How do you net $5 million in the film industry? Start with $10 million.” Old Hollywood adage
Most Films Lose Money. Yes — most films lose money. Indeed, 80% do. The fundamental reason is simple; if you were trying to impress someone at a cocktail party, would you rather say: “I make movies” or “I make widgets”? The film industry is sexy, and many people who produce films are driven by the conscious or subconscious sexiness of the industry. It is much less sexy (and more difficult) to distribute films, rather than produce them, so the law of supply and demand takes it from there. For example, there is a wild oversupply of feature-length film productions—approximately 600 to 700 per year—while only 200 or so obtain even a decent release, permitting any return at all, much less a profit. The rest chase the festival circuit in vain hopes of riches.
Content is Not King. I have often heard the phrase, “Content is King.” Baloney. Due to the law of supply and demand mentioned above, distribution is king. Whoever controls distribution has far more leverage than the legions of producers given the plethora or films looking for limited distribution alternatives. For most of my forty years of practice, the studios were the 800 pound gorillas because they controlled distribution, and they were so cocky that most of their offers were “take it or leave it.” Indeed, the head of distribution at one studio once threw a contract I drafted across the room because I had the temerity to think the studio might agree to something fair. But oh, how the mighty have fallen, since streamers now control distribution, and many studios have become the beggar production companies on their knees to the streamers. No wonder that so many studios have been sold.
In addition to having the leverage of supply and demand, distributors can ensure the best chance for success of their own films. The worst position to be in is an independent film producer who hands over a film to a third party to distribute for a fee. Conversely, the best position to be in is a distributor of other people’s films for a fee, without paying any advance. It is commonly said that film companies make money on distribution, not production. This is a different way of expressing the same thought: It is better to distribute your own films, and it is better yet to distribute the films of others.
Blockbusters. The saving grace in the film industry is that when the rare blockbuster occurs, it can make up for the losses on a lot of other films. The film industry is a form of gambling or wildcat oil-drilling. The problem is that a lot of capital is required to make enough films to obtain the blockbuster, and few companies have the financial stamina to make it. This factor works strongly in large film companies’ favor, as they have the economic wherewithal to withstand a string of flops.
The rise of the streamers has changed the dynamics of blockbusters, since so far the streamers have not given any significant back-end regardless of the popularity of the film. Thus, blockbusters are relegated to the films that are brave enough to bypass streamers for a theatrical release, and given the 50% decline in theater attendance over the last ten years, that risk is generally accepted only by big-budget film producers, mad dogs, and Englishmen. For films sold to streamers, the most that can be hoped for is a sale way above production cost due to competing offers at film markets.
Implications. The economics discussed above have profound implications for the film industry, including the following:
Projections. You need a jaded eye when reviewing projections of future income. I have not yet seen projections for a new independent production company that did not show a rosy picture of ever-increasing profits. If the projections were based on historical averages, the chart with the projections would be turned 90 degrees clockwise.
Single-Film Investment. You must have a high risk tolerance to invest equity in a single film only, or even in a small slate of films, particularly where the film company does not control distribution.
Tax Planning. You should be wary of spending a lot of time and money setting up a complex international tax plan to shelter all those boatloads of cash that will be rolling in. It would be wiser to spend the time and money setting up a structure that will permit the owners to deduct the tax losses that will likely occur.
Lock Up Distribution. Be wary of starting production on a film without locking up distribution in advance. Because of the vast oversupply of film productions, many films—even large-budget films— that are made on spec often cannot obtain any distribution at all or obtain distribution only on pathetic terms.
New Money. Since most films lose money, the film industry has a voracious appetite for money. During my career, I have seen at least fifteen waves of financing from different sources crash on the shoals of Hollywood, only to recede and be replaced by the next wave from another source. Beyond death and taxes, the only certainty in life is that there will always be new waves of money chasing Hollywood dreams, so it pays to paddle the surfboard “outside” looking for the next wave to ride.
This post was originally published on here
