Entertainment Finance Plans Today
The major studio system has changed. Studios are focused on producing fewer films and releasing high budget franchise blockbusters. Less is more. Mini-majors and smaller studio divisions have stepped in and produce the lower budgeted theatrical features that the majors no longer produce. Additional players are added to the mix with the streaming services. Streaming services changed the landscape by moving the audience online.
While new players enter the Hollywood marketplace, international distributors are less aggressive in purchasing distribution licenses for film projects. The reasons for the change vary. One reason may be that streaming services require foreign distribution rights in addition to US rights. Another reason may be the changing local economies. Whatever the reasons, the result is that the demand decreased and so did the pricing level for distribution licenses (pre-sales & sales).
This development is odd in view of the fact that more content is needed today than ever before, due to increasing distribution platforms. If we would look at this as we would in any other industry, we would conclude that a higher demand would increase the pricing.
Apparently Hollywood is not like any other industry, because here it seems that even though the demand for content has increased, the pricing to buy such content has decreased. In turn, this forces producers to reduce production expenses.
In summary: In the industry today “cost of goods” (I.E. films) are forced to be reduced, sales revenues are decreased, while the demand for such “goods” and the demand for quality has increased. I’m making this comparison above in a lingo that relates to any other business in the world because I’m finding this “conundrum” challenging and fascinating at the same time. One should think, if the demand is increased, then pricing/revenues should increase as well. That’s how it usually works in any other business. Well, apparently not always in Hollywood.
It’s challenging because the disruption leaves not much time to maneuver around it. Producers and filmmakers have to be quick on their feet. These are fascinating times because they offer new opportunities. My advice to producers today is to focus on projects with an authentic story based on strong and unique characters. Develop stories inspired by the characters (rather than matching the character to the story plot). Colorful and authentic characters make for unique stories with unpredictable twists. The story is the foundation of the house that builds the film or television project.
Next: Let’s look at what a basic finance plan should ideally include.
Elements of an independent film finance plan can include (all or some of the below):
- Pre-sales of distribution rights against MG — minimum guarantees (ideally min. 35%)
- Gap financing (up to 20%)
- Tax credits / subsidies (mostly non-recoupable, 15 – 50% depending on region)
- Equity financing (ideally not exceeding 35%)
- In-Kind deals (music, post-production, Crowdsourcing, VFX, etc.)
- Mezzanine financing (the “hybrid” between a loan and equity)
- Product Integration and Brand Sponsorship
- Sales Agent MG
The potential value of a film project is established by sales estimates, which present the projected distribution revenues anticipated from the marketplace where the film is being released. In most cases, this would entail non-US (foreign) estimates.
The sales agent reads a script, then considers the cast, director and genre in order to establish a minimum guaranteed license fee for the film project as it relates to each country where the film would be distributed (sold). The sales agent establishes a “take” price (a “low” case scenario) and an “ask” price (“medium/high” price scenario). Banks and financiers tend to only look at “take” pricing. Any smart producer should do the same.
Pre-selling the film at a level of approximately one-third of a budget signals that there is a demand in the marketplace for this film. If very little or no pre-sales are achieved, it translates to the simple message that no one is eager to buy the film. Of course, there are exceptions to any rule, as in any business.
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