I was flamed in the pages of Going Private, a memoir blog chronicling the insights of a private equity professional. Nothing better to do? Read the latest musings here. Short on time? This sort of sums it up:

But, then again, they don’t seem to know the difference between revenue and net income (in my not entirely limited experience a very common problem in Hollywood).

And then there is:

I’m not sure they understand the structure of film production financing, or the nature and purpose of the many preferences that plague such financings. Clearly, the ramifications of changes in these structures in the Cruise case and way they give Cruise a major pay and status cut are lost on the authors. This is a pity, since they purport to be experts on the subject.

Ouch!

Making my job as a hard working Film Funding Blog author rather easy, Going Private provides the data to refute their own argument:

Budget estimates on the film vary, but range between $150 - $220 million in production, marketing and development costs.

I actually think the total costs are much higher than this, but let’s use that range for discussion. The share of box office flowing to the studio from domestic theatrical distribution on a film like MI3 is likely to be approximately 50%.

As an aside, initial exhibition terms probably started out more favorable to the studio, but the contract was likely revised downward. I agree that expectations for MI3 were not met (but maintain that the film will likely still turn a profit.)

Distributor share of box office on international distribution will probably come in closer to 48%, a little lower than U.S. share due to greater “off the top” deductions for box office taxes and theater checking (ticket audits).

Based purely on worldwide theatrical, studio revenue (their share of the box office) would be approximately $225M ($133.5 x 50% plus $330 x .48%). Pretty good for a “flop!” It is rare that a tentpole release breaks even on theatrical distribution. While I think costs are more than $225, coming this close, prior to ancillary releases, is actually a very positive indicator. That means the film will carry over a negative balance, but there are ample opportunities to recoup this shortfall in home video, television, and all other ancillaries.

Low and behold, MI3 is racking up huge sales with its DVD release. The Hollywood Reporter, well, reports:

Studio sources peg first-week sales at 3.7 million units, more than either of the two previous releases in the franchise. And that’s not counting an additional 20,000 units sold on the two next-generation formats, HD DVD and Blu-ray Disc — making “M:I 3″ the biggest-selling next-gen title since HD DVD’s April launch.

http://tinyurl.com/ymbqhr

My revenue estimate for DVD is $144M to $180M with a net of $116M to $145M. In an arcane twist, the studios can capture up to 75% of these DVD revenues without sharing the proceeds with talent, the film’s producers, or other net profit participants.

Even so, with only 25% of the DVD revenues (referred to as a royalty, the base used for revenue calculations in participation agreements) MI3 will still start to cross over into positive territory. DVD sales, TV, and other downstream distribution will trigger contractual residual payments to the writers, actors, and the director. However, I’m fairly confident that DVD revenues and income from the super-secret television output deals will easily cover those costs.

The bottom line? The studio will be fully reimbursed for all costs and stands to earn a distribution fee of 12-15% of total revenues, plus the 75% of DVD (minus replication and marketing). This is very conservatively north of $100M in profit to the studio. Final figures could easily be double this when all distribution channels are considered.

For profit participants, they may see somewhere over $50M depending on distribution, marketing, and overhead costs allocated to the picture. For Tom, he’ll make more money from his points on the film than from his $20M salary.

On a closing note, the latest rounds of hedge fund deals in Hollywood have done away with the stacked deck. Fund investors participate on equal footing with the studios, the portfolio of films include (many of) the crown jewels, and the revenue and cost estimates are fully vetted. (For example, fund investors share in the full pot of DVD revenues.) Come on Going Private, cut us a break! We may not be the sharpest tools in the drawer, but give us credit for at least being able to add and subtract (with an occasional ability to multiply and divide.) Could it be that maybe this time, you’re just wrong? Perish the thought.

ITVS IS LOOKING FOR

• programs that will bring new audiences, topics and voices to public television
• television programs in any genre, including drama, documentary, docudrama, animation, experimental works or innovative combinations
• single programs of standard broadcast length (56:40 or 26:40). In rare cases when a maker’s skills, subject and story structure warrant it, ITVS will consider programs at feature lengths through the Open Call and DDF initiatives.

ITVS IS NOT LOOKING FOR PROGRAMS THAT ARE

• completed and only seeking distribution
• series proposals
• projects intended solely for theatrical release

HOW IS ITVS FUNDING DIFFERENT FROM A GRANT?
Accepted applicants will receive funding in the form of a “Production License Agreement” for production (Open Call or LInCS) or a “Development/Option Agreement” for development (DDF). Both of these contracts assign ITVS certain important rights over the production. Please read carefully the “ITVS License Agreement”.

http://www.itvs.org/producers/funding_guidelines.html

http://www.itvs.org/producers/funding.html

A recent article on BusinessWeek.com offers this advice:

An Investor In the Biz

When looking for investors in the film industry, it’s helpful to reach out to the talent agencies, says Jeff Fishman, a Los Angeles-based financial adviser who works with many entertainment clients. “Agents have relationships with many movie financiers. If you’re looking to meet people at the agencies, try to attend film festivals or even enter your film in a festival. This is usually a great venue to meet varied people from throughout the entertainment industry.”

Your ideal investor will be someone from the industry who knows you well and can help you not only financially, but also strategically. “Such an investor will help you tactically take things to the next level,” says Channing Chen, a venture consultant with the San Francisco Small Business Development Center. “These people…understand what it takes to make this movie successful from a financial standpoint.”

Read more:
http://tinyurl.com/wqub5

I think Business Week missed the boat on this one. While talent agencies do play a critical role in financing, if you do not have an established set of relationships this path is not going to be helpful.

Likewise the advice about seeking investors with experience in film is probably just plain wrong. If you are just beginning your fund raising activities, you need to tap into people who can make an investment of $25,000 or greater. These people are business owners, doctors, perhaps people with family wealth. If they are already in the film business, I think you will find it particularly difficult to recruit them as an investor in your project.

The Going Private blog has an interesting commentary on the recent influx of Wall Street money into Hollywood. A couple of their observations:

“Both the DealBook piece and the New York Times suggest this is a new and revolutionary form of financing for film production. In fact, it is not anything like new and revolutionary finance. What is new and revolutionary is the wonderfully refreshing spanking delivered to spoiled stars like Cruise, and a formalized setup to drag Vegetable Capital into Hollywood.”

…

“What we have here is a Vegetable Capital fishing expedition. MGM wants to pull in outsider money into the coffers so it can direct its attention to sure things. Meanwhile, as to the the riskier projects, those that aren’t part of an existing franchise, well that’s where the Vegetable Capital comes in. What’s interesting is that, while this had become the norm, the only way the deal would fly this time was to throw Cruise and Wagner on the other side of the preferences. Apparently this segment of Vegetable Capital is getting a bit smarter, even if it is still part of the Platyhelminthes phylum. Even Cruise won’t invest in his own films. What does that tell you?”

Read the full post at:
http://equityprivate.typepad.com/ep/2006/11/goddammit_maver.html

I disagree with Going Private and think that this wave of capital flowing into Hollywood from Wall Street firms is much more sophisticated than in years past. An excellent seminar at the American Film Market last week helps to support my perspective. I will define the key details in a subsequent post. But, suffice it to say that the recent private equity and hedge fund investors are much better positioned than the Silver Screen Partners investors of the late 80’s. In those deals, outside investors were stuck with a slate of the weakest pictures.

There is often a question about major talent, and even film producers, personally investing in their own projects. I would argue that when a star like Cruise agrees to make a picture, he is making a tremendous investment, utilizing a currency he controls with a high cash value. The name recognition, and fame, that he brings to a project is conservatively worth tens of millions of dollars.

MI3 is widely considered to be a flop, but that seems to be more the characterization of some bitter Hollywood types. MI3 has a worldwide box office gross nearing $400M. While more of these revenues were generated outside of the U.S., that is less a commentary on the film and more a statement of the importance of international distribution. When global DVD sales and television licensing are factored in, this will likely be a hugely profitable film. It will be one of the few films of the year that generates revenues from every single ancillary market (licensed merchandise, video games, soundtrack sales, airplane & hotel viewing, digital downlaods, etc.) These “ancillaries” will be greater than the primary revenue streams of most films.

Report: Financing Mobile Video Projects Not an Easy Task

11/06/2006

The market for mobile TV and video is growing rapidly, but content providers are finding it difficult to finance new projects, according to a new report by Informa Telecoms and Media in partnership with peacefulfish.

Informa forecasts worldwide revenue from mobile TV and video services will rise from $2.46 billion in 2006 to $8.35 billion in 2011, but content providers vying for a share of this market face challenges.

“While mobile TV and video content is less expensive to produce than film or broadcast TV content, it still requires upfront production costs that typically run several thousand dollars per minute,” said Chris Coffman, senior research analyst at Informa and author of the report. “Revenue shares don’t fund the initial creation of content. The mobile TV and video sector would benefit from distributors, such as broadcasters, mobile operators and content aggregators, sharing in more of the risk.”

The report said companies from both the mobile and media industries are using minimum guarantees and licensing payments to help finance projects. Content providers also rely on outside investments.

The report also suggested producers take advantage of mobile video users’ desire to watch short clips and create new formats and programs designed specifically for that format.

Informa Telecoms and Media www.informatm.com

peacefulfish www.peacefulfish.com

http://www.xchangemag.com/articles/537/6bh612512990066.html

Filmmakers should keep up-to-date on developments regarding content creation for mobile platforms. While licensing is in its early stages, there is a tremendous potential for creativity, and evenutally, meaningful revenues.

Australia’s Channel 9 network
listed their picks for the Best Aussie Movies:

	20. Muriel’s Wedding
19. Wolf Creek
	18. Babe
17. Chopper
	16. Romper Stomper
15. Storm Boy
14. Strictly Ballroom
13. Young Einstein
	12. Shine
11. Puberty Blues
10. Sunday Too Far Away
	9. Priscilla, Queen of the Desert
	8. My Brilliant Career
	7. Man From Snowy River
6. Breaker Morant
	5. Mad Max
4. Picnic At Hanging Rock
3. The Castle
	2. Crocodile Dundee
	1. Gallipoli

http://channelnine.ninemsn.com.au

An update from Creative Capital:

The Creative Capital Foundation is a national nonprofit organization that supports artists pursuing adventurous and imaginative work in the performing and visual arts, film/video, innovative literature, and in emerging fields. Creative Capital seeks to support projects that have the potential for significant artistic and cultural impact, that transcend discipline boundaries and tell us something new about ourselves, our communities, and the moment in which we live.

In 2007, Creative Capital will be considering proposals in the Visual Arts and Media (Film/Video). For more information, please visit http://www.creative-capital.org

Other Creative Capital Programs include:
(NEW) The Creative Capital/Andy Warhol Foundation Arts Writers’ Grant Program will recognize and support the contribution of individual arts writers through project-based grants ranging from $3,000-$50,000. The program aims to promote critical discourse that is both rigorous and accessible, to foster innovation in arts writing, and to encourage writing that nurtures connections between art and the public at large. For more information, please visit www.artswriters.org

The Creative Capital Professional Development Program was launched in 2003 to offer the career-building component of Creative Capital’s Artist Services Program to a broader community of artists. The Professional Development Program has served more than 1000 artists nationwide, and features a comprehensive menu of workshops that include a Weekend Retreat, as well as Day and Evening-long Workshops. For more information please visit pd.creative-capital.org

The Multi-Arts Production (MAP) Fund is a program of Creative Capital, supported by the Rockefeller Foundation. The MAP Fund supports new works in all disciplines and traditions of the live performing arts. Our aim is to assist artists who are exploring and challenging the dynamics of contemporary live performance. In contrast to the preservation of existing repertoire, MAP supports those creating the art of our own time. For more information, please visit www.mapfund.org

[Read more]

We do not recommend do-it-yourself legal work for key production contracts. Properly securing the rights to a script or other literary material can be critical. In many cases, if you obtain a distribution deal with a major studio, they will require a clean “chain of title.” This is often a delivery requirement, an item on the checklist that you must comply with before your film is considered “delivered” to the distributor.

From time to time, we do receive requests for sample templates. While we cannot vouch for their legal appropriateness, we try to share information and links.

For those of you looking for an Option Agreement, Script Sales has made one available online .