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The Markets, Part II: New Media and Other Nontraditional Markets
Prediction is very difficult, especially if it's about the future.
I couldn't decide what to call this chapter. Suggestions included Son of the Markets, Specialized Markets, When Your Film Is Different, One Size Does Not Fit All (my personal favorite), and A Special Film Deserves Special Handling (my assistant, Faryl's, favorite). Finally, I settled on the rather straightforward New Media and Other Nontraditional Markets.
In every online class, workshop, and by email I am asked about writing business plans for cell phones, downloading from web sites, large-format films, and direct-to-DVD. Every independent filmmaker should write a plan for himself, just as any other entrepreneur would do. However, I know that you creative types aren't going to go through this process, unless you are trying to raise money from someone else. And thereby is the conundrum. You can write about the industry, markets, and budget your costs, but how are you going to forecast revenues and figure distribution costs and net profits?
ART VERSUS PROFIT
Lately, this topic has been in heated discussions in Internet blogs, Facebook, and in trade paper articles. Such activity is often the result of any film festival or market, and the 2009 Los Angeles Film Festival ended with another energizing keynote speech. In 2008, we had Mark Gill of the Film Department saying that the sky was falling. This year we had Jim Stern of Endgame saying to “respect the money” and “think market” when making a film. This caused a flurry of opinions on which was more important—one's artistic expression or money?
My view has always been that both are. If you are using your own money, you can do anything you want. On the other hand, if you are using someone else's money, it doesn't mean that you automatically have to forgo your artist intentions; you just have to make clear to your financial source what the chances are that they will every see a return on their money or profit. Then it can be their decision, which is more important.
Although I address this in other parts of the book, it is important to repeat here. We are about to review markets that either have fewer restraints on what you say and do (the Internet and direct-to-DVD) or are driven by a different artistic style and largely educational themes (large format). I could probably just repeat the chapter from three years ago. The most that would be missing is companies moving in and out of new media. Nevertheless, I am going to bring us up-to-date on where those markets are now, and what data exist and what don't. Then I will let you decide how you want to proceed.
THE INTERNET
This is going to be a very labor-intensive business, but we think that in 5 to 10 years it could be the most significant revenue source of all.
JOHN SLOSS
Founder, Cinetic Media, talking about
film distribution over the Internet at Cannes 2008
New Media (Internet, cell phone, and other wireless) rights have been the new focus of all discussion since the last edition of the book. More companies have become involved with Internet distribution. In 1999, CinemaNow was the first company offering secure digital distribution of a studio movie, 1997's Heaven's Burning with Russell Crowe. In 2006, Movielink and rival CinemaNow announced that they would offer permanent downloads of movies from several major studios day-and-date (on the same day as) with their DVD release. Movielink, which started in 2002, was a partnership of MGM, Paramount, Sony, Twentieth Century Fox, Universal Studios, and Warner Bros. Meanwhile, Lionsgate, MGM, and Sony made their movies available for download-to-own through CinemaNow. Other companies began making films available on a nonexclusive basis to both systems. Finding that Movielink wasn't the cash cow it had been expected to be, the original partners finally sold the service to Blockbuster in August 2007. Blockbuster shut down the Movielink site in December 2008, in favor of downloading directly from the Blockbuster web site itself, which now also features movies from IFC.
Other players keep coming into the Internet market. There are both services through which you can download your films directly, and distributors who will make Internet deals. The argument is that distributing through theaters is very expensive compared to the vast audiences you can reach on a single day through the computer without making multiple prints. To get to a theater screen, you have gatekeepers. You usually have to go through distributors and convince bookers/exhibitors that they should both put your film on the screen.
Major DVD distributor Netflix has started streaming many of its films and Blockbuster is streaming from its own site. It is good for them. It reportedly costs Netflix 80 cents to send a DVD out and get it back. The company has a 12,000-title catalog available for unlimited streaming at $9 a month. However, they are selling films that were released in theaters.
With the Internet, theoretically anyone can download their film with a choice of several software systems. The technology not only is empowering, but allows you to send any film anywhere without a rating or, technically, censors to worry about. (There are ways to shut off technology as recent political events have demonstrated, but that isn't part of this discussion.)
So what's the problem? First, the movies being watched are primarily ones that have gone out theatrically. How is someone going to know that your film is available for download? You have to tell them. With social networks and email marketing, self-marketing keeps growing. Nevertheless, you still need some advertising push to alert people that your film is available. And how many of them are going to download? We don't know that. We don't really know except in macro numbers how many people are downloading all those theatrically released films.
Then there is the question of not only what people will pay, but how much will come back to the filmmakers. We know what different sites charge for a customer to download, but we aren't sure what the share is for the filmmaker. Many download sites are ad-supported. There is no common split the way that we can track with brick-and-mortar stores or Netflix.
Speaking of ads, there is YouTube, which made its debut in 2005. Created by three former PayPal employees, it allows users to upload and share videos. Google bought it in November 2006 for $1.65 billion, and they are still trying to make it profitable. The last time Google's financial statements broke out YouTube separately was in 2006, when it lost $276 million. According to a report by Credit Suisse in May 2009, their financial analyst estimates that the site would post an operating loss of $470 million on $240 million in revenue. While much of their site is dedicated to shorter videos, in November 2008, YouTube reached an agreement with MGM, Lions- gate Entertainment, and CBS that will allow the companies to post full-length films and television shows on the site, accompanied by advertisements. This creates competition for other sites, especially Hulu, which has films from Disney. However, the films being made by the studios are older, theatrically distributed films for which any additional income is welcome but not needed.
Short-Attention-Span Theater
Short-attention-span theater, or “video snacks,” as Video Business has referred to it, is very popular. The small screen took a big step forward in 2005 when Google announced that it would download to cell phones. A first impression of downloading to cell phones and downloading from the Internet was that theater screens might become an anachronism. Of course, that incorrect impression has been dealt with already. The potential for selling entertainment products through mobile products is still a new frontier.
At the time of the last edition, the National Academy of Television Arts and Sciences Daytime Emmy Awards announced that they were going to cover this format for original content such as “video blogs, web programs event coverage, mobile phone serials and video-on-demand content.” This step caused The New York Times to comment that the announcement gives new meaning to the line Gloria Swanson made famous in Sunset Boulevard: “I am big. It's the pictures that got small.”
In 2006, the Yankee Group estimated that pure mobile entertainment—games, music, and video—accounted for about $500 million last year, less than 5 percent of the wireless carriers’ data revenue. And the data revenue represented a small fraction of voice revenue. Although people are watching video on their phones in increasing numbers, another researcher, eMarketer, predicted that by 2009, fewer than 10 million subscribers would be willing to pay for premium services.
In the first quarter of 2009, 13.4 million Americans watched video on their mobile handsets for an average of 3.5 hours of content each month, according to Nielsen's quarterly “Three Screen Report.” The company reports that mobile video viewer totals grew from 8.8 million in the first quarter of 2008 and 11.2 million in the last quarter. The most viewed categories were comedy and weather. Subscribers between the ages of 25 and 34 account for 34 percent of the mobile video viewing audience, followed by viewers ages 35 to 44 (20 percent) and teens ages 12 to 17 (18 percent). Men represent 59 percent.
Given the across-the-board economic problems, people are considering what expenses they really need. In June 2009, a new consumer study published by Strategy Analytics’ Multiplay Market Dynamics service reported that 48 percent of Americans said they would drop their mobile data plan completely if circumstances dictated they must reduce household expenditures. Posed with the scenario “Imagine that, due to household budgetary constraints, you have to reduce home entertainment/communications services expenses,” only 10 percent of respondents said they would halt their home broadband subscription, while 12 percent said they would eliminate digital television and 19 percent would sacrifice mobile voice services. “Given the extraordinary importance consumers place on home broadband, we fully expected broadband to have a high ‘keep rate,’” the company said.
Under the same scenario, 17 percent of respondents told Strategy Analytics they would scale back to a lower mobile data tier, 33 percent said they would leave their service unchanged, and 2 percent said they would upgrade to a higher tier. At the same time, only 21 percent of broadband subscribers said they would scale back to a lower tier, and 2 percent would move to a higher tier. “These results suggest that, while American consumers consider home broadband service to be a vital utility, they see mobile data service as simply a ‘nice to have,’” the report concluded.
At the same time, research firm SNL Kagan reported that U.S. mobile-video revenue will grow to about $350 million in 2009, up from $300 million in 2008, and will likely accelerate to a 25 percent annual growth rate over the next few years as more people buy Apple's iPhones, Palm's Pre, and updated versions of Research In Motion's BlackBerry. The most accessed programmers are ESPN, MobiTV, MTV Mobile, and CNN.
The business model for all of this activity has not changed much in the past three years. Not all companies will be able to download to all cell phones. If you are distributing a movie to theater screens, theoretically (and ignoring the clout that major distribution companies have with exhibitors) you can put the film on any screen, if you have the print money and a willing exhibitor. You aren't blocked by the fact that the exhibitor may be making his own films. At the very least, you can take similar films and see how many screens they played on, what revenue they grossed, etc. With cell phones, however, at this point the picture is different.
Certain cell phone providers have indicated that they want to have their own content. Some have agreements with Google, Yahoo!, and other content providers; others do not. In addition, there may continue to be limits on the amount of downloading an individual can do.
What Can You Tell Investors?
A distributor whom I know and respect very much told me that the thing I had left out of the last edition is that the digital wave is heading for the shore like a tsunami and that it is going to change the fundamentals of distribution. Clearly, things are changing. It is the timing that is the problem. If you are planning to distribute your own films directly through the Internet or any other new media technology, there simply is no sizeable money for Internet downloads for indie films. Most of the downloads are television and studio films. With or without a large number of downloads, there is no database to use for forecasting.
Then there are the anecdotal stories about how much money individuals have made selling their own films from their web sites. Clients have told me about money that has been made. Not large amounts of money. In terms of “no-budget” films under $50,000, they have sometimes been able to make back their costs. There are anecdotal reports from some filmmakers who say that they have made $3 to $5 million by selling their films only over the Internet. It sounds impressive. However, these reports are subjective and very few.
All the above information is presented for your use. You should proceed as you think best. I agree with Director Michael Apted and President of the Director 's Guild of America, who said, “All the talk is the Internet and all the deals we did for the future. In a sense, that's sort of fog. The real money and the real deal are in traditional media.”
LARGE-FORMAT FILMS
Large-format films are made by several companies, among which are the IMAX Corporation, studios, and independent producers. Since the industry started in 1970 at EXPO ’70 in Osaka, Japan, when IMAX Corporation of Canada introduced “the IMAX® Experience” at the Fuji Pavilion, the films tend to be referred to by that manufacturer 's name. In 2008, the total number of IMAX and other giantscreen theaters increased by 53, from 412 to 465, the largest absolute increase in the 40-year history of the industry.
Until 1997, these theaters were located in museums, science centers, and other educational institutions, as well as a few zoos. In 1997, IMAX introduced a smaller, less-expensive projection system that was the catalyst for commercial 35mm theater owners and operators to integrate their theaters into multiplexes. Traditionally, the films were 30 to 50 minutes long, mostly documentaries. By 2000, the institutional theaters still comprised 70 percent of the market.
The first independent producers of these films were Greg MacGillivray and the late Jim Freeman. They began with surfing films in 1973. The cameras they used weighed 80 pounds, but they paid IMAX to make a camera with better specifications. Since that time, the MacGillivray Freeman Company has led the independent way with 20 productions. Among the other independent producers are nWave Pictures, 3D Entertainment, National Geographic Cinema Venture, and 3ality Digital Entertainment.
Formats
In 2002, IMAX introduced a process to convert 35mm film to 15/70 (15 perforations/70mm process), which is their standard. Known as DMR, for digital remastering, the process started a new wave of converting longer feature films to be shown on the larger screens. Since the film frame for large format is ten times the size of 35mm film, the films have better clarity and sound when projected on multistory screens. Although they either coincide with the 35mm version or are booked later, the DMR version of a film tends to remain in the theater longer. On the other hand, their average booking length is 77 days compared to films made specifically for the giant screen, which remain 211 days. These figures, from LF Examiner, are by year. An individual large-format film can appear on screens off and on for several years. T-Rex, which was originally released in October 1998, was making irregular appearances on Variety's box office list in June 2009. There is ongoing controversy about whether or not fiction features belong on a giant screen. However, that is for you to decide. Suffice it to say that the economies of scale are vastly different.
Another controversy erupted when IMAX introduced a new digital screen to multiplex theaters in 2009. Since 2004, the size of the IMAX screens has been 76 × 98 feet (23 × 30 meters) while the new screens are 28 × 58 feet (8.5 × 18 meters). The newer systems cost $1.5 million to get up and running compared to $5 million for an “original” IMAX. The company's multiplex agreements allow the removal of the lower portion of seating in stadium-seat venues, creating the perception of greater screen size and viewing immersion. Presumably, the remastering of 35mm films boosts image resolution and brightness. Then there is the question if you can call them “giant screens.” An IMAX representative insisted that “It's isn't a particular width and height of the screen. It's about the geometry.” In the end, the audience will decide. They won't care about how much it cost to make the film, equip the theater, or remaster the film. They will care how it looks to them, and whether or not they should have been charged $5 more for a film that isn't on a six-story screen.
Finances
That brings us to the bottom line for these films. Since I have been covering the industry for The Film Entrepreneur, there have been few real data to obtain. As of December 2005, the LF Examiner discontinued box office information. Editor/publisher James Hyder said on the publication's web site:
Readers are advised not to assume that the box office information on LF films provided here (or in other publications or Web sites) is complete or representative of the entire LF film market. In the conventional film industry, an independent agency collects and tabulates box office data directly from theaters for all films in release. Box office data for LF films are not reported the same way. Some LF distributors choose to provide data for their films to trade publications, but the practice is not universal, nor are the data independently audited or verified. In general, distributors that choose to report do so for the perceived marketing value. Therefore, films reporting their box office numbers are typically stronger than average. Films doing poorly generally cannot afford or prefer not to report. However, this does not mean that all films that do not report are poor performers. Some would undoubtedly place in the top half of these lists. But their distributors have chosen not to report because they believe weekly box office numbers are not a very useful measure of the LF industry's performance. We agree.
That being said, Variety does print box office dollars. There are filmmakers who want to be a part of this industry, and it is the only reference they have to revenue. The problem comes on the cost side— not only the budgets, but also how distributors of giant-screen films calculate their fees. Even if the commercial theater owners work the same fee arrangement between themselves and the distributor, what is the deal with the institutions? In addition, in ten years of covering this part of the film industry, I have never found a written analysis of the split between the distributor and the producer. Anecdotally, various distributors have told me that the split is the opposite of what we would assume for an independent film—65 percent to the distributor and 35 percent to the producer. This makes it a little difficult to write a business plan for equity investors.
After attending the annual conference of the Large Format Cinema Association (in 2006 it merged with the Giant Screen Theater Association to form the Giant Screen Cinema Association), I have found that independent producers generally are funding films as they would other documentaries—with grants, corporate donations, and funds from specific groups that may have a social or business interest in the subject of the film. The ongoing independent producers, MacGillivray Freeman, nWave, and others, have made profits from earlier films and, in some cases, distribute their own films. This lack of financial knowledge also makes it difficult to approach equity investors with a business plan. Information does change over time, however. As with other subjects, it's important to do your own research.
DIRECT-TO-DVD
With the relatively flat sales of DVD and Blu-ray, premiere releasing of direct-to-DVD (and potentially direct-to-Blu-ray) has become more and more of a market for studios and independent distributors. Many indie filmmakers still see this as a market for their product. To consider mentioning this business segment as a future goal is one thing; trying to raise money from equity investors can be a problem.
While very few data exist about direct-to-DVD, it is clear that a majority of the product is from studios and/or franchises of films previously released and popular in the theatrical marketplace. These films have a ready-made audience. Formerly a haven for very mini-budget horror and urban films, the direct-to-DVD business now is dominated by those franchises for popular feature films. With consumers being more careful about their spending, “What's new is old,” said Karen McTier of Warner Bros. Consumer Products Division at the 2009 Licensing Expo. “What retailers want is proven successes. In this environment they can't take any chances.”
Even before this economic crunch, many of the films, and the top grosses, in the DVD premier market were sequels, prequels, or films starring older action heroes like Steven Seagal and Jean Claude Van Damme. In a recent week, Rentrak's list of top-ten premiere releases included two studio sequels (Dr. Dolittle, The Cell 2), an indie sequel (S. Darko: A Donnie Darko Tale), and assorted studio and independent films with stars. Both studio and independent producer/distributors have announced plans for multiple direct-to-DVD films. For example, Dimension Films plans to release 18 direct-to-DVD titles in 2009 alone, including “sequels, prequels and remakes as well as TV spinoffs.” What do all of these films have in common? There is name recognition, a ready-made audience, and a company with money to spend in additional advertising. In addition, the companies that focus on the direct-to-DVD business are spreading their risk over multiple films.
Nevertheless, many independent filmmakers plan on sending their films directly to this market. There are always anecdotal stories about how someone has made money distributing this way. Using viral marketing through the Internet to niche interest groups, such as wrestling clubs or subscription DVD clubs, can bring in revenue. What we often don't know is the relationship of that revenue to budget.
There is no real database available for direct-to-DVD, even for a fee. The Rentrak report available at Video Business that I have been quoting includes only those ten films and ranked by index, with the top title at 100 and all others listed as a percentage of the top title's rental revenue. Therein lies the biggest problem for including direct-to-DVD in a business plan. Although you can find people to quote on how profitable they can be, investors are likely to ask for projections. Occasionally, someone tells me that they have written a business plan for direct-to-video. When I ask what they used for data, the answer is, “You don't want to know.”
I advise readers not to go down that road. The best way to start a direct-to-DVD business is to use your own money, make a mini-budget film, and test the profit-making waters. Only then do you want to write a business plan to raise money from equity investors.