MARCH 1992
	Indies must look beyond H'wood     Published in the Special 1992 Special Finance Edition of Daily Variety, in order to capture a wider share of the market and financing for their films, independent producers must consider the global marketplace rather than simply the American marketplace.
Greg S. Bernstein

Remember the days when the expansion of the cable television and video markets almost guaranteed that a film got made because the video and/or cable company provided enough of a presale to finance the costs of production?

Some might even settle for the time when both a domestic and foreign presale were adequate. No problem. Contracts could be discounted with banks or investors.

Or remember when investors would fund almost any film, because U.S. tax laws reduced their risk, or even provided them with a profit, before your film was ever released?

What about the mid-to-late 80's when "everyone" wanted to invest in movies?

Unfortunately, the list of domestic theatrical and video distributors is dwindling almost daily, limiting the chances of obtaining the presales and financing necessary to produce and distribute a film. Most of the independent distributors that are left are in such financial disarray financially that their contracts could be worthless by the time a film is made.

Even the banks aren't lending like they used to. Regulators are squeezing them. Losses on real estate and other loans are making banks think twice about movies, not to mention that films are supposed to be even riskier than real estate.

Remember those banks that might even loan on "estimates," with the paperwork to follow....sometimes after the film was in release? Those days are gone.

With a contraction in the distribution marketplace and banks restricting their lending activities, obtaining presale contracts, even from some major studios, does not ensure financing of the film.

Since virtually every motion picture limited partnership sponsored by a major studio or independent, along with most of the production companies that went public in the 1980s, fizzled, investors, disillusioned with the financial marketplace in general, and motion picture partnerships and investments in particular, are not willing to invest in T-Bills, let alone movies, except under very unusual circumstances.

While the investing public and Wall Street will eventually forget the mistakes of the '80s, it will be many years before this source of financing is once again available to the independent producer.

While it might seem like it is time to give up independent production altogether (just kidding), remember that throughout the 1980s the independent producer was continually confronted with obstacles to obtaining the financing necessary to make films. But indies always found the pot of gold. The 90's are no different. Only this time, Dorothy, you have to look beyond your own backyard for the Land of Oz.

American independent producers must widen their horizons beyond Hollywood. Although the foreign marketplace may soon dominate the revenues generated from films (and for independent production, the foreign market probably already does dominate), many independent producers still do not place as much emphasis on foreign markets as they should.

Even sophisticated producers who recognize the potential of the foreign markets in all likelihood have underestimated the potential of the foreign arena as a source of production funding.

The independent producer with a respectable project who is determined, creative and realistic (which might mean foregoing some potential profits or control over the film), will be successful in locating financing, even in these troubled times.

Financing of independently produced films in 1992 and beyond will be from foreign sources through a combination of (a) a continued surge in demand for product in the foreign markets, (b) greater lending by foreign banks, (c) strategic investing by foreign distributors, (d) investment from foreign territories which have previously not been active in investing in motion pictures, and (e) expansion of foreign tax benefits and subsidy programs.

Expansion of Foreign Markets

Statistics show that foreign revenues now accounting for between 35% and 50% of the total revenues from a film.

But these statistics are skewed by films produced by the major studios and big independents. Many independently produced films receive well over 50% of' their revenues from foreign sources.

Moreover, the markets in Europe and other territories are still expanding.

More and more theaters, including multiplexes being constructed by U.S. exhibitors, are being built around the world. The European television market is still expanding as countries begin relinquishing their governmental monopoly on broadcasting.

Video, which became a dominant player in some foreign markets, is still relatively rare (compared to the U.S.) in much of the rest of the world. Cable barely exists outside the U.S.

Competition among distributors in various countries, such as Germany and England, is extremely intense. For all the talk of quotas and "buy local," "buy American" is still the foreign viewer's choice.

Internationalize Your Thinking

In order to capture some of this expanding market, American producers must think of their films in terms of a global marketplace and not just in terms of the United States. Producers must think not only of the genre but also the story, dialogue, actors and other talent.

American producers often assume that their film will not play overseas and, therefore, de-emphasize or sometimes even ignore the potential foreign market.

Comedies used to be impossible to sell overseas. The only genres that sold well overseas were action/adventures or, perhaps, psycho thrillers. But look at some of the recent hits around the world.

Yes "Terminator" did extremely well, and so too did "Robin Hood," but "Pretty Woman," "Ghost," "Moonstruck" and even "Home Alone" played extremely well around the world.

Even "sex, lies and videotape" did relatively well. A dialogue picture did well outside the U.S.? These films played well overseas because they involved stories, themes and even dialogue to which the local country could relate.

Just as important as the particular storyline or theme are the actors and directors involved in a project. Don't assume that someone popular in the U.S. is automatically popular overseas. Conversely, many American actors are very popular overseas even if they are relatively unknown at home.

Since a number of these actors, while popular overseas, are not as big a draw in the United States, they are available at a lower cost to the producer.

Europeans also place significant emphasis on the director, especially if he or she is foreign. A British, French or German director can enhance foreign revenues.

Because most American distributors will not accept a film unless there is "recognized" or "name" talent attached to the project, the producer must still spend a million dollars or more for "talent" satisfactory to the U.S. distributor, even if the actor is worthless from a foreign sales standpoint.

By way of contrast, for only a few hundred thousand dollars, if that, the astute independent producer can add the "foreign recognized talent" to satisfy the foreign marketplace as well.

Since most American producers are not familiar enough with the foreign marketplace to determine what sells, the American producer should enlist the support of a foreign distributor or foreign sales agent.

Don't make the mistake of cutting a deal for American rights and then talking to a foreign distributor or sales agent.

The foreign distributor will probably require a U.S. presale for 50% of the budget, but foreign presales are more and more often covering the entire budget when the story, casting, etc. is right.

Most foreign distributors will make estimates of what they believe a film is worth in the marketplace, then, in order to protect themselves, only pay half of this amount as an advance to the independent producer. Some foreign distributors even continue to limit the guarantee to half the budget, even if their estimates far exceed this level.

Plus for Producers

Accordingly, it is advantageous for independent producers, who have the time and patience and wish to increase their profit potential to use a foreign sales agent.

Rather than selling all foreign territories to one buyer, use a foreign sales agent to arrange sales in each territory and, sometimes, media.

Unfortunately, this process can take a year or more and the foreign sales agent does not put up a guarantee. The producer must rely on the guarantee from each individual sale, preferably secured by a letter of credit.

The foreign sales agent will charge a commission of between 15% and 25% for this service. Nonetheless, the benefits of this approach, especially for the Independent producer, can be enormous.

It is very possible to obtain foreign presales for more than half the budget, or even all of the budget, simply from sales in England, Spain/Portugal, German-speaking territories (Germany, Switzerland, Austria), France, Italy, Benelux, Australia and Japan (the "Big Eight").

Many producers assume that if they have six or seven separate presale contracts, they will have difficulty banking the contracts. This is not necessarily true. While it may take a little more time to consummate the bank loan (one to two weeks) or legal costs ($5,000 to $10,000), the benefits will far outweigh the burdens.

For example, a $10 million action-adventure with foreign recognized actors, actresses and director tied to the project could reasonably obtain a single foreign presale of $5 million.

Better yet, by using a foreign sales agent, patience and some good negotiation, presales of $11 million or more, in the Big Eight territories alone ($1.25 million England, $2 million to $2.25 million German speaking territories, $2 million Japan, $1.5 million France, $1.5 million Spain), could be obtained.

Not only is there enough in presales to make the film and earn a profit, but the rest of the world, including the United States, is still unsold.

There is a misconception by producers that obtaining presales equal to their budget is obtaining the financing. While this used to be the case in the early 1980's, it is not the case today. In the early '80s, almost any presale contract from any distributor, domestic or foreign, was bankable. In today's marketplace, only the best domestic distributors, and virtually no foreign distributors are bankable with U.S. institutions without letters of credit that are drawn on strong foreign banks.

It has even gotten to the point where presale or even negative pickup contracts with several major studios are not bankable without letters of credit.

The market is changing so rapidly that a number of domestic banks are even requiring that the foreign letters of credit be confirmed through a U.S. bank. Since very few foreign distributors are willing to give a letter of credit as collateral, unless the distributor finds the product to be extraordinary, the independent producer must find alternate financing sources.

Once again, think global. A number of foreign banks, many of which have offices in Los Angeles, are willing to bank foreign contracts, many times without letters of credit, when domestic banks are not so willing.

A number of foreign distributors have been undertaking what are referred to as the "super presale." It is also sometimes referred to as a co-production or strategic alliance.

For example, a German distributor might wish to obtain distribution rights to a film in the German-speaking territories in return for funding the budget of the film and obtaining an equity position.

While these strategic alliances have been fairly well documented with major studios, as well as some independent production companies such as Carolco (Canal Plus, RCS and Pioneer) or Largo (JVC), they are available to the independent producer as well.

Many independent foreign distributors must compete with the major studios and major foreign distributors to obtain product. In order to obtain quality product, the independent foreign distributor knows that he must "have a gimmick" to attract product.

What attracts the indie producers more than money? Accordingly, these independent foreign distributors provide all funding necessary to make the film, take a priority position for recoupment and an equity position in profits. But, most importantly for the foreign distributor, he is granted the right to distribute the film in the local territories or in a particular media.

Tax-advantaged investment programs, which, in the late 1970s and early 1980s supplied the bulk of financing to the independent producer, are still available in other parts of the world. For those producers willing to make their films in other countries, tax-advantaged programs provide significant opportunities.

In certain foreign jurisdictions, investors are given local tax benefits for investing in films that meet certain criteria, such as the actors, director, writer and/or producer being a citizen of that country, or simply requiring that the film be produced there.

Some countries only require that their citizens own the film. These tax benefits usually give an investor a profit on his film even if he only receives 80% to 85% of his investment back.

Keeping Up

Another emerging source of financing for independent films is investment dollars from the Far East, other than Japan. Malaysia, Thailand, Indonesia, Singapore, Hong Kong and Taiwan have vast resources which have been as yet untapped by Hollywood.

These territories have accumulated significant cash hordes from 30 years of exports to the West are now seriously looking at investment in motion pictures.

Due to local investment restrictions and other reasons, entrepreneurs in these jurisdictions have been unable or unwilling to invest abroad. However, these barriers are crumbling.

It is very common for a producer to obtain presales for 80% to 90% of the budget. It is the last 10% to 20% that is the problem. Don't think like Congress. Raising revenue is not always the answer. Reducing costs is the other side of the coin.

Filming a motion picture in eastern Europe or other countries with lower labor and materials costs is another way of finding the financing for a film.

Not only are the costs of production lower, but a number of foreign territories are providing subsidies to independent producers by way of supplying local labor, materials and locations at a fraction of their true cost. Most governments have come to realize that for every $1 spent on a production, $3 of benefit to the local economy is generated.

Another method of reducing the costs of a film (or, rather, financing a film) is by purchasing foreign government bonds at a deep discount and returning them to the local government in exchange for local goods and services. This is known as a debt-swap.

For example, if a particular country has issued a bond with a face value of $100, and the bond is trading in the international financial community for 25 cents on the dollar (because it is likely worthless), the indie producer could purchase these bonds for 25 cents and return them to the local government (who would like to reduce its debt) in exchange for goods and services equal to the amount of the bond, plus transaction costs.

In other words, the independent producer could receive goods and services worth 85 cents to 95 cents for which he only paid 25 cents.

Opportunities to obtain the financing to produce independent features still exist - the independent producer, however, must consider the global marketplace rather than simply the American marketplace to tap them.

 

 

 

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Reprinted with permission by Daily Variety. Variety and Daily Variety are registered trademarks of Reed Properties, Inc., used under license. Used by permission.

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