Markets, Sequels and Other Things Filmmakers Need To Understand

As the name of the blog implies, I am all about the business side of entertainment. I suppose I'm fairly creative for a lawyer, but I inevitably look at the entertainment business as a fun, challenging and interesting way of making money. If you're not in it for that reason, then what you're doing isn't really a business.

(As an aside, I do serve as a music supervisor for films and there is certainly a creative element to that. My background in music serves me well in that regard, but it doesn't change my view of film primarily as a business rather than a purely creative endeavor.)

That's why I was so happy and excited to read this article from Clive Frayne in his Filmutopia blog. (By the way, Clive is a very smart guy and everyone should be following his tweets and reading his blog. He really understands the business of independent film.) Clive gives an intelligent and articulate discussion of how and when to find the market for your film. I really don't need to reiterate his points. Just read the article and pay close attention.

I find it interesting that Clive published this particular article on the same day that the L.A. Times blog was reporting that Paramount is already talking about the sequel to Paranormal Activity. For those of you who live under a rock (or intentionally avoid reading news about films other than your own), Paranormal Activity was made for about $15,000, sold for about $300,000 and was the top grossing film in the domestic market this past weekend, having earned over $62.5 million so far. Brad Grey says it might be the most profitable Paramount release of all time.

So, there is no question Paramount will release a sequel, right? After all, they don't need to find the market. The market is everyone who is flocking to the first one. Just feed them another helping, right? Maybe not.

The Times blog makes the obvious point about the sequel to Blair Witch Project (which you probably know was a huge financial flop -- and a terrible movie). The question might be whether it is logically inconsistent to attempt a sequel to an anomaly. Greek Wedding and Blair Witch Project and Paranormal Activity are anomalies. They are small, inexpensive films that find an audience and grow beyond anyone's expectation. I don't think you can plan that, and thus I'm not sure you can have a successful sequel to that kind of film.

On the other hand, Saw VI also came out this weekend (losing the box office race by a wide margin to Paranormal Activity). That's perhaps the best example of many small horror films that have spawned mini-franchises, earning more profits with each new release.

Ironically, the biggest problem for Paranormal Activity 2 might be that the budget for the sequel will be several million dollars. Big budgets can create lazy filmmaking where the genuine edginess of the inexpensive original is replaced by a slickness that is much less intense and thus much less scary.

Ok, I'm starting to talk like a creative guy. I'm completely out of my element. So, you real filmmakers tell me -- can Paranormal Activity 2 ever be as scary as the original, or is it destined to lose money? If you were Paramount, what would you do to secure the market from the first film, and ensure the success of the sequel? (Clive, if you have an opinion on this, I would love to hear it.)

Iowa Tax Program Update

After yesterday's post, I got into a great Facebook discussion with attorney/writer/producer/sales agent, Darlene Cypser (@DarleneCypser) of Colorado. She was kind enough to provide a link to the actual auditors' report which ostensibly caused the governor to shut down the program. Darlene suggests that, based on this report, there was definitely a problem. I don't disagree, but we probably differ slightly on where to place the blame.

I have to agree that the report describes circumstances under the program that were almost certainly not in the state's best interests. Ultimately, I think the report supports my suggestion that more careful planning and operation is critical for a successful program. My reading of the report is that a lot of smart Hollywood people figured out ways to mostly stay within the letter of the law while maximizing their tax credits using strategies that the State of Iowa never anticipated.

And I think that's the key. I think Darlene wants to hold Hollywood accountable, but most everything I read in that report could probably have been anticipated and prevented with more careful planning and drafting of the law. I don't want to sound like a typical L.A. entertainment lawyer (or at least like the popular misconception that we are a bunch of arrogant sharks), but if the Iowa regulators understood the Hollywood movie-making culture, they would know that every effort would be made by producers to squeeze the maximum dollars out of the law as it was written. They could have hired any number of consultants that would likely have anticipated every maneuver, and then they could have crafted the law to prevent most of the alleged abuses.

You can't blame a producer for chasing dollars any more than you can blame a lion for eating an antelope. It's what they do. Some people may not like the way they do it, but it is naive to think that they would leave any money on the table. That's not consistent with the prevailing culture of Hollywood film making.

As far as the governor's reaction, even after reading the audit report, I think I would have been much quieter and less dramatic in my response. Clearly some things weren't working. So, they could slow down the application process, get some better regulations written, quietly replace a few people and continue the program. I think that the starting and stopping is potentially much more damaging to their perceived desire to build a film industry than any over-payments. They should just take what they've learned, correct their course and keep going.

Ok, that's all from me on this topic. I think it is probably more interesting to me than to most of you. I'll look for something a bit less dry for my next post.

Iowa Film Tax Incentive Program: Is There Really a Problem?

There is an excellent article in today's Wall Street Journal about the suspension of the Iowa Film Tax Incentive Program. Clearly, the program was driving a lot of film business through a state that would otherwise have very little. But when an audit of the program expenditures revealed subsidies helping to purchase luxury cars, an expensive bed and an iPod, the governor halted the program and heads began to roll.

In reading the article, it seems that everyone was probably acting within the technical limits of the law. No one has claimed that these expenditures were not allowable under the program. However, having the state pay for half of a film producer's Mercedes clearly went against the local sensibilities. This isn't about math or money as much as it is about a clash of cultures. It's like inviting a rock musician or famous athlete over for dinner. You're very excited until you see what they're really like, and then you can't wait for them to leave.

Objectively, it does seem that the Iowa program might have been crafted in a bit of a hurry. I haven't examined the law in detail, but a 50% credit is definitely a big number and allowing things like vehicle purchases, without careful limitations, might not be smart.

Being in the business of representing producers in the financing and production of films, I am naturally a big fan of state tax incentive programs. However, I also know that the best financial arrangements have to truly benefit all parties in order to be successful and sustainable.

In designing and implementing a film tax incentive program, I think states need to follow a few simple guidelines:

1. Before drafting the laws and regulations, states should consult with people who really understand how films are financed and produced. The regulations need to not only provide a list of acceptable expenditures, but also guidelines for a responsible production. The state should approach each film like a bond company or an investor, looking at the budget, schedule and personnel responsible for making the film.

2. The goals of the program need to be carefully considered and honored in the crafting and implementation of the program. There are obviously potential short term benefits in the form of additional tax revenue. But there are also potential long-term benefits from improvements in infrastructure, education and culture. The program architects need to consider how these goals will be reached, and how long it might take. Then, they need to make sure the program drives money and other resources in the right directions, and that they can sustain the program long enough to reach their goals.

3. Finally, they need to really do the math -- both at the front and the back of the process. It is important to quantify expected benefits and then measure results to assure that the expectations are occurring. Inevitably, there will be some discrepancies, but regulators shouldn't overreact. Instead, they should evaluate, adjust, and try a few possible strategies. Nothing is going to work perfectly from the first day. And who cares what kind of car the producer drives home if the state is truly getting the intended benefits?

The real lesson here is that building any industry is not an overnight process. If Iowa had instead decided that its future was in high tech, it would have needed to spend a lot of money to attract technology people and companies. Some of that money would probably be wasted and the program would probably need to be adjusted, and it would take several years before they could truly measure the program's success. It is really no different when building a film industry.

The folks in Iowa need to put aside their Midwestern sensibilities (and I say that with all due respect for those values). They need to stop being offended and start being pragmatic. If they are just looking for some fast tax revenue and to hang out with famous people for a few days, then I agree that they should stop wasting their time and money. But if they are looking to build something that truly benefits their citizens for years to come, then they should get the program back online -- perhaps going a bit slower and being more careful in their application process while they figure out what works and what doesn't.

Hollywood: Are Things Really That Bad?

Earlier this week, I was listening to my favorite business podcast - The Business, hosted by Kim Masters. Let me preface this by saying that I am not picking on TB or Kim. In fact, I am a huge fan of both. I think Kim is seriously one of the very best entertainment reporters I've seen, heard or read.

With that said, I have to complain about the negative tone of some of her recent reports. This week's show had a trio of wonderful, articulate writers talking about how terrible the business is and how bad it is out there for writers and how CBS doesn't buy as many pilots anymore and how big writers are competing for small jobs and on and on and on... I had to turn it off. And that's the first time I've ever turned off that podcast before the final sign-off.

And of course, this is not the only place that negative reports are showing up. They are everywhere. It seems that reporters can't wait to jump on the next indicator of doom and gloom in the entertainment business.

I'm not buying it. Maybe it's my Taoist bent, but I believe there is good and bad in every set of circumstances, and you need to report on both. And if you're in those circumstances, you need to be able to see it from both sides, and then chase positive results.

In the music business, starting several years ago, the shrinking power of the major labels and distributors also resulted in a wide range of artists and genres gaining a level of success that they could never achieve when the industry was controlled by a handful of companies. As any industry changes, the companies that are dominating under the old model will lose power. Kodak and Polaroid were dominant players when snapshots were shot on film. In the digital world, they struggle to compete. Xerox almost went out of business thinking it was selling copiers, while its competitors made great strides focusing on information and document management. A different spin on the same business; but it's your point of view that makes all the difference. There are countless other examples.

In film and television, as broadband delivery takes hold, Blockbuster struggles to compete in home video where it once dominated. The television networks struggle to get the attention of viewers they once had all to themselves. Studios struggle to make money as technology levels the playing field - first in production, then in marketing and soon in distribution. This is the nature of business. The cheese moves (another reference to one of my favorite business books).

But as the established players lose power, other new and nimble players gain opportunities. There are new independent distributors popping up. There are new marketing models. And to Kim's credit, she has been all over the Paranormal Activity story. (Who makes a movie for less than the cost of a nice motorcycle and gets it released by Paramount to the tune of $70,000+ per screen in its first week of limited release?!!) That story would not exist under the old model dominated by the big players.

Writers should stop lamenting and start writing. If you have talent, figure out where to put it to best use under the new rules. Good stories are good stories. Don't complain because you can't sell another one to the same guys who bought the last six -- just figure out where the money is going to come from for the next six. And the same goes for everyone who was making money under the old system and is now making less. You are creative people. Get creative in your business practices and figure out where the new opportunities are. People are still going to the movies. They are playing games and watching videos and amusing themselves in any number of ways. They want to be entertained. Entertain them.

Am I naive? Maybe. But I don't think anyone can see an opportunity that they don't believe exists. Yeah, maybe I'm naive, but I don't think I'm wrong. You tell me.

Current Trends in the Film Industry Create Both Challenges and Opportunities

In this article from Friday's Variety, Peter Bart and Michael Fleming paint a fairly negative picture of the current state of the Hollywood film business. In its subtitle, the article promises both the yin and the yang of the prevailing conditions, but by the end of the piece, it feels like a lot of yin and only a little yang. They don't really put much emphasis at all on the bright side of the picture.

That gloomy sentiment is echoed in this L.A. Times article from Ben Fritz and Claudia Eller. The focus of this coverage is Sony's decision to cut back on development and purchases, and how this is representative of a downward trend in a volatile industry. With the descriptions of upheaval in studio management positions, the implication is clear that this is a dark time for the film business.

I agree that we are in a challenging environment. DVD revenues are indeed falling and the studios are protecting their profits by cutting expenditures and hording cash. However, box office numbers are solid. Audiences are still looking for good films every weekend, and they don't necessarily need to see huge stars or big special effects.

This is the same weekend that Paranormal Activity managed to make over $7 million on about 200 screens. An amazing performance! This is a film that was originally shot for less than the cost of a studio executive's Prius. Paramount and the P.A. filmmakers are looking at huge profits as this picture rolls out to a wider release. The news is definitely not all bad.

The studio pullback is creating opportunities for alternative financing sources and new distribution companies. There are some very smart people entering the theatrical distribution business, and I don't think they are wrong. And I believe that Reliance, Imagenation and Barclays are not stupid for putting their money into the development of feature films (although @davidgeertz thinks I'm crazy for saying it and he might be right).

The Variety article makes the point that actors and writers are willing to work for lower wages, and we all know that there are a large number of attractive tax incentives available for productions of all sizes. This is a time when producers can make excellent films at a reasonable cost, and that is exactly what the market is demanding. The shrinking DVD market will eventually be replaced by revenue from PPV and other direct delivery systems. The decreased costs of digital theatrical distribution will eventually float down to the bottom line. The film business is changing, but it is actually improving in many respects.

This is a time when creative, entrepreneurial producers can make great strides. As is often the case, when the larger, more established players in an industry are pulling back, it leaves a hole for smaller, more nimble companies to gain market share. I honestly believe this is a time of great opportunity for independent filmmakers and distributors.

If you really think I'm wrong, tell me why. (@davidgeertz, that means you.) I invite and encourage other points of view on this.

Smart Money Chasing Proven Producers

An article in today's Variety gives details of recent deals where financial partners other than studios are backing development efforts of proven film producers. The top line relationship addressed is Barclays Bank's reported backing of Jerry Bruckheimer's development efforts with a $20 million credit line. The article also discusses yesterday's Imagenation Abu Dhabi deal with Walter Parkes and Laurie MacDonald, the Reliance arrangement with a slew of big-name actors and directors, and Arnold Kopelson's backing by a Texas fund. There is a definite trend here.

The economics are simple. Smart money wants to be in the film business. Box office numbers continue to soar, and the returns on a successful film can be enormous. I have always shared with clients and investors my belief that the risk/reward ratio for intelligent film financing is much better than for almost any other business. That doesn't mean it's the safest investment in the world but, in my experience, the potential returns more than justify the risk of loss.

If you want to put money in films, it makes sense to bet on proven track records. Studios' recent reluctance to back the development efforts of even the best producers is creating a great opportunity for other companies seeking a smart entree to the film business.

This is further evidence of the health of our industry and another reason that those of us who make our living in this business do so with growing enthusiasm.

Pros and Cons of the New Ortenberg Business Model

I had a great discussion today with Ted Kroeber regarding the new venture from Tom Ortenberg, One Way Out Media. The new company is slated to undertake a variety of functions in the independent film world, including financing, distribution and consulting. This of course takes advantage of Tom's vast experience and superior track record in the film industry.

On the positive side, I think Tom's business model shows a recognition of the many and varied needs of independent filmmakers. Tom sees that many projects are missing only one or two links in the "success chain" and he sees an opportunity to fill those gaps.

On the other hand, I see a couple of potential problems. First, to compete effectively it is often best to focus. Not only does this send a strong message to the marketplace, but it allows a company to concentrate on the things it does best. The second risk for One Way Out is that it could be perceived as a competitor by many of the companies with which it needs to have close relationships in order to succeed.

With that said, I believe that Tom can overcome those challenges and be successful in this venture, as he has been in his prior positions. However, I suspect that his business model will evolve over time and his focus will narrow once he finds the areas in which he is gaining the most traction and making the most money. We all are watching closely and wish him the best.

TV Widgets - A Revolution In Interactive Media

For those of us who watch the media landscape (and make our living in the entertainment business), the development of truly interactive television is an elusive landmark that has been slowly approaching for years. It has become almost a myth, with millions of dollars already lost because it failed to develop as quickly as many hoped it would.

In the past year or so, I have written fairly often on the development of the new generation of web-enabled TV's and the various deals being made between web-based companies and hardware manufacturers. It has been clear for some time that web-based media is finally heading for the living room big screen. This should be the key to real-time interaction between consumers and content providers. However, the actual mechanism for this interaction has not been clear -- at least not to me.

This article in yesterday's Hollywood Reporter gives a simple explanation of the missing link between consumers and big-screen web content -- it's widgets. With companies like Yahoo taking the lead, there is a quickly growing inventory of software widgets which will sit on the screen of web-connected televisions. These widgets will allow viewers to interact with the programming, or keep track of information unrelated to the programming, or engage in any variety of online activities without pausing the program or looking away from the television.

Up until now, a growing number of consumers have been simultaneously using their computers to access web content while they are watching their favorite programs on TV -- risking neck injury as they quickly look back and forth between the big screen and the small screen. This chiropractic dilemma will soon be solved as widgets will allow consumers to create custom web interfaces that sit in the corners or edges of their TV screens, allowing them to enhance or supplement their viewing experience in any number of ways.

From a business standpoint, the article outlines the cost of developing these software tools vs. the lack of a clear revenue stream. The revenue potential is obvious to me. This is the "buy" button that has been fighting for space on TV remote controls for years. Using the same payment system that powers pay-per-view (or pre-loaded secure credit card information or prepaid debit accounts or PayPal or any number of other methods), we will be able to order any product or service at the very moment it is being shown to us. We will be able to participate in game shows as the broadcast is unfolding. We will be able to engage in genuinely shared viewing experiences with friends on the other side of the room or the other side of the country. The possibilities are almost endless.

Read the article and then just think about it for 10 or 15 minutes and I bet you will have a half dozen great ideas for how this technology will be used. Those ideas are the basis of a huge business opportunity. Interactive television will be its own media category. Decades from now, these widgets will be looked upon as one of the developments that completely changed the media landscape. This has the potential to be as revolutionary as television or the Internet itself.