4

The Industry

The Facts and Nothing But

A Bit of History

Moving images had existed before. Shadows created by holding various types of objects (puppets, hands, and carved models) before a light were seen on screens all over the world. This type of entertainment, which most likely originated in Asia with puppets, was also popular in Europe and the United States. Then in 1877, photographer Eadweard Muybridge helped former California Governor Leland Stanford settle a bet by using a series of cameras to capture consecutive images of a racehorse in motion. Little did he know what 21st-century technology would bring.

William Friese-Greene obtained the first patent on a moving image camera in England in 1889. Next came Thomas Alva Edison with his kinetograph in 1890, and shortly thereafter, the motion picture industry was born. Edison is widely credited with inventing the first camera that would photograph moving images in the 1890s. Even he did not have a monopoly on moving pictures for long. Since Edison didn’t take out any patents in Europe, the door was open for the Lumière brothers to create the cinematograph, another early form of moving image camera, in Paris in the 1890s. Little theaters sprang up as soon as the technology to project moving pictures appeared. In 1903, Edison exhibited the first narrative film, The Great Train Robbery. Seeing this film presumably inspired Carl Laemmle to open a nickelodeon, and thus, the founder of Universal Studios became one of the first “independents” in the film business. Edison and the equipment manufacturers banded together to control the patents that existed for photographing, developing, and printing movies. Laemmle decided to ignore them and go into independent production. After several long trials, Laemmle won the first movie industry antitrust suit and formed Independent Moving Pictures Company of America. He was one of several trailblazers who formed start-up companies that would eventually become major studios. As is true in many industries, the radical upstarts who brought change eventually became the conservative guardians of the status quo.

The Eastman Kodak Company, founded by George Eastman, put his first camera in the hands of consumers in 1888. The company filed for Chapter 11 bankruptcy in 2012. Part of the problem beside the lack of camera sales, was an assertion by the studios that they no longer would buy film stock to make movies. But many directors and cinematographers, led by Christopher Nolan, Martin Scorsese, and Quentin Tarantino, made public statements about preferring film. Tarantino even described digital as the “death of cinema.” J.J. Abrams said in an interview, “I would argue film sets the standard, and once it’s no longer available, the ability to shoot the benchmark goes away. Suddenly you’re left with what are, in many cases, perfectly good but not necessarily the best, the warmest, the most rich and detailed images.” In October 2013, the company raised financing and was able to exit from bankruptcy. In 2014, the studios who wanted film for capture, distribution, and archival, made a deal with Kodak to continue using 35mm and 75mm stock. In 2016, Director Colin Trevorrow said that Star Wars: Episode IX would be shot on film, not digital. Digital versus film will continue to be a discussion among filmmakers; but, for the foreseeable future, filmmakers will have their choice.

Looking at history is essential for putting your own company in perspective, whether 100 years ago or last year. Each industry has its own periods of growth, stagnation, and change. As this cycling occurs, companies move in and out of the system. Not much has changed since the early 1900s. Major studios are still trying to call the shots for the film industry, and thousands of small producers and directors are constantly swimming against the tide.

Identifying Your Industry Segment

Industry analysis is important for two reasons. First, it tests your knowledge of how the system functions and operates. Second, it reassures potential partners and associates that you understand the environment within which the company must function. As noted earlier, no company works in a vacuum. The independent filmmaker (you) and the multinational conglomerate (most studios) operate in the same general ballpark.

Film production is somewhat different when looked at from the varied viewpoints of craftspeople, accountants, and producers. All of these people are part of the film industry, but they represent different aspects of it. Likewise, the sales specifications and methods for companies are different not only from each other but also from the act of production. Clearly, you are not going to make a movie without cameras, but the ones you may use are changing. Now we have many films being shot on digital, while other films still are being shot in 35mm. The business operations of the companies that make equipment are seriously being impacted.

When writing the Industry section of your business plan, it is important to note any important business operations that will affect the future of movies. Then, provide a discussion of the process of film production with a focus on the continuum from box office to the ancillary (secondary) markets. Within this framework, you must also differentiate among various types of movies. Producing the $170-million 3D film Captain America: The Winter Soldier or the $135-million The Revenant is not the same as making the $800,000 God’s Not Dead or the $2-million It Follows. A film that requires extensive computer-generated special effects is different from one with a character-driven plot. Each has specific production, marketing, and distribution challenges, and they have to be handled in different ways. Once you characterize the industry as a whole, you will discuss the area that applies specifically to your product.

In your discussion of the motion picture industry, remember that nontheatrical distribution—that is, Blu-ray/DVD, television/cable, pay-per-view, digital download, streaming, and domestic and foreign television—are part of the secondary revenue system for films. Each one is an industry in itself. However, they all affect your business plan in terms of their potential as a revenue source.

Suppose that you plan to start a company that will supply movies specifically for cable or the home video market. Or you plan to mix these products with producing theatrical films. You will need to create separate industry descriptions for each type of film. This book focuses on theatrically distributed films and how all the other revenue sources make up the total of each film. When films bypass theatrical and are sent directly to other media platforms, you have a problem with forecasting for investors. Currently, no credible source includes data for VOD, Netflix original films, and Amazon Prime, whereas in 2015 data for digital downloads was first added to domestic revenue totals.

A Little Knowledge Can Be Dangerous

You can only guess what misinformation and false assumptions about the film industry the readers of your business plan will have. Just the words film and marketing evoke all sorts of images. Your prospective investors might be financial wizards who have made a ton of money in other businesses, but they will probably be uneducated in the finer workings of film production, distribution, and marketing. One of the biggest problems with new film investors, for example, is that they may expect you to have a contract signed by the star or a distribution agreement. They do not know that money may have to be in escrow to sign the star or that the distribution deal will probably be better once you have a finished film, or, at least, are well into production. Therefore, it is necessary to take investors by the hand and explain the film business to them.

You must always assume that the investors have no previous knowledge of this industry, no matter their success in another business. Things are changing and moving all the time, so you must take the time to be sure that everyone involved has the same facts. It is essential that your narrative show how the industry as a whole works, where you fit into that picture, and how the segment of independent film operates.

In the last few years, a large number of real estate developers have started companies to finance films. Successful entrepreneurs from other industries, especially real estate and venture capital, often are drawn by the siren call of potential film profits. Coming from a business with a different model, they often try to impose those methods onto film. Even entrepreneurs with film backgrounds may need some help. People within the film business may know how one segment works but not another. As noted in Chapter 3, “The Film,” it can be tricky moving from working for a studio or large production company to being an independent filmmaker. The studio is a protected environment. The precise job of a studio producer is quite simple: Make the film. Other specialists within the studio system concentrate on the marketing, distribution, and overall financial strategies. Therefore, a producer working with a studio movie does not necessarily have to be concerned with the business of the industry as a whole. Likewise, if you are a filmmaker in another country, your local industry may function somewhat differently. Foreign entertainment and movie executives may also be naive about the ins and outs of the American film industry.

A Snapshot of the Industry

The total North American box office in 2015 was $11.1 billion. The share for independent films was $2.9 billion or 27 percent of the total. Revenues for North American independent films from all worldwide revenue sources for 2015 are estimated at more than $8 billion. Worldwide box office revenues totaled $38.3 billion in 2015. In its 2015–2019 Global Entertainment and Media Outlook, PricewaterhouseCoopers projected a total worldwide box office of $448.1 billion by 2019. Domestically, ticket sales rose 8 percent in 2015, while admissions jumped 4 percent to 1.32 billion. Two-thirds of the population of U.S. and Canada, some 235.3 million people, went to the movies at least once last year, a 2 percent increase from 2014.

Once dominated by the studio system, movie production has shifted to reflect the increasingly viable economic models for independent film. The success of independent films has been helped by the number of new production and smaller distribution companies emerging into the marketplace every day, as well as the growing interest of major U.S. studios in acting as distributors in this market segment. At CinemaCon 2016, both the MPAA’s chairman and CEO, Senator Christopher Dodd, and CEO of the National Association of Theater Owners, John Fithian, cited diverse audiences and the preservation of theatrical windows as key reasons for the growth. “I’m proud to say that the state of our industry has never been stronger,” Dodd told the crowd. He also suggested that three quarters of frequent moviegoers own at least four different types of technology products such as smartphones, tablets, and video game systems helped to drive box office receipts. “Word of mouth no longer exists,” he said. “It’s now word of text.”

As you go through this chapter, think about what your prospective investor wants to know. When you write the Industry section of your business plan, answer the following questions:

• How healthy is the industry?
• How does the film industry work?
• What is the future of the industry?
• What role will my film play in the industry?

Motion Picture Production and the Studios

The history of Universal Studios shows an interesting change of ownership among foreign conglomerates. In 1990, Japanese conglomerate Matsushita Electric Industrial Co. bought MCA Inc., the parent company of Universal Pictures. After five years of turmoil and disappointing results, they sold MCA/Universal to Canada’s Seagram in 1994, which sold it to French communications/water company Vivendi in 2000. In 2003, Vivendi sold Universal Pictures to American mainstay General Electric. In 2011, Comcast Corporation bought 51 percent of the company, which is now called NBCUniversal.

Another interesting case study is MGM. The once-prominent brand was taken private in 2005 by a consortium of private investors including Sony Corporation of America. After a year, the contract to distribute only Sony films ended and MGM started functioning as an independent distributor with a recent return to funding films. Then, in 2011, the company was rescued from bankruptcy by a new group of private investors and is being run as an independent company by Spyglass Entertainment co-chairmen, Roger Birnbaum and Gary Barber. The company co-finances many of its films with studios but also occasionally completely finances a film itself. In that case, the film is classified as an independent.

Originally, there were the “Big Six” studio dynasties: Warner Brothers (part of Time Warner, Inc.), Twentieth Century Fox (now owned by Rupert Murdoch), Paramount (now owned by Viacom), Universal (now NBCUniversal), Metro-Goldwyn-Mayer (now MGM), and Columbia Pictures (now Sony Pictures Entertainment). After the Big Six came the Walt Disney Company. Together, these studios are referred to as “the Majors.” (Note: A good source for the early days of Hollywood is The Moguls: Hollywood’s Merchants of Myth by Norman Zierold.) In most cases, the Majors own their own production facilities and have a worldwide distribution organization. With a large corporate hierarchy making production decisions and a large amount of corporate debt to service, the studios aim most of their films at mass audiences. Although the individual power of each has changed over the years, these studios still set the standard for the larger films.

Until the introduction and development of television for mass consumption in the 1950s, these few studios were responsible for the largest segment of entertainment available to the public. The advent of television as a major medium changed the face of the industry and lessened the studios’ grip on the entertainment market. At the same time, a series of Supreme Court decisions forced the studios to disengage from open ownership of movie theaters. The appearance of video as a mass consumer item in the 1970s became competition for both the studios and television and cable networks. When the technology for digital optical disc became available in the mid-1990s, DVDs replaced videos which companies stopped making in 1997. In this century, the Blu-ray disc was expected to replace DVDs; however, the economic situation in 2008–2009 has slowed the ability of much of the population to buy the new equipment. Another innovation in the 21st century has been digital downloading from the Internet, which competes with all of the above for the movie dollar. Nevertheless, theatrical film continues to be the major driving force for the consumer dollar.

How It Works

Today’s motion picture industry is a constantly changing and multifaceted business that consists of two principal activities: production and distribution. Production, described in this section, involves the developing, financing, and making of motion pictures. Any overview of this complex process necessarily involves simplification. The following is a brief explanation of how the film business operates.

The classic “studio” picture would typically cost more than $10 million in 1993. Or, conversely, seldom could you independently finance above that figure unless you were a well-known international filmmaker like Ron Howard or Martin Scorsese. Now, there isn’t a real threshold, as independent companies like Amblin Partners (formerly DreamWorks Studios), The Weinstein Company, and Lionsgate are capable of financing movies in the multimillions, thanks to hedge funds and foreign investments. Still, many high-budget films need the backup that a studio can give them. For many years, the studio would occasionally take a chance on a $20 million film (“low-budget” from their point of view) with the knowledge that they had the safety net of spreading that risk over 10 to 15 films.

Earlier in this decade, several studios declared, “We’re only going to make blockbusters.” (In the mid-1970s, the entire film industry stated using the term for films, usually high-budget action movies, that became their own event, drawing in a massive percentage of the movie audience.) In 2014, the lure of low-budget films with high box office numbers caused studio executives to re-enter that end of the market and co-finance with independent companies. For example, Blumhouse Productions made a ten-year deal with Universal that took The Purge out of the indie lineup. In addition, the company’s Paranormal Activity: The Ghost Dimension was financed by Paramount. Cross Creek Pictures’ Magic Mike XXL was co-financed by Warner Bros, and Cross Creek now has a deal with Sony. Gold Circle Films’ Pitch Perfect 2 was co-financed by Universal. This change has affected the indie film box office totals in the short run.

There are four typical steps in the production of a motion picture: development, pre-production, production, and post-production. During development and pre-production, a writer may be engaged to write a screenplay, or a screenplay may be acquired and rewritten. Certain creative personnel, including a director and various technical personnel, are hired; shooting schedules and locations are planned; and other steps necessary to prepare the motion picture for principal photography are completed. At a studio, a film usually begins in one of two ways. The first method starts with a concept (story idea) from a studio executive, a known writer, or a producer who makes the well-known “30-second pitch.” The concept goes into development, and the producers hire scriptwriters. Many executives prefer to work this way. In the second method, a script or book is presented to the studio by an agent or an attorney for the producer and is put into development. The script is polished and the budget determined. The nature of the deal made depends, of course, on the attachments that came with the concept or script. Note that the inception of development does not guarantee production, because the studio has many projects on the lot at one time. A project may be changed significantly or even canceled during development.

The next step in the process is pre-production. If talent was not obtained during development, commitments are sought during pre-production. The process is usually more intensive because the project has probably been greenlit (given funding to start production). The craftspeople (the below-the-line personnel) are hired, and contracts are finalized and signed. Because of many lawsuits over the past 20 years over “handshake deals” that seem to indicate otherwise, producers need to strive to have all their contracts in place before filming begins.

Production commences when principal photography begins and generally continues for a period of not more than three months, although major cast members may not be used for the entire period. Once a film has reached this stage, the studio is unlikely to shut down the production. Even if the picture goes over budget, the studio will usually find a way to complete it. In post-production, the film is edited, which involves transferring the original filmed material to digital media in order to work easily with the images. In addition, a score is mixed with dialogue, sound effects are synchronized into the final picture, and, in some cases, special effects are added. The expenses associated with this four-step process for creating and finishing a film are referred to as its negative cost. A master is then manufactured for duplication of release prints for theatrical distribution and exhibition, but expenses for prints and advertising for the film are categorized as P&A (print and advertising) and are not part of the negative costs of the production. Although post-production can last from six to nine months, continuing technological developments have changed the time frame for arriving at a master print of the film.

Tracking the Studio Dollar

Revenues are derived from the exhibition of the film throughout the world in theaters and through various ancillary outlets. Studios have their own in-house marketing and distribution arms for the worldwide licensing of their products. Because all of the expenses of a film—development, pre-production, production, post-production, and distribution—are controlled by one corporate body, the accounting is extremely complex.

Much has been written about the pros and cons of nurturing a film through the studio system. From the standpoint of a profit participant, studio accounting is often a curious process. One producer has likened the process of studio filmmaking to taking a cab to work, letting it go, and having it come back at night with the meter still running. On the other hand, the studios make a big investment. They provide the money to make the film, and they naturally seek to maximize their return.

If your film is marketed and distributed by a studio, how much of each ticket sale can you expect to receive? Table 4.1 provides a general overview of what happens when a finished film is sent to an exhibitor. The table traces the $10.00 that a viewer pays to see a film. On average, half of that money stays with the theater owner, and half is returned to the distribution arm of the studio. It is possible for studios to get a better deal, but a 50 percent share is most common. The split is based on box office revenue only; the exhibitor keeps all the revenue from popcorn, candy, and soft drinks. For all intents and purposes, the distribution division of a studio is treated like a separate company in terms of its handling of your film. You are charged a distribution fee, generally 55 percent, for the division’s efforts in marketing the film. Because the studio controls the project, it decides the amount of this fee. In our example, that leaves $2.25 of the $5.00 for the filmmaker. Next we have the hardest number to estimate: the film’s share of the studio’s overhead. Overhead is all of the studio’s fixed costs—that is, the money the studio spends that is not directly chargeable to a particular film. This would be the salaries for management, secretaries, commissary employees, maintenance staff, accountants, and all other employees who service the entire company are included in overhead. A percentage system (usually based on revenues) is used to determine a particular film’s share of overhead expenses.

TABLE 4.1
Tracking the Studio Dollar

Your Ticket	$10.00
Exhibitor Share (50%)	$5.00
Studio Share (50%)	$5.00
Studio Share (50%—see above)	$5.00
Minus Distribution Fee (55% of $5.00)	2.75
	$2.25
Minus Overhead Fee (12% of $5.00)	$0.60
Amount left to apply toward film negative (38% of $5.00)	$1.65
—does not include interest charges

Note: This example is based on average results. An individual film may differ in actual percentages.

It should be noted that the studios did not make up this system; it is a standard business practice. At all companies, the non-revenue-producing departments are “costed” against the revenue-producing departments, determining the profit line of individual divisions. A department’s revenue is taken as a percentage of the total company revenue. That percentage is used to determine how much of the total overhead cost the individual department needs to absorb.

In Table 4.1, a fixed percentage is used to determine the overhead fee. Note that it is a percentage of the total rentals that come back to the studio. Thus, the 12 percent fee is taken from the $5.00 ($.60), rather than from the amount left after the distribution fee has been subtracted. In other words, when it is useful, the distribution division is considered to be a separate company to which you are paying money rather than a division of the studio.

Now the filmmaker’s share is down to a return of $1.65 or 33 percent of the original $5.00 as your share. During production, the studio treats the money spent on the negative cost as a loan and charges you bank rates for the money (prime rate plus one to three percent of points). That interest is added to the negative cost of your film, creating an additional amount above your negative cost to be paid before a positive net profit is reached. We have yet to touch on the idea of stars and directors receiving gross points, which is a percentage of the original $10.00 if the points are paid on “first dollar.”

Studio Pros and Cons

When deciding whether to be independent or to make a film within the studio system, a filmmaker has serious options to weigh. The studio provides an arena for healthy budgets and offers plenty of staff to use as a resource during the entire process, from development through post-production. Unless an extreme budget overrun occurs, the producer and director do not have to worry about running out of funds. In addition, the amount of product being produced at the studio gives the executives tremendous clout with agents and stars. The studio has a mass distribution system that is capable of putting a film on 3,000 to 4,000 screens for the opening weekend if the budget and theme warrant it. Star Wars: The Force Awakens, for example, opened on 4,134 and Spectre on 3,929 screens. However, I should mention that a very large independent company could have the same clout. Lionsgate/Summit opened The Divergent Series: Insurgent on 3,929 screens. Finally, the producer or director of a studio film need not know anything about business beyond the budget of the film. Experienced personnel at the studio conduct all of the other business activities.

On the other hand, the studio has total control over the filmmaking process. Should studio executives choose to exercise this option, they can fire and hire anyone they wish. Once the project enters the studio system, the studio may hire additional writers and the original screenwriters may not even see their names listed under that category on the screen. The Writers Guild can arbitrate and award a “story by” credit to the original writer, but the screen-writing credit may remain with the later writers. Generally, the studio gets final cut privileges as well. No matter who you are or how you are attached to a project, once the film gets to the studio, you can be negotiated to a lower position or off the project altogether. The studio is the investor, and it calls the shots. If you are a new producer, the probability is high that studio executives will want their own producer on the project.

Those who want to understand more about the studio system should watch fictional treatments of it, such as Christopher Guest’s film The Big Picture, Robert Altman’s The Player, Jeff Nathanson’s The Last Shot, or the “Aquaman” segments in HBO’s series Entourage. Even though Guest’s film was made in 1989, nothing has changed but the names. I also suggest reading some insightful books on the subject from true insiders, such as William Goldman’s Adventures in the Screen Trade and sequel Which Lie Did I Tell?: More Adventures in the Screen Trade, Dawn Steel’s They Can Kill You but They Can’t Eat You, and Lynda Obst’s Hello, He Lied. The studios are filled with major and minor executives in place between the corporate office and film production. There are executive vice-presidents, senior vice-presidents, and plain old vice-presidents. Your picture can be greenlit by one executive, then be put into turnaround with her replacement. The process of getting decisions made is a hazardous journey, and the maxim “No one gets in trouble by saying no” proves to be true more often than not.

Motion Picture Production and the Independents

What classifies a film as independent? The traditional definition of independent is a film that finds its production financing outside of the U.S. studios and that is free of studio creative control. When studios acquire the U.S. or North American distribution rights, it is the same as another country acquiring rights. This deal is different from the co-financing deal with Blumhouse which includes worldwide distribution rights for the studio. Likewise, the Independent Film and Television Alliance (producer of the American Film Market) defines an independent film as one made or distributed by “those companies and individuals apart from the major studios that assume the majority of the financial risk for a production and control its exploitation in the majority of the world.” This is the definition of independent film used to determine the indie segments share of the total North American box office.

It is certainly true that independently financed films made by experienced producers and with budgets in the mid-range of $20 to $40 million are being bankrolled by production companies with consortiums of foreign investors. For one entity to take that kind of risk on a single film, however, is not the rule. Besides the production budget, the print and advertising (P&A) cost also has to be recouped for a film to break even.

Independents usually begin as one person/production company raising money for one film at a time, although they may have many projects in different phases of development. Many independent companies are owned or controlled by a creative person, such as a writer–director or writer–producer, in combination with a financial partner or a group. These independents usually make films under $5 million to start. Unfinished Song and Dope and—made for $30,000 and $700,000, respectively—are at the lower end of the range, with the former often called “no- budget” and the latter “very low.” When a film rises above the clouds, a small company is suddenly catapulted to star status.

In the late 1980s, with the success of such films as Dirty Dancing (made for under $5 million, it earned more than $100 million worldwide) and Look Who’s Talking (made for less than $10 million, it earned more than $200 million), the studios tried to distribute small films. With minimum releasing budgets of $5 million, however, they didn’t have the experience or patience to let a small film find its market. Studios eventually lost interest in producing small films, and individual filmmakers and small independent companies took back their territory.

In the early 1990s, The Crying Game and Four Weddings and a Funeral began a new era for independent filmmakers and distributors. Many companies started with the success of a single film and its sequels. Carolco built its reputation with the Rambo films, and New Line achieved prominence and clout with the Nightmare on Elm Street series. Other companies have been built on the partnership of a single director and a producer, or of a group of production executives, who consistently create high-quality, moneymaking films.

The brothers Weinstein, Harvey and Bob, created Miramax in the eighties as a video company. Due to a series of successful films, The Walt Disney Company purchased the company in 1993, but let it operate essentially independently. Miramax created a sea change in the independent world when their 1998 film Shakespeare In Love won Best Picture. In 2005, the Weinsteins negotiated a divorce from Disney but lost the use of their Miramax label and much of the catalog. The Weinstein brothers then created The Weinstein Company, raising $490-million equity in only a few months. Eventually, Disney sold the Miramax label and catalog to private investors. As a newly independent company, Miramax and the Weinsteins work together on many films. In March 2016, The BeIN Media Group bought Miramax and that company’s library of more than 700 films. The current executive team, headed by CEO Steve Schoch, was expected to remain in place under the new owners. BeIN, which was founded in 2014, is headquartered in Doha, Qatar, and has holdings in sports and entertainment programming, including the BeIN Sports network and the BeIn Movies channels.

In 1999, The Blair Witch Project made Artisan Entertainment a distribution force to contend with, and in 2002, My Big Fat Greek Wedding was a hit for IFC Films (now owned by Rainbow Media) and gave Gold Circle Films higher status as a domestic independent producer and distributor. In 2008, Summit Entertainment, which heretofore had been a foreign sales company, earned more than $675 million with its first production, Twilight, making the company a major independent player. In 2011, however, the company merged with Lionsgate. A reason to keep track of these changes is always to know who the players are. Several of my clients had projects working their way through the management hierarchy at Summit when the Lionsgate deal occurred. They had to wait for the inevitable termination of executives in duplicate jobs, then locate who now had their project. In the worst-case scenario, of course, a project that had been championed by a mid-level executive was sent back to the filmmaker by the next person in the same position.

A realignment of companies caused the structure of the industry to change again with the relatively “mega” profits from low-budget films encouraged the establishment of “independent” divisions at the studios. By acquiring or creating these divisions, the studios handled more films made by producers using financing from other sources. Disney, for example, purchased Miramax Films, maintaining it as an autonomous division. New Line Cinema (and its then specialty division, Fine Line Pictures) and Castle Rock (director Rob Reiner’s company) became part of Turner Broadcasting along with Turner Pictures, which in turn was absorbed by Warner Bros. Universal and Polygram (80 percent owned by Philips N.V.) formed Gramercy Pictures, which was so successful that Polygram Filmed Entertainment (PFE) bought back Universal’s share in 1995, only to be bought itself by Seagram-owned Universal. Eventually, Seagram sold October Films (one of the original Indies), Gramercy Pictures, and remaining PFE assets to Barry Diller’s new USA Networks, and those three names disappeared into history. Sony Pictures acquired Orion Classics, the only profitable segment of the original Orion Pictures, to form Sony Classics. Twentieth Century Fox formed Fox Searchlight. Metromedia, which owned Orion, bought the Samuel Goldwyn Company, and eventually was itself bought by MGM. Not to be left out of the specialty film biz, Paramount launched Paramount Classics in 1998 (reorganized as part of Paramount Vantage in 2006), and in 2003, Warner Bros. formed a specialty film division, Warner Independent Pictures. Between 2009 and 2011, most of the studio specialty divisions were absorbed and became merely labels.

In the 1990s, James Schamus created Good Machine, a producer and distributor of independent films. In 2003, the company became part of Universal as Focus Features. The company’s partners split between going to Universal and staying independent as Good Machine International. Focus Features operated autonomously from Universal and was given a budget for production and development of movies by its parent company. Universal, in turn, used Focus as a source of revenue and to find new talent. The specialty film world took a big loss on October 2013 when Universal gave CEO James Schamus his walking papers and absorbed another company, FilmDistrict, and appointed its CEO to take his place. The division still acquired independent films but did not finance any. In February 2016, Universal made another course correction by adding Focus to the division headed by Executive Vice President of Worldwide Acquisitions Peter Kujawski. The following May at Cannes, Kujawski told deadline.com about Focus, “The philosophy driving [acquiring] films for distribution is always going to be about the audience experience and dialogue with the kind of filmmakers that we love … The content philosophy in this version of Focus is … it is going to be driven by filmmakers, and by [the] first questions you ask in a meeting. Do we love this? … Do we think this can touch and move people? If it passes that bar, then we apply our business model, which is different, one that lets us enter the fray in more ways than we could in the original version of Focus.”

Then there is DreamWorks SKG. Formed in 1994 by Steven Spielberg, David Geffen, and Jeffrey Katzenberg, the company was variously called a studio, an independent, and—my personal favorite—an independent studio. In the last quarter of 2005, Paramount bought the DreamWorks live-action titles and their 60-title library plus worldwide rights to distribute the films from DreamWorks Animation (spun off as a separate independent company in 2004) for between $1.5 and $1.6 billion. Paramount then sold the library to third-party equity investors, retaining a minority interest and the right to buy it back at a future date. Spielberg could greenlight a film budgeted up to $90 million, which caused Business Strategies to count films solely financed by DreamWorks as independent. In October 2008, DreamWorks sought a divorce from Paramount and is once again a standalone production company starting life a new as DreamWorks Studios. This means that it is a very large, vertically integrated company that makes independent films. (In the strange lexicon of Hollywood, it is referred to once again as “independent studio.”) With new investment from India’s Reliance and bank loans, DreamWorks weathered the downturn in 2009–2010. In 2016, they also acquired investment money from Participant Media and Canada’s eOne and moved their distribution deal from Disney to Universal. He also revived the Amblin Entertainment name, his original company in 1981, which has offices at Universal. Both DreamWorks and Amblin remain independent companies in production and financing with distribution deals through a studio. DreamWorks Animation, however, closed a sale to Comcast on April 28, 2016, making it part of Universal studios. It is a loss to the independent film sector box office of between $200,000 and $300,000 a year.

In-house specialty divisions provided their parent companies with many advantages. As part of an integrated company, specialty divisions have been able to give the studios the skill to acquire and distribute a different kind of film, while the studio is able to provide greater ancillary opportunities for appropriate low- to moderate-budget films through their built-in distribution networks. Specialty labels have proven themselves assets in more literal ways as well. At one point, Time Warner planned to sell New Line for $1 billion (Turner paid $600 million for the company in 1993) to reduce the parent company’s debt load. New Line’s founder Robert Shaye and the other principals had always made their own production decisions, even as part of Turner Pictures. In the summer of 1997, New Line secured a nonrecourse (i.e., parent company is not held responsible) $400-million loan through a consortium of foreign banks to provide self-sufficient production financing for New Line Cinema. Making their own films meant that New Line kept much more of their revenue than they would have if they had been a division of Warner Bros. Everyone liked this situation until the release of The Lord of the Rings: Fellowship of the Ring, the first film of the trilogy. The film earned $1.1 billion worldwide, and all three films went on to earn $3.5 billion. In 2007, New Line was taken in-house and made merely a studio label by Warner Bros., which also swallowed up Bob Berney’s Picturehouse and Warner Independent Pictures. Former New Line Cinema chiefs Robert Shaye and Michael Lynne formed Unique Features, a new independent company that plans to produce two to three titles a year. Paramount changed Paramount Vantage from a specialty division to merely a brand name. Relativity Media bought genre division Rogue Pictures from Universal Pictures for $150 million. In late 2015 Relativity Media went through a bankruptcy proceeding during which they sold the television division and merged Rogue with a sports division. In order to accomplish a release from the bankruptcy proceeding, Relativity acquired new investors and bought Trigger Street, Kevin Spacey’s successful production company, and its production head, Dana Brunetti. While current films were to be sold to other companies for distribution, Relativity still had a long line of films planned for the next three years. On Oct. 3, 2016, however, The Hollywood Reporter announced that the company’s founder, Ryan Kavanaugh, had put Relativity up for sale. As this edition is going to press, the only studio specialty divisions operating independently are Sony Classics and Working Title Films.

New Companies

As always, new indie production companies have emerged since the last edition. A few examples follow. James Schamus, former Focus Features CEO, formed production company Symbolic Exchange and struck a first-look and strategic co-operation agreement with Chinese start-up Meridian Entertainment. The agreement brings development and production funding to Symbolic’s English-language slate and paves the way for co-development of Chinese projects. Broad Green Pictures, a new film production, financing, and distribution company, was founded by hedge fund billionaires Gabriel and Daniel Hammond. The company has produced Bad Santa 2, Learning to Drive, and Break Point and distributed 99 Homes. The company focuses on “creating partnerships with talented filmmakers in a collaborative environment with the goal of telling elevated stories, even if that means taking risks.” Former Annapurna COO Paul Hanson launched Covert Media, which is backed by Media Content Capital (MCC). The company has produced Dirty Producer and Rock the Kasbah. Miranda Bailey announced her new financing entity, Cold Iron Pictures, which has produced Swiss Army Man and The Diary of a Teenage Girl. Joel Silver, a longtime studio producer, partnered with Canadian entrepreneur Daryl Katz to create Silver Pictures Entertainment, to develop, produce, and provide or arrange financing for its own slate of feature films, television, and digital projects, both independent of and within the traditional studio system. It has produced Suburbicon and The Nice Guys. Bill Block, formerly CEO of QED, formed BillBlock Media. He is covering the field as both a veteran producer with a first look deal with Warner Brothers and as a sales agent for Red Granite. Block exited QED after he formed Merced Media with PalmStar Media Capital and possibly had different production interests than the investors in QED. This type of movement of a company is frequent in the industry. If you are reading this book in 2018 or 2019, the company’s focus could have shifted again. Family Christian Stores, the nation’s largest Christian retail chain, formed Family Christian Entertainment. The company will produce two films per year. Its first production was 90 Minutes in Heaven, a coproduction with Emmett Furla Oasis.

Chinese companies made a big inroad with U.S. independent companies and studios. The significant Indie companies I will mention here are Studio 8 and STX Entertainment. Fosun Group is invested in Studio 8, a startup run by ex-Warner Bros. Motion Picture Group President Jeff Robinov. Robinov plans to make movies at different budget levels aimed at the global market. The company has a five-year deal with Sony Pictures Releasing for up to 24 of its productions. The company’s first releases in 2016 are Soultrean and Billy Lynn’s Long Halftime Walk. Guo Guangchang, Chairman of Fosun, said, “I just realized that all the movies he produced are all my favorite movies.” Producer Robert Simonds Jr. teamed with Shanghai-based Hony Capital and private equity firm TPG to form STX Entertainment. Adam Fogelson, the former chairman of Universal Pictures, is Motion Picture Group Chairman. He will be responsible for overseeing eight to ten mid-range budget ($20 million to $60 million), star-driven features to be produced, marketed, and distributed in-house. OddLot Entertainment founder Gigi Pritzker also is among the investors and sits on the board. Among the company’s first productions are The Boy and The Gift. As a distributor, the company released a U.S. remake of Secret in Their Eyes, Hardcore Henry, and Free State of Jones.

The primary definition of independent is a film that remains more than 50 percent independently funded and produced no matter whose studio logo is attached to it. It is up to you, the reader, to track what has happened in the meantime. The primary sources are imdb.com and reading the online trade papers every day. They are free, so take the time.

How It Works

An independent film goes through the same production process as a studio film from development to post-production. In this case, however, development and pre-production may involve only one or two people, and the entrepreneur, whether producer or director, maintains control over the final product. For the purpose of this discussion, we will assume that the entrepreneur at the helm of an independent film is the producer.

The independent producer is the manager of a small business enterprise. She must have business acumen for dealing with the investors, the money, and all the contracts involved during and after filming. The producer is totally responsible from inception to sale of the film; she must have enough savvy and charisma to win the confidence of the director, talent, agents, attorneys, distributors, and anyone else involved in the film’s business dealings. There are a myriad of details the producer must concentrate on every day. Funding sources require regular financial reports, and production problems crop up on a daily basis, even with the best-laid plans.

Tracking the Independent Dollar

Before trying to look at the independent film industry as a separate segment, it is helpful to have a general view of how the money flows. This information is probably the single most important factor that you will need to describe to potential investors. I don’t insert this table in plans, as each one has its own forecasts. However, it does serve as a general comparison to the studio system.

Table 4.2 is a simplified example of where the money comes from and where it goes. The figures given are for a fictional film and do not reflect the results of any specific film. In this discussion, the distributor is at the top of the “producer food chain,” as all revenues come back to the distribution company first. The distributor’s expenses (P&A) and fees (percentage of all revenue plus miscellaneous fees) come before the “total revenue to producer/investor” line, which is the net profit.

The box office receipts for independent films are divided between the exhibitor and a distributor, who collects all the money and takes out fees before sending to the filmmaker. The average split is still 50/50. This is an average figure for the total, although on a weekly basis the split may differ. In the example in Table 4.2, of the $10 million in total U.S. box office, the distributor receives $5.00 million in domestic rentals. All other revenues also flow back to the distributor. Each revenue source―domestic ancillaries (home video, which currently encompasses DVD, Blu-ray, and digital sources, plus television, cable, etc.) and foreign (theatrical and ancillary)―is. These revenue areas add another 110 percent to the revenue stream, or 1.1 percent times the $5.00, which equals $5.50 in our example. The foreign box office and ancillaries are another 90 percent of the $5.00 or $4.50 for a revenue total of $15.00.

TABLE 4.2
Tracking the Independent Dollar (in millions)

REVENGE OF THE CRAZED CONSULTANT*
(Millions of Dollars)
Domestic Box Office Gross	10.00
Exhibitor Share of Box Office (50%)	5.00
Distributor Share of Box Office (50%)	5.00
REVENUE
Domestic
Theatrical Rentals (50% of total box office)	5.00
Domestic Ancillarya	5.50
Domestic Revenue Total	10.50
Foreign	4.50
TOTAL DISTRIBUTOR GROSS REVENUE	15.00
LESS:
BUDGET	3.00
PRINTS AND ADVERTISING	2.40
TOTAL COSTS	5.40
GROSS INCOME	9.60
Distributor’s Fees (35% of Gross Revenue)	5.25
NET PRODUCER/INVESTOR INCOME
BEFORE TAXES	6.24

^ahome entertainment, television, cable, digital
*This is a fictional film.

Film production costs and distribution fees are paid out as money flows in. From the first revenues, the P&A (known as the “first money out”) are paid off. In this example, it is assumed that the P&A cost is covered by the distributor who takes a fee to cover those expenses. Our example used $2.40 of the budget, which is 0.8 percent compared to the budget. The distributor’s fee, which is his profit, is 35 percent of the total worldwide revenue in the forecast when a distribution agreement is not in place. The net profit to be split between the filmmaker and investor is $6.24, or a payback of 208 percent of the budget.

Pros and Cons

Independent filmmaking offers many advantages. The filmmaker has total control of the script and filming. It is usually the director’s film to make and edit. Some filmmakers want to both direct and produce their movies; this can be like working two 36-hour shifts within one 24-hour period. It is probably advisable to have a director who directs and a separate producer who produces, as this provides a system of checks and balances during production that approximates many of the pluses of the studio system. Nevertheless, the filmmaker is able to make these decisions for himself. And if he wants to distribute as well, preserving his cut and using his marketing plan, that is another option—not necessarily a good one, as distribution is a specialty in itself, but still an option.

The disadvantages in independent filmmaking are the corollary opposites of the studio advantages. Because there is no cast of characters to fall back on for advice, the producer must have experience or find someone who does. Either you will be the producer and run your production or you will have to hire a producer. Before you hire anyone, you should understand how movies are made and how the financing works. Whether risking $50,000 or $50 million, an investor wants to feel that your company is capable of safeguarding his money. Someone must have the knowledge and the authority to make a final decision.

Money is hard to find. The popular saying is, “If it was easy, everyone would be doing it.” Here in Hollywoodland, we get the impression that everyone is. However, that isn’t true in other parts of the country and world. Budgets must be calculated as precisely as possible in the beginning, because independent investors may not have the same deep pockets as the studios. Even if you find your own Megan Ellison (Annapurna Pictures) or Jeff Skoll (Participant Productions) with significant dollars to invest, that person expects you to know the cost of the film. The breakdown of the script determines the budget. When you present a budget to an investor, you promise that this is a reasonable estimate of what it will cost to make what is on the page and that you will stay within that budget. The investor agrees only on the specified amount of money. The producer has an obligation to the investor to make sure that the movie does not run over the budget. Trying to go back to investors for more money after the initial infusion of cash usually doesn’t work.

Theatrical Exhibition

There were 43,661 theater screens (including drive-ins) in North America in 2015 per the 2016 “Theatrical Market Statistics 2015” report released by the Motion Picture Association of America (MPAA) and 152,144 worldwide. (http://www.mpaa.org/wp-content/uploads/2016/04/MPAA-Theatrical-Market-Statistics-2015_Final.pdf)

Film revenues from all other sources are often driven by the North American domestic theatrical performance. Despite many ups and downs, such as the growth of the multichannel universe and the various home entertainment services, theatrical distribution has continued to prosper.

For pictures that skip the theatrical circuit and go directly to disc, television/cable, downloading, streaming or foreign distribution, revenues are not likely to be as high as those for films with a history of U.S. box office revenues and promotion. The U.S. theatrical release of a film usually ends within three months but can go to six months. The average for both studio and independent films before going into home video generally is equally divided between three and four months. As with other generally accepted standards, this one is undergoing changes. While studio films begin with a “wide” opening on thousands of screens, independent films start more slowly and build. Rentals will decline toward the end of an independent film’s run, but they may very well increase during the first few months. It is not unusual for a smaller film to gain theaters as it becomes more popular.

Social media has had a big impact on distribution. For independent films, it allows the word to spread faster the first weekend, and successful films to expand more rapidly. For potential studio blockbuster films that depend on a big opening, friends tweeting bad reviews on Friday night can now kill the weekend for the film.

Despite some common opinions from distributors, the exhibitor’s basic desire is to see people sitting in the theater seats. There has been a lot of discussion about the strong-arm tactics that the major studios supposedly use to keep screens reserved for their use. (This is sometimes referred to as block booking.) Exhibitors, however, have always maintained that they will show any film that they think their customers will pay to see. Depending on the location of the individual theater or the chain, local pressures or activities may play a part in the distributor’s decision. Not all pictures are appropriate for all theaters.

Time and time again, independent films that have good buzz (prerelease notices by reviewers, festival acclaim, and good public relations) and favorable word of mouth from audiences not only survive but also flourish. Hello, My Name Is Doris is a good example. It started out on 4 screens and expanded to a high of 979 screens. Budgeted at $1 million, the 2016 film just ended its box office run with $12 million and is now going into the ancillary media. When audiences liked the film and told their friends about it, the movie was given wider release in chain theaters in more cities. Of course, have Sally Field as your lead is good for promotion. Older actors are not a sure bet, however, and the distributor used a slow rollout for the film. If you have a good publicity gimmick, it doesn’t hurt. Seventeen years later, people still ask me if 1999s The Blair Witch Project is a real story; I have even been accused of lying when I say that it is utterly fictional, a “mockumentary” no more real than Sharknado or Paranormal Activity 1–5.

Digital and 3D

Digital

Digital film is rapidly changing the film industry. While at the 2012 CinemaCon convention, NATO Chief John Fithian said, “About two-thirds of all screens now have digital projectors, and the transition—as well as the demise of celluloid prints—could be complete by the end of 2013.” He also urged theater owners to check out exhibitors promoting the next stages in the evolution of digital cinema: faster frame rates and laser projection.

On June 5, 2000, Twentieth Century Fox became the first company to transmit a movie over the Internet from a Hollywood studio to a theater across the country. Well, to be more exact, it originated in Burbank, California, and went over a secure Internet-based network to an audience at the Supercomm trade show in Atlanta. (Trivia buffs take note: The film was the animated space opera Titan A.E.) At the end of 2005 according to the MPAA’s most recent report, there were 324 digital screens in the United States; 5,474 in 2008; 25,621 in 2011; and in 2015 there were 42,552, or 97.5% of the total, leaving 1,109 analog screens. In the rest of the world, there were 108,481 screens―40,378 non-3D, 58,120 3D and 9,983 analog.

As we roll rapidly through the seventeenth year of the 21st century, filmmakers keep calling me about the $30,000 digital film they are going to shoot on their low-cost digital camera that will look like a $10-million film and be distributed on 3,000 screens. This deal is not likely on both counts. What is missing in those expectations? For one thing, the filmmaker does not have enough experience to obtain the quality with so little money. That aside, there still is a question about low-budget digital films. Since 1,109 screens are approximately the same number as in 2011, we have to assume many specialty films will play on analog screens. The conversion costs to “d-cinema” screens are considerable; each digital projector is $150,000, along with the more than $20,000 per screen required for the computer that stores and feeds the movies. Studios and distributors have been willing to work with the big chain exhibitors to share or even bear the expenses; however, they aren’t concerned about smaller venues.

We now know that celluloid will be with us in the foreseeable future. Despite the number of digital films sent to film festivals, it is likely you will have to plan on a 35mm version, especially for a low-budget film that may only play on small screens. Include money in your budget to convert to 35mm. Do not assume that the distributor wants to do it. Look at it from his viewpoint. If the distributor is planning on releasing 10 to 20 films a year, and it runs $35,000 or more per film for a quality upgrade from digital to 35mm, he is likely to opt for a film that already has a 35mm format. “But,” you say, “my film will be so exceptional, he will offer to put up the money.” It is within the realm of possibility, but I wouldn’t want the distribution of my film to rest on that contingency. Or you may say, “I’ll wait until the distributor wants the film, and then I’ll raise the money for the upgrade.” Although this is not out of the question, don’t just assume you will be able to raise the money. Those pesky investors with their own rules again. Whether it is one investor or several in an offering, you have to go back to those people for the additional $50,000. Will they go for it? Maybe, but you are stuck if they don’t. If you raise the money from additional sources, you still have to get the agreement of the original investors. After all, you are changing the amount of money they will receive from your blockbuster film.

Then there is the question of quality. When technology experts from the studios are on festival or market panels, they always point out that audiences don’t care how you make the film; they care how it looks. If you can really make your ultra-low-budget digital film have the look of a $5-or $10-million film, go for it. But be honest with yourself.

3D

This section would reasonably be titled “Everything old is new again.” Readers over 60 will remember this technology’s first incarnations in 1952 to 1954, with films like House of Wax (the first with stereoscopic sound) and It Came from Outer Space. It faded in the late 1950s but had a revival in the early 1980s when the large-format IMAX screens offered their early docs in 3D. Studios and other production companies discovered 3D in the past four or five years as the “new format” that will revolutionize the film industry. Thanks to improvements in technology, filmmakers can deliver a better product.

It appears that 3D is here to stay. According to a study conducted by Opinion Research Corp., “consumers are savvy in selecting what movies to watch in 3D. They look at it as a more fun, exciting and valuable experience.” However, how many films that audience will continue to pay a premium for each year to come remains to be seen.

Exhibitors continued to convert screens 3D but not as rapidly as in the first part of the decade. In 2015, there were 16,441 digital 3D screens in North America compared to 13,695 in 2011. The percent of the total digital screens remained at 39 percent, however. Over time there has been some audience fatigue with 3D itself and the higher prices. This factor is more likely to affect studio films in terms of total dollars than indie films; however, there still is a push by filmmakers of indies to convert their digital films to 3D for the large format screens.

In the United States, studios were footing the bill for audiences’ 3D glasses to help push 3D conversion along. As of May 2012, Sony, and presumably the rest of the majors, stopped paying for glasses, which cost $5 to $10 million for a major release. Moviegoers who are fanatical about 3D films buy their own. All of us, nevertheless, pay the extra money added to the ticket price for the theater’s glasses.

Future Trends

Revolutionary changes in the manner in which motion pictures are produced and distributed are now sweeping the industry, especially for independent films. Amazon Studios and Netflix began buying films aggressively at the 2016 Sundance Film Festival, with a total of seven each by the end of February. In terms of Netflix, while the filmmaker may get a nice payment upfront, Ted Sarandos, chief content officer for Netflix, said in a keynote at the Cannes Film Market 2015, “There is no backend because there is no incremental revenue we are earning off that.” It would appear that there is no benefit to investors except to be paid back for the budget. Amazon Studios, however, has put Ted Hope and Bob Berney in charge of their film production and distribution. Early information is that the company was planning a 90-day theatrical window before streaming some films. At this point, there is no way to know what the payback will be to filmmakers or investors. It is not known if or when there will be data from either company; therefore, there currently is nothing to tell investors.

Ongoing web-based companies like Google Play, Amazon’s Video on Demand, Apple’s iTunes Store, Vudu, and CinemaNow continue renting and selling films and other entertainment programming for download on the Internet and through their apps; and subscription websites and apps such as HBO GO, Showtime Anytime, Netflix, and Hulu Plus stream filmed entertainment to home viewers. Streaming platform Vimeo launched its on-demand service in 2013. Streaming media players, such as those made by Google, Roku, Amazon, Apple TV, and Sony, as well as the streaming features of Xbox (360 and Xbox One) and Wii, allow even those who are not tech savvy to stream content from these and similar websites directly to their HDTV screen, creating a home theatre experience. Multi-use portable devices that can provide personal viewing of films (including video iPod, smartphones, and tablets) are flooding the marketplace, expanding the potential revenues from home video and other forms of selling programming for viewing.

Tables and Graphs

A picture may be worth a thousand words, but 20 pictures are not necessarily worth 20,000 words. The introduction of user-friendly computer software brought a new look to business plans. Unfortunately, many people have gone picture crazy and include tables and graphs where words might be better. Making your proposal “look nice” has a point of diminishing returns.

There are certainly benefits to using tables and graphs; however, one rule for writing screenplays does apply. What relation do your pictures have to what investors need to know? Graphic representations are not supposed to be self-explanatory; they are used to make the explanation more easily understood. If you include multiple tables and graphs that are not accompanied by explanations, the reader either will be confused and/or think that you are confused. You might well be asked to explain your data. Won’t that be exciting?

What Do You Tell Investors?

All business plans should include a general explanation of the industry and how it works. No matter what your budget, investors need to know how both the studio and the independent sectors work. Your business plan should also assure investors that this is a healthy industry. You will find conflicting opinions; it is your choice what information to use. Whatever you tell the investor, you must be able to back it up with facts. As long as your rationale makes sense, your investor will feel secure that you know what you are talking about. That doesn’t mean he will write the check, but at least he will trust you.