The New Model Of Indie Film Finance, v2011.1 Domestic Value & Funding

This was once going to be a single post.  Today is part three.  There will be at least two more to come.  I started it here. And then yesterday we tried to determine the factors for accessing foreign value.  Today, let's look stateside. Until the double whammy of Toronto 2010 & Sundance 2011, it looked like the US acquistion market for feature content had fully collapsed.  No reasonable P&L would have shown more than a modest six figures for US acquisitions.  Hybrid & DIY models have not been developed yet to consistently deliver returns in excess of this amount (or even at these figures).  Perhaps this is now changing, but it would still be foolish for any filmmaker or investor to expect this and we can't budget for such expectation.

How many of the 7500 films produce in the US annually return 20% of their negative cost from US licenses?  Although it puts emerging filmmakers at a great disadvantage, I think the surest determining factor for predicting US acquisition potential is the filmmakers' track record.  If you have found buyers previously, you are well suited to find them again -- and even still exceeding that 20% is the exception and not the rule.

When the US market was depressed, I often had sales agents & finance experts challenge me with the claim that the market wasn't down; it was just that there were no good films.  People like to think that good films sell for good prices.  If 7000 American films can raise money to fund their works and no films are selling, what are those investors thinking when they fork over their cash?  They can't be thinking that are actually helping their children or nephews and nieces when they give them money only to recognize their failure?  They must be thinking that they are making good films, and all 7000 can not be 100% wrong.

Clearly we are at a point in US film culture where the infrastructure is not serving either the investors, the creators, or the audiences.  Good films are getting made but not being delivered to their audience.  Last year I went to a film investor conference. Several other producers were invited and we all asked to pitch projects.  None of us left with funding, but the investors said to me that I was the only one that addressed how we would deal with the reality of not just getting our film to market, but bringing it to the ultimate end-users -- the audience.  As artists build communities around their projects in advance of actual production, they are developing a plan to give domestic value to their films.  It is hard to imagine that any artist will be able to do enough pre-orders to predict 20% of negative costs from the USA -- unless they are working on microbudgets -- but taking a step forward is still a better plan than surrender to the unknown.

So where are we now in the process of getting your films funded?  If you've gotten your foreign sales estimates, and you can somehow reasonably anticipate a 20% of Negative Cost US Acquisition License, you are in great shape.  That is, you are in great shape if you have foolish investors.  The wise ones will still be wondering about how they cover sales fees, sales expenses, and the opportunity costs on the money.  Those numbers are still routinely ignored in many business plans for indie film I find.  If you are working with semi-literate investors, you will still be scrambling to find another 25% or so of your negative costs.

How will you fund your film if you can not predict full recoupment from the combined US & foreign licenses?  Fortunately, if your film is set in America, you can pull in some tax credit relief.  Otherwise, I hope you carry a foreign passport, and qualify for foreign subsidies.  If you plan on cash flowing any of this soft money, don't forget to discount them and budget for the additional legal expense.  From personal experience, I find it hard to justify the costs of cash flowing soft money on the type of budgets we are talking about  -- but that's good news.  In the NMOIFFv2011.1 you are wise to treat this soft money as revenue towards the project so that such aforementioned costs will be covered.

If you are fortunate enough to have all of these rare qualities (foreign value, US acquisition potential, strong team with a track record, soft money qualifications, and cash flow partners) inherent to your project, you probably are still wondering where's the upside.  How do we get to profit?

I think we now have a subject for tomorrow's post.  Stay tuned.

The New Model Of Indie Film Finance, v2011.1

I recently had one of the top sales agents explain to me that the only indie film that gets made or sold these days are those projects that make absolute sense.  Okay, granted what he was referring to was only within the mainstream indie business -- the type of films that he and his cohorts commission -- but it is worthy of our time to delve a bit deeper into this.  What indie film project makes absolute sense?

The agent said there was no room for guess work in today's mainstream indie business.  If you want to get your film made, you have to have to make it for a price that all concerned feel it will certainly recoup at.  "Absolute sense" is this regard is a film that will inevitably make back what it cost.  "Absolute sense" can also mean a project that a company feels it has to have, usually due to the people involved or the timeliness of the concept, but those "packages"  are frankly even harder to come by than those that seem to be inevitably recoupable.  You are looking for  the needle in the haystack with either, and need to build it yourself if you want to hope to come close.

My last few projects all were designed to remove any guess work for financiers.  Between foreign sales estimates, tax credit rebates, and the undisputed value or attraction of the stars, if you want to be sure your film will get made, your project needs to read that the value of the work will exceed the cost of creating it.  Value in this regard, is strictly business related, and not cultural (sorry art-for-art's-sake fans, this isn't going to be one of those posts).  As much we can understand or even accept, those words though, what is the math that adds up to this formula? And where do the numbers even get their value anyway?

Even with 39 or 40 (and still rising)  films selling at Sundance this year, the first take away from it is we probably should keep our budgets below $5 million.  Granted the highest sales were the ones that had budgets towards the higher side of the scale, but those were also the ones that had the most to lose.  The films at Sundance 2011 were acquired for reasonable amounts with the US acquisition price generally in the low 7 figures or below.  No one, even the large corporate distributors, can stomach losing a great deal of money these days, and the business is currently designed around this preventative action of covering one's ass (no surprise that several of the corporate funded indies are now exploring the micro-budget field).

If the film business remains in an era of risk mitigation (and how in this economy could it not be?), just as acquisition prices will continue to be reigned in, budgets will be kept to a minimum by most investors.  Let's leave the issue of how to attract experienced producers and directors to a project when you can't afford to offer them a reasonable rate aside, and not worry about how budget effects the quality of the project; instead, let's try to give some greater understanding to what this principal of risk mitigation looks like in practical terms of getting our movies made.

As foolish as it is, the mainstream indie film industry relies on estimates from foreign sales agents to set the value for the films.  It is this "market value" that truly determines the budgets for the films that get made under this system.  Forget for the moment that everyone recognizes that those estimates rarely hold water any more these days.  Let's ignore the fact that international sales have been dropping 20-30% annually for several years.  Dismiss it as anomaly that certain former major territories no longer license films like they used to.  Until we develop the tools and know how to assign valid figures to the other factors that actually determine a film's success, this is the system we have.

Tomorrow, I will get into how foreign value appears to be determined.