The Perfect Marriage: Documentaries and Non-Profits

Last Tuesday, when the lights rose, vigorous applause heralded a milestone for our documentary A Plastic Ocean – because this was a milestone audience. We were screening at the United Nations, for more than 600 delegates, policy-makers, and engaged activists.

The film, which launched in January, and hit Netflix in April, was invited to the UN to engender discussion, and as an example of the social impact of documentaries. It is an example not just of social impact, but also of the impact non-profit organizations can have on documentary filmmaking and, in turn, the value documentaries can bring to non-profits. Because A Plastic Ocean is the product of documentary – non-profit/NGO marriage.

Value

As someone who has been in the film industry for three decades, I am critically aware that the greatest obstacle to getting a movie made is not getting the money. It is having enough value. If a potential film project can demonstrate that it has sufficient value, money rushes to it like a river coursing toward the sea.

In conventional, scripted movies, value is measured along a single vector, the vector of profit. If you are an investor, whether a studio or a high-net-worth individual, you want to know if you will get your money back and then some. You look at models and comparatives, run spreadsheets with sensitivity analyses. You realize you’re taking a risk, so you try to find downside protection while retaining your upside.

More Value

With certain documentaries, however, value can be measured differently: in terms of social impact instead of financial profit. As a producer, I am always straight with financiers about their potential for financial returns. I can’t look a documentary investor in the eye and say, “You’ll get your money back,” unless we’re in the rare situation where we have a pre-sale and distribution guaranteed.

But I can tell a non-profit organization that it could be the best money they spend. Because a documentary, unique among communications media, can spread a story, share a message, and motivate social impact.

What’s a Doc?

In this framework, I am talking about feature documentaries – fully-produced films with running times of 70-100 minutes. I am not talking about little video segments or other kinds of media.

There’s something special about a feature documentary. A feature-length running time allows narrative to unfold with grace and finesse, opens a set of characters to the audience, and offers sufficient time to go into details. It’s a truism that we don’t remember facts, we remember stories. The greater truth is that we remember facts when they are conveyed to us through storytelling.

That’s what a feature doc can do. It is long enough for an audience to get involved, and it does take some commitment, some setting-aside of time to experience it fully. Therefore, while feature documentaries are only rarely mass-market entertainment, they are profound opportunities for core audience connection.

Why Non-Profits?

Non-profits face a continuing challenge: making people care. If you’re running a non-profit organization, you need to keep your current constituents while also expanding your base.

But non-profits have a significant business advantage over other entities that may finance movies: non-profits don’t have to post quarterly profits or keep their shareholders happy. Many of them define success as sharing their message by engaging people in greater numbers and with greater depth.

Freed from the constraint of the financial profit-motive, non-profits are well-positioned to become the perfect financiers for social impact documentaries, because docs can provide exceptional social impact returns. For the same money as a few “opinion maker” TV commercials on CNN, MSNBC, or Fox News – commercials that most people will miss because they’re going to the bathroom or fast-forwarding – a non-profit can make, market, and distribute captivating documentary that can reach more people and will live for a long time.

As an example, A Plastic Ocean is now being seen worldwide, and has been screened for national legislatures, city councils, and environmental organizations. It is inciting policy change and social change. The film was financed primarily by three non-profit foundations (Plastic Oceans Foundation, Adessium Foundation, and Hemera Foundation), and our funders could not more pleased with the social impact value and return-on-investment.

The Model

To be clear: the model I’m describing is not for small, cash-strapped non-profits. It is viable for larger non-profits and NGOs, organizations that have a sound financial base and scale. It is also viable for collaborative partnerships among like-minded non-profits that, by working together, can achieve common goals.

To put some numbers around this, it costs $500,000 a few million dollars to make a feature documentary (the wide variation in cost is a factor of the scale and complexity of the film), and another $100,000 – $500,000 to market and distribute it. That’s the price of admission when seeking to put a large social impact issue onto the national or international agenda.

It’s a price many larger non-profits and NGOs are paying already but, I would argue, paying for media that will not be as compelling, enduring, emotional, or inciting-to-action as a strong feature doc. In the social impact arena, when the right non-profits/NGOs place their resources in the right documentary, it can truly be the perfect – and most cost-effective – marriage.

Park City Climate: Sundance Infographic 2017, Million $ Piracy Losses, Distribution Changes, and Slamdance Stats

Originally published in Cultural Weekly on January 18, 2017.

Park City has a change in the weather this year. For the first time in along time there will be snow, and, as if to counter deniers, Sundance has programmed a special section on climate change films. The festival will also be marked by social actions directed toward President Trump’s inauguration. As always, though, the action in the cinemas, events, parties, gifting suites, crowded restaurants, five-to-a-room-and-sleeping-on-couches rentals, and late-night negotiation sessions will not all be political.

Using Sundance data as a bellwether for the independent film industry, ground-truthed through interviews with producers, distributors, and sales agents, and, this year, also adding some data from the Slamdance Film Festival, which runs concurrent with Sundance’s opening weekend, here is our weather report on the independent film business. (Scroll to see the infographics at the bottom of this article.)

CLICK HERE TO SEE ANIMATED SUNDANCE 2017 INFOGRAPHIC
(please allow a few moments for it to load)

$2.3 billion

Annual spending on independent films has remained fairly constant at $2.3 billion. This is because the number of submissions to Sundance seems to have plateaued. Our estimates of average budget levels are based on discussions with indie movie producers and sales agents. These estimates, too have remained constant since last year.

Piracy is worse than expected

The cost of piracy for independent films is significant. Working with Tecxipio, we are publishing the actual number of torrent illegal downloads for 14 films from Sundance 2015 and 2016.

To understand why our piracy numbers are probably low, I need to get geeky about piracy. There are two kinds of illegal downloads: torrents and streams. Torrents are able to be monitored and quantified; that’s what Texcipio does. Streaming illegal downloads, which in some cases comprise more than half of all pirated downloads of a film, cannot yet be reliably quantified. We are therefore only publishing torrent data.

In making our calculations for the amount of revenue piracy costs each film, we are assuming that only 5% of the people who did an illegal download would have actually purchased the movie, and that their purchase price would have been $3.

Our 5% figure could be a *very* conservative number relative to how much pirated downloads actually cannibalize sales. For example, peer-reviewed academic studies of sales displacement tell us that the rate of piracy displacement is in the range of 14% to 20% at the lower end, up to 100% on the higher end. To be conservative, let’s go with 5%; but I really think the lost revenue is much, much worse.

It’s interesting to compare pirate download numbers for 2015 Sundance films over a full year. For example, Brooklyn had an additional 4.3 million illegal torrent downloads in the past year. Nor are movies for older demographics immune: A Walk in the Woods has had 2.4 million torrent downloads. The film with the most illegal downloads from 2016 is Swiss Army Man (over 7 million torrents); by our minimal estimates that represents a loss of over $1 million in revenue, and based on the peer-reviewed studies cited above, that number could be $3-$4 million in losses.

Virtual reality

VR has fully come into its own, largely due to Sundance and Slamdance’s support of the emerging artform over the past several festivals. For the first time this year Sundance has an official virtual reality section; it received a whopping 346 submissions.

Distribution and sales

We also traced how many Sundance and Slamdance films got distribution – although I refrain from calling every instance a “distribution deal.” For our purposes this year, I am defining distribution as having the film available for sale on a legitimate and public platform – iTunes qualifies, as does traditional theatrical distribution. It costs more money to put a movie up on a major digital platform than it costs to press DVDs; that’s why not every film can get onto iTunes, as they and other platforms have become more selective.

Most of the films at Sundance will be distributed, and about half of Slamdance’s selections will achieve this milestone. However, the sales prices – when there are actual cash advances (or minimum guarantees) – will vary widely. Last year, Sundance saw a record sale of $17.5 million for The Birth of a Nation, an investment that proved ill-advised for Fox Searchlight. In contrast, the highest sales recorded at Slamdance was Batkid Begins (2015) for $1 million to Warners, primarily for remake rights. Last year, Slamdance’s Million Dollar Duck sold to Animal Planet and Lionsgate for a deal worth $350,000-$500,000. (The Slamdance infographic is right below the Sundance infographic.)

The Netflix of it all

Continuing a trend that began five years ago, streaming services like Netflix, Amazon, and iTunes will continue to be the dominant platforms for independent films. Netflix has four original features, one original documentary feature, and episodes from two documentary series screening in the festival.

In addition, the festival has fully acknowledged that some of the best “film” work is now done in episodic television. This year is the first year that episodic content has been eligible, and 403 episodic films were submitted. Nineteen episodic films will screen, including premieres from Netflix, Amazon, and YouTube Red.

Chillier

Like the weather, I expect a somewhat chillier buying season than in 2016. There will be even more responsibility put on producers and directors to deliver audiences for their movies, down-shifting traditional marketing efforts from the distributors to filmmakers. I suspect that buyers will be more cautious, and that even Netflix with its trumpeted $6 billion content-acquisition budget will be judicious. There is simply a glut of great content, not all of which is feature films, and Peak TV is already becoming a factor.

We can soon expect a cyclical downturn in our business, and we may see early signs of it in Park City this year, where the weather will be cold even while the politics will be hot.

Sundance Infographic

Sundance 2017 Infographic

 

Slamdance Infographic

Slamdance 2017 Infographic


Top: Jason Segel appears in The Discovery by Charlie McDowell, an official selection of the Premieres program at the 2017 Sundance Film Festival. The film will stream on Netflix in March. Courtesy of Sundance Institute.

Will the Movie Industry Contract in 2017?

Originally published in Cultural Weekly on January 4, 2017. 

Movies are going gangbusters, and one studio—Disney—achieved a record-breaking $7 billion global box office last year. What could possibly go wrong?

According to my analysis of historical patterns, we’re due for a downturn.  The film industry is often likened to a roller-coaster because we experience it as having surprising ups and down. The analogy is even more precise than we would like to think. Just as a roller-coaster rises and falls on a fixed and predictable track, so too the film business has an uncanny, regular pattern of peaks and valleys.

I first became aware of this pattern in 1988 as a junior executive at Walt Disney Studios when the Writers Guild went on strike. The strike lasted 155 days, during which time no new screenwriting took place, and even after the strike was over it took years before movies and TV shows achieved full levels of production. I imagined this was an unpredictable economic event. But when I talked with some of the old-timers, people who had been in the financial offices of Disney and other studios for decades, they told me it was to be expected: they didn’t know the writers would go on strike, but they had been certain the movie business would have a downturn in the late ‘80s. They had seen the pattern before.

How could that be? I started to do some research, going back to the beginnings of filmmaking in 1891, when Thomas Edison patented the kinetoscope, the precursor to the motion-picture projector. I discovered that innovations in technology and distribution have been driving the movie industry through rising and falling economic cycles, and that the cycles happen in a predictable, ten-year pattern.

I first wrote about this phenomenon in Screen International magazine in December, 2009. My editor dubbed my observations “The Leipzig Hypothesis.” At that time the movie business was in a downturn, and I predicted that the cycle would start to turn up in 2012. It did.

My hypothesis states: The film industry’s expansion and contractions — based on known milestones — for the last 120 years has followed a wave pattern which peaks with uncanny regularity in the middle years of each decade, then bottoms out in the decade’s last years, only to rise again from the ‘0’ year driven by new innovation. It looks like this:

Film Industry Cycle over a decade

I admit that the Leipzig Hypothesis is somewhat impressionistic. It relies, in part, on verbal data I got in conversations with finance people who had been in the movie business since the 1950s. It’s difficult to evaluate the entertainment industry’s profitability from the outside; studios play fast and loose with the numbers so it’s been hard to measure historical ups and downs. Box-office numbers, even when adjusted for inflation (which they usually aren’t) account for only a fraction of a film’s revenue, and today box office revenue matters less than it ever has before, because of the films being financed by streaming services Netflix and Amazon.

In addition, domestic numbers often seem to show patterns that alter radically when currency-fluctuating (and poorly counted) foreign sales are thrown into the mix. So the movie industry, unlike more numerically minded businesses, is never really sure whether its economic viability is rising or falling; it has always seemed more of a gut feeling, at least to people outside the highest levels of the industry.

However, based on my nearly three decades in the business, my knowledge of studio balance sheets, and my interactions with the financiers who keep this industry spinning, I’m ready to go out on a limb once again and predict that a contraction will happen starting in late 2017 or early 2018, and filmmaking will feel an economic downturn. If the hypothesis holds, it will make the movie business a bit more quantifiable for everyone. If the hypothesis fails – which it may, due to significant changes in business models – we can put it to rest as a historical artifact.

Here is how the hypothesis has functioned historically. (See infographic below.)

In the early years of each decade, as an innovation takes hold, the business tends to expand. There’s a sense of renewed optimism among industry executives and bigger movie budgets soon follow, along with higher salaries and richer deals for the talent. The expansion generally peaks around the sixth or seventh year of each decade, when higher spending has taken its profit-reducing toll.

Then, pessimism sets in, and industry leaders call for the business to be reined in. Budgets become smaller and negotiations become tougher amid prognostications about the ill health of the industry. In the final few years of each decade, which we are entering now, the business contracts, reaching its nadir at decade’s end, when, almost miraculously, the next innovation is born that will start the cycle anew.

Each innovation is an advance in technology or a new distribution market. For example, in 1900, the size of each reel of film doubled, allowing longer, more complicated takes. In 1910, black-and-white movies were enhanced with two-color tinting.  Technicolor was chartered in 1921 and the first film in Technicolor’s Process 2 was released the following year. Synchronized sound technology started in 1927; silent movies ended in 1929. Then 1940 saw the advent of multi-channel sound; the screen image became much wider in the early 1950s with the innovation of CinemaScope; and special effects took a leap forward in the late 1950s and early 1960s.

New distribution markets have been the drivers for the past 40 years, beginning with the first multiplex cinemas in 1970, and the creation of HBO and cable television in 1972. Then, in 1976, VHS and Betamax videotape appeared, starting the trend towards in-home entertainment, which became widespread by 1980. The foreign markets exploded in 1990: films began making more money overseas than from the domestic market, and a new internationalism began to take hold in Studio-land. DVDs began to explode in 2000.

The most recent expansion was due to wide adoption of another new technology: streaming video services. Although Netflix began its streaming service in 2007, it really took off in 2012 when it went public and was able to grow exponentially. Since then, Netflix has grown from 27 million subscribers to more than 86 million today, and has a presence in more than 190 countries. Amazon Prime began streaming original content in 2013 and now has nearly 70 million subscribers.

I feel it is an open question if the hypothesis will continue to hold.  For the first time, it is hard to quantify exactly what the movie business is. When Netflix and Amazon finance or acquire feature films to exploit their value on their streaming services – not at the box office – and further, not reveal how many people are watching (which they don’t) there is no way to tell if movies are economic success or failures. As Michael Smith and Rahul Telang posit in their book Streaming, Sharing, Stealing, the power-center of the movie business has moved from companies that create content (studios) to companies that own their audiences (Netflix, Amazon, YouTube, iTunes). This shift is fundamental, unstoppable; we may need a new model to predict expansions and contractions.

On the other hand, the cycle may hold. For one thing, the U.S. dollar is at record-level strength against other currencies, which means that international revenue will be lower than projected – this alone could incite a contraction. Also, the content acquisition budgets for Netflix ($6 billion) and Amazon ($3 billion) are unsustainable and both companies will probably begin to ratchet back their spending in the next couple of years.

My conclusion? Let’s find out together. I’ll meet you back here at the beginning of 2018 to take the pulse of our business again and see where we are on the roller coaster.

Film Industry Cycle Infographic

Film Industry Cycle Infographic for 10 years

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Top image: Concept art for Captain America: Civil War, which earned over $1.1 billion in worldwide box office in 2016. Courtesy Marvel Entertainment/Walt Disney Studios.

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The Other Movie Industry

Originally published in Cultural Weekly on September 28, 2016.

Every morning when I wake up I drag myself over to my laptop and methodically delete 150 emails that have come in overnight, advertisements and spam my junk filter didn’t catch. Then, just as methodically, I study 50 important emails about independent film projects at various stages of their hectic, insecure lives, and respond to every one.

Except when I am traveling. The experience of travel throws me off my body-clock and game. I arrive in a distant city, schedule as compact as the clothes precisely rolled in my travel bag; I am somewhere else! I want to enjoy the people, take advantage of the place! I experience my new surroundings from morning ’til late night when, spent, I fall into the hotel bed. I yell at myself, inside my head, knowing the emails are piling up, until the yelling becomes white noise and I find myself awake the next day.

So it was in Helsinki, Finland, this past week, from where I have just returned, refreshed despite being burdened with 2,000 emails, most of which I will, of course, delete. Because the Finnish film industry has moved to an exciting place in only the past few years, and I wanted to learn as much as I could while I was there.

Why was I in Helsinki? It was the week of Love & Anarchy – The Helsinki International Film Festival, and, embedded within it, the Finnish Film Affair, three days devoted to movie industry professionals. For the Finnish Film Affair, I had put together a dream team of a panel: Mike Goodridge, CEO of Protagonist Pictures, the UK-based production, finance and sales company; Claudia Lewis, who served as President of Production for Fox Searchlight Pictures for 10 years; Laura Munsterhjelm, the talent agent and founder of Actors in Scandinavia agency; and Mike Runagall, Managing Director at Altitude Film Sales. We’d been asked to talk with Finnish film professionals about finding movie stories that travel. How could Finnish films go beyond the borders of Finland and find audiences around the world?

Finnish Film Affair event moderated by Adam Leipzig

Our panel at the Finnish Film Affair. Photo by Petri Anttila.

The question, in fact, does not apply only to Finnish filmmakers. It is hard to get an accurate count of the number of films made each year — I have heard estimates as high as 10,000 and more when Nollywood and Bollywood titles are added to the mix — and few of them capture global audiences. By and large, worldwide audiences are the domain of big studio ventures, movies that come from comics, pre-aware titles, and well-traveled franchises. Only big studios can commit the marketing resources, often topping $200 million, to open a movie everywhere. Other than big studio movies, most film distributors are only interested in locally-produced product: Indian movies in India, Chinese movies in China. Few distributors anywhere showcase “foreign-language films.”

Therefore, our panel concluded, there are two challenges Finnish films need to address: the worldwide disengagement from international cinema, and the fact that, outside of Finland, nobody speaks Finnish.

Could Finnish films travel better if they were made in English? In some cases the answer is yes, but I certainly would not want to see that happen at the expense of quality. During the festival, I had the pleasure of seeing The Happiest Day in the Life of Olli Mäki, directed by Juho Kuosmanen, which won the Un Certain Regard jury prize at the Cannes Film Festival and is Finland’s entry for the Oscar’s Best Foreign Language prize. Olli Mäki tells the story of the lead-up to the 1962 world featherweight boxing match. No rational sales agent would have wanted the film if it had been pitched before it was made: It is in Finnish, a period piece, shot in black and white, about a person few outside Finland have ever heard of. But the resulting movie is a grand happy surprise, deftly made, funny and charming, authentic and true to itself. Made in English, the film would not have worked.

Which brings me to the process by which Finnish film currently operates. If you want to make a movie, and you can do it for around 1.4 million Euros, and you can get a bit of money from the government’s cultural arm, as well as a commitment from Finland’s film distributor and broadcaster, you are done: You will have your costs covered. For the people who get their movies made, this creates a regular opportunity for work and creative output.

U.S. indie filmmakers would love to have so straightforward a process. Our movies would be less hectic and insecure. I found a rare, unaffected enthusiasm for film and storytelling among the Finnish filmmakers I met. They have a system, which works in its way; theirs is, fundamentally, the Other Movie Industry, one that does not play by the rules to which we Americans have become accustomed. The Other Movie Industry, versions of which exist in many countries, especially in Europe, allows filmmakers to make movies on a regular basis and, therefore, lead more sustainable lives.

Of course, there are limitations on the closed-loop of the Finnish system: budget limits, obviously, and also limits if you are not among the filmmakers blessed by official process. Therefore, the potential of expanding to audiences in other countries, as well as the game-change of a filming financial incentive that will go into effect next year, will allow for a greater diversity of films and filmmaking talent. That will benefit everyone, and up-level even the filmmakers who stay within the existing system.

Finnish filmmaking is quite accomplished, and is poised to expand and flourish in the next few years. Of that I’m certain. I’m also certain of one unintended consequence: Finnish filmmakers will have to deal with a whole lot more emails.

Image from The Happiest Day in the Life of Olli Mäki, directed by Juho Kuosmanen.

Sundance Infographic 2016: Ample Distribution, Paltry Deals, and the Cost of Piracy

Originally published in Cultural Weekly on January 20, 2016.

For the myriad filmmakers descending on Park City this week we have good news and bad. The good news: If your film is in Sundance, it will get distribution. The bad news: Your financial return on distribution will probably be minimal and your film is likely to be pirated, further diminishing your income.

Those key findings come from our annual survey of the independent movie landscape, on view below in our Sundance Infographic. Each year, we crunch the numbers on the Sundance Film Festival and use it as a bellwether for indie filmmaking at large. When Sundance’s Transparency Project begins to share data (later this year, we hope), we will all have even more information for analysis.

CLICK HERE TO SEE ANIMATED SUNDANCE 2016 INFOGRAPHIC

Distribution Dynamics

The overall number of distribution deals at Sundance is staggering. Last year, 105 of the 125 films achieved distribution of one kind or another. That’s a twenty percent increase from the year before, and a stark contrast to 2010, when only twelve films got distributed. What changed? Massive penetration by streaming services like Netflix and iTunes and the increased appetite for cable players like CNN and Discovery to take on feature-length documentaries.

Filmmakers at the Slamdance Film Festival, which runs concurrently in Park City, will have the same experience – all will get some distribution opportunities and most will be financially minimal.

When I say minimal, I mean minimal. Based on my conversations with producers and sales agents, many offers from distribution companies have zero minimum guarantees and rely entirely on back-end participation. When a deal is made with a digital-only distribution company, filmmakers will be expected to show up with a marketing plan in hand and will be expected to help sell tickets or streams themselves.

Why are distribution deals so paltry? Two reasons. First, there is too much content in the marketplace. Last year, there were some 700 feature films released theatrically in the US, of which about 150 came from studios and their subsidiaries. Those studio films accounted for 92.1% of the total box office, leaving approximately 550 independent films to fight for less than eight percent of the box office. Then, there are hundreds or thousands of movies that get digital-only deals, via companies like Amazon or Gravitas. In addition, 2015’s audiences had the opportunity to watch 409 scripted television shows – not hours, but actual shows, each of which has four to 22 episodes. Meanwhile, the number of hours of content uploaded to YouTube each minute is approaching 500. This much content is enough to make one’s eyeballs explode, and yet, with all the tonnage, truly excellent work is still rare.

The second reason distribution deals are low is the continuing devaluation of creative content. Increasingly audiences want to pay little or nothing for content in a fixed form – movies, books, music – even as they will pay nearly $1,000 for a three-day pass to Coachella. This is a generational, cultural shift –  and that’s where piracy comes in.

Piracy Costs

We know that piracy is a big issue for studio films, and we wanted to learn how it affects independent movies. For this year’s Sundance analysis, we worked with Excipio – a company that collects forensic evidence against pirates and does analytics. Excipio analyzes data collected from BitTorrent networks and does not extrapolate or estimate.

The results should be troubling to all independent filmmakers. Excipio analyzed illegal downloads of fourteen films that screened at Sundance in 2014 and 2015. All had at least hundreds of thousands of pirate downloads; Whiplash was downloaded illegally more than 12 million times.

What does piracy cost? Some piracy proponents (yes, there actually are such people) say it costs nothing and that it even helps build awareness for films, but that argument is false on its face. There is already a surfeit of content and one more free movie does not make a ripple. Audiences must be targeted carefully with specific marketing campaigns to build awareness and want-to-see; pirated films subvert that process. Piracy directly affects the bottom line, because some percentage of people who download illegally would have paid for the film if there were no illegal no-cost alternative.

How can we estimate the cost? We decided to be conservative. We’re estimating that if the illegal option were not available, five percent of customers would have paid for downloads and that they would have paid only $3 per transaction, which is a low number for digital downloads. Using this formula, we found that the fourteen films we sampled lost between $57,000 and $1.83 million in revenue.

Jonathan Sehring, president of IFC Films and Sundance Selects, and a producer of Boyhood told me: “Obviously piracy hurts every film company and any owner of intellectual property, regardless of size and scope. It is painful to look at those numbers and try to rationalize why people do this, especially to indie films.” Boyhood has had 10,383,141 pirate downloads. By our estimates, that cost the film $1.56 million. Life and death money for an indie filmmaker.

$3 Billion Invested

Each year, we estimate the budget of all the films submitted to Sundance to get a ballpark on how much is being invested in independent movies. Based on my conversations with producers, distributors, financiers, and people familiar with the festival circuit, this year we are estimating an average budget of $1 million per dramatic feature and $400,000 per feature documentary. The aggregate total tops $3 billion.

Does investment in indie films pay off? Clearly not, in most cases. But it is difficult to calculate on a case-by-case basis. For example, our infographic shows the sales price and the US box office gross, but most often films are bought for many territories – not just for the US. With Netflix now available in 190 countries, they often buy the world. Further, digital revenues are not transparent and are closely guarded. Unlike theatrical box office figures, which are publicly available, the amount of total views and income from all aggregated digital sources is not possible to track. Even insiders who run streaming companies tell me there is no way to get a clear figure beyond what they see from their own services. That lack of transparency has to change for independent filmmakers to get a fair understanding of today’s distribution economics and be able to strike deals that are fair all around.

Given the state of things, film distribution is ripe for continuing disruption. Increasingly, independents are exploring alternatives and finding entrepreneurial ways to do it themselves. Filmmaker James Kaelan, whose virtual reality experience The Visitor is in Slamdance, and who produced Hard World for Small Things in Sundance’s New Frontier section, told me, “With the advent of crowdfunding, with the efflorescing of free range distribution platforms, you don’t need to wait to get picked anymore. You can make your film on your own terms, and exhibit it directly to your audience without signing away your most-cherished rights. That’s a monumental shift.”

That shift is a trend likely to be even more prominent when we survey the independent film landscape a year from now.

SEE ANIMATED AND INTERACTIVE SUNDANCE 2016 INFOGRAPHIC

Sundance Infographic 2016

Sundance Infographic 2016

Sundance Infographic 2016 | Produced by Cultural Weekly and Entertainment Media Partners | Sponsored by Macmillan Learning

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Infographic sponsored by Macmillan Learning. Produced by Entertainment Media Partners for Cultural Weekly. Tod Hardin, special features editor; Ahmad Zaeem, designer.

Top image: Sky Ladder: The Art of Cai Guo-Qiang directed by Kevin Macdonald in World Documentary section at Sundance Film Festival. Photo courtesy Sundance Institute.

Filmmakers: Get Ready for Film Festivals

On December 9, 2015, I did a seminar for the filmmakers whose movies have been accepted to Slamdance 2016. This seminar will be useful for all filmmakers getting ready for film festivals anywhere and hoping to take maximum advantage of the opportunity.

Adam Leipzig

Adam Leipzig talks with Slamdance filmmakers. Photo by Peter Baxter

Slamdance founder Peter Baxter joined us (you’ll hear his voice in the intro). We did the seminar in the CreativeFuture offices where I serve as COO.

In this 75-minute seminar, you will learn the answers to these questions:

  • Do I need marketing materials, and if so, what would they be?
  • Should I hire a publicist?
  • How do I pick the right sales agent?
  • How to pick a sales agent?
  • Should I stay for the whole festival?
  • What kind of deals are being make for independent films?
  • What can I do with my short film?
  • How do I answer the question I will be asked most often?
  • What about other film festivals?
  • How can the festival leverage my career?

Congratulations to all the filmmakers, and I hope you find this useful.

We did an audio recording of the seminar. Listen or download here:

Top photo: Adam Leipzig (l) and Slamdance founder Peter Baxter discuss indie film strategies in a film noir-ish parking lot. Photo by Deron Williams.

The Distribution Equation

Originally published in Cultural Weekly on April 22, 2015.

Congratulations! You just finished your movie, which puts you at the edge of the winner’s circle—lots of people start movies and are never able to bring them out of post-production to the light of day. You finished yours.

You made it micro-budget, for $400,000, and it’s awesome, or so your friends tell you. Your investors are happy, but also nervous: Will they get their money back?

Let’s say your friends are right, and your movie is awesome. You even manage to go further, and get your film into a festival, maybe Tribeca. Grateful festival audiences will see it, and distributors, too. Because that’s what you need, distribution.

Distribution is the fulcrum of the financial equation, because without distribution audiences cannot see your movie and investors have no hope of financial return. This is where most independent films fall down: they do not have a distribution plan before they start production. Hence they are vulnerable. Of all the feature-length films that are completed each year in the US, fewer than 10% actually get any form of distribution. Ninety percent or more repose uselessly on hard drives, gathering dust in someone’s garage.

You don’t want your film to be among the 90%. Your investors certainly don’t want that. How do you solve the problem?

In the first place, you need to make a good movie, and I mean really good—a film that works for its genre, delivers for its audience, is excellent in its execution and boasts a brilliant cast. Whether you cast known or unknown actors, they’ve got to be great.

Let’s go to the next step and assume your movie really is good, but you enter the festival with no distribution set. At this point, there are two possible outcomes: either a distributor will want your movie and offer you a deal, or not.

If it does happen, you may feel as though you have won the lottery. In one sense you have, in terms of an opportunity to be distributed by a legit company. But your investors likely will not be pleased. Unless your film sparks massive attention, which in turn attracts the interest of more than one distributor, hence fueling a bidding war, you will be offered pennies on the dollar.

As evidence of this, you can look at the films that played this January at the 2015 Sundance Film Festival. Even now, deals are still being discussed, and most of the films in the festival will be picked up for distribution. But very few will have had the chance to raise their sales price with a bidding war; most will sell for $100,000 or far less.

That is not a good financial outcome. However, if you did not pre-plan your distribution strategy, pre-plan it even before you started shooting, this is the situation you will be faced with.

Is there another possible outcome, a way to improve your side of the distribution equation?

There is. Today, wise filmmakers and their investors are planning and budgeting for a distribution strategy from the moment of their first fund-raise. For a low-budget movie, they raise an additional $300,000-$500,000 and keep it in the bank, so they can cause distribution to happen if the perfect distribution company does not make the right offer.

Let’s take a look at two scenarios to see how this might play out.

Scenario 1: Traditional Distribution

You made your movie and also have a $500,000 war chest for marketing and distribution. If distributors see your movie, love it, and offer you a fair price, you can take it.

At that moment, though, you have terrific bargaining leverage. You don’t need the distribution deal because you have the resources to do it yourself. Of course you want the deal, because a legit distribution company is in the distribution business and will do a far better job of distribution in most cases than you will—it is their métier, after all.

But now you have leverage. Either you can take that $500,000 marketing war-chest and give it back to your investors; your investors will be happy. Or you can strike a more aggressive deal with the distribution company, offering to co-finance the marketing spend. Some distribution companies won’t let you do that—they will want to keep full control over marketing and the opacity of its accounting. On the other hand, some will let you co-venture P&A, and they’ll admire your foresight. Depending on how much marketing money you actually have to co-invest with the distributor, you can potentially drive the standard distribution fee of 30% down to about 15%. That will make your investors delighted.

Let’s run some numbers.

When distribution companies offer to buy your movie, what they are really doing is giving you cash as an advance against potential future earnings. Let’s say you get an offer of $1 million for your $1 million movie. Of course you will take it, because now your investors will come close to breaking even. You’ll also be offered 50% of the proceeds after distribution fees and expenses are recouped by the distribution company; the company will keep the other 50%. Will you ever see more money than your initial advance? Not likely.

The amount that cinemas keep, versus the amount that goes back to the distribution company, is called the “settlement rate.” The settlement rate averages 42%, which means that the cinema keeps 58% of every ticket sold, and the distributor gets 42%. But that is the average across all movies, including studio movies. In the indie world, the settlement rate is far less, sometimes dropping as low at 20% for documentaries.

Let’s say your settlement rate is 40%. After the distributor gets its share (40% of the tickets sold), the distributor will charge its fee (typically 30%) and then subtract the cost of advertising, marketing and publicity, a number that can be surprisingly high, even in the independent landscape. If the box office is good, the distributor will keep spending marketing money to chase a higher box office return, and the net result will be that theatrical run will lose money.

Enter home entertainment sales, the big basket that includes cable, VOD, SVOD, Amazon, iTunes and the like. The average settlement rate here is higher—70% will go back to the distributor, then the distributor will still charge its 30% fee off the top, plus subtract additional expenses.

As you’re about to discover, it is good to be in the distribution business, and not so good to be in the movie making or movie financing business. Here’s the math:

Let’s assume your movie will make $1 million at the theatrical box office, and an additional $1 million in home entertainment. 215 movies made at least this much money in 2014.

If you are working with a traditional distributor, the $1 million box office revenue will bring back $400,000 to the distributor, because of the 40% settlement rate. The distributor will take its 30% distribution fee, leaving $280,000. Marketing expenses will probably have been $750,000, so that means the film is at a net loss of $470,000.

Home entertainment could begin after, during, or before the theatrical run. Assuming an additional $1 million in home entertainment revenue, and a 70% settlement rate, $700,000 will come back to the distributor. The distributor will take its 30% fee, leaving $490,000. The distributor probably spent an additional $100,000 in home entertainment marketing, so the film is now at a net loss of $80,000.

You and your investors will not get anything more than the initial advance, whatever that was. Note that although the film is showing a loss, the distributor will still have made $330,000 in its distribution fees.

If you had access to your marketing investment war-chest, you could have co-ventured the P&A spend with your distributor, with each of you paying for half of the total $850,000 marketing spend (or $425,000 apiece). Now, in addition to getting that money back, you could have been able to shave the distribution fee to 15%, which means your investors would have been able to get back an additional $165,000.

Will your investors make a profit? It all depends on the advance you got from the distributor in the first place. If the advance was only $100,000, and your movie cost $400,000, your investors will be in a losing position.

Scenario 2: Free Range Distribution

However, let’s say you choose to be responsible for distribution yourself. Now you will work harder, because you will have executive responsibility for keeping everything on track, even though you will hire top-caliber people to handle distribution for you. But you will spend less. The settlement rate will be the same, but the distribution fee will be less (distribution professionals work for a percentage) and you will keep far more money.

You would play out this scenario if you don’t get a distribution offer or you don’t get one that’s financially exciting. Now you can take your marketing war-chest of $500,000 and guarantee distribution by hiring one of the stronger companies that can book theatres, handle marketing and publicity, and make VOD, SVOD and cable deals. In this case, because you are the “client,” you will have full transparency into costs and spends, and distribution expenses will be far lower.

This financial scenario can be even better. Given the same financials, your P&A cost will be less— likely $500,000 all-in, for home entertainment and theatrical marketing, and also including the for-hire distribution professional’s upfront fee.

Why will your marketing expense be less? Because free range distributors do things more grassroots, and have cleverer ways of using their resources.

The total revenue will be the same, $1.1 million ($400,000 from theatrical and $700,000 from home entertainment). Assuming you now pay the professionals you hired 10% of the generated revenue, you will spend $110,000 in additional distribution fees, leaving you with $990,000. Now let’s subtract the marketing expenses of $500,000: you’ll end up with $490,000.

As you can see, that is a far better financial outcome. Your movie would be in profits.

I must end with a bunch of disclaimers. There is no regular ratio anymore for theatrical-to-home entertainment revenue in the indie sector, so any film’s specific performance will vary widely. I’ve simplified a complex process for this article, and there are other factors to take into account, such as international revenue, but it is probably safe not to include it, as American independent films don’t traditionally make that much money overseas. Finally, of the 693 films released last year, only 215 of them made more than $1 million at the theatrical box office, so the movie business is as risky as ever and financial success is no sure thing. Which means, again, your movie needs to be exceptional, with a clearly-defined and big enough audience before you start making it.

All the more reason, therefore, to build distribution costs into your business model from the beginning. Without them, you and your investors stand even less of a chance of being in the winner’s circle.

My thanks to Glen Reynolds and Sebastian Twardosz at Circus Road Films for their expertise and checking my numbers and formulas.

Top image from the self-distributed film ‘Particle Fever.’

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