Independent Films Sprout New Life

Jay Cohen from The Gersh Agency reports more positive signs for independent films. Movie sellers are feeling more upbeat after last month’s Berlinale film market and believe Cannes and the AFM will deliver more cheer.

Foreign (non North American) film distributors are still paying around 35% less for their acquisitions than the dizzying heights of 2007/2008, when buyers would gorge themselves on a buying feast of 30 overpriced movies on the first day of a film market. However, more sales territories are being sold into, including Eastern and Western Europe, Scandinavia and Latin America. Film buyers are still cautious despite the reported fourfold increase in sales activity. Japan, still remains a difficult market due to the preference of locally produced films.

Berlinale saw many producers raise 50% – 60% of their production budgets through pre-sales this year. A few years earlier, this figure was closer to 100%

In the past, distributors would “spot price” films on the basis of a name star, director or popular genre with proven audience pull. As distributors become increasingly market savvy, they are now reading scripts, conducting market research and cherry picking films at the right price with relatively conservative business models and sales estimates. Still, this is a vast improvement of sales activity in 2008/2009 when film buyers had their credit lines disconnected mid deal, or offers of $10000 to $20000 were commonplace so producers couldn’t recoup their costs. Offers were paltry, but it was a take it or leave it option.

Big budget studio films don’t rely on pre-sales to get their movies produced. They generally have output deals with global distributors guaranteeing sales. Production money gushed in from Wall Street and other reckless venture capital funds from high net worth individuals wanting to reduce their tax liabilities. Some of this capital was also shunted to the independent sector causing unmitigated growth in production.

After the recession of 2001, pre-sales of independent films stalled and virtually collapsed towards the end of the decade. The old school indie cinema business models pioneered in the seventies by luminaries such as Dino Di Laurentiis, became increasingly unworkable. It was no longer applicable to promise a quality film and actually deliver one.

Studios also wanted a piece of the indie action, often bragging about $30 to $50 million production budgets and equally lavish P&A budgets. A heated economic environment fuelled by low interest rates, seemingly endless hedge fund capital, domestic and international tax breaks and subsidies of production budgets, unleashed a flood of films into the market place. Many of these were produced to take advantage of easy finance, rather than being of sufficient quality to be shot. The rapidly dropping prices of equipment meant that anyone could produce a film in their bedroom.

As if these factors weren’t enough to overheat the film market, exponential increases in DVD sales added more fuel to the production fire. Foreign television stations and government schemes virtually threw cash to anyone who asked for it. Some studios such as Disney and Fox backed locally produced films such as in Asia. The market couldn’t accommodate these  economic dynamics strained to breaking point.

By 2006 the film production spikes became unsustainable. Too much substandard film product depressed sales prices and distributors were opting to acquire finished product rather than invest in movie production.

During 2007, when global liquidity froze, the situation became more dire. Advertising revenues dropped sharply, as did DVD sales, bank lending and venture capital inflows. 2008 marked the death knell of the independent film market by a thousand cuts. By 2009, most independent distributors were burnt by paying exorbitant premiums on underperforming films and eventually ceased trading. It was widely rumoured last year that it was easier to produce tent pole studio films than independent films.

Have we learned our lesson? Do we ever? Time will tell. Of the 150 or so registered independent production companies left, about 15 are churned every year. New production companies spring up as vehicles for specific, often one-off films, while others become undercapitalized and disappear, or trade in movie libraries rather than new films.

Previously generous banks are becoming increasingly risk averse. Back in the day,  you could secure a 75% discount on your production loan if you pre-sold your $10 million film. Today, producers would be lucky to obtain a 50% discount.

Banks either want more equity, tax credits, or other forms of soft money as collateral.  They can renegotiate terms if the finished film does not meet their expectations, they feel it was over budgeted, or they don’t believe it can compete in the current marketplace.

Despite the guarded optimism, buyers are still restrained and prudent. There are fewer film buyers and sellers as the glut of films has filtered through the distribution and exhibition chain.

We live in a more sobering brave new world which will hopefully revert us to more responsible quality cinema and greeted by enthusiastic audiences. The film industry is a resilient one, with 2009 seeing one of the best box office results ever. This year may top that. Thank you, Avatar.


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