How to Have Greater Success in Independent Film in 2013

Conditions in the film business are changing.  Theaters are struggling as consumer habits are drastically shifting.  People still want to see movies, but they also want to play games and use Facebook and watch Youtube and engage in any other number of activities.  

The DVD market has also declined precipitously.  When they do watch films, many people are satisfied to watch them on their big screen TV, their iPad or even their phone, but they would rather not bother with discs.  Instead, they want direct access, either through pay-per-view or subscription models (or pirated online copies, but that’s a different topic for another day).  The revenue from these new home distribution models has not replaced the lost DVD revenue

In looking at these changes, where are the opportunities?  The answers are in audience demographics and a focus on profitability rather than top line revenue.  When you look at many of the most profitable films of the last year, you see a fairly narrow target audience, modest production costs, innovative marketing and strong international appeal. 

Some examples:

1.                  The Best Exotic Marigold Hotel.  This is a film made for $10 million dollars that grossed over $134 million worldwide.  It was aimed at an older audience and marketed in very cost-effective means (including a commercial tie-in with Starbucks).  In terms of profitability, it was a rousing success, playing for 25 weeks without ever breaking the top 5 and having no appeal to the “prime” movie-going audience of teens and young adults. 

2.                  Magic Mike.  This film was made for only $7 million and grossed over $167 million worldwide.  In terms of profitability, this is a gross that is almost 24 times the production cost.  That is a huge number.  And again, it was done without a massive marketing budget.  It essentially sold bare male chests to women and gay men – targeting audiences who are perhaps underserved in the way that this film entertained them.

3.                  Paranormal Activity 4.  Of course, the horror genre is always a good bet to deliver a profit.  This franchise sequel was made for only $5 million (wisely resisting the temptation to grossly inflate the budgets of sequels in a successful franchise).  The picture grossed over $140 million worldwide.  That’s over 28 times its production budget.  It did this with a narrowly targeted audience, modest marketing and strong foreign, all resulting in a huge profit – see the pattern?

4.                  The Devil Inside.  This film made over $101 million on a $1 million production.  That’s 100 times the budget – clearly an anomaly, but no studio picture has any possibility to make that kind of return on a percentage basis.

All of these numbers don’t even consider the subsequent revenue from domestic pay-per-view and other home distribution. 

Here’s the point:  The key to long term success in the film business is to carefully control risk so that losses are manageable, and simultaneously maintain the possibility of substantial returns.  If you can effectively do this, financial success over time is extremely likely.

In summary, follow these rules:

1.                  Target Specific Audiences.  From its inception, each film should be squarely aimed at a clearly identifiable group of people.  This vision should never waiver, and every production element and marketing campaign should be designed and evaluated with this audience in mind.

2.                  Control Production Costs.  This is another advantage of technological advances – production value is less expensive than it used to be.  The money can be concentrated on elements that are truly attractive to the target audience.

3.                  Appeal To The World.  While it is possible to make profit selling only to domestic audiences, it is much smarter to create films that the entire world can enjoy.  International box office is often as much as 2/3 of the revenue for successful films.  There is no reason to leave this money on the table.  

4.                  Market Intelligently.  When you market to a specific audience, you should be able to control marketing costs and still get the message out to your audience.  And don’t ignore the power of commercial tie-ins as a part of your marketing effort.

If these precepts are diligently followed, and you make good films, then losses will be controlled and profit potential will be maximized.  That’s the road to success.  Best wishes to everyone for a successful 2013.

Microsoft Hires Nancy Tellem: Why This Is Important

This week, Microsoft hired veteran television executive, Nancy Tellem, to head the company's new entertainment division.  The new division will be based in Los Angeles (where Tellem lives), rather than in Redmond, Washington where the main Microsoft headquarters is located.  When I posted this news on Twitter and Facebook a couple days ago, my buddy Mike Duffin asked me to explain why I thought this was important. So, this is why.

At its core, Microsoft is a software company.  It gained ubiquity and riches by commandeering the controls of virtually every PC in the world.  But that battle was over decades ago.  The real question since then has been "What should Microsoft do with its huge footprint and bank account?  Where does it go from here?"

The company has dabbled in hardware, sometimes with success and sometimes not, but hardware is a very low margin business.  It takes constant research and development, as well as constant design upgrades, and at the end of the day, the profit margins are generally tiny.  And other than Apple, it is difficult for a company to develop real brand loyalty around hardware.  Consumers like their latest gadget until a better one comes along.

Consumers are generally more interested in using gadgets than in just owning them.  That means that consumers ultimately respond primarily to the content and experience that their hardware and software deliver.  They like to watch programs and play games and use apps.

And not only are consumers more loyal to content than to hardware, but the per unit profit margin on content is much, much higher and it has a shelf life that keeps it earning money for decades.  It simply makes economic sense to move towards the content business.

So, why does Microsoft need a veteran entertainment exec like Nancy Tellem?  A couple of the biggest reasons:

1.  They recognize that if they want to develop a loyal audience, they need content that consumers actually like.  They ultimately can only develop and keep their audience engaged by delivering superior  entertainment.  Nancy Tellem is an experienced programming and development executive.  She knows how to create superior content.

2.  The entertainment business is very particular in its culture, and different from the technology business. Nancy Tellem is not only the ultimate insider, she is a major player who garners instant respect and stature for Microsoft.  Everyone in Hollywood takes her call and listens to what she says.  Microsoft needs that kind of power to break into an otherwise insular industry.

With all of that said, there is no guarantee that this will work.  It might be that Microsoft will not be welcomed into Hollywood.  But if anyone can help Microsoft succeed in entertainment, Nancy Tellem may very well be the one.  It will be interesting to see what happens.   

In The Age of Social Media, Quality Prevails Over Marketing

In the pre-Internet entertainment business, access to the public was everything.  There were a handful of gatekeepers who decided what songs people would hear and which movies they would see.  If you couldn't get your project through one of those doors, it was unlikely anyone beyond your friends and family would ever experience your art.

Today, not only is it possible to get your music and films in front of millions of people, but the public is actually determining which artistic endeavors succeed.  As a result, quality is beginning to prevail over marketing clout.

It used to be that a mass marketing campaign could keep a bad film in theaters for weeks, and millions of uninformed viewers would continue to show up.  Critics were mostly perceived as arrogant semi-insiders and no one really paid much attention to their opinions, if they read them at all. Even if Roger Ebert hated a movie, you would probably still go see it if the trailer looked good.  (In fact, you might go out of your way to see it if you generally disagreed with Roger Ebert's opinions.)

Today, there is instant feedback from thousands - even millions - of people within hours of a film's release.  These are people like you, including your friends.  Their opinions are freely given and presumably unbiased.  They have inherent credibility and if they don't like the film, you probably won't either.  As a result, the public response can now kill a film within hours, so film makers are more pressed than ever to make films that people will actually like.

It's not that film makers never cared about quality before, but "good enough" used to be a workable standard.  Now, more often than not, it actually has to be "good" in order to be successful.  And "good" is determined by the actual audience rather than a handful of elite insiders.

Does this mean that marketing is no longer important?  Hardly.  It is more important than ever.  In an environment where the choices are essentially infinite, good marketing is the only way to rise above the din.  But once your marketing gets the attention of an audience, your product better deliver or it will a die a swift commercial death.

THX has a famous slogan, "The Audience Is Listening."  Well now the audience isn't only listening; they're talking too.  To each other.  And if they decide they don't like your movie, everyone they know is going to find out really fast.

I think that's a good thing.  It makes all of us in the industry pay more attention to what our audience really wants, and that's good business.

Antitrust and the Cable Industry

I was recently contacted for an article for TechNewsWorld on the Justice Department's apparent antitrust investigation of the cable industry.  Below is the full text of the comments I sent to the reporter,  Erika Morphy.

It's a really good article and an interesting issue.  Take a couple minutes and give it a read.

My comments to Erika on the DOJ investigation:

This arises primarily as a result of the dual role played by cable companies in many households.  Not only does the cable company provide access to televised programming, but in many households, the cable company also provides the high-speed internet service.  In fact, I believe many cable companies provide financial incentives to encourage consumers to “bundle” those services together.  Technically, the programming and the Internet access are carried over separate networks within the cable company, but both services come into the home over the same cable and are billed on the same bill.

 In general, the U.S. legal system attempts to protect consumers from price-gouging by creating competitive markets (as opposed to imposing price controls).  The basic goal of antitrust law is to assure that there is legitimate business competition in every market which creates choices for consumers and thus (theoretically) keeps prices in check as a result of economic pressure (i.e., competing companies must keep their prices competitive or consumers will choose a cheaper alternative).  The Department of Justice is charged with the task of enforcing federal antitrust statutes and maintaining these competitive market environments.  This means that they investigate situations where competition is being artificially suppressed by a company’s ability to dominate a particular market sector.

In the case of the cable companies, consumers are increasingly seeing Internet-based streaming as an alternative to cable and television programming.  Consumers use Netflix, Hulu, Amazon and other streaming services as a means of viewing films and previously-aired television programs.  Presumably, this takes viewers away from the cable programming, including the cable companies’ own pay-per-view services and premium channels.

At the same time that this is occurring, cable companies are seeing massive increases in the amount of data that their Internet networks are being required to carry (with the increased use of the streaming services being a substantial part of this increased data traffic).  This results in increased costs for the cable company as it must provide additional bandwidth in order to maintain acceptable levels of performance for its customers.  In order to control this burden and/or shift the cost of this increased traffic to the responsible parties, cable companies have implemented caps on the amount of Internet data that consumers can transfer in any given month.  If a household goes over this amount, then there is either an extra charge or the speed of service to that household is reduced for the remainder of that period.  This reduced level of service causes delays in video streaming, making it difficult or impossible to watch programming from any of the Internet based providers (Netflix, Hulu, etc.). 

It is important to note that these data caps do not apply to the cable company’s own private network which carries the cable programming, cable company pay-per-view and other proprietary programming from which the cable company makes additional revenue (e.g., Comcast’s Xfinity).  Thus, the data caps on the Internet side of the cable companies’ business could have the effect of making the cable companies’ own programming a more attractive alternative, or in some cases, perhaps even the only alternative.  If consumers know that watching too much Netflix or Hulu could cause them to lose their Internet service at some point in the month, they will naturally limit their use of those services.  This makes those services less attractive and/or valuable to the consumers, and it pushes the consumers toward the cable companies’ own programming as the only practical alternative.  While the cable companies, of course, claim that there is no anti-competitive intent in their actions, there would appear to be a significant chance of an anti-competitive effect.  If that is the case, then the policy of capping Internet data capacity could very well be a violation of federal antitrust law. 

This can be summed up as cable companies using their unilateral control of digital data access in many households to create circumstances which give the cable companies’ own programming an unfair technical advantage over Internet-based competitors.  This technical advantage is being converted to an economic advantage as it creates a disincentive for consumers to use the alternative programming sources.  It also could allow cable companies to charge higher prices and still maintain their market share.  That is bad for consumers, who generally rely on market factors to assure that they are paying the best prices for their goods and services.