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August 30, 2005

New Mexico Shoulders Full Burden


In a departure from prior subsidy requirements, New Mexico is fully financing the production budget for Treasure Entertainment's "High Midnight" reports Variety. While the state subsidy program, which includes an interest-free loan program, a 20% tax credit, some free shooting locations, and reduced labor costs, does require distribution -- "Midnight" will be guided by ThinkFilm -- it had also required some equity capital from the producers as well. The full coverage may be due to the size of the loan -- $5 million -- versus the new cap -- $15 million up from $7.5 million.

New Mexico has been aggressive in seeking to attract more production to its state, arranging for easy scouting trips, providing rebates and loans and guiding filmmakers through the process created with the advice of entertainment lawyer Peter Dekom. In return for an interest-free loan, the state receives 10% to 11% of any profits. For more info on the program, see the New Mexico Film Office website.


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August 29, 2005

The Weinstein Channel


Alledgedly seeking the first step towards the multimedia, multiplatform world they envisioned, the New York Post reported today that The Weinstein Company is in talks with Cablevision to acquire Fuse, its music video cable channel. Of course, the brothers Weinstein [Ed. note: the link is to Harvey because Wikipedia gives short shrift to Bob] are seeking more than a competitor to MTV, but rather a concrete step in their partnership with, who else, Cablevision's Rainbow Media subsidiary to "acquire low-budget movies for home-video release and television distribution."

The Post was nice enough to attribute the story to Broadcasting and Cable which first reported the potential transaction. While pegged at $450 million, B&C does point out that "Fuse is the lowest-rated of the 60 basic-cable networks that are tracked by Nielsen. In a recent week, it averaged a minuscule 37,000 viewers in prime time." However, the cost and, more frankly, the ability to launch a new national cable network makes this backdoor entrance highly attractive.


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August 24, 2005

See Me, Feel Me


The New York Times steps in to bring a pragmatic view about the ever shifting landscape in film distribution. And far from chasing the disaster prognosticators of "plummeting" box office, disintegrating video windows, VOD invasion and home video standards wars, they rightly point out that there's still a lot of money in the brick and mortar home video world.

That's right, even with Blockbuster suffering losses from the death of its late fee revenue stream and investment in the competitive world of online rentals and Movie Gallery way off target on earnings, "the video rental business last year ranged from $8 billion to $8.9 billion."

"The number of DVD's (and a dwindling number of VHS tapes) rented by the movie-loving public still dwarfs any other form of movie watching. According to Adams Media Research, there were nearly 3.2 billion rental transactions last year. By contrast, box-office admissions were less than half of that number, DVD sales totaled about 1.1 billion and there were fewer than 350,000 purchases of movies through video on demand or pay per view."
The primary points of the piece are that: (a) Blockbuster and Movie Gallery are poor communicators; (b) people like to go to stores and touch stuff; (c) "rationalizing" the video store business with greater product breadth (video games) and services (buy/sell/trade) and lower costs can drive a profitable business; and (d) oh yeah, DVDs are not going to be quickly supplanted by alternative media in the near future.

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Do You Still Want a Revolution?


Variety touched base with one of the few remaining "independent" studios with a piece on Joe Roth and Revolution Studios. The upside of the analysis is that Revolution's partnership with Sony wraps up at the end of 2006 and two of it's partners -- Rob Moore and Todd Garner -- have moved on from the company.

Without predicting the future of Revolution, the article points to Roth's desire to slow talks until after its upcoming slate conquers at the box office, for reflecting a more balanced portfolio of pictures that reads differently than its young male past (Tomcats) with Rent, Freedomland and The Fog. For Sony, with a number of labels on its own besides Revolution and integrating MGM into the fold, the question becomes do they need this product?


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August 19, 2005

It's not me, it you


And in the slow tides of summer news, the box office fiasco/catastrophe/disaster/signal of a new era that represents the decline in receipts over last year has jumped to the front pages of news outlets everywhere. Peruse the Hollywood Reporter, the New York Times, the Los Angeles Times, and the Guardian Unlimited are reporting John Fithian's, head of the National Association of Theatre Owners, response to Robert Iger's recent statement that decning box office revenue supports the need for simultaneous theatrical and home video release of movies.

Made during a recent analyst call on August 9th, Iger said:

"I don't think it's out of the question that a DVD could be released in fact in the same window as a theatrical release, although I'm sure we'll get a fair amount of push back there from the industry…. I think that all the old rules should be called into question because the rules in terms of consumption have changed so dramatically."
Not surprisingly, but with very direct language, Fithian's response was mainly:
"I'm not sure who was asleep, but it wasn't the exhibition industry. Here's what we know about 2005: the movies are not as good. They're not terrible; they're just not as good. And so the industry has experienced a temporary drop-off compared with 2004, the biggest box office year in movie history." [Editor: emphasis mine]
Frankly, this is a really complicated issue. On the one hand, the movie theater experience is increasingly marred by high ticket and concession prices, preshow advertising, and general rude theater behavior. Of course, that is offset by a reasonable argument that the movies this year have generated less money because they have appealed less to the public. In fact, it's very similar to the problems in the music industry when falling sales were blamed on piracy and rising sales -- despite much press about better reviewed and received albums -- pegged to effective anti-piracy messages.

For theaters, the high concession prices and advertising are driven primarily by the need for profitability. As movies increasingly earn the bulk of their theatrical revenue in the first week or two of release, theaters receive a smaller portion of the box office grosses. The reigning split formula has the theater share increasing over each week of release.

To be fair to Iger, it is unlikely that he or the rest of the studios would abandon an almost $10 billion market unless it was shown that the profit earned from day-and-date releasing would be greater than that earned under the present system. It is clear that DVDs get a huge jolt in sales and awareness from the very fact that films are marketed -- for more than $35 million a pop -- in theatrical release. That is what has been driving the collapse of the video window: to capitalize on awareness, studios are releasing DVDs sooner to avoid repeat marketing spend.

So is all this drama really specific to current box office performance? Unlikely, according to this analysis from the LA Times:

The year-to-date gross total for this year stands at $5.57 billion compared with the $6.05 billion that had registered at this point in 2004. But of that $6.05 billion, $489.4 million was generated by the two indie phenoms, "Passion" and "Fahrenheit 9/11." Remove those two from the 2004 totals and the comparable gross-to-date would stand at $5.6 billion, nearly identical to this year's $5.57 billion.
However, it gives the studios a chance to frame a conversation that will tackle the impact of digital release and multi-platform availability ahead of the piracy woes that hit the recording industry. Times are changing soon and Iger appears to want to ride the crest of that wave.

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August 18, 2005

Made in the USA


The LA Times files a report on the increasing domestic competition for luring location production to states around the Union. The uberobvious thesis is summarized by producer Joel Silver: "It all comes down to costs."

Primarily telling the story of how chap the Big Easy has become, the incentives detailed in the story are not for Louisiana, but Illinois, and Utah, with New York mentioned as another haven (previous detail on NY subsidies). In Illinois, "the incentives offer a tax credit of 25% for wages paid to state residents working on Illinois sets, with an additional 10% for producers hiring from economically disadvantaged neighborhoods." And in Utah, there are "tax rebates of up to 20% on local spending, dollar-for-dollar salary matches for job training and promotion, and no-interest loans of as much as $15 million a production."

The bottom line analysis "for a hypothetical production that would cost $19.24 million to produce in Los Angeles":






































  Total production costs State incentives Total adjusted costs
Utah $19,077,649 $500,000 $18,577,649
Illinois 19,394,120 884,008 18,510,112
Louisiana 19,077,649 1,041,997 18,035,652
New Mexico 19,099,212 1,301,000 17,798,212
Florida 19,386,400 2,000,000 17,386,400

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August 16, 2005

People Will Always Buy Distractions


Veronis Suhler Stevenson has just released highlights of its annual media industry outlook and Variety summarized some of their key findings. Despite all of the doom and gloom surrounding box office receipts and DVD revenues, VSS anticipates that box office revenue will hit $10.6 billion in 2009, from $9.54 billion in 2004. More importantly, VSS believes that DVD revenues will continue to grow at an average of approximately 11% per year to top out at $40.4 billion in 2009, growing from an estimated $26.7 billion this year. The reasoning behind this forecast appears to be the adoption of high-def product at high average unit prices and worldwide demand -- while box office is for the domestic market, DVD is a worldwide forecast.

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Rechnung, bitte


The largest source of German equity funds has just lost its main sales arm. According to an article in Variety, "Commerzbank has discontinued the sale of new film funds from VIP Medienfonds, the country's most successful private investment film financier, following a report highlighting the company's dramatic profit shortfalls last year."

While German Chancellor Gerhard Schroeder has already indicated his desire to end the availability of tax credits that have driven German money into Hollywood, Commerzbank has essentially shut down VIP's ability to fundraise, at least for the time being, as it has been estimated that Commerzbank provided 75% of the capital raised by VIP last year.


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August 15, 2005

It's a little bit French


Demonstrating that they meant business in opening France to worldwide production, Variety reports that a French appeals court has overturned a ruling and will allow "L'ex femme de la vie," partially financed by Warner Brothers, to access French subsidies.

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No, Harry Potter was actually Romanian


As the dust settles in the adjustments to available foreign coproductions, Olswang (a British law firm serving the entertainment industry) actually crunched the numbers surrounding Britain's announcement of its new tax rebate program. Variety reports that US film producers should expect to see rebates of 2%-5% of their budgets as opposed to the 9% currently available under Section 42.

According to Variety, "The U.K. Film Council is lobbying for the tax credit, which takes effect in April, to deliver a 15%-20% benefit for big-budget movies." And those numbers reflect spending 80% of the budget in the UK; anything less results in less tax credits. Films budgeted below 35% will see more credits available, but still less than previously expected, based on Olswang's analysis.

It is possible that Hollywood-financed UK characters such as James Bond and Harry Potter will find themselves filming in foreign lands.


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And then there was Arnon


Clearly the zeitgeist of the summer of 2005 is the the demise of the independent film studio as box office receipts drop off the cliff. Regardless of the coming doom, Arnon Milchan seems to have earned himself a mash note in Variety. With DreamWorks in play at NBC-Universal, Milchan is soon becoming one of the last high volume independents in town over at Regency.

The article zeroes in on the key for long term existence in the world of film and television production:

"Part of the rationale to take more risks is that at 25 years old, Regency is starting to see substantial returns from its 100-title library and its TV division. Regency TV has six shows on the air, two of which -- "Malcolm in the Middle" and "The Bernie Mac Show" -- are in syndication. Those two alone generate $180 million annually."
Regency fully financed the $110 million Mr. and Mrs. Smith this summer and that risk is paying off -- though there are more than enough big budget "blockbuster" films that haven't. And it has also been helped by diversifying into such enterprises as Puma and worldwide television rights for the Women's Tennis Association.

Variety was focusing in on a new venture being formed with Fox (an equity investor as well as a distribution partner) and Daimler-Chrysler to focus on new consumer products that follows another deal with Yahoo! and Fox Interactive focused on the Internet.


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August 12, 2005

A Reasoned Armageddon


So it seems that David Jay Epstein can present an articulate analysis of the current state of the motion picture industry. In a two part piece from July,
Hollywood's Death Spiral Part I and Part II, in Slate, he takes apart the distribution windows, their seeming collapse and what that might mean for seeing movies in theaters.

You might take the romantic view of motion pictures and believe that there will never be a day when humans won't desire to congregate together to experience the magic of the moving image, but Isaac Asimov was just as successful in envisioning a future where xenophobia is taken to the extreme (see Spacer worlds). Epstein's point in these articles is that in pursuit of short-term revenues and profits growth, studios have slowly (potentially) cannabilized theatrical revenues. Windows of six months just ten years ago have given way to some as short as three months, with the DVD release announced during the theatrical release.

Epstein lists and then knocks several potential solutions:

  • "eliminate the windowing system entirely"

  • "multiplexes would 'incentivize' studios [to keep the theatrical window intact] by forking over an additional share of the box-office earnings"

  • "a split-window scenario in which different movies would have different paths to DVD"
Epstein argues, successfully, that each scenario would either be unlikely to occur (the second due to the same antitrust concerns that took studios out of the distribution game) or would be ineffective (the first could shutter theaters entirely and the third would likely devolve to the first).

His conclusion? Wait and see.


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The summer of the film profit math model


With all major mass media and trades atwitter about the "box office slump" signaling the end of the movie industry as we know it, Slate's Edward Jay Epstein, author of The Big Picture: The New Logic of Money and Power in Hollywood, points out that movies earn their money from a variety of sources. In fact, he takes a stab at demystifying the numbers between theatrical, home video and television in his article.

The main point Epstein makes is that there is tremendous money and profit in the television zone of the distribution windows. While it is inaccurate to breakdown the contribution of each platform to a movie separately -- a movie should be thought of as a separate business investment and it's lifetime cash flows and costs should be analyzed -- the following is also very true:

"What makes television licensing, both at home and abroad, especially profitable for the studios is that virtually all the expenses required to market a television program, including tapes and advertising, are borne by the licensee. The studios only have to pay the residuals to the guilds and unions, which varies between movies and TV and average roughly 10 percent. The studios get to keep the other 90 percent. In 2004, this amounted to slightly more than $15.9 billion, making it the studios' single-richest source of profits."
You can find these numbers and more on Epstein's site.

Finally, besides pointing out that studios do make money from making movies, even if it's not at the theaters, is that the volatility of movie returns can only be effectively hedged by a library of television and movie titles that provide a constant cash flow from continued play on television and home video. And with DreamWorks appearing to be on the verge of disappearing into the NBC-Universal world, the point is that standalone "studios" require luck -- in the form of strong movie choices -- and significant capital.


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August 10, 2005

We Don't Need Your Stinkin' Theaters


In a moment of fortuitous timing (or is it corporate synergy?) both CNN and Entertainment Weekly took to examining the future, if any, of movie theaters. EW, in its latest issue, tackles the "slump" in box office take with its own puny approach "You're Mad As Hell And You're Not Going To Take It Anymore." While CNN, in its mini special Hollywood Today, focuses on the transition of theatrical play from prominent, sole studio revenue source to glorified DVD extended-trailers.

The gist of the coverage, not unfairly, is that the experience of movie-going had been more special event, magical moment, entertainment extravaganzas that have devolved into smaller box, stadium seating, cell-phone ringing, baby-crying, one-week outings for films before a quick hop to DVD and then television. Or as EW approaches the issue:

"How rising prices, bad behavior, and all those ads have created a perfect storm that's ruining the moviegoing experience and what the industry plans to do about it"
While it is certainly too early to declaim the death of the first window -- that would take several years of declining revenues and attendance -- and CNN wisely points to the fact that the three previous years saw unprecedented growth in movie attendance, both articles do highlight that:
  • The prominence of certain forms of entertainment changes over time (vaudeville anyone?); and

  • With new technologies and media equipment available in the home, and the shortening of the theatrical window to allow for DVD release within four months of theatrical debut, moviegoers are now asking "Why Should I?" rather than "Why Shouldn't I?" for attending their local multiplex.
The theatrical experience is becoming more expensive -- as theater owners boost ticket prices -- to gain more total dollars against a smaller percentage of the gross as movies clock out in under a month, as opposed to the months of release a movie used to play; more like television -- as theater owners boost pre-show advertising -- to further bolster their coffers; and less exclusive -- as movies become available on other platforms sooner.

It's not clear that this really means anything for studios today, but if theatrical experiences disappear or even decline, the model changes.


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August 03, 2005

DVDoh!


Just to counterbalance the exciting world of straight-to-video, Variety noted today that "the home video rental market was down 2.3% in the first half of the year." With Blockbuster and Movie Gallery warnings that earning will be down this quarter due to a weak release schedule, a more realistic view of home video might be emerging. It is likely that much of the accelerating growth in DVD has come from lower introductory price points, a desire to build up libraries with better technology, and the underlying availability of more content.

Factoring in TV series and older movies not released on VCR, it's not surprising that DVD exploded the home video category. But now we are seeing grim forecasts of a slowing sales and rental market and a realization that titles that don't perform at theaters may also not perform in home video.

So what lesson can distributors, financiers, studios and producers learn? That quality (or at least interesting) content is key and that big budgets don't always result in big box office (see the summer action flick slump of The Island and Stealth).


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August 02, 2005

Straight-to-video no longer a dirty word


The Los Angeles Times brings in a thorough piece on the $3 billion and growing direct-to-video market. Noting the climb from schlock and titilation to expanded family fare with Disney's "Alladin" sequel "The Return of Jafar" in 1994, the Times points out that "Nearly every major studio has a division devoted to DVD "originals" or "premieres," as the studios prefer to call this cost-effective revenue stream."

And why is the LA Times focusing on this segment? Because the cool people are happy to participate, noting that

"A-list producers such as Joel Silver ("The Matrix," "Lethal Weapon") and John Davis ("I, Robot," "The Firm") have climbed aboard and, although the stigma has not fully evaporated, some stars are following suit."
More importantly, this distribution platform allows studios to take smaller dollar risks with higher available rewards,
"And at prices ranging from $2 million to $20 million, made-for-DVD movies are a bargain. They don't require costly film prints, $300,000 premieres and $50-million marketing budgets."
To give you a better sense of scope, Twentieth Century Fox Home Entertainment released "Sandlot 2" in May to watch it sell more than a million units. Clearly, with ancillary revenues from television still available for these titles, making straight-to-video titles is a low risk decision that brings more content to consumers who need something to do when not attending movie theaters.

My favorite quote comes from Kevin Kasha, senior vice president of acquisitions and programming for New Line Home Entertainment, who reflected on his early days in the business, "When I started out in the mid-1980s, a direct-to-video movie was an action-adventure-horror piece like 'Ice-Pick in the Eye, Part 12'."


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Rising Capital


First Look Media has found a partner it can do business with in Capital Entertainment, founded by Henry D. Winterstern. As reported in Variety (see article), after the companies merge, the combined entity will be called First Look Studios, with Winterstern serving as CEO and co-chairman with First Look's CEO Chris Cooney. First Look brings a library with over 400 titles, including "Waking Ned Devine," and "The Secret of Roan Inish" and a foreign sales operations, while Capital has a strong home entertainment distribution buisness with "American Idol," "Baywatch," and "Thirtysomething."

From the press release,

Mr. Winterstern commented: "This is the perfect marriage of two companies who bring unique strengths and assets to form a highly competitive business. First Look's strong home entertainment operations, foreign sales arm, significant library and position in the marketplace is enhanced by Capital Entertainment's high profile DVD properties..."
On an interesting sidenote, this marks two transactions featuring independent DVD distribution companies joining forces with complementary companies. Also of note, the targets both seem to have more attractive websites.

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Criterion United


In an $8 million deal, public DVD distributor Image Entertainment (DISK)has acquired 19-year-old Chicago-based publisher-distrib Home Vision Entertainment, bringing the distribution of Criterion Collection titles under one roof, according to Variety (see article).

Backed by an exclusive distribution deal with Criterion through 2010, transaction is a pure consolidation play, with Image anticipating $2 million of cost savings through removal of redundant operational assets.


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Germany to focus on government coin


In today's Variety comes news that "German Chancellor Gerhard Schroeder has greenlit a d90 million ($110 million) government fund to support the local film industry over the next three years." Of course this is not much of a replacement for the "private film funds, which last year raised an estimated $1.9 billion, 90% of which was used to fund studio or international indie movies."

Much like their British brethren, this money comes with country-specific requirements, including "requiring that five times the amount of the loan be spent in Germany." Not unlike the requirements of the private film funds, "producers must also show that they have at least 80% of the budget covered and a legally binding distrib deal in place..."

While Variety notes that VIP and Equity Pictures are going on a roadshow to highlight the continued necessity of private equity funds, coupled with Britain's announcement this weekend signals that the familiar world of international co-productions is going to become less familiar.


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August 01, 2005

But I Say "Big Ben"...


HM Treasury -- the British money people -- has released its report The Reform of Film Tax Incentives which also provides guidance on a proposal for new tax credits to replace Sections 42 and 48.

As Variety reports,

The tax credits will provide up to 24% of the budget for British movies costing less than £20 million ($35 million) and a maximum of 20% for bigger-budget pics.

That compares favorably with the current relief, with S48 typically worth 14% for films up to $26 million and S42 generating around 8% for bigger movies.

At real issue is the cultural aspects of the new regime, wherein films are scored on a points systems for "better targeting of support towards culturally British films" according to the press release from HM Treasury. Additionally, only UK expenditures would qualify for tax breaks, as opposed to the 100% of spending allowance under current rules. While likely to be less restrictive than the French, who denied qualifying status to a French language film because it was "funded" by a major studio, it will reduce the ability of Hollywood to utilize these credits in their film financing arsenal.

Reflecting on the proposal, UK Film Council Chief Executive Officer John Woodward remarked that, “The new tax credit system will continue to provide a subsidy for British films but also offers the potential to help build British film businesses by encouraging investment in slates of films rather than single projects." The slate comment is related to a provision allowing producers to claim some tax-free income from not just a single film but across a slate of films.


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NBC-Uni, DreamWorks No Longer a Blind Item


Giving final nod to the NYPost scoop last week, Variety reports today that the Board of GE has given Bob Wright the go ahead to enter negotiations to acquire DreamWorks. While "one Universal insider figures there's less than a 50% chance the two sides will be able to agree on price," it would help cash out SKG's early investors (including Paul Allen) and consolidate existing distribution relationships with Universal.

It appears that NBC-Universal is seeking to add content to their library and secure future distribution content. If this is the case, then it looks more like a defensive move to maintain their distribution slate and prevent competitors from grabbing DreamWorks output.

A quick aside: The home page of GE currently has an incongruous picture of Topher Grace promoting the DVD release of In Good Company between an announcement of a new partnership to better detect water-born infectious microorganisms and a healthcare alliance for Alzheimer's research.


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