal it, which is what happened with music industry. People want to interact differently, don't want to be told when, where, how.
Robert: DVD vs. VOD. With Twilight we did both on the same date and saw no cannibalization.
SF: So if the industry stays up with the technology curve, we won't go away?
Robert: Peer2peer is still an issue - Spain used to be 5%, now it's down to 3% because people are getting content [for free] over the internet.
Doug: Most of us have no direct relationships with our customers. But NetFlix does. As you move towards that relationship, you can make more money. There are interesting 1-on-1 relationships from a marketing standpoint that can come out of the internet. With cable companies all of us here are never in a retail position.
Ashok: Piracy affects us in a lot of ways. Locks, keys, then people crack the locks. It's changing how early we send out films for dubbing, scheduling, lots of timing issues, it's a big deal.
Robert: Breaking Dawn is going out in 2 weeks and there's dubbing, censorship approval, it's all over the place, and if one copy gets on the internet it's a big problem. We're spending a fortune to monitor the internet. In some countries we have people physically tasked with protecting the content, physical guards.
SF: Most US productions these days seem heavily reliant on state tax credits. Many of these are going away due to state finances being in disarray. How comfortable are you with this shift?
Jared: We haven't been in a situation yet where we don't get grandfathered. We're still lending against rebates etc; still viable. And you'll always have governments getting into this space. When they do the programs effectively it works, it stimulates the economy.
Doug: We use the programs that are tested and work. We spend a lot of time in Louisiana for this reason - it's been around for a long time. In UK they change the rules all the time, but they tend to grandfather [existing players?]. It's just part of your risk analysis, just like asking which distributor you're comfortable with.
Ashok: We've shot in a lot of states, N. Carolina, Louisiana, got one of the last checks out of Michigan. In some places it keeps getting trickier and you have to worry.
Robert: Mostly you negotiate locally, like Miami: "we're going to shoot here, we want the money set aside for us, we don't want to be in a bidding war with Warner Bros 4 months from now when we come in to shoot".
SF: What markets are going to work?
Ashok: high-end indy films. First 2 days here at AFM have been great.
Jared: Yeah well the first 2 days here everybody usually says it's fantastic, lots of confidence. We tend to play in the realm of $20M with big stars, and that's strong. There's not that much of that product here compared to Cannes. That's actually good for the people here since it means people like me need to fight for the good content that IS here.
Robert: We need to talk about advertising, the "A" in P&A. People are focusing on theatrical, and advertising costs going UP despite a down market, down economy, advertising rates going up. So higher-end movies attracting a lot of attention.
SF: I had one guy a few years ago say "even the guys who aren't going to pay you aren't buying" [ha]
Ashok: We want to see some of these indy films succeed each year - King's Speech, Black Swan.
SF: Star salaries have gone down - have you seen a reduction in budgets?
Ashok: Certain category of star salaries have gone down. AAA stars not down. Mid-level of stars are more open to deals now, or the agents are more realistic about the star value now. And the agents are putting movies together also so they see the values.
Robert: Not much drop for the 15 top actors. But we're seeing shifts in "pre-break gross" threshold - that's going away. That's where you pay the star even if you aren't making money. Moving towards "true cash break" - you start sharing money after you start making a decent return.
Doug: Availability of stars is slightly better since fewer films being made, for 2nd-tier people, not the top 15 stars.
Jared: On the revenue side the dollar is weak WRT the Euro and that helps sales.
SF: Jared, as a banker, what's the current situation in the Eurozone, even if you're paid in dollars it's still Euros underneath.
Jared: We're nervous, but we're bankers, we're always nervous. Starting 18 months ago we thought we'd see a lot of defaults, but so far not so much. Current situation is a rollercoaster. If you're in sales you're probably hearing "times are tough, we can't pay that much", but you'll always hear that in sales. Need to make sure your deals are structured properly. We presold something to Greece and people were worried, but we discussed - it was only $100K and they put $20K down, and we weren't lending much against that, so OK. There's always something going wrong somewhere in the world so you have to deal with it.
Re US vs. non-US:
Jared: Currently seems like it's non-US that's going up rather than US going down.
Robert: People used to be willing to put up $20M as a US rights guarantee, but now it's down to $12M, so the amount of $ people are willing to put up against an independent is dropping.
SF: Doug, what's your sweet spot for a bridge loan?
Doug: It's opportunistic. Is there a takeout, is there solid financial underpinning, looking for 4-10 weeks, is there a bridge to the other side? It can't be a "pier loan" where it falls into the ocean in the middle, that's not a bridge!
SF: Many lenders in this business have pulled out in the past few years. Who is coming back or who are new entrants?
Jared: 35-40 banks at height of market. Then 10-12 left in 2008-9. In past 12 months we've seen ~6 new entrants - same bankers, now at different banks [ha]. There's enough liquidity to get most deals done - no capacity issues like a few years back. If you run out of capacity then you can go for senior debt with the institutional market. I get calls all the time from our banks saying "do you have anything for me?"
Patrick: You're not near the peak of 35-40 lenders, not as much structured finance. Actually I think that's positive for the industry - fewer films being made, less competition every weekend in the theaters. Reshuffling of senior lender debt - people are going to new banks.
Robert: Hollywood has a history of fleecing investors - "we take your money and we go away" (and you don't get your money back).
Doug: the equity in the independent market we've seen has come from individuals funding individual films.
Jared: Private equity and hedge funds are MIA right now in terms of new money.
Ashok: The exception is we have a deal with ImageNation, owned out of Abu Dhabi, and BTW at the end of the day everything in Abu Dhabi is owned by one guy. Specific types of investors. If you can stop fleecing investors then there might be money there.
SF: Well, we aren't going to turn down the money if it's there - look at all those independents in the audience, they'll take your money.
SF: We had a glut of "broken theatrical films" a few years ago - lots of films sold as if they were going to be theatrically released but they never made it. Is this happening again?
Ashok: The money isn't there for that right now.
Doug: The agencies are catering to the high net worth individual now, and they've learned that if you screw them, gosh, they don't come back, so maybe we should try to keep these guys around instead of fleecing them. That's a big mental shift for some of these sales agencies [ha].
Patrick: Big institutional money hasn't come back to 2007 levels. Lots of buzz around family offices [high net worth individuals / families], also around China / Chinese investment.
SF: Doug, why don't you have more competition in the P&A space?
Doug: P&A fund - we just announced a $150M fund. Structuring is a trick. Everybody has a different opinion about what P&A is. It's actually a mix of investment types, senior, subordinated, and equity, and it turns out that you can't really tell what type it was until the film is released.
Jared: We do a bit of single-picture P&A lending. But good movies don't lack for P&A. For the marginal movies it's easy to get burned (lending to them).
Patrick: We spend a lot of time working with firms about where to spend their P&A - you need to study the analytics, it's not simple.
Robert: 10 years ago it was hard to lose on P&A but now you can do it. But in a slate situation it's better, hard to lose.
SF: What trends are we seeing in finance?
Jared: More restrained. Banks returning to tried & true structures: loan against presales, loan against a film ultimate, maybe loan for P&A.
Ashok: From producer standoint, need to be more passionate about your material. It's important to make high-end festival films. For all the producers out there, focus on your material.
Doug: Not a lot of Mezz funding these days, not many players. Today if you've got the stuff then you're sold out already, there's no [funding] gap.
Patrick: WSJ this morning had another article about Google over-the-top platform launch, they're launching 15 channels on day 1. Powerful and stable companies launching platforms.
SF: The recurring theme seems to be at the end of the day, you need equity [financing]. Where do you get it? High net worth individuals?
Robert: Well we do that. Lions Gate does it. There are players, plenty of sources for equity.
SF: One of my assistants once observed that the harder it was to close a deal, the less successful the film was. Is this true?
Robert: Yes. If there's a kernel of something on the page [script] then we'll take on the project. But when you start mishmashing the European tour into the mix - we have to shoot X days in Spain, Y days elsewhere, to pick up the tax credits, it gets really hard. And you can get these complex structures with hierarchies of lenders, it's a mess.
SF: In a perfect world, what would you like to see to make your lives easy as finance people?
Doug: More direct way to market to individuals, I want to have a way to market to them. Right now we just blast advertising all over the place. It's weird that we don't know our customer - we don't know who the huge Bruce Willis fans are. In my dream world we have a more direct relationship with our customers.
Robert: Lower advertising rates. Lower virtual print fees. More coordinated VOD efforts to replace DVD.
Ashok: We want the Japanese to go back to funding movies for 10%, ad costs down, stars take less money, ponies for everybody, etc.
[In general I noticed a trend here for the Friday finance conference, which is that the panelists are working on projects in the $15M to $60M or $60M++ range and are wearing suits, while everybody who comes to the microphone is wearing jeans and is a small-budget filmmaker with a budget of $1M or less. Big disconnect here between what the audience needs and what they got from the panel. This pattern was true both for the 9 AM session and for the 11 AM session.]
Q: The panel doesn't really represent the kind of films that this audience makes. Can you speak to microbudget films, $500K to $1M, with no-name casts, how can you fund and distribute these films?
Doug: You need a lot of equity, you're not going to get presales in most cases. You need subsidies and a pile of equity. Banks aren't going to loan to you without presales.
Ashok: Well are you making Paranormal Activity? How do you explain your movie to people. Every distributor in every country needs you to say who are you making this movie for?
Doug: Sundance and other submissions are high, 2K to 3K submissions, films ARE getting made on smaller budgets.
Q: Re platforms and digital, do you see a day when filmmakers will make their money on the $2.99 iTunes download or whatever? Is this the future?
Patrick: Part of the future. There's a new platform every day. At a $2.99 pricepoint if you're making a $50M film you're probably going to lose money. Electronic sellthru is still evolving, right now it's still mostly iTunes.
Robert: How do you get enough of the population to download your movie, that's the challenge.
Q: Re "skin in the game", what do you mean, and can you speak about crowdfunding?
Jared: "skin in the game" means equity. Crowdfunding, we're not involved in that today, those tend to be small and microbudget films.
SF: As a lawyer, crowdfunding scares me - you've got people putting up money and not being given the types of information that investors normally get. [I think he's confused about the legal terms for crowdfunding, which in the U.S. don't involve an equity stake by the crowdfunders. Kickstarter supposedly has worked this through their lawyers, though who knows, lawsuits can always happen.]
Robert: BTW get your screenplay in shape before you start looking for funding!
Q: What do you mean by "film ultimate(s)"?
Robert: True cash results including all media, you subtract these 50 different costs and you hope that the resulting figure isn't red. Usually looked at over 10 years. Another term is "residuals". We start running estimates of ultimates early in the game. Once you're in theatrical release, you generally know by the second Monday how you're going to do in that market, AND in all international markets.