Monthly Archives: April 2009

Latino producers meet, pitch projects and lament – Los Angeles Times

Latino producers meet, pitch projects and lament – Los Angeles Times

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Do you like foreing movies?

You may want to attend the South East Europe Film Festival. This is the program for the festival that starts in Los Angeles on April 30, 2009.

SEE FEST – South East European Film Festival
April 30 – May 4, 2009

Program

Behind The Glass


Hispanic Fan Base Fuels Film’s Success

Reed Johnson’s article identifies the importance of having relevant content for diverse markets. On a related topic, I had a conversation with a film executive that shared information on another film that did well among Hispanics: “The Haunting in Connecticut,” where the genre of the film makes it popular among Hispanics.

Reed Johnson–Los Angeles Times

HOLLYWOOD — In addition to the roar of car engines and the blast of automatic weapons fire, there’s another sound in “Fast & Furious” that’s been integral to the franchise’s success: Spanish-language dialogue and accents.

The latest installment of the action-thriller series has a distinctly Hispanic feel, including its south-of-the-border location settings (although some actually were shot in California), its soundtrack, several of its characters (including one played by Puerto Rican rapper Tego Calderon) and its plot line (hot-rodding hero Dominic Toretto battles Mexico-based drug runners).

Those elements are no coincidence, and they’re partly responsible for the disproportionately large Hispanic crowds that the current film — and the franchise in general — have drawn, according to Universal Pictures, the movie’s distributor.

Adam Fogelson, Universal’s president of marketing and distribution, said that a limited sampling in five U.S. markets last weekend showed that 46 percent of the “Fast & Furious” audience was Hispanic.

Although that percentage was not necessarily “representative of the national sample,” Fogelson said, “it was again recognition of a huge part of the core fan base of this movie.”

The movie has performed well so far in Latin American territories, bagging the biggest opening of 2009 in Mexico and Central America and accounting for 50 percent of the weekend box office in Mexico and Brazil, according to Universal.

Fogelson said that the Hispanic media marketing budget for “Fast & Furious” was the largest ever for a Universal film.

The promotional campaign included running advertisements during a Mexico-U.S. World Cup qualifying match last winter, tapping into Spanish-language Internet social networking sites and dispatching stars Vin Diesel and Michelle Rodriguez to do publicity in key Hispanic markets.

Fogelson said any future installments of the franchise would continue to take care of an audience segment that always has “taken care of the franchise.”


Film Financing Forum

State of the Industry

The two day event, organized by Winston | Baker, took place at the Hyatt Regency Century Plaza on March 11 and 12. The agenda covered the current state of the industry, the credit crunch, why investors still bank on Hollywood, merger and acquisitions, packaging and fund raising, joint ventures, co-financing, insurance and legal strategies, digital projects, tax incentives, plus domestic and international distribution trends. This is an unusual time for the industry with money for P&A shrinking and the studios reducing their participation in independent projects. The international markets have also pulled from financing. On the brighter side, the industry is doing well overall with box office revenues breaking records and so there is opportunity for savvy investors and film makers. This is the first installment of the forum; the organizers put together a fantastic group of presenters.  For more information FilmFinanceForum.

The overall economic conditions have affected the industry. Money for P&A has shrunk, and the studios have reduced their participation in independent projects. The international markets have also pulled from financing. Wall Street dried up. The banks are more careful.There is less mezzanine financing. The recession and Wall Street crises has caused as a result a low number of pictures been produced.

Patriot Pictures and other independent producers see opportunity. They have money; the agents are looking at options with big stars. They are looking at specific pictures that work well with the times: revenge, romantic comedies, and horror. For entrepreneurs, this is opportunity and need to find you own opportunity. You could probably get a deal with major talent on TV and theatrical projects.

Independents are niche players according to Stephen Jarchow of Regent entertainment /Here Media. They started with one picture and then expanded to cable and television via pay per view. In the last 4 years, they have built a subscription service targeting gay and lesbian that goes world wide. They purchased The Advocate and turned it into a brand for video and with another purchase; they are looking at multiplatform distribution. Currently working with international pictures and international markets. They changed the model and are going directly to the audience and working with other distribution models. They like niche markets but have enough volume to make it a winning project. The company is also working on direct sales.

Movie production is down according to Mark Gill. Investing in entertainment is a good opportunity now because other industries are down: real state, automotive, etc. With talent agencies, you could offer half of what you were paying for top talent. Output also is down by half, to 300 films per year. Studios are looking at quality now. Having the potential to bring a star for a television show can make or break the picture because the international sales can be zero if you do not have that star. The number of independent producers and distributors has been reduced to half..

Studios are not green lighting picture because of the strike. This is opportunity for independents because they are producing. However, the independents are not getting the financing for P&A.Need to get smarter. Niche markets are opportunities under the current circumstances; comic books have been successful in similar situations.

Equity portion of financing has increased to 30%-50% of productions right now. There are also tax credits. The pre-sell financing markets have been reduced dramatically. They are only financing star power projects. Fewer deals are done without a domestic deal.

The change on the currency is an issue for international markets. American independent, English language films have been replaced by local language pictures.

To finance a film (Regent entertainment), in the 5 million budgets or less, they give freedom to pick up talent as long as they work within the producer limits. They do not work with top talent but this is an opportunity under the current market situation. They do not have pre-sells, instead it is out put deals in major territories. Collecting is a problem in these output deals. TV advertising is down and this has caused problems in the TV markets. TIVO, DVR and other technology including broadband are to blame for the reduction on revenue. This will cause a permanent change in the financial models in movie making.

It is happening and it will affect talent: they need to work. This changes or transition could take over a decade to resolve. Nobody has a solution. Capital dislocation and other related problems are here to stay. They look like the problems faced by other industries like real state in the 80’s. The opportunity here is when you can purchase brands in the traditional media environment like print at a bargain price.

Tax credits are important. Also 75% to 85% of budget needs to be financed internationally. The producer is financing 30% in equity to make the picture. International distributors want a domestic release to consider that picture.

DVD is not down. Need to have number for the first quarter. VOD will grow and DVD will also continue. Mobile could knock down the piracy. Countries have problems with piracy and after theatrical release can loose all revenue.

Promoting a picture in theatrical as well as on TV is difficult for some companies because the budgets and the proliferation of stations respectively. Managing people is a skill that many young people do not have and managing film projects require a seasoned team.

Film slates financing under capital structures are not taking place as often as before. Banks are more active in the performance risk. Studios finance projects with third party financing. That could come from overseas. Many producers like financing one project at the time.

Next wave of financing is coming from Middle East and Asia and tied to technology in part mobile. Hedge and equity funds are a source for other producers, if you provide a 20% return, they will continue to work. Hedge funds need to be managed and implemented. 15% to 20% is a good return in a P&A financing. Who is behind the project is important.

Senior debt from equity is at 7%-10% for a slate and 15 to 20% in single picture. Banks could work at 3%-4% above LIBOR. 20 million to 25 million for P&A is key and important for wide releases.

Investors: why do they continue to bank in Hollywood?

Evaporation of capital will cause a dramatic shift in the entertainment market. Syndicate bank financing continues to be available but the restrictions are larger. People with money can buy now under their terms. They are competing against the institutional investors. Individual investors have been affected. Their fortunes were cut by half due to the Wall Street crisis. They are pulling from equity and moving to bank to keep it as cash.

Isaac Palmer: private equity, hedge funds and other are the funding sources for MESA. High net worth individuals are used to finance more films.

Next wave M&A

Video game and online games is a family event (wii). Milenials are strong in that area. People are spending more time online than watching TV. We are not sure if the recession will have an influence on this pattern. Online search for entertainment takes place but also look for the news. TV still is the #1 influencer for advertising. People are now more comfortable with online advertising model . Sell through video is not dead. People are still buying the DVD. Internet connectivity is popular with younger audiences. Blueray can be the salvation of home entertainment. People are using blueray.

The market is in a crisis. However the cost of equity has not changed much. The current crunch is causing a reduction in the amount of deals that are taking place: it is minimal. People have settled in February of 09. People are going to combine forces to continue in business. It is happening in the entertainment industry right now as a need to survive. There are a lot of rescues taking place. They is also a lot of new funds coming into the market.

This is a great time for investors because industries are overall very healthy. The rates of EBTA to debt are very healthy. The issue is the lack of liquidity from the banks. Most companies are producing revenue and the companies are successful. The book values of many companies have been reduced. Specifically many old media companies have this problem. Broadcasters trade a 10 to 15 multiple and now are trading at a 5 multiple. Investing in entertainment can provide you with a 7% return rate in billions of capital. The performance is positive and is returning healthy returns.

Video (DVD) in 1997 went in a replacement mode for VHS and a big bubble took place and then level out. Inventory management changed the figures. There has been a reduction on the consumption of DVD’s maybe due to the recession.

Indie Funding

Of all movies that get release in the US 70% make less than 100K. Many investors do not see a return on their investment. There is a away to make money via indie films. The way you structure and indie film is important. Managing the production from beginning to end requires an expert team. There are companies that help investors with entertainment financing: manage production, secure distribution and manage the risk for investors.

The current model is more of a natural market state. It is not a buyers market. Product needs to be in the pipeline. You need to understand who the buyer is and make product for that buyer. Who is the audience? The quality of pictures has improved dramatically. Also the fees that are charged have changed; it is a business for the independent producers. Few equity players in the market and many good opportunities are available. Box office is up and along with the quality of films. There are many opportunities; the government provides you 15% to 20% of the budget based on where you produce. Very few industries provide you that incentive to produce locally: Tax credits.

Producers are mitigating risk with credits. Foreign agents want product that is marketable in their territories. Some producers focus on international buyers, others build the international market based on the domestic performance of the films. A bank will require pre-sales to do gap financing. They look at the sales agent overseas, their track record. They may lend you without domestic distribution. What is an indie? The budget could be $10 to $100K but done in cooperation with international sales agents and as part of an international co-production. Independent productions cannot pay talent top dollars.

How do independent projects get financed? Many investors go directly to producers/distributors. The current market conditions are ideal for entertainment because alternative investment vehicles are not performing well.

Institutional inventors, wealth managers and others are sources of financing. Senior debt base could be provided by banks. They also provide gap financing. Pre-sales are in decline. Buyers are selective. In some cases,  pre-sales now account for 20% of the budget of the film. Other sources of financing besides tax credits include product placement, and integration. This could add issues with the talent.

Places like Australia have expertise on working with tax credits. Other areas that are new may pose issues because of the inexperience. Banks will look at this on a case per case bases.

Pre-production Packages and Business Plans
How do you pitch a project before and after talent attachment?

The key is the script and you build from there. You need to be clear about what you do and what is the risk associated with the project. Put together a team that will work there. Without the script, you can not attract other good talent. That will help you determine your budget and what makes sense in general. Depending in the genre you approach the investors. Then you look at the deals that you could do with the studios based on the talent you bring for the project.

A producer found financing for a film on dancing and did not have any attachment. Other opportunities are inspirational films.

The traditional way starts with the script, then attaches the talent and gets the funding. The base can be a book too. These are the starting materials. You need a team for the project. The producer is the business partner and then you need the creative team that includes directors, actors, writers, etc.. He will have a vision and deliver on that vision. You build the creative team. With that you build the business plan for financing, working with international sales teams that can also co-produce. You also look at the soft money around the world. You need to reach senior debt, mezzanine and equity financing. You need to attach an ROI to the project for the business side. Other people are looking at their own philosophy and that is the driver: to be part of the film business. The reasoning from them is not ROI.

Talent agencies work on the packaging process for their own projects or others.

The process to bring money for a project changes from company to company. You need to align or bring into the project people that can have an interest in the film. The process is complicated and you need to have the best team possible. They need to have good knowledge of the business. Distribution partners are very important because they can bring your assets into the foreign markets and work with you. Most people have IRR in mind and you have to provide that return.

The material is important as well as the actors. The producers determine what is their own taste for the work. A large percentage of the films in the Oscars were independently financed. Same was the case 2 years ago. When you are putting together the team, you need people that can open doors.

There are a lot of movies that were not distributed in the last 4 years because there were to many movies being financed because the abundance of money. To some degree there is an over abundance of films and has make it a buyers market in the last years. This will resolve on its own.

When you are packaging a film, you could work with agents and lawyers to get the cast in place. Then you can work a term in the contract where the offer is based on getting financing within a specific time. It is a pay or play deal and conditional. You place the money on escrow. The chances of getting a domestic deal right now are almost impossible.

Federal and estate incentives help insure investments. There are issues when you are raising money and you pay money to someone else that helps you raise the money, you can have problems with the law. Because you get into securities law.

Financing of entertainment
1) Finance 100%
2) Co-financing 50/50
3) Split rights distribution (foreign sales)

Scenarios:
Studio finances the P&A
Low fee to studio and viceversa

Sources:
Pre sold
Gap loan
Super gap loan
Tax credit
Equity financing

From industry history, films with budgets under 20 million loose less money as well as films with budgets over 100 million. Other budgets in between have a higher probability of loosing money. 84% of movies under 20 million make money. Family films have a higher probability of achieving a higher box office and then you have action or horror films.

Advance vs. back end
The studio will provide you an advance based on their probability of getting their money back; they have higher odds in the lower budget: 75%

Territories
Japan 14%
UK 13%
Germany 11%
France 9%
Italy 9%
Spain 7%
Latin 6%
Australia 5%
Eastern Europe 5%
Scandia 4%

Studio Distribution Issues
Producer P&A approval
Studio Approvals
Advance vs. Backend
Studio cost “add ons”
The fine print in the contract

Other funding participation
Talent participation
Pre break participation before recoupment of negative costs
There are several types of pre backend deals
Other sources of income

Studios projects: high end concept and easily marketable
High break even probability: determined by genre

Selling internationally
Know what sells internationally

Many projects require 25 million on P&A to make 20 million at the domestic level. They do that to promote video even when they loose money with the theatrical distribution.

Bonding a film
Completion bonds: Insurance
Porn and horror are the number one making money genres.

Section 181 Incentives
Hedge funds will be tax heavily in the future. You can guarantee investors a recovery of 50-75 cents. Section 181- federal incentive is part of the American job creation forum. It has been extended till 2009. When a investor provides the money to a producer, they can deduct 100% of the money as a lost. The write off and the budget can not be greater than 15 million and can go to 20 if the production goes to a low economic area. 75% of the service wages has to be done in the US. And can not be a sexually explicit movie. This works for films and TV projects. There are states where you spend the money and qualify, in several states it will change. You get a credit at the federal and state level. If you provide a return to the investor, they will be taxed only on the 92%. This is a great opportunity to get tax credits of up to 50 cents in the dollar. You need to have one day of principal photography before deadline to qualify. The accountant cannot capitalize the investment. The investor needs to search what states provide the best benefits for investors. Then also look at the resources like crews, etc. Some States can provide you up to 75 cents on the dollar on incentives.

Understanding Capital structure
The funding of entertainment projects have gone through many changes including the support of video, international sales and now the gap financing.

Typical financing structure for a 5 million indie film
Pre 2008
Pre-sales $2,000,000
Soft Money $1,000,000
Gap $1,000,000
Equity $1,000,000
Total $5,000,000

You get the first 2 and then get the rest. Equity could account for 25% of the total. The new market has changed. International has changed, maybe 20% at the most. Soft money still there. GAP almost non existent and equity now accounts for most of the financing: 40%

Equity and debt are not the commodities that they were before. There are less dollars going around and you need to treat film business as any other business. You have to be passionate it about and at the same time be an entrepreneur. They need to develop the brand (themselves) via all new media.

Equity in film financing and what are the returns those investors expect:

In many cases 6-7 parties come into place: bank, tax credits (soft money) and equity. There are almost no deals in place without equity. You need to get equity involved in the projects to get the other parties involved. Once you get a Jumbo sale (internationally) or a domestic partner, other parties take you seriously. There has been a new relationship developing in the late years with the participation of advertisers and will change the structure of the future. The other portion is the technology for production and post production. There are many options where the quality is there and the possibilities of amortizing any purchases like camera, etc. Also digital projectors can reduce the cost of prints, shipping costs, etc. This opens up the opportunity to piggyback on the distribution of the film. There are some cases in 2009 that advertisers have come on board with 20% to 30% of the budget for a film.

Gap is usually debt to cover against pre-sales shortage. Bridge gets you to close the loan: gives you the cash and helps you close the contract. Soft money is a debt component. In some cases you go to a estate where they give you a credit and could get a loan from the soft money via a bank.In some cases, you can get 40% to 50% funding via projects in Germany and UK but those opportunities have disappeared.

Return to Capital Pre 2008 Post 2008
Senior Debt 8% to 12% 15%
Mezzanine 15%-18% 20%
Equity 20%+ ???

Film makers are competing with the sophisticated investor. People managing hedge funds look at a slate of films where the return could be in the 40% rate. In reality you do not get a 40% return. If you buy it at a discount at 80% you could get that high return.

Here you need to look for people that are looking for other reasoning to get involved besides the return exclusively. People need to be passionate about the project so they get behind it. The film business is resilient to a recession to some degree and fares better than other industries.

The involvement of advertisers is not only product placement but tied more to the demographics and the possibility to get promotional items to that audience via posters and other promotional opportunities.

You need to budget the projects properly and give it the actual commercial value under the current circumstances.

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The Sign is at the Box Office

The news of downward trends among many industries paint a scary picture of the current economy but if you do your homework and search, you find areas of growth and opportunity.

Case in point is the entertainment industry that in a down economy continues to grow box office year after year. On March 29, 2009, the domestic B.O. was up a whopping 40% over the same frame last year, thanks to “Monsters” and Lionsgate‘s horror entry “The Haunting in Connecticut.” This was not an isolated incident and continued on April with the opening of “The Fast and Furious” that brought the box office 65 percent ahead of same week last year.

What makes the success of “The Haunting in Connecticut”, “Monsters” and “Fast” unique is the contribution of Hispanics to the box office office success. According to exit poll stats, Hispanics made up 46% of Furious and50% of Haunting’s audience. The core audience for both movies is young man and women (17-24).

I was not able to find exit polls for “Monsters” but the genre of the film (animation) has children and families as their key demo. I will venture to make an estimate and place the percentage of Hispanic audience for this move at 30%. After all, the majority of first graders at the top 10 DMA’s in the U.S. are Latino. You do the math.

Talk about purchasing power, economics and the implications for corporations targeting Hispanics: they generated about 63 million dollars at box office in 2 weekends. Most film studios recognize this market and its potential but few know how to reach it.

Recent news from comScore on the growth of online Hispanics further highlights the value and potential of the market but also presents the need of experts when communicating with them.

My questions for marketers that have not implemented a Hispanic strategy is:
Can any other segment in your business contribute about 63 million dollars in 2 weekends?
And if you already have a Hispanic strategy, is it effective, efficient or are you leaving money on the table?
Do you know how to reach them on line?

It all starts with how you see the current situation: is your glass half full or half empty. If you have done everything possible int he general market and your glass is half full, it is time you look for new opportunities and fill the other half.

By Ivan Cevallos, Founder and CEO of ethosGroup Inc.
April 17, 2009


When They Go Online, Hispanics Download

Adoption of broadband, digital downloads high.

More US Hispanics are going online than ever before, and most are using broadband.

According to Scarborough Research, 54% of Hispanics were online in 2008. While that is up slightly over the previous year, it still trails the 69% penetration rate of total US users.

Read whole story


The Paradigm of Transformation

We are going through a period where media and communication models that have been used to deliver messages to consumers at eroding at a rapid pace. That in combination with the transfer of control from marketers to consumers has left traditional media and the echo system they support wondering what to do next. The shift is taking place among all segments of the population. This is both a tread and an opportunity for companies that develop new communication models and understand the role consumers play in a brand’s strategy under the new paradigm. There is no magic potion but the answer lays on a good understanding of the basics: know your target and how your product or service satisfies a specific need in the target.

Confronted with these changes, marketers can not use the same strategies they have used for the last 30 years. It is not about old or new media, it is about the role consumers have taken as creators of content whose distribution is facilitated by technology. This content can be in the form of a consumer complaining about your product and notifying the entire network in Facebook or all their followers in twitter. So brands listen up to what consumers have to say and use the same technology to empower your brand evangelizers.

The common denominator here is that the same technology consumers use to communicate is available to brands and they can identify trends and truthfully engage audiences in a conversation. You may not have the entire resources in house and need to bring them on board or outsource. There is no single formula for success. What can make a difference is the preparation of your internal resources along with a strategy that was derived from research and arrives at the intersection of a clearly defined consumer profile and how your product or service satisfies a specific need.


The Paradigm of Transformation

We are going through a period where media and communication models that have been used to deliver messages to consumers at eroding at a rapid pace. That in combination with the transfer of control from marketers to consumers has left traditional media and the echo system they support wondering what to do next. The shift is taking place among all segments of the population. This is both a tread and an opportunity for companies that develop new communication models and understand the role consumers play in a brand’s strategy under the new paradigm. There is no magic potion but the answer lays on a good understanding of the basics: know your target and how your product or service satisfies a specific need in the target.

Confronted with these changes, marketers can not use the same strategies they have used for the last 30 years. It is not about old or new media, it is about the role consumers have taken as creators of content whose distribution is facilitated by technology. This content can be in the form of a consumer complaining about your product and notifying the entire network in Facebook or all their followers in twitter. So brands listen up to what consumers have to say and use the same technology to empower your brand evangelizers.

The common denominator here is that the same technology consumers use to communicate is available to brands and they can identify trends and truthfully engage audiences in a conversation. You may not have the entire resources in house and need to bring them on board or outsource. There is no single formula for success. What can make a difference is the preparation of your internal resources along with a strategy that was derived from research and arrives at the intersection of a clearly defined consumer profile and how your product or service satisfies a specific need.


The Paradigm of Transformation

We are going through a period where media and communication models that have been used to deliver messages to consumers at eroding at a rapid pace. That in combination with the transfer of control from marketers to consumers has left traditional media and the echo system they support wondering what to do next. The shift is taking place among all segments of the population. This is both a tread and an opportunity for companies that develop new communication models and understand the role consumers play in a brand’s strategy under the new paradigm. There is no magic potion but the answer lays on a good understanding of the basics: know your target and how your product or service satisfies a specific need in the target.

Confronted with these changes, marketers can not use the same strategies they have used for the last 30 years. It is not about old or new media, it is about the role consumers have taken as creators of content whose distribution is facilitated by technology. This content can be in the form of a consumer complaining about your product and notifying the entire network in Facebook or all their followers in twitter. So brands listen up to what consumers have to say and use the same technology to empower your brand evangelizers.

The common denominator here is that the same technology consumers use to communicate is available to brands and they can identify trends and truthfully engage audiences in a conversation. You may not have the entire resources in house and need to bring them on board or outsource. There is no single formula for success. What can make a difference is the preparation of your internal resources along with a strategy that was derived from research and arrives at the intersection of a clearly defined consumer profile and how your product or service satisfies a specific need.


The Paradigm of Transformation

We are going through a period where media and communication models that have been used to deliver messages to consumers at eroding at a rapid pace. That in combination with the transfer of control from marketers to consumers has left traditional media and the echo system they support wondering what to do next. The shift is taking place among all segments of the population. This is both a tread and an opportunity for companies that develop new communication models and understand the role consumers play in a brand’s strategy under the new paradigm. There is no magic potion but the answer lays on a good understanding of the basics: know your target and how your product or service satisfies a specific need in the target.

Confronted with these changes, marketers can not use the same strategies they have used for the last 30 years. It is not about old or new media, it is about the role consumers have taken as creators of content whose distribution is facilitated by technology. This content can be in the form of a consumer complaining about your product and notifying the entire network in Facebook or all their followers in twitter. So brands listen up to what consumers have to say and use the same technology to empower your brand evangelizers.

The common denominator here is that the same technology consumers use to communicate is available to brands and they can identify trends and truthfully engage audiences in a conversation. You may not have the entire resources in house and need to bring them on board or outsource. There is no single formula for success. What can make a difference is the preparation of your internal resources along with a strategy that was derived from research and arrives at the intersection of a clearly defined consumer profile and how your product or service satisfies a specific need.


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