Film Fund-amentals: Year-End Tallies

5 Comments

1. maddie
   Posted January 7, 2009 at 1:08 pm | Permalink

   Your conclusion, after looking at 2008 top box office films, that "Some comic book movies can make a lot of money," gave me a chuckle. It reminded me of a professor who was fond of responding to some students' comment in a lecture by saying, "You have a profound sense of the obvious."

   I offer a slight revision to your conclusion, rephrasing it to: "Good Comic Book movies make money." Just as a good Western will make money. A good Musical will make money. A good James Bond film will make money. (Emphasis on "Good.")

   People with real insight in the industry recognize this: Talent will out. Originality will out. Creativity will out. Beyond that, it's anybody's guess which project will succeed at a given time.

   To quote William Goldman's now famous and probably singly most insightful observation that has ever been made about the Motion Picture business, "No one knows anything."

   I state this because I object to t the mentality held by a sector of Hollywood that there exists, at any given time, a model, a genre, a star, which will definitely succeed. Success is not hinged on any one or two elements. "Iron Man" was successful because of the individual creative elements of that particular film and the fact that audiences connected to the film and its characters.

   There is a lot of "gestalt" in a successful film—some might call it "magic."

   Your observation that most of a film's profit is currently made in the DVD market has been true for quite some time. But thank heavens for DVD's! It created a secondary market for new films and an opportunity to re-market existing film libraries. This has sustained entertainment companies while they have coped with the rise of cable and the internet, both of which have usurped part of their market.

   As for your conclusion that studios should now be ready to make lower budget films based on the success of "Twilight," I draw your attention to the fact that every studio in LA has started up at least one "Low Budget Film Division" over the last 20 years. They inevitably close it down. Part of this is because the "low budget film divisions" start making films which are more and more expensive. I see this as the nature of the Development Executive Beast.

   The success of a DE's is evaluated (by themselves and others) by the fee and notoriety of the directors, actors and writers—scratch the writers, tongue firmly planted in cheek!—with whom they work (i.e., hire). It's only natural for the budgets to start creeping up unless you have strong senior management who are truly committed to the mission of the division.

   As for the Marketing of these lower budget films, that's a whole other ball game than the marketing of "Tentpole" movies. And it's not one that most Marketeers have tremendous experience. As all experienced industry execs know, the Marketing of the film is critical to the success of a film. Lower marketing budgets make expert marketing strategies all the more important.

   The profit objectives of these divisions must be kept in mind by EVERYONE. When the President or the Board reviews the Low Budget Division's P&L, they must remember that the total profit simply cannot rival that of a "Tentpole Project." Either they are on board with the concept of small profitable films or they are not. And they are not.

   It's a lot cheaper, less risky, and less bothersome for studios to allow an indie filmmaker to find the money themselves, produce the picture and then bring it to Sundance and the studio then purchases a known quantity.

   Meanwhile, the studio survives on revenue from its "Tentpole" films and the merchandising of such.

   Your conclusion that "Experience strongly suggests that something is about to go bust in the business and a new financial model is needed," also surprised me.

   Beginning with the launch of basic cable all the way through the delivery of feature films on internet ready television sets (I refer you to the recently announced Netflix/LG Entertainment product.), those of us in the "filmed (and taped) entertainment business" have been quite aware that a new business model is needed!

   Let's remember that the idea of a "Blockbuster" is a relatively new one. "The Godfather" stunned the industry with box office proceeds of $20mm. "The Exorcist" made $20-$25mm and the studio execs were on their knees thanking…someone. Then a little film called, "Jaws" came out and, pardon the pun, blew the industry out of the water with box office proceeds of $200mm. All of a sudden, spending hundreds of millions of dollars on a movie didn't seem irrational. And the industry changed it's model. So the industry has historically been responsive to changes in market conditions

   Entertainment companies have revolutionized some of their products and their distribution. You would be surprised at some of the inventive and profitable innovations some big studios have implemented. No, the industry has not found "the answer" yet. But the new media market is evolving extraordinarily quickly. A moving target is hard to hit.

   The entertainment companies are certainly doing a lot more than the "U.S. Captains of Industry" in the automobile business did 30 years ago when it became obvious to Tokyo that fuel-efficient cars were the way of the future.

   What are your suggestions for revolutionizing the business model of the entertainment business?

2. creditspectrum
   Posted January 8, 2009 at 2:42 pm | Permalink

   Dennis Toth’s response:

   I would agree that William Goldman’s statement about the movies should be the required motto of everyone in the business. However, I have long resisted the word “magic” simply because it is not an answer but merely a form of mystification. One would like to think that a good film would do well and that a successful film must be a good one. Unfortunately (and perhaps we should quote Mae West), goodness has nothing to do with it. Good grief, Titanic made more money than most countries, but it was still a long way to go before the iceberg put everyone out of their misery.

   Basically, the Hollywood concept of financial management is largely based on a collective mythology. It’s all magic, pixie dust and whopping huge budgets in the false belief that the more money they spend, the more money they ultimately make. The thinking is pure bunk, and for the most part they are not really making money so much as merely shifting funds around over and over again as the continuous movement of capital becomes a pale substitute for profit.

   Which in certain regards is why the system is exactly like the automobile industry (around the mid-1990s). Hollywood is convinced that the current way to go is to make more and more tent pole movies (the cinematic equivalent of an SUV) while unloading the small-budget operations (read: sub-compact). It is a convenient form of logic because most major Hollywood companies have no clue how to operate within the small-budget venue, and they really are not comfortable with the whole milieu. Besides, the tent pole production provides plenty of eye candy for the masses and carries a large (though largely illusionary) concept of merchandising tie-ins. Likewise, they are strongly convinced that they can always get funding for a movie costing $85 million, while a movie budgeted at a mere $5 million gets laughed out of the room.

   It is a good system as long as Hollywood resides on another planet. The industry likes to think of itself as being pretty well insulated from the larger economic picture, but it is not. It never has been, even though the old classical system was better structured — it was an illegal monopoly, but it was better structured. The modern system is extremely linked into the whole economic scene while largely living in a deep state of denial about these interrelated connections.

   I feel that you are mistaken in what you refer to as the current alternative financial models. The cable TV approach came and (pretty much) went over a decade ago. At best, cable TV companies provide a limited haven for some amount of independent film making. But mostly, cable TV has been co-opted into the standard model.

   As for DVDs, get real. Sure, they have become the exclusive basis for the porn industry and the primary focus of the horror genre, and the format provides extremely large profits for the tent pole movies. But Hollywood still treats revenue from DVDs as if it were “found money.” As if finding an abandoned bag of $20s at a bus stop, everybody just grabs, and nobody has given a lick of thought to the structure. So the DVD industry rolls along at its own weird pace, full of flashy technological promise and often short on clear financial notions. Otherwise, Hollywood’s main concern about the DVD industry is to try and make sure that they don’t have to significantly share the profits with anyone else involved in making the movie. If this is a financial model, then the Vikings were major investors when they looted England.

   Finally, the concept of the blockbuster is not new. D. W. Griffith more or less invented the feature narrative film with Birth of a Nation (1916). Then he invented the blockbuster with his production of Intolerance (1918). The rest of his career was largely spent in his failed attempt to crawl out of the enormous debts he incurred while making Intolerance. Once again, Griffith may have been a forerunner to the industry.

3. Stark Raving Sane
   Posted January 9, 2009 at 11:46 pm | Permalink

   I have worked in the movie and TV film industry for over thirty years, and would like to add a few more observations to Mr. Goldman’s maxim.

   First, Whenever you don’t understand what’s going on in Hollywood, remember, it’s never about the money, it’s always about the ego.

   Second, All good movies are accidents.

   Conglomerate ownership has produced a creative inbreeding of crippling proportions. Hollywood Distributors labor under the delusion that all movies should make money. This is just not true. The goal should be to allow true independent creativity. Only in this way can the masters emerge. Artists aren’t expected to gain popular acceptance with one or two paintings, or plays, or musical compositions.

   Hollywood should now fund a great many smaller, independent films and use the Internet to distribute those which cannot support a theatrical release.

   That’s the way I think they can make money. It must be the ego standing in the way of profit.

   Stockholders beware; In Hollywood, Nobody Knows Anything.

   That’s why All Good Films Are Accidents.

4. maddie
   Posted January 10, 2009 at 11:20 am | Permalink

   I agree with you and Mae in that “Goodness has nothing to do with it.” However, after 30 years in the business, I have concluded that the a superb Marketing campaign is the key to success. Thus, Marketing Departments belief (true or not) in their need for a “big name” in the director and/or actor department.

   After 30 years in the finance end of the business, I whole-heartedly disagree that the Hollywood concept of financial management is largely based on a collective mythology. The truth is, within limits and with prudence as to what the money is spent on, spending more money on a feature film most definitely can reap rewards in film revenue.

   This is one of the critical differences between TV production, which is “producer driven,” and Motion Picture Production, which is “director driven.” In TV, the revenue is locked in by ad sales long before the product is even created. In film, if you add an explosion (e.g., $100k in costs), you increase the chance of more people laying down money to watch the film. (Again, Marketing loves explosions for their trailers. Increased production value equals increased enthusiasm for the audience.)

   You will note that the first word I used in my initial response to describe the ephemeral and elusive quality that makes a film take your breath away was “gestalt.” Perhaps that doesn’t include the mystical overtones to which you object. It was with reluctance that I used the word “magic” for the very reasons you describe. While the “gestalt” may be elusive, I do not believe they are “accidental.” They are carefully crafted and sometimes it works and sometimes it doesn’t. And they do NOT all hit, nor should they be expected to do so.

   As for the auto industry, forget the mid-90’s. I’m, thinking about the early 1970’s, during the OPEC embargo. Although in grade school during the crisis, it impacted my family greatly. After it was over, I observed the reintroduction of large gas guzzling cars (SUV’s hadn’t even come about at that point.). Even as a child it made absolutely NO sense to me. Did those business leaders have no memory of what our nation had just gone through? (Now I see the entire situation as mainly related to world politics and the greed of politicians, business leaders, and wealthy investors—who have no real regard for the American public.)

   Low budget movies are riskier because the probably potential ROI is less. The abandoned development costs which are written off each quarter are disheartening to industry financial leaders. It makes a great deal of sense to keep the studio making the “Tent pole” films for which no independent producer could raise the funds. While at the same time, allowing the indie prod to raise the capital and produce the less expensive pictures which the studio can buy at Film Festivals—when the Marketing people can chime in on whether or not they can SELL the film. Thus, we end up with “sleepers,” or little gems such as “Little Miss Sunshine” and “Juno.” The producers of those films probably made far more money than they would have made producing for hire for a low budget division of a major studio. And the studio probably came out ahead, despite the high price tag for the rights to these “small films”, because they didn’t abandon hundreds of thousands of dollars of development costs, pay for the cost of the low budget films that never get off the ground, or pay the overhead for the Low Budget Division itself.

   I share your opinion that many major Hollywood companies are not accustomed to operating within a small budget. Again, I reiterate the point made in my initial posting regarding the definition for success for a Development Executive and the importance that Studio Boards of Directors and senior management remain aware of and committed to the mission of the Low Budget Division. A perfect example is the second “Star Trek” feature, “The Wrath of Khan,” was produced by the Television Division at Paramount because the feature group spent so much money on the first one. Television producers and directors are much more accustomed to working with low budgets than feature producers and directors. However, in success, the TV Producer and/or Director gets a chance at producing and/or directing an feature and off they go—into the big budget mentality.

   My understanding regarding “Birth of a Nation” that it was an extraordinarily profitable film (costing the current equivalent of $2.2mm and generating the equivalent of $10mm in revenue). “Intolerance” in current day dollars cost about $41mm. “Intolerance” was far from what we today call a “blockbuster.” In fact, it was the box-office flop that forced Triangle Studios to close its doors.

   Regarding the term “blockbuster,” post “Jaws,” it has greater meaning that just “extraordinarily profitable.” Big production and marketing budgets are implied as well as significant merchandising revenue.

   I’m sorry that you don’t think I’m “real” when it comes to the DVD world. I share your observation that the DVD world is largely maintained by porn (as is the internet, so I am told), I can say from my own professional experience that DVD revenue is not looked upon as “found money” in the studio world. And while the horror genre did live in the DVD world for a period of time, currently, the horror genre is alive and well in the first-run theatrical world.

   As for the “current alternative models” to which I refer, I have not gone into them in detail because they are proprietary information. The response to cable is historical enough that I can refer to it without breaking confidentiality.

   I guess, all in all, I take umbrage at what sounds like very harsh judgment of Film Industry Creative and Financial Leadership. The statements in your postings seem very harsh, not entirely informed, only slightly familiar with the day-to-day operations of the industry today, and—perhaps most importantly—the criticism they contain is not followed up with a single workable suggestion for an alternative.

   On the other hand, “Stark Raving Sane,” has a specific suggestion, which I’m sure has not been overlooked by studio and distribution execs. Make these smaller movies for distribution over the internet. This ties in with the Netflix/LG agreement to which I referred in my first email. And the idea of watching a movie on a large screen tv is THE thing that, I believe, has been preventing the film industry from busting through and making the internet its main source of distribution. Who wants to watch a movie or tv show on a computer screen, or, heaven forbid, a cell phone screen?

5. Stark Raving Sane
   Posted January 10, 2009 at 6:19 pm | Permalink

   Well, comic book movies can make box office stars of off-beat actors like Christian Bale and Robert Downey Jr. So you got to give them credit for that. And the directorial choice for “Iron Man” demonstrates that these movies are like television - producer driven. Jon Favreau was an interesting choice, but I’m pretty sure there were very serious discussions at Paramount about handing over that kind of money to an indie director.

   The other thing to keep in mind is that a large part of the “Production Costs” of a major studio film are for goods and services provided by the studio itself and all costs, especially the labor, materials and services provided by off-studio sources are marked up by the studio before processing by the production accountant.

   Then there’s the distribution. As maddie can attest, distribution arms take their fee (1/3) off the top. Then the distributer takes their prints and ad costs off including interest on the money advanced by the studio for these costs. The remainder is used to retire the production costs which are drawing interest charges from the funding source (usually the studio).

   In this way a film which is reported to lose money can actually be profitable to the studio overall. Sure the production costs are never fully recovered, so net profit participations never have to be paid. Thats why power players get paid in “gross earnings”. Even then the lawyers and business managers argue for years over contractual definitions that would confuse God.

   I watch movies on my laptop all the time. It’s actually quite satisfying. Of course I’m first in line at the big screens for “Dark Knight” or “Iron Man” or anything in 3-D. And almost every new TV coming out this year will have direct Internet capabilities so Netflix etc. can send Hi-Def on demand with out having to haggle with Time-Warner. (Ironic ain’t it?)

   Check out Hulu or the big TV networks websites for full episodes on demand. The quality is becoming quite impressive. And you can’t fast forward past the commercials.

   Shows like “Burn Notice”, “The Mentalist” and “Life” are just a few of the more interesting experiments in TV programming.

   Again, after 30 years making major studio films and network TV movies, I must conclude that every good movie is an accident.

   Please cite an example of a bad movie that became a hit because of brilliant marketing, and “Blair Witch Project” doesn’t count because the marketing didn’t come from a major distributor. In fact as I recall, the film-makers created the original website long before Artisan picked up the film.

   BTW, I look forward to watching “Iron Man II” on my cell phone, while stuck on the tarmac at LAX for two hours waiting to take off.