Film Fund-amentals: Tell Us What We Already Know

First published April 25. 2013.

It sometimes takes a lot of work to tell us what we already know.

That is one of my impressions after reading the recent Variety report about the current state of Hollywood, as analyzed by Michael Nathanson for Nomura Equity Research. Nathanson’s report, based on ten years of scrutiny, seems to present a semi-optimistic picture of Hollywood’s current direction as he maps out the its modern business model. Notice I have a “semi” in there.

According to this report, Hollywood has succeeded in streamlining cost issues by reducing productions and focusing on a few selected tent pole releases. I guess that is one way of looking at it. In turn, these movies have a higher box office profile and generate much larger revenues. By and large, that is true. For every $300 million spent, at least $250 million is earned at the box office.

The report suggests that the past decline in theater admission may now be on a slight upward tick. Actually, the real figures suggest that the decline may have at best bottomed out. The signs of life are erratic.

The decline in the home-video market has possibly bottomed out as well. Quick note to Nathanson: don’t bet on it buddy. I know that life is full of maybes, and maybe you have a point, but maybe the entire home market is changing so rapidly that you are simply not able to factor that in; and so maybe, just maybe, you are way off base.

The report also notes that the dynamic emergence of the international film market has greatly bolstered Hollywood. This is a fact. Most major Hollywood blockbusters are currently earning the main bulk of their profit from the overseas market. Heck, some of these suckers are only earning their money overseas. At the moment, this has become a godsend to Hollywood.

OK, I am being a little backhanded in my presentation of this report. I didn’t intend to start out that way. After all, Nathanson makes some good points. It is true that, by vastly reducing the amount of modest productions and loading maximum money into a few big movies, Hollywood as indeed successfully streamlined the whole process. Why heck, just a decade ago Disney would have had to produce over two dozen bombs in order to lose the kind of money they blew on John Carter.

I can’t help but point out the problem with this methodology. It only looks good on paper for about two seconds. Then, it becomes obvious that by loading everything into one boat, you can lose it all that much faster. For example, you have just spent $300 million on a movie (which is increasingly the standard budget). Then you spend about another $250 to $350 million on post-production, advertising and stuff (again, increasingly normal). So you have to make over $600 million to even come close to breaking even. So sure, most of these films make lots and lots of money. But the end result is really just a highly inflated version of chump change.

Ticket sales are not really going up. Ticket cost has gone up. That is the factor that makes it look as if admissions have risen. Fewer people are going to the movies, but they are paying more for the tickets, so the increase is optical only. I realize that the entire film industry has a long tradition of playing funny games with these figures, but this is not the moment to do so. Admission is up. Attendance is down, way down.

Nathanson presents the home market as reaching a point of stabilization due to the increase in VoD and online distribution. Essentially, he sees the online approach as a helpful component to mainstream DVD distribution, which is tantamount to seeing the online future as a handmaid to the market. Ironically, many people in the online trade sees themselves in an evolution moving in a completely different direction. I personally think that Nathanson hasn’t a clue to the long-term direction of the digital market.

In his study, Nathanson admits he had problems getting figures from the major companies (especially ones with large TV divisions) that clearly separated flows made between film productions and other forms of media. But he concedes that TV operations are currently making up the majority in profit for these companies. In a financial sense, behind every Hollywood movie are a lot of TV shows that keep the system rolling in revenue.

TV brings in the bacon, and then the overseas market stirs it up in a pan. Currently, a tent pole movie earns two to three times its gross overseas. Presumably there are many reasons for this, but many of the official reasons don’t make much sense. Presumably, the phenomenon has been due in part to Hollywood’s long standing ability to flex economic dominance over large parts of the foreign market. Also, presumably, it is related to the foreign market’s ongoing focus on theater presentation at the expense of other distribution modes.

But all of this is changing. For example, the Spanish company Alta Films is on the verge of going under, in part because the Spanish audience is shifting from theater viewing to VoD. I suspect this process will be felt eventually throughout the European market. Likewise, there have been indicators of a commercial shift toward national productions over American films, originally seen in France and now, increasingly, China. So maybe this report isn’t so rosy after all. There are a lot of strings attached to it.

Not strings actually. More like big heavy ropes with anchors attached. Be forewarned.

Film Fund-amentals: Flying With Steven Soderbergh

First published May 7, 2013.

When Steven Soderbergh is cruising at 32,000 feet, he gets philosophical.

That is one impression from his recent State of the Cinema address delivered April 25, 2013, as the keynote speech to the 56^th San Francisco International Film Festival. The speech has become a must read, as it has made the rounds of blog sites and entertainment news reports. I think it has actually received more press than the Gettysburg Address in its day.





If you have not watched the tape or read the transcript (both are provided in the above link), then do so. Sure, its not going to be on the honor roll of rhetoric like the Gettysburg Address, but Soderbergh does make a series of important comments about the modern state of indie filmmaking. Especially once you get pass the first couple of paragraphs about jet travel (where Soderbergh sounds as if he is doing an opening bit for the Seinfeld show).

Soderbergh makes many solid points about the semi-sorry state of the modern industry. I don’t want to deal with his dividing line between film and cinema. That is really a whole another blog piece. But the rest is painfully valid and achingly precise.

For example, his take on the recent Nomura report on the current Hollywood industry. Obviously Soderbergh is on the right track (since I was saying much the same just last week). The major film companies have sharply reduced output while increasing production cost in order to focus on tent-pole movies that systematically consume the vast majority of available screen space while producing brief bursts of increased revenue to shareholders.

The trick is sort of working, though it is detrimental to indie movies (and many other things). The shareholders are largely happy. For now. You see the secret to this trick (which has been used in almost every other form of major American business) is that it is not designed to work for long and really doesn’t create self-sustaining, long-term enterprises. Instead, it is designed to squeeze out a fast short-term profit and then sell everything off and move on. Otherwise the whole thing inevitably goes bust and the shareholders become very unhappy. I have already witnessed this process in three other industries. I have a very unfortunate but pretty solid feel for the results. That is why I call it the Locust Theory, as in a locust swarm wiping out all the farm fields. In the end, only the locust is happy.

Meanwhile, the major companies are still tightly locked into a full-blinder mindset. Adam Goodman of Paramount recently expounded at the Variety Entertainment Technology Summit about the lasting nature of the theater experience while also talking excitedly about the possible first movie that will be made with the Google Glass. Goodman is totally convinced that people will not want to watch stuff on their cell phones while waiting at the bus stop. If he were given more time, he might also explain how vinyl has a better sound than CDs and gosh golly, but Betamax had a better picture. The brief history of the digital revolution has already produced a mammoth graveyard. I don’t want to dwell on the contradictions in Goodman’s presentation. But, at the start of the digital revolution, dailies made the same comments about newspapers Goodman is making about theaters. You know, the one about how people will never want to loose the pleasure of having an honest to goodness newspaper in their hands at the breakfast table. So be forewarned. As for Google Glass, he and the rest of Hollywood have more than just that gizmo coming their way and quite simply, they are not going to be the folks to benefit from all this stuff.

To be honest, Soderbergh has a touch of a similar problem. At the beginning of his speech, he goes into a whole story about the guy on the plane with him, who gets all settled into his seat with his iPad and starts watching a movie. What Soderbergh noticed was that the guy was really spending his time flipping through the movie. Skipping past narrative parts and playing and replaying action scenes. He was scanning the film, not watching it.

This observational experience sent Soderbergh spinning into various thoughts about the difference between film and cinema. What he observed he describes well,  but what he doesn’t quite grasp is the shift taking place. A massive shift. One that will soon result in enormous changes within the very foundation of the entire visual/narrative industry. The gentleman’s behavior is part of the rapidly emerging change in viewing experience evolving from the ever expanding forms of new technology.

I’m not really criticizing Soderbergh. Basically, I agree with him on that whole film and cinema thing. A lot of that is generational (and since I am ten years older than Soderbergh, I should be the bigger stick in the mud). Unfortunately, I also sense – heck, it’s more than sense; I know – that it just doesn’t matter. Technologically speaking, the film era is over. Aesthetically speaking, the cinema age is ending. This change is happening. It is unstoppable. Its effect is going to be enormous upon the entire industry.

So everything Soderbergh said in this speech is true. And soon it will all be meaningless, as even more massive changes take place. I only hope that in the next couple of years Soderbergh will take some more flights. I can’t wait to hear what he thinks next.

Meanwhile, Goodman may want to invest in some really comfortable shoes. After all, it will be hard work pitching movies at the bus stop and you do have to go where the audience is located.

Film Fund-amentals: Who’s A Mad Scientist?

First published May 15, 2013.

Thanks to the New York Times, folks in the film industry are once again worrying about the invasion of the data crunchers.

In the recent article Solving Equation of a Hit Film Script, With Data, reporter Brooks Barnes practically compares us data crunchers to a zombie invasion. And yes, I said “us.” I am a data cruncher (though oddly enough, we don’t much use that term in the business).  So I do have a wee bit of an invested stake in this topic.

Which is why I feel the need to set the record straight on a few points.  So let’s immediately dispense with the idea that we are somehow the “mad scientists” of the film industry.  I have heard this term used by various people in film.  I suspect it gives them a brief sense of bogus empowerment to reduce us to the weird level of a character played by John Carradine.  In reality, we are closer in type to Harper Reed.  Well, minus the glasses and the strange resemblance to Conan O’Brien.

The only “mad” thing about what we do is that we attempt to use logic, reason, and rational thinking as a means of charting patterns and projections through the otherwise confusing elements inherent to the film production process.  Like what are we supposed to use, goat entrails and Ouija boards?  Trust me, that’s been tried and it doesn’t work.

Hollywood and the world of the data crunchers are on a convergence course. The reason is pretty simple: because it works. In reality, it works in many other fields as we are reminded by the blog post Is Big Data the Next Frontier for Innovation in the Arts?   Contrary to the long standing industry folklore, there are many elements of the process that can be quantified and studied. Of course, there are the usual responses:

1. Arthur De Vany proved that it couldn’t be done. In his book Hollywood Economics: How Extreme Uncertainty Shapes the Film Industry, De Vany argued that there were too many unpredictable elements in the process to predict a successful outcome. Actually, De Vany presents a notion of film investment that inadvertently should dissuade any sane person from ever going near film investments. However, his focus was on the issue of being able to predict a major successful outcome for a movie. This is a very narrow (and I would even argue misguided) focus.  We are more concerned with preventing the film from falling flat on its face. Likewise, De Vany was dealing with an old business model that is no longer relevant to the industry. Personally, I think it is time to put De Vany to bed.
2. William Goldman said it all when he stated about movie production: “Nobody knows anything.” It’s a great line. Very snappy. The same is true of my neighbor’s dog. What Goldman does remind us is that movies, like everything else in life, is full of uncertainties. That is true even in certain areas of mathematics. So?  Seriously. Goldman’s comment is not a rebuttal. It is primarily an expression of exasperation. Nothing more, nothing less.

No one involved in this pursuit is promising miracles. What we do promise is a manageable concept with definable results. Granted, a lot of people in the film industry are not that familiar with the basic concepts and I would strongly recommend a bit of study into the general areas of statistical analysis. Sometimes, the best presentations for the general reader (or viewer) is found in some of the more satirical presentations (and it should be noted that critical presentations is one of the ways we learn stuff in this field – that is why some of the most scathing critiques of statistical analysis is produced by people practicing the trade).

Darrell Huff’s classic book “How to Lie With Statistics” is still a must-read, especially for the general audience.  Likewise, Sebastian Wernicke’s video presentation called Lies, Damned Lies and Statistics (About TEDTalks) is a hoot of a backhanded guide to the process (which, by the way, is his field).  You can even start acquiring a rudimentary education at eHow.com. It’s all pretty basic stuff, but the basics are how you learn.

Granted, you will discover some strange things. In the NYT article, Vinny Bruzzese of Worldwide Motion Picture Group points out that “bowling scenes” have a negative effect on a film’s box office outcome.  This has led to a lot of giggles among the naysayers. Actually, Bruzzese is right. Nobody can actually explain the why, but it is one of about three really weird, yet overwhelmingly negative recurring patterns that can be charted through such analysis. I can tell you right now that a PG-rated horror screenplay about zombie bowlers who read Ayn Rand is a sure bet for box office failure.

The bowling thing is extremely straight forward. Then, Bruzzese goes on about how movies with Guardian Superheroes always perform better than film’s with Cursed Superheroes. Again, he is right but there is a catch. The vast majority of these movies would fit the type of Guardian Superheroes.  Only a few (roughly 3 to 5 titles depending upon the way he is defining the types) would fit as Cursed Superheroes. In the case of at least 3 of these films, other issues would be sufficient to explain their failures. Likewise, the imbalance in the data is so great that I don’t feel a reasonable analysis can be achieved. At the very least, I would have to question the approach on this particular set of figures, which is OK.

What a lot of people fail to understand is that this is a process. The results produced through this type of process are not meant to be words written in stone. Instead, they create a framework from which a more thorough analysis is made possible.

It isn’t magic. It’s science. Heck, you are even allowed (and encouraged) to ask questions.

Film Fund-amentals: Today’s Audience

First published May 31, 2013.

Several years ago, I asked if the film industry knew their audience.  It’s a question that can be asked at virtually every level of the business as demonstrated last month during a panel discussion at the International Cinema Technology Association.

Of course, the presentation at the International Cinema Technology Association was primarily focused on exhibitor related issues.  Especially issues related to digital conversion, alternative content (for example, sports) and items at the concession stand.  For indie filmmakers, the second item might be the only interesting point.  After all, it’s not impossible (though it might seem to be) that a theater might host something like a Thursday night indie presentation.  Naturally, they would have to get distributors to loosen up on some of the strings attached to the standard first-run contract.

Unfortunately, most theaters would rather do something like the NBA playoff than indie movies  But it is a possibility.

There are other issues that go way beyond the exhibitors.  Heck, the whole foundation of theater distribution and exhibition is in the process of a massive radical change.  The exhibitors know this, and they really don’t have a clue about what to do.  I have no doubt that a recent post at mikejones.tv about the possible strength of viewer engagement through non-theatrical digital presentation (for example, laptop) is going to receive  a rousing Bronx cheer.   The piece makes a compelling argument, but nobody in the theater business wants to hear it at the moment.

What they do want to hear, or at least need to read, is the 2012 Theatrical Market Statistics just released by the Motion Picture Association of America.  Though it is targeted for exhibitors, this annual MPAA statistical review is one of the few comprehensive guides to the American film audience, which is why it is also studied by the entire industry.

So what do the figures tell us?  Overall, movie attendance increased in 2012.  OK, the increase was barely 6 per cent, which means that attendance has scored a very modest gain over what was a notable slump in 2011.  So the attendance figures are closer to an over all break even mark.  But these days that looks good.

The cost of movie tickets has increased marginally (0.03%) from 2011.  Well, sort of.  As The New York Times noted earlier this year, exhibitors waited until well into the 4^th quarter of 2012 before going after a steeper increase that is only half-reflected in the MPAA figures.  The current average ticket cost is $8.05 (standard projection) and rising.

On the other hand, movies are still a cheaper entertainment outing for a family of four (cost of $31.84) than such other activities as NFL games ($313.52 for four) and theme parks ($199).  Of course, these are just the ticket figures, and the MPAA always stacks the deck with big ticket items. A bowling night out might be a better point of comparison.  Once the family of four gets bushwhacked at the concession stand, you can easily add in an extra $50 to $70, and suddenly the MBL game looks cheaper at $107.92 (unless you live in Cleveland where they are starting to give tickets away).  Sure, the family could skip the concession stand, but then that would severely damage the theater business.

Hey, they don’t make their money off those tickets.

Mostly, the key figures suggest a soft market with a tiny glimmer of minor improvement largely produced by a few major successful movies (for example, The Avengers and three other films.  It could be seen as good news, but you don’t want to shout it from the roof.  A soft whisper in a small room will suffice.

The really interesting material is in the demographic section of the report.  In 2012, there was an increase in frequent moviegoers across all age ranges.  Three age ranges display very notable increases, though the MPAA assumes that the rise in the 40-49 age range is short-lived and only views the rises in the 18-24 and 25-39 ranges as meaningful trends.  Their reasoning has to do with the match between the relative size of different age groups and the frequencies of their movie-going habits.  For example, the 18-24 age range represents only 10% of the population but 21% of frequent moviegoers.  In the older demographics, size and frequency are reversed.

Yes, I know.  There is a self-fulfilling element at work here.  Most movies are made for the 18-24 range and the older audience often feels left out.  So the older audience goes less and they are then discounted in these type of studies when they do go.  Once in a blue moon, a movie is released for an older audience.  If it does well, everyone acts surprised and then goes back to chasing after the youngsters.  So this report does a neat job of reinforcing traditional wrong-headed thinking in the business.

Frequency by ethnicity is another interesting section.  Caucasians make up about 64% of the general population and they are 56% of all frequent moviegoers.  African-Americans are 12% of the general population and 11% of the population of frequent moviegoers. Hispanics are 17% and 26%, respectively, which suggests that a lot of Hispanics leave the theater just long enough to get back in line for another show.  The figures indicate that Hispanics are, long-term, a dependable audience.

You would think this reality would be more widely reflected the content and ethnic make up of film actors.  Largely, it isn’t.  Hispanics are like the older audience: there but easily forgotten.

Much the same is true of African-Americans and women. Ironically, women make up 52% of any given audience.  In fact, women make up the majority of the audience across all age ranges.  You wouldn’t know it from the young male structure of most major movies, but without the female audience, Hollywood would be lucky to get five fan boys in for a  matinee.

So inadvertently the MPAA is once again reminding us of the exclusionary nature of contemporary Hollywood cinema.  Lots of over-produced films designed for young male viewers that have to score big with an ethnically diverse pack of women aged 30 and up.

Is it just me, or is there something weird about this set-up?

Film Fund-amentals: How Do We Define Indie Cinema

First published June 11, 2013.

We all know what an indie film is, right?  It’s a movie that is independently made…and that particular tautology sums up the problem.

This use to be a pretty straight forward proposition. If it wasn’t made by a Hollywood studio, it was an indie. Though this was strictly an institutional definition, it was viewed as relatively sufficient. But as Hollywood studios became media companies and the financial conditions of film production became an increasingly complex system of multiple investors, all movies have become largely independent productions in the most basic economic sense.

Sure, these flicks are not indie movies in any way, shape or form. But they are not really studio movies either, since no studios really exist any more. They are more the byproduct of enormous media conglomerates. Though the Media Ownership slide show by “cigdemkalem” is focused on the British film industry, it is quite accurate on both sides of the Atlantic. This is the current laissez faire approach, though I prefer to call it the Libertine Model. Totally open ended and anything goes.

A much more precise definition of indie cinema is any movie made totally outside the confines of mainstream Hollywood dominated media. Movies made in a manner that completely removes them from a financial, technical or distribution system connected to commercial cinema. In other words, extremely low budget movies that will never see the light of day. This is the Puritan Model.

This is not meant as a cheap shot. Some of these movies are actually pretty interesting and fun to watch on the rare occasion when you get see one. And every once in a very rare blue moon, one of them escapes into wide distribution (for example, Paranormal Activity). However, the minute that happens, it becomes a “studio” film and its indie status is open to debate. But this extreme definition of indie is not exactly what most indie filmmakers want. Most people making an indie film have the strong hope that it will somehow, in some way, get made and released by some means that involves maximum exposure with minimum compromises. Their film. Their vision. Their way.

This is not going to happen. Though digital self-distribution may eventually change this situation, the current scene is locked into a mysterious dance between indie filmmakers and large media conglomerates in which the best outcome often resembles either a Faustian pact or a Hobson’s choice.

For now, digital filmmakers are stuck with a financial structure and a distribution system that are totally weighted against them. The hope for most indie filmmakers is that they can go on the festival circuit, get a strong presentation at something like Sundance, be quickly noticed by a major company, and have a distribution deal before they pack to go home. However, the reality for most is that they will not get into a major festival. They will not be noticed by a major company.

Though the digital revolution offers great promise for indie movies, it is also barely in its first phase and is already being stymied in its commercial development. The move toward total digital distribution in theaters (to be completed by the end of this year) presents a new system that will, theoretically, make it possible to widely release a movie at extremely low cost. But that is not how the digital distribution system is being designed.

The commercial application of digital projection has several major strings attached to it. One of these strings, called the Virtual Projection Fee, adds $800 to $1000 per screen to the distribution cost. The VPF is designed to help the theater pay back the enormous cost of converting to digital projection. Since the major studios helped to finance the conversion at most theaters, they also get a cut of this fee. For the big companies, it is a pretty sweet deal. But for indies, it is a Road Closed sign on the digital superhighway.

So the indie filmmaker will need more than ever the support of the major distributors. However, many of the major distributors are mostly looking for movies that have named performers, highly defined genres, and broad audience appeal. In other words, what used to be pretty standard mainstream commercial movies. The low budget, no-name, and very off-beat terrain that is indie at its best (more often than not) is not what these companies are seeking. Which means, many distributors are seeking indie movies that are not exactly indie in any sort of significant artistic sense.
Which bring us back to the question of how do we define indie.

Ideally, it is an alternative to the current state of mainstream cinema. Realistically, it is mostly determined by its budget. Technically, it is constrained by a lack of financial resources. So this leaves only one area wide open for indie that the current major films can’t do: artistically distinctive, highly idiosyncratic presentations of the cinematic craft. By their very nature, big budget movies are constrained to very simplistic structures and predictable repetitive patterns. This is why the tent pole movies appear to be the same movie over and over again. They are the same movie. They have no ability to do otherwise.

Only the indie cinema is capable of creating and exploring new directions. Often they don’t, but at least they can. This difference is not just the key to defining an indie film. It is also the key to the survival of the entire indie cinema.

Film Fund-amentals: The Hollywood Death Cafe

First published June 24, 2013.

According to the prophets, the major studios will soon implode into a vast dark pit while meteors will fall and the rain shall turn into fire and brimstone.

OK, that isn’t exactly what was said by Steven Spielberg and George Lucas, but it would be pretty easy to jack it up that way for the movie version. The recent presentation by the two grand men at the media center of the University of Southern California has stirred up debate through out the film industry. Obviously I am no stranger to preaching about the End of Hollywood. But I didn’t realize that they were already opening the Hollywood Death Cafe. At the core of their chat, Spielberg and Lucas both outlined the imminent demise of the current studio system. It seems ironic that they would bring this up about the same time that the movie Man of Steel would set a domestic release record.

But Man of Steel actually proves their point. The reasons are pretty straight forward.

Man of Steel is officially listed as having a production cost of $225 million (which suggests the real production was closer to $250 plus million). It was preceded in release with a remarkably old fashioned wall-to-wall PR campaign that easily could have cost another $200 plus million. Heck, the studio even went so far as to send talking points for Sunday sermons to ministers across the country. Quick note to Warner: as a kid I listened every Sunday to an extremely conservative Lutheran minister who was prone to giving pep talks about how comic books were the Devil’s plaything, designed to mislead good Christians into false analogies. May not be the best PR strategy when trying to woo the Bible belt!

Man of Steel’s record-breaking amount of product placement did produce a hefty income even before it opened (by one estimate, merchandising tie-ins were about $150 million) and its global opening totals were around $200 million. These figures are all high and wild and I just busted my calculator trying to tabulate the score.

But now it’s over. This coming weekend Man of Steel will, more likely than not, drop by at least 50 per cent in box office. Its overseas play has so far been below the domestic take, which is not a good sign. The vast array of product placement (so large, the movie should have been called Man of Sales) provided the flick with financial coverage but is otherwise meaningless. Nobody goes to Sears because of Superman.

Which means that Man of Steel will roughly break even and make a wee bit of profit. A few years ago, that wouldn’t be a problem. The real money would come from its DVD release. But it doesn’t work that way any more. The DVD market is basically dead. Don’t believe me, just check out a provocative piece by Lynda Obst called Hollywood’s Completely Broken. It presents an even more exact description of the process I have crudely drafted. And note the sly title. Obst seems to be implying something about the business.

Which gets back to a simple point that I have made many times before. The current business model used by Hollywood is totally unsustainable. The question is not if but rather when it will crash. It would appear that Spielberg and Lucas envisions what I would call the Hindenburg Model where it all goes in a gigantic blast. Personally, I lean toward the Whoopee Cushion Model, a slow but systematic series of steady collapse (sometimes accompanied by a noticeable odor).

Of course this leaves open the major question: What will be the new model? In a sense, this is where Lucas’ speculation about the future of theaters come into play. Personally, I don’t think the price for a movie ticket is going to hit $150 bucks. But theaters will increasingly become singular events reserved for hi-tech sensory experience. It started with digital 3D and continues with open bars and full menu restaurants, and I wouldn’t be surprised if the next phase included drugs designed to “enhance” the sensory experience – kind of a Brave New World approach. If this sounds ridiculous just remember that back in the late 1960s a certain amount of the audience for 2001 were dropping acid in synch with the movie’s experimental climax.

Quick note to Lucas: Your idea about pro-rating ticket costs to the production budget of the movie is not new. John Waters suggested the same idea back in the 1980s. I dimly recall that he even suggested a ticket price to Rocky 25 of $150.

But the real question is: What will replace theatrical distribution? Both Spielberg and Lucas are assuming VoD. At the moment, it is the only apparent answer. Well, VoD combined with a massive shift toward an increasing range of personal devises such as iPhones and iPads and iGizmos running out of the consumers’ wazoo. Personally, I suspect VoD will only be a transitional form until the next phase of the digital revolution appears. I don’t even know what that phase will be but I have a hunch there will be something else lurking just below the horizon.

Either way, the impending changes will be dramatic. Only the popcorn trade may stay the same.

Film Fund-amentals: The Next Phase of the Digital System

First published July 7, 2013.

Film distribution is about to undergo the most radical transformation seen since the Lumière Brothers switched from private to public screenings. Heck, it may be the most dramatic change since Thomas A. Edison hooked a coin box to the Kinetoscope and began milking the audience.

The entire future of the film industry is changing as we enter the full blown digital universe. Which also means that we haven’t a real clue as to what is about to happen. All the standard rules and models for filmmaking, film distribution, and movie financing are coming to an implosion point. Oh sure, right now it all looks sort of normal (well, as much as the so-called “new normal” has ever looked normal). Some major figures in the film industry have begun a public discussion on these impending changes. Privately the industry is going half-crazy trying to second-guess and prepare for their advent. Bob Dylan once said, “You don’t need a weatherman/To know which way the wind blows.” But these days, even the wind direction is confusing.

What Christopher Nolan would like notwithstanding, the change to digital production in Hollywood is a done deal. The reason is simple: the vast physical infrastructure needed for the use of the photochemical film process is gone. These days, trying to find some place that can develop film is like popping over to the hardware store for a vacuum tube.

Despite what some small theater owners would prefer, the digital distribution system is well underway. In theory, it will confer many advantages. In reality, many major companies are working awfully hard to make sure that those advantages don’t become too advantageous to anyone. The cost of the digital conversion has resulted in fees to the theaters and the fees are designed to cover the cost of digital conversion and well, gee, gosh golly gee whiz, it just so happens that the fees pretty much are usable as a means of blocking any indie players with major distribution plans. What a surprise!

The real source uncertainty is what everyone is looking at: digital online distribution. Which leads to the obvious question: Digital distribution to what? PCs? Laptops? Cell phones? Tin foil hats? No matter what the winning platform turns out to be (most likely all of the above, including the hats), movie distribution will be splintered between ultra-expensive spectaculars shown in the diminishing realm of theaters, and everything else unloaded in a mad stampede through wireless systems.

The process of distribution will become a battleground for competing systems. In theory, it should offer new advantages to indie filmmakers. However, the major industry players are already attempting to move into these new venues in the hope of controlling the various emerging digital forms. What they have on their side is money and a culture of corporate aggressiveness. What they do not have, is a clue. They bring a pushy sense of utter incompetence to the game. It could almost be fun to watch if the stakes were not so high.

Film financing is collapsing all over the place. The sheer cost of the dominant tent pole movie model is impossible to sustain. But all the major players have placed all their eggs into this one basket and cannot conceive of any way to alter the broken model. The large financial players that furnish the financing for these movies could make a difference. But they are also clueless. They have convinced themselves that movies have to cost gazillion dollars and deeply distrust any film that has a budget of only one integer and six zeroes. A lot of financial guys also still think that the DVD market will save a major movie’s box bottom line. Many of these folks really don’t bother to keep up with the industry’s business reports.

Since mainstream financial venues for movie funding has largely vanished into the tent pole vortex, indie filmmakers have increasingly turned to crowdfunding and other alternative approaches. The success rate for crowdfunding is hard to determine, though some reports place it around 35 per cent (give or take – well, no one is sure what that means which is part of the problem). Even if the success rate were only 20 to 25 per cent, this would place crowdfunding way ahead of most other approaches.

Crowdfunding is about to undergo an overhaul by the SEC, though the SEC is taking its grand old time on moving forward. The effect of these impending changes are still difficult to factor. Though crowdfunding has been relatively free of fraud, the possibility of fraud risk has been raised. The SEC overhaul of Jumpstart Our Business Startups Act is supposed to deal with this concern. Paradoxically, it may contribute to a problem that didn’t exist before the SEC were told to fix it. Before the overhaul, crowdfunding was a ridiculously simple process; the more it becomes a junior league version of corporate enterprise, the more likely the junior league version of Bernie Madoff will be on the prowl.

Nevertheless, crowdfunding has become the alternative Hollywood system for financing. From Zack Braff to James Franco, the Hollywood pack that wants to make a movie budgeted for one number and six to seven zeroes have packed off to Kickstarter. These big names with big needs bring a lot of media attention to the Indie scene. Of course, you would think they could do a better job of tapping into their Hollywood contacts or something as they increasingly steamroll over the small indie filmmaker in pursuit of public dollars. It doesn’t sound equitable, and it isn’t.

Which means that the immediate future of indie filmmaking is about to become a free wheeling combat zone. OK, that is not exactly new. But it is going to get worse. Or, at least it will until the mainstream model goes into deep collapse, which is coming soon.

Film Fund-amentals: Far From the Maddening Crowd(funding)

First published July 14, 2013.

Before we begin, let me emphasize that crowdfunding is a real word. Just ask the Oxford American Dictionary. They have Oxford in their title, so they ought to know.

Historically various forms of crowdfunding can be traced back to the 17^th Century, starting with early forms of subscription systems for the publication of works by Martin Luther. This link to the Reformation is not surprising since crowdfunding carries with it a certain inherent rejection of hierarchical authority. Part of the modern appeal for crowdfunding is its libertarian appeal, as it holds out the possibility of a level playing field. All projects are born equal in the eyes of Kickstarter.


The modern form of crowdfunding started in 1997 when the British rock band Marillion raised $60,000 for their U.S. tour from fans via the Internet. This success was quickly followed by the indie filmmaker Mark Tapio Kines http://www.marktapiokines.com/ who used a similar system to raise $125,000 for his production of the movie Foreign Correspondents. Many people in the traditional investment community were less than impressed by an approach that they viewed as quirky, wrong headed, and just plain weird. Mostly they ignored it and assumed it would go away.

Then, from about 2001 to 2010, crowdfunding went through a steady but relatively quiet period of development. Sites like Kickstarter, IndieGoGo, RocketHub and SellaBand successfully developed crowdfunding models for everything from movies to rock bands to quilting societies. The crowdfunding model went through a phase of slow, very steady growth. Then, around 2010, it blasted through the stratosphere.

Today, crowdfunding has evolved as a major approach to fund raising for everything from software development to filmmaking and all points in-between. Even the Girl Scouts crowdfund. The predominant crowdfunding model to have emerged is the donation model. You post your project, list the time-line during which you need to raise the money and set the basic parameters of how much people can contribute. In many ways it is like dumping loose change into the Salvation Army bucket around Christmas time (minus the annoying bell ringing).

Except that it isn’t exactly a donation, not in the big D sense used by the IRS. The donors cannot write this off their taxes unless the project is covered by a tax-exempt status. That is why the correct term for these donations according to the IRS is gifts. In the tax universe, the word donations opens up lots of possible legal issues whereas gifts are simply nice things to receive. So the real term should be gift model crowdfunding. However, this legal correction is not used by anyone except a few of us quirky folks who like to nitpick.

The donation model has been successful enough to attract lots of interest. Especially from Hollywood studios. Not directly, but indirectly. Most Hollywood companies want only to make a few tent-pole movies per year with mega-budgets and production costs that would wipe out most medium sized countries. However, the studios don’t exactly object to some amount of low budget movies being made within the system as long as they are not really made (in other words, financed) within the system. So suddenly crowdfunding is being co-opted for basic lower cost Hollywood filmmaking.

The successful Veronica Mars movie campaign was an important forerunner to this approach.
So, Hollywood is finding a way to enter the crowdfunding universe while simultaneously off-loading the financial cost of making low budget movies. That is half-OK. It does bring a lot of attention to the process. Big names will always attract the press. It could be a common tide that floats all boats. Too bad the average indie is best described as a kayak while the established crowd more resembles a yacht. A small one, perhaps (take for example Zach Braff, who could be described as a 26 foot “yacht,” at the dividing line between boat and yacht). Either way, these Hollywood vessels require a lot more water from the tide and pretty much leave all the kayaks in their wake.

But, that is also half-OK. Except that the entire crowdfunding system is about to be altered. The donation model will soon be changed into the equity model. At least, it will be whenever the SEC gets around to announcing the new rules. Although the SEC recently announced that startups can begin to advertise under the JOBS Act in about 60 days, it would appear that the impending announcement of the SEC rules on crowdfunding has been slowed down by internal political issues.

But, no matter what, the equity-model is about to be imposed and there are already grave concerns about how it will affect the crowdfunding universe. (The Forbes article “The Trouble With Crowdfunding” by Brian Korn is worth a read, if only to gauge the current attitude towards crowdfunding in the securities market. A lot of those folks just don’t like the whole idea.)

It is possible that the SEC will allow both models to co-exist under certain restrictions (I have heard a variety of figures proposed as a cap on donation model crowdfunding). But the incoming equity model is designed for start up ventures and will involve an extremely different approach. It will be a lot less indie friendly since it will require massive amounts of more rigorous legal work and more extensive corporate structure. But in some ways, it will be more user friendly for the established operators who are already adapted to the corporate structure and looking for the type of financial ranges that the equity-model is designed to accommodate, basically $1 million to just under $100 million.

Which will favor the yachts over the kayaks.