Saturday, August 30, 2014

An approach for funding independent films...via Netflix

The business and process of funding, making and distributing motion pictures is going through changes at least as wrenching as those caused by the rise of television after the Second World War:

  • Technology has changed everything from movie production to theater projection. You can buy a camera that will give you images that stand up quite nicely in a movie theater for the same price as a big screen TV from a few years ago. Editing and color correction that once required hundreds of thousands of dollars of equipment can now be done on a PC that you buy from Amazon. The only company that still makes motion picture film is Kodak, and they're still in the business only because the big U.S. motion picture distributors agreed to buy a minimum quantity of film per year. Film is almost completely phased out as a delivery medium for theaters; it's been replaced by digital projection.
  • International revenues from movies are starting to exceed domestic revenues. In particular, China has become the single biggest and most important international movie market. Dialogue-heavy movies tend not to do well in China and some other markets, so the major studios have shifted their emphasis to expensive, special effects-heavy movies like Marvel's superhero series.
  • The shift in emphasis from plot-driven to action-driven titles has dramatically decreased the amount of funding available for smaller, more literate movies that were once the "bread and butter" of the major studios. There are still a few producers who make these kinds of movies (Megan Ellison's Annapurna Pictures is a good example,) but by and large, the major studios acquire these titles for their prestige and award-winning possibilities, not with the expectation that they'll make much money.
  • Most of the major studios have shut down their independent divisions, or as in the case of Universal's Focus Features, have radically reorganized them to fit better with the studios' new international emphasis.
  • Streaming and Video-on-Demand have largely supplanted, although not totally replaced, DVDs and Blu-Ray discs for home video distribution. The studio revenues from streaming and VOD are significantly less than what they made from physical media, but consumer preferences (a shift back to movie rental after years of purchasing DVDs) have forced the studios to adapt.
All of this means that if you make small, independent movies, it's getting harder and harder to get them funded and onto movie screens. Note that I didn't say "get them distributed." It's easier than ever to get independent movies into consumers' homes, with Netflix being by far the biggest outlet, while Amazon, Apple iTunes, Crackle, Epix, Google Play, Hulu Plus, Redbox Instant, Sony Unlimited Video, VHX, Vudu, Xbox Video, Yekra, YouTube Movies and others also stream movies to consumers. Some of these distributors selectively license titles, while others are open to anyone.

For independent producers, the problem isn't finding distribution--it's making money. Let's take a movie that costs $1 million to produce (including post-production.) You send the movie to Netflix, but they offer you only $1,300 for the rights plus a bonus based on the number of times your movie is watched. Apple's iTunes and Amazon won't pay anything upfront, but iTunes will sell your movie for a 30% commission, and Amazon will take a 15% commission. Unless your movie is very popular, none of the three will do any promotion for you, and the promotion they will do is limited to preferred placement of your movie on their websites and apps. That means that you've got to budget a significant amount of money for promotion, which may include:
  • Submissions to film festivals
  • "Four-walling" (renting) theaters to get a theatrical release and reviews
  • A social media outreach campaign
  • If you happen to have a well-known actor or two in the cast, queries to radio stations, local and national daytime news shows, daytime and nighttime talk shows, syndicated daily entertainment shows and celebrity/entertainment magazines.
There's no single rule of thumb that says how much you should budget for your promotional campaign, but for a $1 million movie, the very least that you should expect to spend is $100,000. If you've got a lot of well-known actors and a strong pitch, you could end up spending $1 million or even more (but in this case that's good news, because it means that you're getting lots of coverage.)

So, let's say that all-in, you've got $1.25 million in the movie and promotion. You've got to get back at least that $1.25 million just to break even, and you and your investors would certainly like more. Let's take a simple case: You price the movie at $10, and you sell 60% of your total sales through Apple and the remaining 40% through Amazon. To break even, you need to sell a little under 165,000 copies. 165,000 is a high but not completely unreasonable number if your promotional campaign is successful. However, you have to raise the $1.25 million at the very beginning of the project in the hope that you can sell 165,000 or more copies at the end.

There may be another model, at least for some distributors and filmmakers. Netflix has built a very successful business using an "all you can eat" subscription model. With its recent price hike, Netflix charges $8.99 per month in the U.S. The company has 48 million subscribers worldwide as of their last financial quarter. The cost of the infrastructure and bandwidth to serve those customers is factored into the $8.99 price.

Netflix could create a second tier--call it "Netflix Premiere"--that would offer exclusive new movies 30 to 90 days before they're available through any other outlet, for an additional $5/month. If 10% of Netflix's subscribers sign up for the Premiere service, that would be an extra $24 million of gross revenue each month--largely incremental revenue, because the infrastructure and bandwidth are already paid for. A hefty portion of that $24 million could be used to fund new independent films. If Netflix reserved 70% of the revenue for film production, that would result in $16.8 million that the company could use to fund films each month. To a studio, $16.8 million is chump change, but to independent filmmakers, that could represent two or more complete films.

Netflix could distribute the money in two ways:
  • It could be an investor in a film (for example, funding half the film while other investors and distributors fund the remaining 50%.)
  • It could fund the entire cost of the film, and own the film outright when it's complete.
Netflix would have the exclusive first distribution window in either case, as a condition of the producers accepting its funding. It's very unlikely that any film funded by Netflix would get domestic theatrical distribution because of the first-showing restriction, but there's a good chance that at least some of the films would be picked up by other streaming and VOD distributors. There might be some opportunities for hotel and airline distribution as well, not to mention international distribution in markets where Netflix either doesn't do business or doesn't exercise its first-showing right.

For the first year or two, Netflix would have to underwrite the Premiere service, acquiring and showing movies until its subscriber base covers its costs. After that, however, the Premiere program could underwrite at least a dozen independent films a year, and potentially many more. This approach certainly won't fix the independent film funding problem, but it will put a dent in it, and if it's successful, it'll encourage other companies to launch similar programs.
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