Filmmaking: Tips, Sources & Tools — January 24, 2012 at 4:44 am

Film financing in Hollywood: past and present

This is something I encountered yesterday, and I believe this would be quite interesting to those, interested in movies – an interview with John Burke, General Council of the American Film Institute.

He talked about such interesting topics (in my opinion) as film financing, profit sharing, film investment and others.

For example, everyone knows that financing a film project is not the easiest of things to do. So what does a project need to become more attractive to financing? Burke says a number of factors must be considered.

“First, you need a script that is worth making into a film, which is harder to acquire or develop than you might think. Then you need a good director or high-level actor(s) committed to the project and, most importantly, you need a major studio to commit to financing all or a portion of the budget,” says Burke.

He goes on by explaining: “If you want to go the more challenging independent route, you still need the film elements as well as some distribution set up, so that when financiers assess financial risk of the project, they have some comfort that can mitigate some of the risk through pre-sales and tax rebates offered by various jurisdictions to promote local film production. For example, if it’s a $20 million picture, there are very few people who will fund the entire budget, let you make the film and then go shop for distribution. Nobody sets out to make a bad film, but if it happens, you have a problem recouping your investment”.

“Producers mitigate risk by hiring a foreign sales agent to provide estimates that the picture can get sold internationally for, let’s say, $10 or $12 million. You can shoot the film in a jurisdiction that offers tax benefits and cover another $3 million,” he said.

“Now the investor can say, allright, it’s a $20 million picture, and if I can get $13 to $15 million of it covered, at the end of the day I’ll have $5 to $7 million at risk when the picture gets released.  If it’s successful, I’ll get my money back, and I may make some money; if it’s not successful, my maximum loss is $5 to $7 million, and that’s a bet I’m willing to take”.

“Film is a very, very risky and volatile investment. It’s hard to predict the performance outcome of any particular film, which is why the studios produce  portfolios of films: they release 15 to 30 pictures a year knowing that something like 60 percent of those pictures are going to break even or perhaps even lose a little or a lot, but of the 40 percent that are profitable, a few will make enough money to make the entire portfolio profitable overall. But an individual investing in one picture doesn’t have that portfolio diversification, so you might get really lucky with a picture that actually hits the ball out of the park, or you might be unlucky and take substantial losses”.

Speaking about the investment in film productions, Burke points out that major film studios have always picked up most of the tab.

“When you consider who is responsible for funding the budgets of films on an annual basis, the studios are responsible for 85 to 90 percent, and, frankly, the other 10 or 15 percent is skewed by a couple of independent pictures like Twilight that make a great deal of money,” Burke told Metropolitan Corporate Councel.

“Since 2005, the studios have all taken on major co-investment partners – not individuals who are investing in one or two pictures, but investors who, depending on the studio and on the slate, have invested 25 to 50 percent of the production costs of most of the studio’s films. Some of the larger equity funds participated in deals done between 2005 and 2008, when we saw the economy starting to get shaky,” he said.

“Today, the business requires larger equity bets to be made on a particular film. You used to be able to finance a film independently and have a fairly limited exposure at the end of the day, as in my example of a $20 million film where you had $15 million covered by other benefits and your exposure might be $5 million or less. Today’s risk profile involves equity exposure of closer to $8 to $10 million on a $20 million film,” adds Burke. “The financing of films by individuals have definitely fallen off.

Burke adds that the foreign presale market today has changed as well, its not as robust as it once was. Today, according to him, foreign distributors would rather wait to see the finished pictures before buying them, since they might have bought too many “greenlight staged” pictures, and couldn’t get their money back.

“Independent producers promise that they’re going to get domestic, meaning U.S., movie distribution, which is important because the studios spend a lot of money on marketing when they distribute pictures. The average marketing budget for an MPAA picture in 2010 was about $40 million, and when you spend that kind of money on a picture in the U.S., the marketing effort travels a long way, Burke noted.

“You get the Entertainment Tonights, the Access Hollywoods, the news programs – affording exposure worldwide, so the distributors in France, the UK, Germany and elsewhere don’t have to spend as much on marketing. In prior years, people were much more likely to buy a picture that didn’t have a U.S. distributor on board – on the expectation that U.S. distribution would be in place by the time the picture got finished and delivered. In many cases, that expectation was not met because the studios have become much less willing to pick up third-party product to distribute and, instead, focus more on their own internal development. They’ve concluded that they have more success with the pictures they develop internally, and if they’re going to spend $40 or $50 million marketing something, they want the best possible shot at producing a hit,” Burke says.

There’s “another side of the coin” here as well.

“Investments are made sometimes for reasons, unrelated to making a profit. Studios and individuals invest because they’re already very rich, and investing in film has more to do with a social or political agenda. They want to tell a story that they think needs to be told; it’s personal to them, or they’re being supportive of a director, actor or a producer with material they find appealing. They think the film should be made, and they want to have some fun or glamour in their lives,” Burke said.

Great, but what about profit sharing?

“Profit sharing has a reputation of being complicated, while its not really that. If you’re an actor or someone participating in a film, there is an expectation in the industry that you should have some sort of profit sharing; however, frankly, if you’re an unknown actor, profit sharing is going to be defined in a way that is intended to make it very unlikely for you to share in any real profits unless the film is an extraordinary hit, and industry people understand that. If you’re an A-list actor in a film, your representatives will be able to negotiate a much better definition of net profits or adjusted gross profits or a better sharing of the revenue, depending on what contribution you’re making to the film and how much that’s worth,” Burke explained.

“An A-list actor has leverage to negotiate a very good economic-sharing arrangement and will get paid quite a bit of money if the film’s successful – or even if the film isn’t successful. Even though an actor has negotiated as strong an economic-sharing arrangement as possible, when it comes down to the studios reporting the accounting, there are always areas of gray, and it shouldn’t be a surprise that they’re going to report in a way that is more beneficial to them and less beneficial to you. So it’s inevitable that anybody with a major position in a film or in a film slate will ultimately audit the studio. Everybody expects it to happen, and it almost always results in additional payments to the investor,” Burke concluded.



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