Money Matters

Ed Pressman and I started ContentFilm two years ago, and we have produced eight films in that time with more on the way. My last job was co-president of October Films, where we acquired or produced over sixty films before the sale to USA Films, and before that I was the CFO of Miramax from 1989-92 where it seems like we did sixty films a year. From all this I’ve come away with some knowledge of independent film finance, and I’d like to share some of it here.

It seems to me that despite the endless variety of financial structures for independent film, you can break it all down into three models—the single picture deal, the portfolio approach, and the integration model. I’ll talk about each one. In fact, the history of various companies, such as October, Miramax, and New Line, is really the story of how they progressed through these three models, and their ultimate success, at least financially, has been determined by how successful they navigated these phases. As an independent producer, you need to know what each production/distribution company is looking for, and I mean both creatively and financially, because the movies that get made are the ones that cross both those hurdles.

The Single Picture Deal

Passion meets madness

At the Toronto Film Festival this year, I saw Mario Van Peebles’s film, How to Get the Man’s Foot Outta Your Ass. This should be required viewing for indie producers. It tells the amazing story of Mario’s dad, the legendary Melvin Van Peebles, and how he made the original blaxploitation film, Sweet Sweetback’s Baad Asssss Song outside of the studio system in 1971, when there was no such thing as outside the studio system. It is the textbook case of the single film deal.

Melvin had a dream, an inspiration—to make a feature film about a black hero for a black audience with a black soundtrack by a multi-racial crew. And as Bill Cosby says at the end of the movie, “Melvin had a great dream, and the first thing you have to do when you have a great dream . . . is wake up.” Melvin woke up to the reality of self-financing. He cobbled the money together from his own pocket, from donations of film and equipment, and finally from a $50,000 loan from Cosby. He bounced a $500 check to the unknown musicians who were laying down the score—some dudes who called themselves Earth, Wind & Fire. He opened it in Detroit, after everyone had passed on the film, by telling the Goldberg brothers he’d buy them each a new suit if Sweetback didn’t outgross the B-movie they had on the marquee. And then he promoted the film himself on the radio. It worked. It hit a nerve, and he created a whole genre that lives to today in such films as Foxy Brown or our film, The Hebrew Hammer, which is a homage to Sweetback.

Melvin made it happen with passion and a touch of madness—nothing would deter him—and today we see indie filmmakers do this all the time. The single picture deal is a one-off, a roll of the dice fueled by passion, madness, or both. It’s the single cell amoeba or better yet, bacterium, in the evolutionary cosmos of film that extends all the way to the woolly mammoth of the studios. And when the bacterium spreads because it has the right stuff, then you’ve got sex, lies, and videotape or Memento or My Big Fat Greek Wedding,” a beautiful thing to behold, a film that spreads around the world from a tiny beginning and enters the culture. (It also inoculates the culture against anything else like it becoming successful, but that’s another story.)

So when you raise the money, there’s no pitch you can honestly make other than, “You may not see a penny back, but this is why I want to make this film.” Or as Mario said to Cosby, “This is why this film has to be made.” Sure, you can build a business model, you can point to comparable films, put together a nice investment document, but fundamentally it’s all guesswork. The only time that changes of course is when a single picture is pre-sold in some market. That usually means some name talent is attached or it’s a genre film for a narrower market than theatrical, and as such, you’ve already advanced to a multi-cell organism.

The Portfolio Approach

Keeping the lights on

The portfolio approach is next and requires a higher level of sophistication and experience. That’s what we’re doing at ContentFilm. With a certain amount of success under your belt in the single picture deal scenario, you’ll be ready for the portfolio approach. It is the deployment of a larger pool of capital into a slate of films that will be managed centrally and exploited through different distribution platforms around the world. It requires a business model that can anticipate the hits and misses that might occur in the portfolio, and can analyze the sensitivity to those outcomes. It requires a deep knowledge of distribution and the realistic values that may be assigned to the films in the various markets and territories worldwide. It requires an awareness of classic deal terms and the traps that can drain any future value out of the portfolio. It requires production discipline to drive the films to completion on budget, and it requires the creative genius for assembling an original and powerful group of films, well-directed, well-cast, and well-scored.

That’s why we’ve hired such talented people at ContentFilm, because Ed and I don’t know any of that stuff. Seriously, Douglas Tulley on the business model, Michael Roban on the deals, and on the creative side, Sofia Sondervan in New York, and Alessandro Camon in Los Angeles are the reason we’re off and running so well. We raised equity financing two years ago from a group led by Syntek Capital, and we’ve supplemented that with a bank facility with WestLB bank in New York. We’ve invested that money in eight feature films to date, we’ve kept our overhead down, and we’re selling the films successfully around the world. We are extremely proud of the films, and I don’t think it’s a stretch to say they might not have been made if we hadn’t been here.

So what happens under the portfolio approach? If the films sell, you get to stick around and make more films. If they don’t, sayonara. So what do Ed and I look for? A script that knocks us out somehow. We can get knocked out loudly (Never Die Alone), or quietly (Undertow), or humorously (Rick, Hebrew Hammer), or sadly (The Guys), or creepily (Love Object). Next the director has got to have the goods. The director can be a first-timer like Wayne Kramer or Jim Simpson, or a veteran like Ernest Dickerson, but we have to believe he’s got the vision to pull it off. Finally, the last hurdles—who’s going to buy it? Who’s the audience for the movie? If the movie doesn’t work out, what are the values we can fall back on?

From all these discussions inside the company comes a portrait of the film as an economic proposition—production and selling costs against the worldwide revenue potential spread over time. And not only must it look profitable, but it must take care of its share of our overhead. So if we make five or eight films a year, and make some money on each one, we’ll cover our overhead and have a steady-state production company, a machine that creates new copyrights every year and builds a library. If one of the films kicks out a few extra million by over-performing, that’s great, but it doesn’t change the basic mindset. The mantra of ContentFilm and other portfolio companies like Killer, Hart/Sharp, and GreeneStreet, has got to be “keep the lights on.” Manage cash, expect productions to go over budget, expect payments from sales to be slower than your worst assumption, model it out as if your big film sells for 0.5x instead of x. Keep the lights on. If you can pull this off, you’ll be ContentFilm. If you can pull it off for a long time, you’ll be Working Title. You’ll be Ron Livingston in the final scene of The Cooler raising his drink and saying, “Gentlemen, the future looks very bright indeed.”

With a certain measure of success in the portfolio approach, you will achieve longevity and volume, and those two beautiful words will lead inevitably to integration, which is the next phase. It is the siren song that calls the successful producer to the rocky shores of distribution and lures his happy boat toward the ravenous shoals of P&A and theatrical overhead.

The Integration Model

The final frontier

These are the voyages of the Starship New Line, Miramax, or Dreamworks—the combining of an ongoing production capability with the ownership and management of distribution channels around the world. It calls for a business model of the most sophisticated and far-reaching structure. It calls for a capital strategy that is no longer based on simply a portfolio of films and their performance, but on an integrated view of many businesses—film, video, television, music, merchandising, and distribution apparatuses in different territories. It requires equity, debt, and access to the complex financing vehicles that are in constant metamorphoses around the world. Financing emerges from a macroeconomic view of content creation, delivery pipelines, information exchange, and corporate value. And if you’re truly blessed, or maybe truly self-deluded, you arrive at that Zen-like frame of mind that is embodied in a recent quote by David Geffen, which caused great hilarity in our offices. “The future is an illusion. Business plans are an illusion, aren’t they? All that matters is what’s so.”

At the mature stage of the integration model, you’re a major corporation raising hundreds of millions, so this is probably of limited relevance to most of the readers of The Independent. But smaller production companies can take steps into the integration model in careful ways—Hart/Sharp started its own video distribution company, and ContentFilm has started its own foreign sales business.

Evolution

From bacteria to Miramax

I find it fascinating that so many companies have moved through these phases and arrived at their destiny largely based on how they managed each step. Bingham Ray and Jeff Lipsky started October Films with a single film: Life Is Sweet. I joined them six months later to put together the package that would move us into a portfolio company with the means to acquire many films and roll them forward into a real business. After some success, Universal gave us integration and that entity evolved into Focus Features.

Harvey and Bob Weinstein started with single picture deals, and then spent years learning the theatrical business, promotion, and the ancillary markets by living picture to picture, (Secret Policeman’s Other Ball, Playing For Keeps, Working Girl), and thus gaining the keenest survival instincts out there. When I arrived, Harvey and Bob had just raised their first outside money, and they were crossing over to a portfolio company. The first portfolio—Thin Blue Line, Pelle the Conqueror, Scandal, My Left Foot, sex, lies, and videotape, and Cinema Paradiso—changed the independent world forever. But when the portfolio had a dry spell, and it did in 1991-1993, they gained integration and security by selling Miramax to Disney for $50 million. Now they’ve built a business that might be valued at over a billion dollars, but it’s owned by Disney’s shareholders.

New Line went further and became the most completely evolved indie in the business. Bob Shaye started in 1967 with single picture deals like Reefer Madness, moved into portfolio financing on the strength of the Freddy Krueger franchise, raised outside money, and then evolved into an integrated company. He built international sales, home video, and television distribution into wholly-owned businesses, and added key players like Michael Lynne. They raised money by going public and issuing debt, and grabbed library deals, like Nelson, that fed the integrated machine and strengthened it. When they sold their company to Ted Turner, it was worth $400 million because they successfully navigated the transitions and built a mature business.

What It Means to You

Taking a meeting

When you take a meeting with a producer or financier, you’re ready to tell him or her about the story of the film, the brilliance of the writer, the vision of the director, and the genius cast you’re putting together. You know all that, and you’re ready to deliver it with conviction and passion.

Believe me, if you add to all that a quick synopsis of the film’s economic goals and how it fits with the financial profile of the company you’re pitching, you will be on a different plateau. It might be as simple as “I know you make movies for the budget I’m talking about, and I know this film can sell!” Or it might be a complex and seasoned analysis of the soft money component, gap financing from a bank, deferred compensation for the talent, minimum video units that will ship, etc. Both these approaches show you have a good grasp of the money and that you care about the return on investment; that you’ll drive the film toward that goal, and maybe even tie your own compensation to it. After all, you’re asking them for large amounts of their cash, and you’re promising to return in several months with something on celluloid (or digibeta anyway). It’s pretty amazing that any films get financed when you stop and think about it. So be considerate of these poor people who have nothing better to do than give their money away—have a really good idea of how to get their money back to them. Because if you do, they’ll give you more! And they’ll tell their friends, and soon you’ll even have banks giving you money!

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