Sunday, July 31, 2011

The Grand Experiment: Quality vs. Opening Weekend

Studios, and especially young studio executives, don't realize this, but they actually don't care about the quality of the films they make.

This is not to say that each individual involved in a production isn't doing the best job possible. They are. You don't rise to the top of a business as competitive as the film industry without skills. No one at a studio would say, "we don't care if the movie's any good or not, we just want a big opening weekend," but they will say, "we want a big opening weekend."

After the opening weekend, there are a handful of people in the business who will pay attention to drop off. That is, the difference between the first weekend and those that follow. Funny thing is, they call it a "drop off." They expect the second weekend to be lower than the first. Young executives will say, "but it always is."

No, it's not.

Step over here into indie film world for a second. Let's look at two movies that came out about the same time. One a tent pole, and the other an indie film.

This is the weekly box office chart for 2001's movie PEARL HARBOR, as reported on IMDBpro. That's a classic drop off.

This is the same chart for 2002's MY BIG FAT GREEK WEDDING. Sixteen weeks into its run, it was making more money than when it opened. This is a classic build.

What does all of this have to do with the quality of the movies? Everything.

On opening weekend no one knows if the film is any good or not. It's marketing's job to convince people to get off their butts and into the theatre. We should all tip our hats to those people, they do a great job. The quality of the film is not responsible for a successful opening weekend, since no one knows if the movie is any good or not. All the general audience knows is what they get from trailers, and possibly a few advanced quotes that the marketing executives have wined & dined from critics.

Young studio executives will tell you that word-of-mouth is the most important form of advertising, and in the same breath use the term "drop off." They will say that a small drop off is due to good word of mouth.

No. Good word of mouth would create a build, like GREEK WEDDING.

The business's obsession with big opening weekends, and the belief that drop-offs are normal, has become like the housing bubble was before the recession. "Housing prices only go up." Really? How's that working for you?

"Movies always drop off in the second weekend." It ain't necessarily so.

Indie films have no big marketing machine behind them. They don't have the clout to get advanced quotes. The only thing they have to rely on to pull in an audience is the quality of the movie. "My best friend said this movie is great! You have to go." The indie filmmaker is under much greater pressure to tell a good story well, where the studio filmmaker is under pressure to sell a story well – if it's a good story, that just happens to make it easier and more fun.

Think about this experiment. What if I were to pitch a movie to studios using nothing but stars who were attached. "Bruce Willis is on board as the hard ball detective, with Julia Roberts as the femme fatale, and the kids from Twilight are the white-collar gangsters, and it's nothing but action, romance and more action." If I actually had those stars attached, the project would get funded, right?

But... this experimental movie is nothing but trailer beats. "One man, stands between her and happiness..." No actual plot. No story. Just a collection of ads for a movie that never gets made. Except, we make the movie and marketing sells it. Pretty soon you're watching a preview of Willis saying cool, tough things to Roberts, who is looking smoking hot and sexy surrounded by the Twilight kids. "That looks good," you tell your date, and plan to come see it.

Think the drop off for that would be any worse than Pearl Harbor?

Friday, July 15, 2011

Let's Talk Business, Indie Film Business, Part Two

Like so many indie filmmakers, a few years ago, I sat down to write a business proposal for a movie I wanted to get financed. Like so many filmmakers, I knew nothing about writing a business proposal, so I got all the books, read all the blogs, and taught myself.

One of the first things I learned, which will come as no surprise, is the practice of presenting comps – short for complimentary films. These are movies like the one you want to make that are already on the market. You use their performance as an example of what your film might do. Typically, a business proposal would have three comps: a highly profitable, a mid-level, and a not-so-successful.

Really? Just three?

Most of the research I'd done on the subject talked of the difficulty of finding financial information on movies. That makes sense, IMDB Pro was new, so it probably wasn't around when these books were written.

So I decided to bring the digital revolution to the business plan. First, I e-mailed IMDB Pro to find out where they got their numbers. They said they are a compilation of information provided by the production companies and the trade magazine reports. Fair enough. The textbooks all said contact the production companies to get what information they are willing to share, and then dig into the trades. For $13 a month, IMDB did the work for me.

So, I did a search for all films with budgets between one and ten million dollars released between 1999 and 2006. [NOTE: I attempted to update these numbers for 2010, but IMDB is revamping their Home Video/DVD numbers, so they are no longer available. Given the change in distribution and viewing habits, that data is vital, so my old numbers have to do for now].

Many of these lower budget movies show no income whatsoever. These films either have no distribution – which is important, more on that later, or were direct-to-video which make for difficult calculations. I removed titles with no income data.

So, my statistical set becomes all movies with budgets between $1-10 million, that have reported theatrical income.

Instead of three comp titles to work with, I now had 260. I loaded all of them into Excel and got to work.

On the income side, we have two fields: Box Office and Home Video. Box Office was required for this exercise, Home Video was not. In many cases there was no HV income reported on titles that we all know are available, like: But I'm a Cheerleader, Jesus' Son, etc. Fifty-five titles in all had no Home Video reported, so that skews my income numbers in a conservative fashion.

Box Office is only domestic, so again my numbers are extremely conservative as foreign box office creeps up to equal domestic. I have no TV numbers, domestic or international - so, again, my income numbers are well below what might be expected.

In other words, the final report will be worse than real life. That's a good thing as far as investors are concerned.

Expenses include:
Distributor Fees = 50% Box Office
Prints & Ads = 3K plus 33% of box office (more on that calculation below)
Home Video costs = 40% of Home Video
Guild Obligations = 12% of Home Video.

For studio films the calculation for Prints & Ads can be as much as three times the budget. This is another reason tent pole movies have such a slim profit margin, if any, in the theatres. My calculation is based on a rolling open. Smaller distributors may only have a handful of prints to send to theatres, so they will open in select cities to get reviews for the DVD. The movie will stay in theatres as long as it makes money, but there isn't a huge advertising budget. To open a movie in New York, theatres require proof of $100,000 in advertising. My calculation figures on a three city open at $100,000 each, plus one third of the box office which might be churned into more prints and ads. It's not a perfect calculation, but it's more accurate than the studio model, and errs on the conservative side.

Given all of these calculations, what did I conclude?

116 movies showed a profit. That's 45%. Of those, the average return was 80%.

So if you give a filmmaker a million dollars to make a movie, you have basically a 50-50 shot at a profit. If you do make a profit, chances are, you'll walk away with 1.8 million off of your million dollar investment – and that's before international box office, international home video, pay TV, free TV, International Pay TV, International Free TV, and now, Video On Demand.

Of course, it's still a high risk investment. Remember those movies that showed no income. But as the high risk world goes, I'd say the film industry, if done smartly, is safer than most people think.

Friday, July 8, 2011

Let's Talk Business, Indie Film Business, Part One

During one of the panels at this year's Dances With Films festival, our guests pointed out that the most recent WGA strike ended with a horrible deal for top-tier writers. I asked if these people were seeing any participations (a.k.a. "backend") money. I got the reaction I expected from people used to working with studio films, laughter.

One of my many day jobs in the studio system was working in the Participations Department for both Universal and Warner Bros. I recall one of the senior analysts talking about the reports she slaved away on day-in and day-out. "I don't know why we bother. They never pay."

We were talking about tent pole films, so I asked, "What about the low-budget ones?"

"Oh, yeah, they pay."

Why would a smaller film that fewer people have heard of pay out more money than the household name, summer blockbuster? Lots of reasons.

The easiest to wrap your head around this is that they cost less to make. The film industry is a funny business. The price of the product is in no way related to the cost for the consumer. It costs you the same amount of money to see Harry Potter as is does The Hang Over. Participants – people who participate in the sharing of the profit of a film – don't see any money until there is a profit.

The more difficult reasons smaller movies pay out before larger ones has to do with the fact that the above sentence isn't entirely true.

Some participants – usually big stars – can negotiate a deal where they are paid based on gross income, not net. So their money is deducted from the pool before the other participants get to share. This makes the math really difficult.

Add to this, the initial investors are also participants. Different from the writer, director, hired producers, talent, etc. who are paid a salary to make the movie, the investors are the ones who paid these people. They must get that money, and the rest of the cost of production, back first, with interest, since they've taken the biggest financial risk. As an indie filmmaker, you want these people make money because you've probably got another project you'd like them to invest in.

All of this who-gets-paid-back-when stuff is called "the waterfall." Ideally, the people who took the most risks are at the top of the waterfall taking their fair share first. The people at the bottom may never see a drop. They are the ones you usually hear complaining about there not being backend money in the movie business.

But keep this in mind. The people at the bottom of the waterfall have already been paid. Sometimes they've made six or seven figures before there was any water in the stream. The people who paid them are at the top hoping against hope that there will be enough water to refill their reservoirs.

I've seen so many speakers at seminars wearing designer clothes, expensive jewelry, and driving fancy cars complaining that they never see any money from their movies. It's made me conclude that there are two types of people making this claim: those that have already been paid, and those that are making so much money that they don't want anyone else to know about it.

I also mentioned at the seminar that close to 50% of low-budget films turn a profit. In part two of this segment, I'll show you how I got to that number.

Until then, thanks for reading.