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October 29, 2004

Lire for the Cinema


According to Variety, Italy has launched the government-backed Cinefund I through Cinecitta Holding to raise €60 million from private investors and institutions for 30 to 40 films per year (see article). The move is seen as an alternative to the subsidies currently under review for cuts by Parliament.

As this money is meant for domestic product, it would be wise for potential investors to note that only twenty percent (20%) of films in Italy are considered winners, grossing over $1.2 million. And if this is meant for "local" product, the global prospects might be limited as well.


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Direct to Director Funds


German media fund VIP Medienfonds has entered into a first look deal with Roland Emmerich for his non-studio projects, to be produced through a joint venture production company based in Munich (see article). While no level of funds or anticipated projects were announced, it is likely that VIP was looking for a quality source of big budget projects -- Emmerich's films include "Stargate," "Independence Day," "The Patriot" and "The Day After Tomorrow" -- and German tax commitment will ease Emmerich's hunt for financing if these pics are seeking the independent financing route.

Additionally, one would think that with VIP's level of funding, it can leverage its relationships with international buyers (including the domestic studios) to quickly piece together completion financing, outside of its twenty percent.


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October 28, 2004

Writeoff? I'll Give You a Writeoff!


After years of lobbying the government to make filming in the US as attractive (or at least more than it had been) as in such exotic locales as Canada, the UK, Romania and Hungary, President Bush signed a bill last Friday designed to provide significant tax breaks to domestic films (see Variety).

Independent producers now may write off a movie in a single year if it has a budget of $1 million-$15 million and 75% of that budget is spent in the U.S. The expensing limit increases to $20 million if the movie is made in a low-income area of the U.S.
The significance of this allowance is that it accelerates the recognition of a loss for investors and deferral of any gain. Similar to the tax breaks found for UK-qualifying films, there is a time value of money mechanism at play. Industry insiders will now just wait for financial firms to design the appropriate instruments that will provide immediate access to these breaks, reducing hard budget dollars required.
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There's a New Bank in Town


New York-based Adirondack Pictures has let loose the gates of hope for most likely thousands of filmmakers (see Variety). Claiming a 100% equity baed fund seeking to produce or invest in three to five films a year, with a likely price tag between $5 and $15 million, Paul Hardart and his brother Tom "are willing to selectively provide gap, bridge and P&A financing."

Leaning on his experience running Universal Focus("Being John Malkovich," "Pitch Black"), Hardart will look to partnerships with distributors and/or producers to secure product and placement.

While it's not clear exactly how much was raised -- no total was given and until commitments are made this could be more in the league of Endgame rather than Walden -- it emphasizes again that there is palpable interest in the return that smaller films can provide over a slate.


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Deutsche Coin Gets Spent


Medienboard Berlin-Brandenburg, the subsidy organization, just announced today that several upcoming pics will receive Euros, as part of its effort to spend the $23.6 million a year authorized by the Berlin state government (see Variety).

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If We Draw It, They Will Pay


Today saw DreamWorks Animation's (NYSE: DWA) extremely successful IPO. Priced at $28 per share, well above the expected share range of $23 to $25, the stock jumped to close today at $38.75. Raising $812 million split $700 million to DreamWorks Animation and $112 million to existing shareholders who threw 4 million shares into the pot (see Variety and Mercury News).

A vote of confidence for DWA and CGI animation in general, timing the IPO to coincide with the (expected) sucess of "Shark Tale" at the box office seems to have paid off. Offering proceeds will be used to pay down debt arising from the separation from parent company DreamWorks SKG and for future production costs.

DWA will have a chance to prove its model out with two features next year ("Madagascar" and "Over the Hedge") and "Shrek 3" in 2006.

DreamWorks Ani's success could drive to swifter conclusion any hint of a destination for free floating Pixar.


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Reducing the burden


Seeking cheaper capital costs, Alliance Atlantis recently announced that it has successfully negotiated to offer C$700 million in debt. Merrill Lynch & Co., Royal Bank of Canada and The Toronto Dominion Bank have agreed to fully underwrite the financing commitment for any new credit facilities (see article).

Alliance Atlantis will use the funds for operating purposes, as well as to retire 13% senior subordinated notes and the outstanding balance on an existing credit line facility.


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Seeding the Market


Taking a page from the cable companies push for greater adoption of VOD, AOL has extended its "alliance" with Movielink with a new promotion for AOL Broadband subscribers (see release). With ten free classic titles in the first month and five free classic titles thereafter, paired with a $0.99 download price for certain recent studio films, Movielink seems to be pushing for the adoption of new consumer behavior and AOL is trying to justify the additional cost of its service over the basic broadband connection charge (see Variety).

It might be the time for such an effort to make a beachhead as Microsoft, HP, and other technology companies are launching integrated home media networking products. If the learning curve for employing this technology is simple enough for mass consumers, AOL is the right place to market.

Perhaps this is the beginning of true media integration.


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October 23, 2004

The Trouble with Little Girls


By way of the Movie Marketing Blog is this Hollywood Reporter article (separate link) detailing the fickle nature of that moneyed group, tween girls. Seems that with the relative failure of "Raise Your Voice," Hilary Duff's latest starring vehicle, movie marketers have concluded that:
"One of our gut responses to what went wrong is (that) there seems to be a very specific image or identity that any one of these young female stars have and if you sway from that, it could be problematic."
"The young female movies are almost impossible to figure out right now," one studio marketing executive said. "The girls are just rejecting the young female movies. They are a fickle segment of the audience, and it's pretty hard to figure out who is going to go to these movies."
This observation actually hews closely to the portfolio theory of film investment. These tend to be less expensive movies, that if "star" driven are smaller (read: inexpensive) personae, that offer less risk and more reward. If you throw five of these at the screen and one hits, you've profited across the slate.

And for the ubiquitous quadrant quote:

"There is no star who can open any movie," one executive said. "It's always about the concept of the film and if the concept is a good fit for the audience. 'Mean Girls' was smart enough to appeal to a broad audience, and 'Princess' was a pre-established brand. It needs to go beyond the one quadrant. Hitting just 8- to 12-year-olds is not enough."

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October 14, 2004

Creative Math for the Data Mining Consultant


By way of Dave Poland over at The Hot Blog (see post), there's a new expert in film performance and profit: Entertainment Business Group. Established as a "a California business services, production funding and global sales company" aimed at assisting producers, EBG has landed itself in The Hollywood Reporter and was picked up by Reuters. Unfortunately for EBG, while the article applauds the company for focusing on an attempted measure of profitability, it points out that creating an index with opening weekend box office doesn't really provide any valuable information whatsoever.

The tricky thing about Hollywood is that unlike most other industries, especially those comprised of public information, there is not much in the way of market data, outside of box office grosses and dvd sales ranks. Common wisdom that most films are still in the whole after theatrical release is accurate given average film production costs and P&A costs reported by the MPAA. So, the windows that provide profit for a film are not reported per film.

Analyzed on average performance, this is both a strength and weakness of the film industry. A strength because measuring performance across a portfolio of investment is the best way of achieving returns from these risky assets. While a single home run can push venture capital funds to three digit returns, any wise investors looks to the returns from the entire investment base.

A weakness because there is very little post mortem learning on a per film basis towards understanding the effectiveness of cost structures and spending relative to return. Marketing and distribution departments love to say that the success or failure of any film is impossible to predict and based on an innumberable amount of factors.

So, any effort to focus on the profit is welcomed here. Of course Kagan has been at it for a while.


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October 13, 2004

No, Look Over Here


David Poland once again delivering an insightful roundup on Disney's current negotiating woes over at The Hot Blog. He mostly successfully argues that most of the dire press coming from both camps is positioning play and that until something else is announced for either Pixar or Miramax, there is still a deal to be made.

While I would agree with his general assessment, if the offer to Bob Weinstein was as bad as both sides seem to admit and no sweeteners are going to Pixar, he's probably wrong. DreamWorks has demonstrated that there are other studios good at family animation marketing, and Disney would be hard pressed to make Miramax movies (the small ones of the golden days) without the Weinsteins.


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Upping Indie Status at Paramount


The Los Angeles Times had a nice piece on Paramount's (really, Tom Freston's) desire for a stronger, more profitable (really, greater revenues) independent division. While Paramount Classics has been distrib'ing foreign language fare, Freston points to the success of the Fox Searchlight model for inspiration.

When I spoke to Freston late last week, he made it clear he views the specialty film world as one of the leading growth areas in the movie business. "Once you get past the tent-pole movies like "Spider-Man' or 'Shrek,' the indie film companies are the most financially viable part of the business today," he explained. "A specialty company is a place where you can make a profit on pictures at a relatively low risk, market movies more cheaply and build talent relationships that provide access to great material and bring new creative energy to the parent studio."
The key here is that a good distribution portfolio needs to accomodate a range of budgets and genres. More importantly, Freston recognizes that in smaller, niche films there is room for nice returns against much reduced investment. A $5 million acquisition of a film like Napoleon Dynamite with box office upwards of $40 million will bring significant returns to Searchlight. And it allows a studio to spread investment over a slate, as opposed to the impact of blockbuster event movies.

Coincidentally, consider this news in conjunction with the active risk-avoidance by New Line and Universal in their recently announced German tax fund deals (here and here).


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October 12, 2004

I'll Take a Comedy and a Thriller, Hold the Drama


Variety today reports that Universal Pictures can expect Hannover Leasing to fully finance one or two pics on their slate. The Montranus Zweite Beteiligungs fund, aimed at total funds of €230 million, is being launched during Germany's fundraising season.

New Line Cinema is also dipping back into the German market (see previous money men), looking to ALCAS' newly launched Macron Filmproduktion to cover production costs.


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One More Pretty Stock Certificate Please


With Shark Tales performing well at the box office, $87.7 million and climbing, and Shrek 2 gobbling up cash across the world, DreamWorks SKG is rolling out the red carpet at investor meetings starting this week to raise IPO coin for DreamWorks Animation.

According to today's New York Times, "DreamWorks SKG executives expect to raise as much as $650 million in the sale." Here's the main deets:

In a filing with the Securities and Exchange Commission in July, DreamWorks Animation said it planned to spend about $175 million of the money raised in the offering for general corporate purposes, and use the rest to pay down some or all of the debt it intends to assume from DreamWorks SKG. The company will be controlled by Mr. Geffen and Mr. Katzenberg, largely through Class B shares that will give them and the original investors majority ownership and supervoting rights.
For more detailed information, check out the SEC filings.

It will be interesting to see how the other studios react to this vis a viz Pixar, still at the lonely singles dance.


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October 11, 2004

First Mover Disadvantage


I don't tend to follow individual company fortunes except as they are illustrative of more macro level trends, which is the reason for several posts on TiVo and Netflix. It would be difficult to argue that these two ventures have not been fundamental in pushing forward visual digital media (film and television) in the same manner that mp3 has for music.

And here comes an article from Daniel Gross of New York Magazine discussing the evershortening window of business model innovation and first mover advantage. His main point, that windows protecting new technology or product category entrants is shortening, misses the fact that adoption of new technology as a whole has collapsed and accelerated and that the entire lifecycle model has as well. So, it's not incredibly surprising that larger pocketed companies have less time to wait before striking out at first movers.

What he did miss is an opportunity to muse on what this new technology portends for the future of our media consumption. That the act of delivery (Netflix) and digital content (TiVo) entering into at least an engagement is a signal of the direction consumers are moving. That how, when and where we consume media will become more flexible and that the existing gatekeepers are looking to maintain control (cable companies introducing their own PVRs, Blockbuster and Walmart with their own delivery service) as they gingerly seek to adapt without destroying their own cash flows.

By way of GreenCine Daily.


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October 10, 2004

Because It's About the Money!


I am not looking to paraphrase, rephrase or reargue the insightful post from Dave Poland over at Movie City News. Arguing that an article (linked via the post) in the New York Times on the demise of the Fuqua/Washington project "American Gangster" misplaces the point by ignoring real world context and events, Dave isolates the most important factor for Hollywood entertainment: Will it make me money (directly or indirectly)?

That's right kids, once again, all together: It's About the Money!

And don't look to such distractions as: what about low grossing indie films that bring Oscars? Because that indirectly increases the value of a studio (and more potentially, directly through post-theatrical windows).

Oh, the link came via a post in GreenCine Daily, a wonderful aggregator of film content web-wide. Go read and learn!


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October 08, 2004

What About MY Backend?


In an interesting screed on The Movie Blog, John Campea discusses the nature of (box office) performance bonuses for actors via the acknowledgement by Sean Astin that he earned $250,000 for all three Lord of the Rings movies. We don't need to discuss the profits added to Time Warner's coffers from this venture.

As one interested in return on financing risk, I take great heart from the following:

It has always been my philosophy that those who take the risks are the ones who should reap the rewards. New Line risked $300 million dollars on The Lord of the Rings. Sean Astin risked nothing. He was going to be paid his $250,000 no matter what. He had nothing to lose. So if Astin didn't stand to lose any money if The Lord of the Rings failed... why should he stand to benefit more than his contract if it succeeds? [see post]
Now there are actually a number of intelligent comments following the post that debate and expand his notions.

What I'd like to point out is that the econosphere (I mighta coined that one just now) of the movie industry is based on a slightly open capitalist market. Just like in the stock market where the price of a stock is equal to market perception of the value today of future performance, so too do studios make deals with talent.

With respect to Lord of the Rings, New Line certainly risked a trememdous amount on the film and it would be hard to argue that having Sean Astin in a major role would in any significant way reduce that risk.

However, where an actor takes a reduced salary to enable the funds to be raised for a budget (often on a "passion project") or there is expectation that a film has the potential to be gigantic and that the actor will help "open" the film, studios willingly negotiate participation deals. And those deals are for different levels of participation -- gross, adjusted gross, net, etc. -- that reflect the market expectation for the value of that asset (the actor).

I say that it is a slightly open market because there are very few ways to accurately predict, before the first frame is shot, how well a movie will do. Although sites like The Hollywood Stock Exchange try to provide an aggregation of public expectation through movie stocks and star bonds and research like these from professors at UCLAAnderson seek to explain movie choice.

At the end of the day, participation is warranted, but so are contracts without participation. It is the market, right or wrong, that determines worth.

Now, whether the present participation system works as the most efficient model is a discussion best left to another day with more time and words.


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October 06, 2004

But Where Will We Put Them?


As reported today in the Hollywood Reporter and Bloomberg, Rupert Murdoch wants to increase film production (and acquisition, I guess) from the 14 films to be released this year and the 11 films released in the fiscal year ended June 30th "to as many as 25 `major' movies a year and as many as 10 from its Fox Searchlight unit" [emphasis added].

While Rupert sees that Fox is "on a great streak," doubling production, basically releasing a new film every two weeks (or more) and further filling up the theatrical pipeline is a difficult task. It will certainly force Fox to become very aggressive at squeezing competition out of their release way.

The stats for major studio releases according to THR are that:

Last year, no studio topped the 20 films-per-year mark. Warners, Sony Pictures and the Walt Disney Co.'s Buena Vista Distribution each released 19 films. Fox issued 15, followed by Paramount Pictures and Universal Pictures with 14 each and New Line with 13. MGM and DreamWorks trailed behind with eight and seven, respectively.
Importantly, the number of releases in the domestic market have been decreasing in recent years as distributors seek to protect the films already deployed in theaters.

To accomplish the production increase, Fox will look more to its financing and producing partners including New Regency, Icon Productions, and Scott Free Productions.

The question really is, how much is too much? How many are too many? At what point is the marketplace oversaturated? Will this drive the theatrical lifecycle of a film to one weekend? Can producing more big movies bring in more dollars or do we simply get movies like Sky Captain that can't deliver on their promise?


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October 05, 2004

German Coin for New Line


According to Variety today, New Line has gained access to €50 million from a film fund, Meradin Zweite Prods (sorta translated), organized by DaimlerChrysler Services Structured Finance and investment group Hannover Leasing (see article).

The fund previously partnered with New Line on the "The Lord of the Rings: The Return of the King."


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October 04, 2004

Weinstein PR Efforts Abound


Once again forgetting that "traditional" media moves slower and over longer epochs than online and trade journalism, I couldn't see that the articles from Newsweek, the Times and New York Magazine were a signal for the following item from Variety today (see article):
With the Walt Disney Co. playing hardball, a Miramax request to take its case to Mouse House's board of the directors has been turned down.
So, it looks like the last hope of the Brothers Weinstein to remain within the Disney family has faded. A couple of interesting asides during the course of this and the Pixar debacle points to a continued course of reckoning for Disney's board. Given that Bob Iger has pronounced that any deal with Pixar is unlikely and "that the relationship has 'approached the end of its natural life span'" and the board is effectively tossing off the Weinsteins (with its anorexic offer to keep Bob on board), it will be interesting to see if Roy Disney steps up with more dissent.

So, Iger is acting as heir apparent, with Eisner sightings likely to become as rare as Loch Ness sightings, and the Board isn't moving to change any of the corporate politics that Eisner has put into play.
Well, the more things change...


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All About Harvey


Now that the MGM saga has been resolved and there seems to be little drama left in the guild negotiations, the media has turned their attention back to Disney. And what a full nest of stories that is: leadership changes, animation giants and indie stalwarts.

This weekend brings a confluence of coverage on the brothers Weinstein and the fate of Miramax. Three articles, including an interview with Harvey in New York Magazine, adequately summarize current events.

Basically, Miramax was acquired by Disney over ten years ago to continue what it had successfully been doing: acquire and finance smaller, critically acclaimed movies (in the $10 million and below range) that could be hugely profitable, without being costly losses. Flash forward a decade and Harvey Weinstein is making $80 and $100 million movies ("Gangs of New York", "Cold Mountain" and "The Aviator"), Eisner doesn't want to renew Harvey's contract or sell Miramax out to the Weinsteins.

This summer it looked like Bob would stay with Disney to run Dimension and Harvey would get a new pot of gold to mint movies from. Then the offer to Bob was insulting and the Weinsteins decided that they wanted to bring their case directly to the Disney board, especially given Eisner's impending exit.

What happens next is not clear to anybody, but as A.O. Scott points out in the Times, Miramax brought us corporate indie movie making and it won't go away if Miramax does...look at Focus and Sony Pictures Classic, among others and the new generation of independents like Newmarket.

In the Times, New York Magazine, Newsweek.


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October 01, 2004

See. We Are Relevant!


Netflix and TiVo announced on Thursday their agreement to jointly develop a service to download movies directly to set-top boxes. With Netflix negotiating for film rights and TiVo working out the technology, this new services is expected to be available sometime after this year.

In response to questions of a merger between the two companies, TiVo CEO Mike Ramsay has this to say,

"I can stop that rumor right here. The reason I resigned from the board is that we now have a commercial relationship with Netflix," he told Reuters.
Let's see what happens to the distribution windows now.

See articles in Wired, CNET, The Wall Street Journal, Mercury News.


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