Is the Ride Over?

November 2008

Back in August of 2008, award-winning producer Effie T. Brown seemed on the verge of getting a $10-million loan for a slate of three films. “I had a deal with a lender and everything was great,” she recalls. “I had great talent and they loved the projects.”

Then came the dark days of September and early October, when stock markets swooned and many banks appeared on the verge of collapse. Soon, Brown, the founder and president of Duly Noted, Inc., was on the phone with the person who was arranging the financing. “This is a game changer,” he told her. “It is really hard to borrow money right now.”

Brown’s story is an increasingly familiar one in the indie-film sector these days, even among experienced producers with sterling reputations. Her films have won several awards at the Sundance Film Festival and she’s produced such films as Real Women Have Curves and Rocket Science, which won the Sundance 2007 Grand Jury Prize for Directing. She sits on the board of Film Independent and will be on a panel on international finance at the American Film Market (AFM) this year.

“It is hitting people with proven track records,” she notes. “We’re not starting from scratch. I’ve heard from people who have produced for the major studios saying, ‘I can’t get this movie financed to save my life.’”

With that financing up in the air, Brown has decided to produce two low-budget films from the film fund she raised last year. That way she won’t have to find outside financing and will have some product to sell once the economy improves.

These concerns about film financing come at a time when a number of other factors have been roiling the business. Worried about the future of DVD sales, a glut of product and slumping ad revenues at major broadcasters, buyers have been reducing the license fees they’re willing to pay and distributors have been cutting the minimum guarantees they are shelling out to producers for new films.

“We’ve seen the minimum guarantees that distributors are giving producers decline significantly,” notes Amotz Zakai, the VP of production at Echo Lake Productions, who represents a number of writers and directors and will also be speaking on the international finance panel at AFM. “Distributors have seen the money they are taking in [from sales] decline considerably. If you sold a film last year, you were probably getting two or three times as much as you could get this year.”

Even the executives who are generally optimistic about the industry’s prospects in upcoming months admit the situation is dire for many indies in the run-up to the AFM.

“Some of us are feeling a little like George Clooney in The Perfect Storm looking up at the wrong end of a wave and saying ‘oh baby, this is going to be bad,’” notes Ken DuBow, the president of worldwide sales at PorchLight Entertainment.

DuBow believes the industry will see an up tick in sales in late 2008 and early 2009, but he admits, “The movie market was highly dependent on Wall Street money in the last years and that is going to disappear for a lot of independents. Some companies will have to slow down their production and some may go under.”

Glen Hartford, the chairman and CEO of Cinamour Entertainment, agrees. Although he also sees a strong AFM, he says “the credit crunch has slowed things down for the larger indies and killed the ability for weaker companies to access traditional banking equity.”

That doesn’t mean the movie and TV screens are about to go dark around the world, DuBow, Hartford and others stress. Banks, distributors, agents and producers interviewed for this article all maintain that financing is still available for higher quality, commercially viable product and that many indies are likely to emerge from the crisis stronger than ever.

Both Liz Mackiewicz and Adam Wright, the co-presidents of Regent Worldwide Sales, see a strong sales climate going into AFM. “Because of the output deals and the way our company is structured, we are not having problems funding our films,” notes Wright.

The crisis is also affecting companies in different ways, with firms that have strong roots in the television business in relatively better shape.

“There has been talk of a recession for quite a while because of the frenzy in the financial markets,” says Fernando Szew, the CEO of MarVista Entertainment. “But we are primarily a television-driven company and that business has always been a bit more stable. We have been able to sustain prices and continue our output of programming to the market.”

Distributors also see a strong demand for quality commercial entertainment, particularly stories with family appeal and a happy ending, in a period when consumers are trying to escape a depressing economic landscape.

But many executives also admit that the credit crunch, coupled with difficulties in the DVD business and a slump in TV advertising revenues, will reverberate through the indie film business for some time.

Wheel of Misfortune

“The era of cheap money is gone and that will have a big impact on the business,” notes Ross Mrazek, the managing director of Media Capital Group, which is continuing to provide financing for a number of projects. “The landscape has changed tremendously. A lot of lenders in this business have either curtailed their operations or have just closed their portfolio and are managing down what they have. The banks are very hesitant to deploy their capital.”

All of this is a major change from only a few years ago, when leading Wall Street investment banks, private-�equity groups and hedge funds were pouring money into the movies sector.

At the height of the boom, between 2005 and the start of 2007, Bloomberg News estimates that Wall Street funds poured over $4.5 billion into Hollywood movies.

While the major Hollywood studios swallowed up much of the cheap credit, a lot of money also trickled down to the indie sector, producing a boomtown mentality that troubled some veteran bankers.

Last year, at the AFM’s annual finance conference, Mrazek—who previously ran the entertainment finance division at CIBC World Markets—recalls hearing Wall Street bankers talking about their financial expertise and the teams of analysts that would somehow protect them from the infamous vagaries of the feature-film market.

“I just remember thinking this is a disaster waiting to happen,” Mrazek says. “They may have analysts that are fantastic at analyzing cash flows of real businesses, but that expertise isn’t much use in the film business where cash flows are so unpredictable. You need to really understand this business.”

It wasn’t box-office troubles, however, that undid these would-be movie moguls. The collapse of the housing bubble in 2007 triggered a crash in the market for mortgage-backed securities, which in turn raised fears about the solvency of many banks. As Wall Street banks ran into trouble and dropped out of the film-finance business, the credit crunch also forced banks and other lending institutions to raise new capital and adopt much more cautious lending practices, making it difficult for producers to find financing or forcing them to pay higher interest rates.

“Experienced producers with long-term relationships with banks in this business are finding they can’t find financing or find it at the price they need,” notes Mrazek.

LICENSE TO LOAN

That doesn’t mean financing has dried up. Canadian banks have remained fairly active and have, so far, been relatively unaffected by the credit crunch, in part because regulators restricted their investments in mortgage-backed securities and other instruments that got U.S. banks into so much trouble.

Charlene Paling, the senior account manager in the TV and Motion Picture Group at National Bank of Canada, explains that they focus exclusively on interim cash-flow financing and that they have not in any way curtailed their lending activities since the crash.

“It is a very volatile market and everyone has questions as to what will happen,” she notes. “Everyone seems to be concerned and scared but we haven’t seen that affect what we are doing. The volume of work and the numbers we’re seeing don’t match the rumors. For us, it is business as usual.”

Mrazek is also busy. Although he co-founded his firm in late 2007, just as the worries about the financial system were deepening, the Media Capital Group has been busy arranging a full range of financing for film and television projects and can draw on funds from a variety of sources, including a major U.S. bank and funds raised from private equity. “One of the reasons we founded Media Capital was to take advantage of the whole range of financing options,” he notes. “It allows us to be a lot more flexible in helping our clients.”

Mrazek and others also point to a variety of tax credits and other production subsidies that have proliferated around the world in recent years. Besides the long-standing programs in Canada and many Western European territories, a number of U.S. states, including Michigan, New Mexico, Maryland and Louisiana, now offer lucrative subsidies.

Butch Kaplan, the executive producer at Mase/Kaplan Productions, who is known for his line work producing in Europe, believes that producers will increasingly turn to government subsides and tax credits as other sources of funds dry up. But he cautions that international markets have seen massive currency swings in the last year that can make it difficult for filmmakers to plan their budgets.

“If your movie is in the $20 million to $30 million range, you might have seen a currency swing of $3 million to $4 million in the last six months, which can wreck havoc,” he notes.

Another major issue at AFM will be the DVD market and skittish buyers. Some distributors say the license fees they are getting out of some major territories have fallen by 10 percent to 25 percent over the last year.

That bad news may have a silver lining, however. A number of distributors are hoping that the glut of product that has depressed prices will disappear if fewer films can get funded.

“I am hoping that we will go back to less quantity and more quality,” notes Lise Romanoff, the managing director of worldwide distribution at Vision Films. “Everyone needs good-quality programming and hopefully will pay decent prices.”

Others agree, but note that it is difficult to predict how the market will react in upcoming months.

In many respects, this year’s AFM is likely to be business as usual. Jonathan Wolf, the executive VP of the Independent Film & Television Alliance (IFTA) and managing director of the AFM, notes that attendance, as well as the number of new films being screened, are running at about the same level as last year.

“We haven’t seen any pullback in global production,” notes Wolf. But he stresses that films showing at this year’s AFM were obviously financed one or two years ago, when the economic climate was much different.

supply and demand

The big question, Wolf adds, is how the current financial turmoil will impact the industry over the next year. “The industry has talked for two or three years about a glut of product and complained that this product is pushing down pricing and making it difficult to bring some films to profitability,” he notes. “It is possible that the liquidity issues around the world could result in bringing production levels back in line with marketplace demand.”

But, he also notes that production subsidies and guaranteed broadcast deals are fueling production in many countries around the world and that producers in developing markets are creating better films that have more international appeal.

“While we are seeing a slow decrease in English-language films at the AFM, there is an increase in non-English-language films, primarily from Asia and other developing areas of the world,” Wolf explains. “It is hard to say if this crisis will mean an overall pullback or if there are so many other funding sources that it won’t matter.”

Conflicting sentiments can be found about the state of the DVD market. “As soon as consumers are able to download a feature in as little time as they can download a song—and that time is coming up quickly—then we are all dead,” argues Echo Lake’s Zakai. “We have to figure out how to reinvent our business because we have just a few more years left in the DVD market.”

Szew at MarVista argues, however, that there is still a lot of life in the DVD business and that other new technologies are beginning to emerge.

“There has been a depression in DVD numbers but that is not new or something that’s happened in the last two months” with the financial crisis, Szew notes. “Last year, everyone was talking about the gloom and doom in the DVD market, but now we are seeing that it is somewhat stable. Blu-ray is coming into its own and some of the newer platforms like VOD are beginning to show some revenue.”

A FUTURE IN 3-D

Further down the road, DuBow at PorchLight sees a bright future for digital downloads and 3-D production. “I count about 20 movies coming in the next year in 3-D,” he notes. “Theater owners are realizing you need to keep the energy level up in a world awash with virtual reality�As indies, the product we bring has to be spectacular if it is going to compete.”

More importantly, though, DuBow sees a strong sales climate for traditional product. “Despite all the troubles, I am wildly optimistic about the end of 2008 going into 2009,” he notes. “We have had a recession in this business for some time and a lot of buyers have held back on buying new product. But what we’re hearing from buyers is that the supply is beginning to run low and that they are returning to the market.”

DuBow and others also argue that the stronger indies with established sales arms and close contacts with buyers and broadcasters will be able to continue to finance new slates.

“On the bright side, we see a lot of our clients continue to do well with the $3 million to $6 million film for DVD, VOD or television,” notes film financier Mrazek. “The companies with good foreign distribution arms that have output deals with the TF1s and the RTLs of the world continue to do well.”

PorchLight, for example, has been using its longstanding ties to international buyers to expand into the movie presale business. “We had a very good business of being able to presell animation and TV movies,” notes DuBow. “So when I got here, I said we should try movies as well.”

Typically, the producers of these films have locked 80 percent to 90 percent of the funding in place and PorchLight is using its global sales arm to raise the rest in presales. DuBow expects to have three to five of these new films at the AFM, including The Last Dragon, which stars Sam Neill.

The disappearance of some larger distribution companies has also strengthened the hand of other distributors, giving them more product to choose from.

“At the moment there are a lot of finished films around,” notes Mackiewicz at Regent. She also points to the ongoing demand for their core business, “which is TV movies. We’ve been in that business for 15 years and have very strong relationships with broadcasters and distributors,” with Eastern Europe, Germany and parts of Asia remaining very strong.

In an uncertain economy, good, strong entertainment product will be in particular demand, adds Cinamour’s Hartford. “Our business will continue to expand even in this dodgy economy. After all, Walt Disney started during the Great Depression. Pure genre films with good casts,” he says, will continue to be in demand.

Distributors also highlight the growing interest in family friendly fare. “Entertainment always seems to ride out recessionary times pretty well,” notes Szew. “In tough times, people still want to be entertained and perhaps need even more of an escape. We believe now is as good of a time as ever for good, wholesome family films.”