MAY 1995







The latest twist in financing independent films are discussed in this Article published in the Special 1995 Cannes Edition of Business of Film .

Greg S. Bernstein

It is late spring 1994. You just finalized enough international presales from AFM '94 to cover $2 million out of a $3 million production budget. With international sales accounting for over 60% of the budget, a domestic deal, for straight to video, should be a snap to put you into production .... just in time to announce the project at Cannes. Then the unexpected happens. The domestic video distributor starts to renegotiate the minimum guarantee (down), or worse pulls out altogether. No problem you say. You will just try someone else. Lots of offers, but none even close to what the first distributor was offering. Oops! Now the first distributor drops the minimum guarantee even further.

If you produce low budget, under $5 million, films, which most independent producers produce, the foregoing scenario is, unfortunately, all too familiar.

Over the past couple of years we have seen domestic deals drop from $2.5 million on a $5 million film, to maybe $750,000 to $1.2 million. Video deals for such films might be $300,000 - $500,000, while premium cable premier films have seen the license fees drop from $1 million to $750,000, or less. Lower budget films are almost off the radar screen.

The fall-off in video sales, both here and abroad, together with a consolidation and restructuring of the domestic independent distribution market, has meant lower minimum guarantees and less alternatives. To make matters worse, at the same time as the domestic distributor was reducing its contribution to a film's financing, from 50% of the budget to 20%, the same distributor began to demand higher profile (and more expensive) talent to be included in the film... "to give it theatrical potential."

While every day we read that a film should be made for potential theatrical release, both domestically and abroad, the likelihood of a reasonable domestic theatrical release for a low budget film is slim and remote, especially if the film is not genre driven or a sequel to an existing franchise.

With domestic presales on low budget films now accounting for less than 25% of a film's budget, and European presales accounting for 50-65% of a film's budget, it is illogical to continue to place primary emphasis on the "all important domestic deal," or, for that matter, a film's appeal to the domestic audience.

Today's independent producer must be flexible. He or she must not be constrained by yesterday's paradigm. He or she must have a global appreciation of a film's financing and production potential, not just its domestic distribution potential.

The silver lining in 1994 for the independent producer was international television, which continued to expand, both in terms of demand for film product and pricing. More important for many independent producers is the fact that the films demanded in international television distribution are not the typical action picture starring one of a handful of male stars that we have seen over and over again.

Why this demand for television product? International television has, relatively speaking, only recently discovered competition. New channels, as well as cable and satellite transmission, are being added, or the penetration is expanding, at an almost geometric pace in some territories. This is true in large and small territories.

International television buyers seek out quality American productions, because their audiences demand, and the associated advertising revenue tends to skew towards quality American films rather than indigenous product. Indigenous product, on the whole, fairs worse than American product. Also, unlike other industries, American film product is gaining, not losing, market share in most countries, except to the extent quotas have skewed market forces.

Why American films? Why German cars, Japanese electronics or Swiss watches? Consumers know what they want. But why? Who knows? May be it's simply Hollywood knowing how to make a film better than others. May be it has something to do with globalization of the world's economies and the fact that the American life style is sought by many of the world's peoples.

Whatever the reason, with audiences demanding American films and television programmers trying to fill the "slots," the result has been increased prices and demand.

In fact, low budget, independently produced films that attract the greatest interest of European television exhibitors tend to be American films that are artistically driven, with a strong "international" cast and an internationally recognized director.

Accordingly, the key is globalizing a film by improving its revenue potential in one or more European territories by enhancing its international theatrical or television appeal, usually at the expense of the domestic marketplace. It's no different from what we used to do to enhance a film's revenue potential for American distributors. It may mean that one of the stars is popular in a particular country, or that the film's subject matter is of great interest to a particular niche market.

Given the insatiable demand for television product, many foreign television exhibitors, whether independent or state owned, cable or broadcast, have had to find ways to fill their programming needs, not to mention finding product which is demanded by their viewers.

One problem, however, for both the American producer and the European exhibitor, is the limit on the number of non-European films which can be aired in E.U. countries, due to quota limits.

The crème de la crème, as one would say, would, therefore, be to create a film with the required international characteristics and, while unquestionably American in its derivation, nevertheless qualifies as a European film for purposes of quotas.

In order to assure itself of competitive product, the international television exhibitor has found it beneficial to partner, or co-produce, the film with an American production company, which can also have the added benefit, under certain conditions, of qualifying the film for European quotas.

Some of these co-productions take the form of a substantial presale, actual equity investment on a single film, or long term, more comprehensive, partnerships on a slate of films. The latter provides the independent international distributor with a steady source of American quality film product as well as the ability to tap the American producer's reputation and/or domestic output arrangements.

Take for example the recent announcement by Fox/Searchlight and France's UGC to co-produce films and cross distribute each other's films. Fox/Searchlight produces and distributes "specialized adult-oriented films," a euphemism for non-genre art films. In the deal, UGC has commenced production of English language films to be distributed domestically by Fox. Fox/Searchlight product will be co-financed by UGC and, along with other Fox product, distributed in France by UGC. UGC ends up with access to the American market for its films through Fox and distribution rights for Fox product in France. In addition to speculated distribution benefits in France over its existing operations, Fox gets co-financing on films that on average have limited domestic results sufficient to justify the typical domestic investment in such films, but have enormous domestic potential if they hit (e.g. "Four Weddings and a Funeral," "Sex, Lies and Videotape," "Enchanted April").

My advice to my clients is to create a project that has good balance of actors that appeal domestically and others that appeal internationally, but all at the right price. In some markets, a distributor might limit it's presale investment to the same amount whether the budget for the film is $2 million or $5 million. As such, the typical "specialized adult-oriented film" or "artsy film" cannot support a budget greater than $3 million. The film must, however, have a cast that would be associated with greater budgets. Fortunately, with "artsy" films, the right script, or director, might attract such talent. Take Bruce Willis in "Pulp Fiction," for example, which he did for a reported fee of $250,000 instead of his reported $10 million fee for "Die Hard With a Vengeance." Other possibilities include actors who want to direct and can get their celebrity friends to star for a fraction of their normal fee.

On the issues of balance and globalization, make sure that one or two of the actors is popular internationally, or in particular countries, even if not as popular in America. Just as a "star" can improve the minimum guarantee on a domestic video deal, so too can the right "star" improve the U.K., German or Japanese presale. Examples of stars more popular in certain countries than they are domestically include John Lone in the U.K., Alyssa Milano in Japan and Rutger Hauer in Germany.

Over the past couple of years we have seen domestic deals drop from $2.5 million on a $5 million film, to maybe $750,000 to $1.2 million. Video deals for such films might be $300,000 - $500,000, while premium cable premier films have seen the license fees drop from $1 million to $750,000, or less. Lower budget films are almost off the radar screen.

OK, now we have the project and cast, what about quotas? Besides working with a European producer or television exhibitor, the easiest way to back door European quotas is to shoot in Canada under the Canadian content system. Because of treaties, Canadian films qualify as "European." Shooting in Canada is not more difficult or expensive than shooting in the United States. (For some, it's no different than shooting in North Carolina or Florida.)

More importantly, shooting in Canada under their content or ''point" system, qualifies for certain tax advantaged investment funds, subsidies and other financial benefits which can also help get a film produced. The drawback of this system is, of course, having to compromise creativity for government imposed requirements as to the nationality of actors, director, producer and/or writer. Nevertheless, such benefits do exist and can enhance the likelihood of a particularly difficult film getting made.

In summary, today's independent producer must not only gear his or her U.S. production towards European and Japanese tastes to obtain the greatest dollar value for foreign distribution contracts, but must also think of ways to enhance a film's value in a particular international territory or region, take advantage of co-producing opportunities with foreign television companies, make use of below-the-line benefit programs, or make a strategic alliance. While this strategy will not work with all films, and certainly not with film's of larger budgets (over $5 million) , it does provide the independent producer of lower budget, non-genre, films with the opportunity to produce the film. Once produced, the film's quality will determine whether the film has a domestic theatrical life, or for that matter, profit.




Reprinted with permission by The Business of Film

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