Now Is The Time To Create Quality Programming

An exciting trend is quickly developing in the entertainment business.  We are at the beginning of a new period of opportunity for creators of quality films and programming.

It seemed for the past several years, the quality of content was of marginal concern.  Certainly many good films and programs were getting made, but the business and technical aspects of the industry seemed to be more important.  As new companies used the Internet to create new doors into the business, the talk was about superior technology and innovative delivery and pricing strategies and convergence and brand integration and HD and 3D, and on and on.  Everyone still recognized the need for good content, but it wasn't viewed as a key differentiator between the various competitors.

While many of those "new media" conversations are still taking place, something else interesting has happened in the past couple of weeks.  Consider these developments:

As Amazon and Facebook joined Hulu, Vudu and others in attacking Netflix' growing dominance in home video, Netflix saw the writing on the wall.  Prices for existing films in the 3rd or 4th window will inevitably increase.  (That's certainly what the studios are planning.)  As a result, the quality of the Netflix streaming catalog would become more expensive to maintain, and consumers wouldn't care as much.  With more streaming options available, and the collective film library spread across so many companies, consumers would probably just start looking for the best deal.  That means Netflix would be spending more and making less while trying to hang on to its customers.  Not a pretty picture.

In response, Netflix recognized what HBO had seen years before.  The way to differentiate in a competitive market is to have something that no one else can offer.  That means original, exclusive, appealing programming.  So, last week Netflix made the House of Cards deal which will give it exclusive first window rights on the David Fincher/Kevin Spacey collaboration.  If anyone wants to see that program (and a lot of people will), they will have to subscribe to Netflix.  That's a competitive advantage that's based on quality, not price. A much better place to be.

Hulu figured out the same thing, and it has already started airing original programs of its own.

And Reelzchannel got the memo too.  When the controversial "The Kennedys" program was dropped by History Channel, Reelz recognized the opportunity.  By grabbing that show and advertising it, Reelz has already expanded into millions of more households and gained millions of viewers, and The Kennedys program doesn't even begin airing until April.

All of a sudden, as the playing field is leveling and the competition is fierce, quality original programming has become the key strategy of choice.

Of course, this is not a totally new concept.  As I mentioned, HBO has successfully pursued that strategy in the cable business for years.  And the prime time network TV business is still largely based on offering attractive original programming.  In fact, FX, TNT and other second-tier networks have been firmly rooted in the original programming business for several years. But now, with the key digital programming consolidators also adopting that approach, there is a vigorously growing market for quality productions.

In addition, sales at Sundance were the best in years, and even Berlin saw a lot of deals being made.  This resurgence in independent film is further supported by the recent formation of the Open Road distribution venture between AMC and Regal.  Apparently theaters also want to protect their businesses by gaining control over original programming.  Controlling the first window of a quality production appears to be the primary strategy across much of the entertainment business right now.

Obviously, this is good news for the creative community.  The bell has sounded, my friends.  Start creating.  There is a growing sellers' market, and that means that financing will not be far behind.  I am certain investors and lenders will be happy to back MG's from Netflix or Hulu or Open Road or even Reelzchannel.  And these are perhaps just the tip of the iceberg.  There will be more players entering the market for quality content.  In fact, I can't imagine that Walmart/Vudu is not already planning to control exclusive content which can drive sales through its streaming channel as well as its retail business, including related merchandise.  They are uniquely positioned to pursue such a strategy and they are too smart not to recognize the opportunity.

If you have a project to sell, now would be a good time to think about producing it.  This sellers' market for content will not last forever.  All of these companies need to spend money now in order to grab market share.  But when the dust clears, there will be consolidations, mergers and probably a closure or two.  Programming will remain important, but the number of buyers will once again shrink.  The market for programming will cool off a bit and the buyers will put their wallets back in their pockets.  So strike now while these companies need to spend money in order to compete.

The opportunity to create is right now.  I don't know how to say it more clearly than that.

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.

Is Netflix The Next HBO?

At a Liberty Media investor event yesterday, Liberty Chairman, John Malone, drew a comparison between Netflix and HBO.  He was discussing the relationship between his Starz unit and Netflix, and seemed to be acknowledging the amount of power that Netflix is gaining as home video moves online.

It's an interesting question - Is Netflix the next HBO?  What are the similarities, and does it make sense for Netflix to follow a similar strategy?

HBO was an early entrant into the pay cable segment -- a pioneer really.  It originally focused on sports programming, but gained power as one of a handful of premium cable movie channels.  However, HBO was positioned as more of a network than a cable system.  It created several channels with different themes, and made an early move to develop original programming.  The focus at HBO was always on content as its management recognized the value of owning intellectual property.

Arguably, the master stroke was developing dramatic series which took advantage of the commercial-free, less restrictive environment of pay cable.  First with OZ and then with The Sopranos, HBO was able to attract loyal audiences looking for edgier entertainment.  Its original series have allowed it to become a brand that stands for a certain type and quality of programming.

Today, Netflix is gaining substantial market share as an outlet for a wide variety of films.  It started as a more convenient way to get DVD's, with a huge selection and fast service, but Netflix management quickly saw the possibilities in  becoming a streaming service, looking to deliver films in overnight downloads as early as 2006.  It has since become a leader in streaming films directly to televisions, with its major competition right now being the PPV films offered by cable systems, but with many other formidable competitors on the horizon.

The question is whether Netflix will use its market reach to develop its own original programming and expand its brand, as HBO did in the 1990's.  Actually, in 2006, Netflix started the Red Envelope Entertainment division, first for providing distribution to original independent films, and then as a platform for developing its own programming.  However, that division was closed in 2008 -- ostensibly because Netflix did not want to compete with its studio partners.

My thought is that the vision was right on target, but perhaps just slightly premature.  Netflix currently has about 15 million subscribers.  HBO now has over 41 million.  So, Netflix still doesn't control nearly as many eyeballs as HBO, but it does command enough market share that it can't be ignored.  If the Netflix numbers continue to rise (in the face of stiff competition from Apple, Amazon, Walmart and others, including HBO), then studios won't be able to dictate the deal terms.  And if Netflix can use original programming to attract even more subscribers, then the studios will have to continue to supply films as the cost of not being available through Netflix would just be too great.

Eyeballs equal power in the media business.  It's always been true and nothing has changed in that regard.  If Netflix can dominate the streaming business and expand its market reach, then you can bet that it will be back in the original content business.  (Pete Putman at HDTV Magazine reached a similar conclusion in a recent article.)

I have always liked Netflix' prospects.  I think they do a lot of things very well, and make very few mistakes. Their primary risk at this point is that increased competition will put pressure on prices and their margins will suffer.  That would be bad in the short run, but if they can continue to expand their volume, the original programming opportunity will remain viable.

I'm interested to see what happens next.  These are very exciting times in the media business, my friends.  Stay tuned.

Do You Need Permission to Make a Movie About Real People? Ask Mark Zuckerberg and Joe Francis.

Clients often ask me about obtaining "life rights" in connection with films based on real events.  Most clients are under the impression that they can't make a film about real people without getting permission.  Not true.

Here's a great example -- the upcoming film, Social Network.  This article in The Hollywood Reporter describes apparent negotiations between producer Scott Rudin and executives at Facebook in connection with some of the depictions in the film.  The article makes clear that the film is not precisely accurate in its depiction of the story, nor is it intended to be.  Further, the last paragraph of the article specifically describes that life rights of Mark Zuckerberg and other key players were not obtained, and why it was not necessary.

While Rudin might be making a few minor accommodations, the truth is that film makers (and other creators of media) have the right to tell stories based on real people.  And they can even bend the facts a bit so long as they do it carefully, and clearly disclose that certain events did not actually occur.

Joe Francis

Contrast this with the story about Joe Francis threatening to sue Jerry O'Connell and the makers of Piranha 3D for disclosing Francis as the basis for the unsavory character played by O'Connell in the film. Clearly, Joe has no legal right or ability to stop the film.  However, the implication that the character is based on Joe when there is no underlying factual basis for that connection may indeed cross the line into defamation.  (It's probably not a strong case, but it certainly warranted the letter from Joe's attorney, Larry Stein.)  Thus, Jerry was clearly instructed to be more careful in how he used Joe's name in interviews about the film.

The bottom line is that the First Amendment does provide a lot of protection for film makers and creators of other media.  However, if you aren't getting permission from the people in your story, then you need to really understand the limits of that freedom and what actions cross the line into a lawsuit for defamation.

Don't give up on making your film or writing your book just because you can't get permission.  Be bold, be creative -- but also be smart and get some advice if you want to stay out of court.

How China Will Change The Film Business

Reading this article in The Hollywood Reporter, I had a somewhat shocking realization.  As the market for film (and everything else) becomes truly global, there is no escaping the impact of other cultures on the content that is created in this country.

The article focuses on the Chinese government's resistance to creating a rating system for film.  The Chinese system is black and white -- either a film is appropriate for Chinese citizens or it is not going to be seen by anyone in China. Period.

Place this in the context of China having just surpassed Japan as the world's second largest economy, and China's #2 spot in revenues for the film, Avatar.  The implications are clear -- if you don't make a film that is going to pass muster with the Chinese government, then you are giving up your #2 market and a whole lot of potential revenue.

This may not matter to a lot of smaller films (although nobody wants to give up significant revenue potential), but on a more expensive film it can mean the difference between red ink and profits.  That means that studios and producers of larger pictures, whether they like it or not, need to look at a film through the eyes of Chinese censors.  They need to make a conscious decision whether they will forgo that market (and substantial revenue) in order to make controversial or edgy content.

So, while we have more freedom and choice than citizens of China, the views of the Chinese government are ultimately going to influence what we see and hear in our own country.  And as the Chinese market continues to grow, that influence will increase. Through the power of economics, their culture impacts our culture.

Interesting how that works, isn't it?

Reports Of The Death of 3D Are Premature

There was a very good article a few days ago in The Wrap about the downward trend in 3D box office revenues. (By the way, The Wrap is a favorite publication of mine on the entertainment business.  If you don't read it, you should.)  While the author (Daniel Frankel) gives fair coverage to the topic, I think the article misses the big picture.

An underlying assumption seems to be that tracking 3D statistics independent of all other factors is meaningful.  I'm not sure that's true.

While 3D versions of films currently command a higher ticket price, it is not a separate genre of entertainment.  3D is a production technique, just like Dolby or DTS sound, IMAX, or any number of past innovations like 70mm film or Panavision lenses.  3D is certainly a more dramatic departure than many innovations, but it isn't anything separate and apart from the underlying film.

Films attract audiences because of a combination of good stories, good acting, good editing, and all of the other factors that go into making a captivating entertainment experience.  Put a bad film in 3D, and it is still bad (if not worse because the shortcomings are literally jumping off the screen at you).

The assumption that audiences will go see anything just because it's in 3D has never been true.  The current numbers are bearing that out.  Bad 3D films are performing badly, and good 3D films are performing well.  This is not a surprise to anyone.

3D is another wonderful tool in the bag of filmmakers.  When it is used well on a good film, it will enhance the quality of the film and probably produce increased revenues.  When it is used poorly and/or the underlying film is not well-made, then the use of 3D just means they spent more money to make a bad movie.  It won't do anything to increase the audience for the picture.

So the overall decrease in 3D revenues results not from a fading of the attractiveness of the technology, but from the broader use of the technology across a wide spectrum of films -- many of them being pretty bad films.  That pulls down the average, but it has nothing to do with 3D.

Hot Topic: Digital Media's Impact on Film & TV

There are interesting developments this week in the intersection between digital media and the more traditional media of film and television. These events raise the question once again of whether digital media will have a positive, negative or neutral impact on traditional media.

On the negative side, Voltage Pictures filed its lawsuit this week against all persons who have infringed its copyright by selling pirated copies of The Hurt Locker.  The lawsuit is the first step needed for Voltage to attempt to find the identities of the alleged pirates.  This will lead to settlements and perhaps a few trials, but the philosophy is certainly designed as much to deter piracy as to collect damages.  Clearly, the underlying assumption is that digital media facilitates piracy and that this is a dangerous trend that must be stopped at any cost.

It is much the same strategy the RIAA has used for years in the recorded music industry, with varying success.  There would be some argument as to whether the cost actually justifies the benefits.  There still seems to be plenty of unlawful sharing of music files going on.  And iTunes has probably done more to curtail that problem than the RIAA's legal actions.

On the other end of the spectrum, Time Warner chairman and CEO, Jeff Bewkes, this week told investors that he views digital media as a positive factor in the media business.  He emphasized that film, television and magazines are not the same as the music business, and are not impacted by piracy in the same way.

Of course, Bewkes' message needs to be considered in proper context.  He was talking to investors.  He is likely attempting to allay their concerns so that they will keep investing in TW stock.  However, I don't think there is anything misleading in what he is saying.  I believe Bewkes and his team view TW as a broadbased media company, and digital media is a part of that business.  He is making a point of not getting mired in any particular business model or medium and I applaud that approach.  This is a guy who is moving his cheese before someone else moves it for him.  (If you don't recognize that reference, look here.)

So, who is right?  As data pipelines expand and it becomes easy to move entire full-screen films between computers, do producers and distributors need to call in armies of lawyers to fight the pirates?  Or does film and television content have inherent value for which consumers are happy to pay?

I think it comes down to value and user interface.  iTunes moves a lot of music because it works well and the price is right (kind of -- they would sell a lot more at 25 cents than 99 cents, but that wouldn't satisfy all of the stakeholders in the content).  I think the same economic theory applies to film and TV content.  If consumers can get it easily at a price that doesn't inflict too much pain, the vast majority will continue to pay.  Netflix and its competitors might be the iTunes for the film business.  Actually, iTunes might be the iTunes for the film business if its interface with the living room television works well and penetrates the market.

Bottom line - the entertainment business continues to change and those of us who make our living in it must use the new tools to give consumers an experience that they value at a price that makes sense.  Quality plus Value equals Profit.  That's the only formula for success that always works.

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.

Digital Cinema Funding Comes Out Of A Coma

This week's big news on the business side of the film industry has to be JP Morgan's announcement of its return to the digital cinema funding business. The Wall Street survivor announced a $525M fund that is targeted to roll out about 500 new digital screens per month, almost doubling the North American penetration by the end of 2010 to as many as 13,000 screens. The fund will ultimately underwrite up to 15,000 conversions, and will also support 3D equipment in many of the new locations.

If you have followed this story for the past few years, you know that there was over a billion dollars of funding headed for the digital and 3D theater markets when the economy collapsed last year. A lot of studios had already launched their 3D plans in anticipation of the new screens, but then the funding evaporated (with the rest of the lending market). This slowed the D-Cinema roll out to a crawl and left the studios fighting for domestic screens on which to release the 3D projects they already had in production.

This announcement by JP Morgan is good news on many levels. First, it means that the theaters will not be hamstrung in their quest to offer the ultimate 3D experience in a theatrical environment. With Sony and other consumer electronics makers rushing the development of 3D home theaters, it is critical for theater chains to go as fast as possible to capitalize on that market before it gets diluted.

Second, this means that studios will be able to keep their 3D films in theaters longer, thus making more money. That means that development of additional 3D productions should pick up.

Third, the development of more digital screens means that the ultimate cost of theatrical distribution should trend downward. (With the payment of virtual print fees, this won't be immediately apparent, but it will still happen.) That means that more films will theoretically have the financial strength to reach big screens. Of course, a lot of other factors have an impact on small film distribution, but independent distributors (such as the new venture from Rich Wolff and Richard Ross) should benefit.

Finally, participants in the 3D business such as In-Three and, most obviously, Real D, will enjoy the benefits of a market that will expand much faster than it has to date.

This is good news all the way around. And perhaps most important, for the entertainment industry, this is a strong sign that the economic climate is indeed moving in a more positive direction.