This Is The Year The Indie Film Business Starts To Come Back

I was going to title this post with a question - asking if this is the year the indy film business starts to climb out of its doldrums.  But in truth, I am writing about it because I think there is no question.  This is indeed the turn around year.  Here's why I feel so optimistic:

Obviously, the volume of sales at Sundance was a big positive.  Since 2008, Sundance sales had been in the dumps, falling to only 10 sales in 2010.  This year the number was almost 4 times that amount.  Both of the 2011 Sundance films that I worked on sold to great distributors in very favorable transactions.  I found that personally encouraging, but that's not what sparks my optimism.  It is the overall willingness of a number of different distributors to risk their dollars on a variety of films.  This is a broad showing of confidence from smart people with their hand on the pulse of the industry.  That means a lot.

Another positive factor is the tipping point in the evolutionary metamorphosis of the home video market.  The grieving over the death of DVD's seems to be subsiding, with the rise of Netflix, Hulu, CinemaNow, Amazon, iTunes, Vudu and other streaming services helping to dull the pain.  While the revenue from these services has not filled the hole left by the collapse of the DVD market, there is now a clear path to profit.  In fact, once the market penetration of streaming rises a bit further, it will be a much more profitable model for delivering films to consumers' living rooms. 

The other part of the home market that is perhaps even more exciting is mobile distribution.  There were 80 different tablet media devices exhibited at the Consumer Electronics Show this past month.  There will be millions and millions of these devices in consumers' hands this year, and the numbers will continue to rise dramatically for years to come.  This is a new market for films that has never really existed.  Certainly some consumers were using portable DVD players, but that was all part of the DVD market.  Tablets facilitate distribution in a way that should greatly expand the amount of mobile viewing.  And it facilitates support from sponsors and advertisers in a way that DVD players could not provide.  This has to result in an economic boost.

And none of this is at the expense of the theatrical business.  Theaters are doing well; consumers continue to enjoy the theatrical experience and average ticket prices are inching up.  (A lot of that is the result of 3D and bigger studio films, but the indie business still benefits as audiences show up at the multiplex and a certain number of them will choose to see smaller, critically acclaimed films.)

Clearly, the revenue picture for the film business is stabilizing and actually looking pretty favorable in terms of future growth.  That is the factor that will bring investors back into the game, raise the minimum guarantees, bring lenders back to the table and generally free up some financing to start making more movies.

There are two possible negatives.  One is a potential decline in state incentives.  States are very tight on money and it is possible that a significant number will pull back or even eliminate their production incentive programs.   If that happens, the money will be difficult to replace.

The other challenge is that budgets have been squeezed pretty hard.  The films I'm working on have much lower budgets than five years ago.  While better technology has created production efficiencies that take up part of the slack, there are still limits on how ambitious most independent productions can be.  This means that certain films will still be difficult to make.

With all of that said, I remain confident that we will begin to see an improving environment for independent film production.  It won't be a meteoric rise in activity, but it should definitely start heading the right direction.  So dust off some of those scripts that you abandoned a couple years ago.  It might be time to take another shot at getting them made.

Movie Futures Market Approved, But It's An Empty Victory

The CFTC has approved Cantor Exchange to trade futures based on film box office performance.  Earlier in the month, the CFTC had approved a similar program to be operated by Media Derivatives.  All of this would appear to be a big "green light" for the trading of film futures. But...

Unfortunately for Cantor and MD, the House of Representatives included a ban on these trades as a part of the economic bill passed last Friday.  This ban is likely to remain a part of that law when it comes out of Congress, and the President has indicated he will sign it.  So, this is a hollow and temporary victory for Cantor and MD.

It may very well be that Wayne Friedman of MediaPost is right when he says it's about access to information. (I made a similar point in a post back in April.) The culture of Hollywood is all about spin, and that means tight controls on what information leaks into the public.  The culture of securities is supposed to be about access to information.  Investors are supposed to have as much information as insiders in order to make their trading decisions.

There's a big cultural clash between those two positions -- control vs. access.  It is actually a common theme in the media and entertainment business. (And technology too -- look how crazy Apple went when the iPhone 4 leaked.)  Hollywood seems to have won this round.  Congress trumps the CFTC, so there is unlikely to be any trading based on box office numbers.  Too bad.  I still think it would have been fun.

Cantor says that it is still committed to providing tools for the entertainment business to use in connection with financial transactions.  I will be interested to see what they come up with next (and what the studios do in response).

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.

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.