April 2015 - Adam Leipzig

The Distribution Equation

Originally published in Cultural Weekly on April 22, 2015.

Congratulations! You just finished your movie, which puts you at the edge of the winner’s circle—lots of people start movies and are never able to bring them out of post-production to the light of day. You finished yours.

You made it micro-budget, for $400,000, and it’s awesome, or so your friends tell you. Your investors are happy, but also nervous: Will they get their money back?

Let’s say your friends are right, and your movie is awesome. You even manage to go further, and get your film into a festival, maybe Tribeca. Grateful festival audiences will see it, and distributors, too. Because that’s what you need, distribution.

Distribution is the fulcrum of the financial equation, because without distribution audiences cannot see your movie and investors have no hope of financial return. This is where most independent films fall down: they do not have a distribution plan before they start production. Hence they are vulnerable. Of all the feature-length films that are completed each year in the US, fewer than 10% actually get any form of distribution. Ninety percent or more repose uselessly on hard drives, gathering dust in someone’s garage.

You don’t want your film to be among the 90%. Your investors certainly don’t want that. How do you solve the problem?

In the first place, you need to make a good movie, and I mean really good—a film that works for its genre, delivers for its audience, is excellent in its execution and boasts a brilliant cast. Whether you cast known or unknown actors, they’ve got to be great.

Let’s go to the next step and assume your movie really is good, but you enter the festival with no distribution set. At this point, there are two possible outcomes: either a distributor will want your movie and offer you a deal, or not.

If it does happen, you may feel as though you have won the lottery. In one sense you have, in terms of an opportunity to be distributed by a legit company. But your investors likely will not be pleased. Unless your film sparks massive attention, which in turn attracts the interest of more than one distributor, hence fueling a bidding war, you will be offered pennies on the dollar.

As evidence of this, you can look at the films that played this January at the 2015 Sundance Film Festival. Even now, deals are still being discussed, and most of the films in the festival will be picked up for distribution. But very few will have had the chance to raise their sales price with a bidding war; most will sell for $100,000 or far less.

That is not a good financial outcome. However, if you did not pre-plan your distribution strategy, pre-plan it even before you started shooting, this is the situation you will be faced with.

Is there another possible outcome, a way to improve your side of the distribution equation?

There is. Today, wise filmmakers and their investors are planning and budgeting for a distribution strategy from the moment of their first fund-raise. For a low-budget movie, they raise an additional $300,000-$500,000 and keep it in the bank, so they can cause distribution to happen if the perfect distribution company does not make the right offer.

Let’s take a look at two scenarios to see how this might play out.

Scenario 1: Traditional Distribution

You made your movie and also have a $500,000 war chest for marketing and distribution. If distributors see your movie, love it, and offer you a fair price, you can take it.

At that moment, though, you have terrific bargaining leverage. You don’t need the distribution deal because you have the resources to do it yourself. Of course you want the deal, because a legit distribution company is in the distribution business and will do a far better job of distribution in most cases than you will—it is their métier, after all.

But now you have leverage. Either you can take that $500,000 marketing war-chest and give it back to your investors; your investors will be happy. Or you can strike a more aggressive deal with the distribution company, offering to co-finance the marketing spend. Some distribution companies won’t let you do that—they will want to keep full control over marketing and the opacity of its accounting. On the other hand, some will let you co-venture P&A, and they’ll admire your foresight. Depending on how much marketing money you actually have to co-invest with the distributor, you can potentially drive the standard distribution fee of 30% down to about 15%. That will make your investors delighted.

Let’s run some numbers.

When distribution companies offer to buy your movie, what they are really doing is giving you cash as an advance against potential future earnings. Let’s say you get an offer of $1 million for your $1 million movie. Of course you will take it, because now your investors will come close to breaking even. You’ll also be offered 50% of the proceeds after distribution fees and expenses are recouped by the distribution company; the company will keep the other 50%. Will you ever see more money than your initial advance? Not likely.

The amount that cinemas keep, versus the amount that goes back to the distribution company, is called the “settlement rate.” The settlement rate averages 42%, which means that the cinema keeps 58% of every ticket sold, and the distributor gets 42%. But that is the average across all movies, including studio movies. In the indie world, the settlement rate is far less, sometimes dropping as low at 20% for documentaries.

Let’s say your settlement rate is 40%. After the distributor gets its share (40% of the tickets sold), the distributor will charge its fee (typically 30%) and then subtract the cost of advertising, marketing and publicity, a number that can be surprisingly high, even in the independent landscape. If the box office is good, the distributor will keep spending marketing money to chase a higher box office return, and the net result will be that theatrical run will lose money.

Enter home entertainment sales, the big basket that includes cable, VOD, SVOD, Amazon, iTunes and the like. The average settlement rate here is higher—70% will go back to the distributor, then the distributor will still charge its 30% fee off the top, plus subtract additional expenses.

As you’re about to discover, it is good to be in the distribution business, and not so good to be in the movie making or movie financing business. Here’s the math:

Let’s assume your movie will make $1 million at the theatrical box office, and an additional $1 million in home entertainment. 215 movies made at least this much money in 2014.

If you are working with a traditional distributor, the $1 million box office revenue will bring back $400,000 to the distributor, because of the 40% settlement rate. The distributor will take its 30% distribution fee, leaving $280,000. Marketing expenses will probably have been $750,000, so that means the film is at a net loss of $470,000.

Home entertainment could begin after, during, or before the theatrical run. Assuming an additional $1 million in home entertainment revenue, and a 70% settlement rate, $700,000 will come back to the distributor. The distributor will take its 30% fee, leaving $490,000. The distributor probably spent an additional $100,000 in home entertainment marketing, so the film is now at a net loss of $80,000.

You and your investors will not get anything more than the initial advance, whatever that was. Note that although the film is showing a loss, the distributor will still have made $330,000 in its distribution fees.

If you had access to your marketing investment war-chest, you could have co-ventured the P&A spend with your distributor, with each of you paying for half of the total $850,000 marketing spend (or $425,000 apiece). Now, in addition to getting that money back, you could have been able to shave the distribution fee to 15%, which means your investors would have been able to get back an additional $165,000.

Will your investors make a profit? It all depends on the advance you got from the distributor in the first place. If the advance was only $100,000, and your movie cost $400,000, your investors will be in a losing position.

Scenario 2: Free Range Distribution

However, let’s say you choose to be responsible for distribution yourself. Now you will work harder, because you will have executive responsibility for keeping everything on track, even though you will hire top-caliber people to handle distribution for you. But you will spend less. The settlement rate will be the same, but the distribution fee will be less (distribution professionals work for a percentage) and you will keep far more money.

You would play out this scenario if you don’t get a distribution offer or you don’t get one that’s financially exciting. Now you can take your marketing war-chest of $500,000 and guarantee distribution by hiring one of the stronger companies that can book theatres, handle marketing and publicity, and make VOD, SVOD and cable deals. In this case, because you are the “client,” you will have full transparency into costs and spends, and distribution expenses will be far lower.

This financial scenario can be even better. Given the same financials, your P&A cost will be less— likely $500,000 all-in, for home entertainment and theatrical marketing, and also including the for-hire distribution professional’s upfront fee.

Why will your marketing expense be less? Because free range distributors do things more grassroots, and have cleverer ways of using their resources.

The total revenue will be the same, $1.1 million ($400,000 from theatrical and $700,000 from home entertainment). Assuming you now pay the professionals you hired 10% of the generated revenue, you will spend $110,000 in additional distribution fees, leaving you with $990,000. Now let’s subtract the marketing expenses of $500,000: you’ll end up with $490,000.

As you can see, that is a far better financial outcome. Your movie would be in profits.

I must end with a bunch of disclaimers. There is no regular ratio anymore for theatrical-to-home entertainment revenue in the indie sector, so any film’s specific performance will vary widely. I’ve simplified a complex process for this article, and there are other factors to take into account, such as international revenue, but it is probably safe not to include it, as American independent films don’t traditionally make that much money overseas. Finally, of the 693 films released last year, only 215 of them made more than $1 million at the theatrical box office, so the movie business is as risky as ever and financial success is no sure thing. Which means, again, your movie needs to be exceptional, with a clearly-defined and big enough audience before you start making it.

All the more reason, therefore, to build distribution costs into your business model from the beginning. Without them, you and your investors stand even less of a chance of being in the winner’s circle.

My thanks to Glen Reynolds and Sebastian Twardosz at Circus Road Films for their expertise and checking my numbers and formulas.

Top image from the self-distributed film ‘Particle Fever.’

SEC Crowdfunding Rules: Hello, Dumb Money!

“Dumb money” is a phrase you used to hear a lot in Hollywood circles. It refers to investors who don’t understand how the movie game is played, and then get played by the movie game.

However, in the past few years, there has been a lot less dumb money floating around, which is a good thing. Largely, the dumb money has been replaced by smart money, money from high-net-worth individuals who have studied the film industry, approach it like a business, back visionary directors and have caused some brilliant films to be made.

The newly announced SEC crowdfunding rules, which allow small investors to partake of the Hollywood dream, unfortunately will mark the return of dumb money. “Imagine a new film financing world, where average investors—not movie moguls and financiers—can buy a stake in a future film, and enjoy a portion of that project’s success,” reported CNBC, without a hint of irony.

“That project’s success”??? What success? Most movies at the studio level break even, a few lose money, and about one in twenty are home runs. In the independent sector, the odds are even worse. As we reported in our analysis of the films submitted to the Sundance Film Festival, most money invested in independent movies is not recouped.

When people give their money to crowdfunding campaigns, money that is non-equity, they’re giving it purely out of goodwill and a desire to see the movie made. Sometimes that’s for a social cause. Sometimes it’s to support the filmmaker. Sometimes its an act of sheer fan exuberance.

The Mars Example

In the exuberant fan category, we might take the Veronica Mars movie as a case study, and contrast what did happen with what might have happened if equity crowdfunding existed when that film was made.

After the Veronica Mars series was cancelled, its creator Rob Thompson wrote a feature script and brought it to Warner Bros., the studio that had produced the TV show. Warners executives responded positively to the script, but when they crunched the numbers, the film did not make financial sense — they felt certain that it was not a good investment, and, if made, they would not get their money back.

Enter Kicktarter. On March 13, 2013, Thompson and the Veronica Mars Team launched a Kickstarter campaign that ended thirty days later with an unprecedented war-chest of $5,702,153 donated from 91,585 supporters. Filming began two months later, and the movie was set for release on March 14, 2014 — one year from the beginning of the crowdfunding campaign. With Warner Digital on board and the studio’s distribution operation now supporting the film, all looked set for a big success.

As part of the crowdfunding campaign, many donors had been promised a digital download of the movie on the same day it was theatrically released. Big problem: movie theatre chains won’t play a major studio movie unless there is a time period between its theatrical release and its digital availability. The only way Warners could get around this problem was literally to rent the screens from AMC Theatres.

Veronica Mars went on to gross $3,322,127 in its domestic theatrical run. (It was barely released internationally, and only grabbed $163,256 overseas.) It made an additional $6 million or so in combined home entertainment revenue. In round numbers, then, let’s say it grossed $10 million. However, with a $6 million production budget, and marketing costs exceeding the production cost, the film was a certifiable financial flop.

What are the takeaways? The fans were generally happy (except for a downloading glitch on opening day, for which Warners had to issue refunds); they liked the movie they had crowdfunded. But if the fans had been equity investors, they would have been as distraught as Stu “Cobb” Cobbler, the character Veronica finishes off with a golf club at the end of the movie.

In other words, if the fans had been equity crowdfunding investors, they would have been dumb money. Where was the smart money? In the pockets of the Warners executives, who had refused to bankroll the movie in the first place.

The Rest of the Story

My concern about equity crowdfunding investment is primarily about investment in movies and other media. It’s an area I know well, and much of my time in my other life, running Entertainment Media Partners, is spent advising investors not to invest in movies. There are specific opportunities where film investment is warranted, opportunities that have been carefully analyzed and that put investors’ money in a preferential position.

However, this kind of analysis won’t be available to the crowdfunding masses. Movie projects will be sold as a glamorous spin of fortune’s wheel.

I recognize the counter argument. Crowdfunding can unleash a massive new source of capital for start-ups, and for far more businesses than movies alone. I’m not an expert in other industries, but I do know that 3 out of 4 venture capital-backed enterprises fail, and 90% of tech start-ups bite the dust.

I would like to live in a world where there was truly an even playing field, where all investors could make wise decisions using the same, transparent information. Unfortunately, our world presents high-net-worth individuals and well-funded investment companies with better opportunities than those available to civilians. Until and unless that changes, which will not be any time soon, we’re all better off crowdfunding in the original spirit of Kickstarter and other such sites: give because you love the work, want it to be in the world, and you support the creative team. Just that, with goodhearted selflessness.

Otherwise, if you’re hoping to get rich with a crowdfunded equity stake in the Hollywood dream, you’re just throwing away dumb money.

Alvin Ailey American Dance Theater in Uprising

Power of Ailey

Originally published in Cultural Weekly on April 15, 2015.

The opening night program of Alvin Ailey American Dance Theater at the Dorothy Chandler Pavilion showcased four pieces from the repertory, and affirmed the company as America’s premiere dance troupe. Collectively entitled Power of Ailey, the evening featured Episodes with choreography by Ulysses S. Dove, Caught with choreography by David Parsons, Uprising with choreography by Hofesh Shecter, and Ohad Naharin’s audience-participatory Minus 16. It was a night of pathos and magic.

In Episodes, dancers in pairs and trios execute leaping near-misses, repeating gestures of reaching and repulsion. How much do we want connection? Enough to embrace each other in arcs of muscle. How much do we fear it? Enough to float away from a partner on point, without even wearing toe shoes. Facing toward and away from each other in John B. Reade’s diagonal runways of light, the full troupe finally materializes on stage. As the music stops, they face each other and the relationships they have made and lost. That’s when realization sets in: all the connections they missed while they were creating their drama.

Kirven Douthit-Boyd is the solo dancer in Caught. Shirtless with simple white pants, he stands in a pool of light. Then in a gasp, as the stage goes black, magic begins. A strobe light flashes. On the formal level, this work is simplicity itself: a man and flashes of light. But O, what magic. The strobe’s flashes catch Douthit-Boyd mid-air, moving across the stage. You believe a man can fly. Our persistence of desire reinforces our persistence of vision, because we want magic to be real. That’s the meaning and paradox of this piece — the moments when light catches him are moments of flight, of purest freedom. The choreographer seems to ask, How much of freedom depends on brutal selectivity, such as seeing only seconds of an entire leap? How do constraints, such as the simple elements of Caught, keep us free?

Alvin Ailey American Dance Theater’s Kirven Douthit-Boyd in David Parson’s Caught. Photo by Rosalie O’Connor

Uprising, unlike the first two pieces, is full of loose muscles and dangled limbs. It begins with seven men on stage, men who are troubled but cannot fully express their anger. One begins to raise his fist, and another man beings his arm down. After a blackout, as we watch the men prone on the ground, backlit, their silhouettes twitching, one cannot help but see Trayvon and Eric and Levar and all the others. #blacklivesmatter

What happens to raised a fist deferred? Maybe it just sags like a heavy load; there is a long, static section where the men stand motionless and slowly collapse to the ground, then pick themselves up, only to fall slowly again. One man remains on the ground, his forehead inclined on the stage, his right arm raised in a fist like a promontory from the earth. Then they gather in a circle and begin to struggle with each other. What keeps us from rising up? The answer is ourselves. The solution comes at the end, in a heroic tableau with red flag aloft, a mashup of Soviet Realism, the Paris barricades of the July Rebellion, and American marching band flourishes. It’s the only questionable moment in the piece, because it suggests false optimism. The raised fist deferred doesn’t turn itself into a meme. More likely, it explodes.

Alvin Ailey American Dance Theater in Ohad Naharin’s Minus 16. Photo by Paul Kolnik

The evening concluded with Minus 16. A semicircle of twenty company members enact a repeated grammar of conformity and the struggle with it. They throw off articles of clothing, arch their backs, raise their arms, fall back, chant a lyric, and repeat, repeat, repeat. Then, dressed again, approaching the apron like zombies, they break the fourth wall and descend into the audience, pulling patrons onto the stage with them. Here the choreography becomes especially brilliant, because the dancers make the civilians look great. With whoops of delighted joy from the supportive house, twenty audience members dance on stage. At the end, one audience member remains, center stage. As in an elemental theatre, she has come dressed for the part, in black pants and a red tunic, set off against her white mane of hair.

It is ideal stagecraft, all the more perfect because of its unpredictability, and proof that the democracy of movement can make magic real. Yes, everybody’s got some dance in them. Power indeed.

Read Sarah Elgart’s interview with choreographer Matthew Rushing.

Top image: Alvin Ailey American Dance Theater in Hofesh Shechter’s Uprising. Photo by Paul Kolnik