Here is a broad overview that explains the nuts and bolts of independent film production.
It is the goal of every producer to marry the creative and financial elements of a film so it is viable on every level. Certain aspects of this lie within the producer’s control and others do not. The creative process is much less tangible in that one must rely on the artistic integrity and capabilities of the creative people involved. This ranges from developing a quality script, to hiring the proper director and crew, to casting the right actors for the roles. As this process is as much art as it is science, it is much more reasonable to focus on explaining the financial underpinnings. This narrative will serve to explain in broad detail how we manage the fiscal process.
In a tumultuous financial environment, we work to treat film as a business. We do as much as we can to mitigate risk while still striving to create content that satisfies our investors, our distributors and the consumers. It is for this reason that we believe that multi-picture financing is the best way for us to place equity investment. This allows us to spread the resources and even though our business model is predicated on hitting “singles,” we do understand that more opportunities gives us a greater chance of hitting a “home run.” Having the ability to fund multiple pictures also gives us greater credibility in the marketplace. We are taken more seriously by the agents and managers who are the gatekeepers to the talent, and the distributors who are the gatekeepers to the consumers.
Once we begin pre-production on any film, we begin to actively seek out specific partners to help us exploit the picture and maximize the amount of revenue we will collect. In today’s market, it is extremely rare and often not as profitable to sell the film to one distributor who will exploit the film worldwide. With the international market’s appetite for films growing, we seek partners who will have the best chance to market and distribute the film in their respective territories. We will then use a similar process to sell the rights domestically. This allows us to predict with a large degree of accuracy the minimum gross receipts we can expect once we take the film out to market.
The Foreign Sales Agency
The first step is to choose a reliable and well-respected Foreign Sales Agency who will serve as both a sales company and liaison between us and the distributors around the world who acquire the rights to the film. This is an incredibly important step as they help us gauge early on what they anticipate the value of the film will be based on their existing relationships and track record in the international market place. In this regard, a foreign sales agency serves a very similar purpose to an appraiser evaluating real estate. The more established and highly regarded the company, the more accurate “the appraisal.” This allows us to know in advance how to accurately predict revenues from the sale and license of the film to different distributors around the world. This is not a “one size fits all business” and we depend on the reliability of our sales agent partner to diligently stay on top of market trends and changing distributor tastes. Once we select a project, the sales agency begins to speak with buyers / distributors around the world. These end companies then offer a Minimum Guarantee in exchange for the right to exploit the film in their country or territory. The Minimum Guarantee is an amount paid to the production that represents an advance a distributor will pay for the right to exploit the film in all media in their territory. It is possible and in many cases likely to expect overages in certain countries. This means that the distributor is in profit after recouping their marketing costs and Minimum Guarantee from the film. Our foreign sales agent will negotiate individual contracts with each of these territories which will reflect our percentage of revenue sharing once the film is profitable. These overages can be thousands of dollars or even millions of dollars PER TERRITORY depending on the success of the film. The foreign sales company will negotiate the contracts with the distributors and help us collect all invoices and payments due. The Sales Estimates sheet is a projection of what the estimates for an example film will look like. There are High and Low columns that represent the amount the foreign sales company will ask in each territory for the right to distribute the film (the High column) and ultimately what they will accept (the Low column).
Although we will work with different cast, production crews and producers on individual projects, we have forged a multi-picture alliance with Cinetel Films to act as our foreign sales agent. This is based on a number of factors including their longevity, reliable estimates, extensive relationships with distributors around the globe, reasonable fees and reputation in the marketplace.
As a rule, the international market (excluding the United States and sometimes Canada) accounts for about two-thirds of the revenue we expect to receive on a film. This varies based on cast and genre but this is generally the guideline we follow when budgeting a production.
Domestic Sales Agent
In addition to finding a partner to help find distributors around the world, we may also hire a company to assist us in negotiating the best possible deal for the distribution of the film in North America. Since the United States is still generally the highest projected Minimum Guarantee and the United States market behaves differently than the rest of the world we periodically use a different sales agent to broker this sale. This negotiation will include the Minimum Guarantee offered, the amount of prints and advertising dollars committed, and the number of screens the distributor commits to the release of the picture. The negotiation also factors in all domestic ancillary rights, revenue sharing, and box office participation we will realize over the life of the film. There is a huge amount of variance in how this deal may look. There may be a large “buyout” offered, a smaller up-front payment but a large commitment to market and exploit the film, or other incentives that allow us to share in the success of the film across all media. Our projection in the sales estimates reflects one likely scenario where we get a solid minimum guarantee and the opportunity to participate in the upside of the film. Currently, the large talent agencies (such as Creative Artists Agency, William Morris Endeavor, United Talent Agency and International Creative Management) are the highest profile North American sales agents. However, given Cinetel’s strong relationships with domestic distributors, it is probable that we will utilize their expertise to represent our films in worldwide marketplace including the US.
As a rule, the domestic market (United States and Canada) accounts for about one-third of the revenue we expect to receive on a film.
A good analogy is to imagine that every film is a multi-unit housing complex. There are forty-five total units of varying size and luxury. The United States almost always is the penthouse unit that commands the best price. Our foreign sales agent is the broker who is responsible for selling the remaining units to buyers around the world. They accomplish this either through existing relationships or at markets where international buyers gather such as the Cannes Film Festival in France or the American Film Market in Santa Monica, California. Just like the real estate market, there are internal forces we control such as budget, cast, and quality and there are external forces we do not control such as shifting technology and worldwide economies. It is our job to “build the best house in the most desirable neighborhood with the most attractive amenities and all for a reasonable price.” Now we understand this is a challenge but we have had great success accomplishing this and we believe the market is in a great position to afford us more and more opportunities.
The waterfall is a visual representation of how money flows back into the production once we begin collecting receipts. The most predictable revenues are the minimum guarantees offered by foreign distributors, the minimum guarantee offered by the North American distributor and the tax credit realized by the production. The waterfall diagram depicted in this document reflects ONLY those three elements. Given the almost endless possibilities of ancillary revenue streams that are subject to market changes, audience reaction and critical reception it is better suited to have a discussion of additional anticipated receipts but not include them in the visual estimate. When money begins to flow through the waterfall, the lion’s share is returned to the investors to recoup their position. We will use a third party professional collection agency that protects the integrity of the waterfall and assists in the collection of worldwide receipts. Guilds such as the Screen Actors Guild also charge some fees against anticipated receipts which are negotiated once we begin to sell the picture and have a better sense of its worldwide release pattern. The sales agents, both domestic and foreign, charge commissions that are a negotiated percentage of the gross collected receipts. Given the relatively low budget of our films, the projected high caliber cast and the strong and relevant source material, we anticipate being able to generate very strong returns without factoring in any box office performance or receipts from ancillary markets.
Ancillary Markets and Additional Revenue
Films have a strong potential market value across a number of platforms. Sometimes, distributors will pre-negotiate box office participation based on gross audience receipts. They may also pre-negotiate participation based on consumer interest in the new video-on-demand market. Once a distributor has recouped their minimum guarantee and marketing costs, we begin to share in all profits in the film IN PERPETUITY. A hugely successful film can generate tens of millions of dollars in profit. There is also revenue generated from a variety of sources: Home Video (DVD’s), Pay-Per-View, Video-On-Demand, Online Subscription Services (Netflix), Pay TV (HBO, Showtime), Cable TV, Free TV, Airlines, Soundtrack and Merchandise. It is very difficult to predict the revenue from all of these sources but a successful film can generate significant dollars in each of these outlets.
Independent Film Finance
It is our goal to limit extraneous expense wherever possible and keep as much of the cost of the film ON THE SCREEN. One of the great benefits of independent film making is the fact that our productions are not burdened by huge overheads associated with studio pictures. It is for this reason that we are able to limit costs from development all the way through delivery. There is no way to fund a film. Depending on the budget, genre and nature of an individual project, we may elect to 100% equity finance or combine debt and equity once the budgets start to increase. The debt position on a film is based on collateral from pre-sales to distributors or tax incentives from shooting in film-friendly locations.