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The Tao of Movie Investment – Part 2

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Read part 1 of The Tao of Movie Investment here.

Evolving technology, rethinking delivery

Digital technology has changed the movies like it has any other industry, not the least of which is that there are so many more people making movies. Being a film director was a profession learned from the factory floor of a set once. Today any kid with a camera and a good idea can call himself a director, and some who've done just that are now the most respected filmmakers in the world. "Films embraced the technological change from analogue to digital quite early," says Jason E Squire. "For anyone entering or dabbling in the business, traditional barriers for entry have fallen. Today there's no excuse not to go out and shoot something."

The change is also affecting the supply chain behind the scenes, and everyone from Hollywood right down to your shopping mall multiplex are doing away with heavy, dirty canisters of 35mm film that have come across the world for a projectionist to load onto a clumsy and expensive projector. Some movies are now shipped as electronic files to be shown through computerised digital projectors no different than the way your DVD player reads the data on a disc.

While it's an enormous cost saving for distributors who can stop copying and shipping thousands of celluloid film reels, there's been reluctance on the part of cinema operators who'd have to outlay hundreds of thousands of dollars to upgrade projection equipment. But in late 2008 a consortium of US exhibitors signed deals with four major studios to share the costs, and today you can experience digital cinema at major theatres in most Australian capital cities.

So in the near future of cinema investment it will be feasible to be a film distributor with no capital outlay. If you can sign a deal with the filmmaker you need only facilitate the delivery of a computer file to cinemas and then get to work creating awareness.

Cutting out the bulky, slow-moving Hollywood system is also an approach endorsed by no less than George Lucas, who told USC (his old school) in 2006 that Lucasfilm was getting out of the movie business and into TV, calling films 'too expensive and too risky'. An avowed digital convert, Lucas is an enthusiastic proponent of a future where smaller, cheaper movies and shows will be downloadable for the audience to consume at their leisure.

Jason E Squire also thinks we'll have more business models than just giant blockbusters and quirky dramas. "The real value of the web [is] to allow for niche programming and niche business models," he says. "It's just a matter of time before some hungry, smart people outside the mainstream are going to perfect that and others will follow."

Even so, we shouldn't get so carried away when considering the impact of technological innovation on cinema. The ups and downs of box office takings have traditionally relied far more on competition from other media and the economic mood than from the introduction of advances like sound or colour.

The most recent technological revolution was the advent of digital effects in the 1990s, as everything from backgrounds to explosions were added using computers in post production long after the actors had gone home rather than staging dangerous stunts or expensive sets. We're in the throes of the next great leap forward right now, that of life-like 3D.

Studio bosses and visionary directors alike are behind the push, which begs the question – is it a creative tool to enable a more engaging way of telling stories or a desperate act to get people back into cinemas after steadily dwindling audience numbers in the home theatre and DVD age? You be the judge, but the signs that theatres are trying to draw the crowds back are obvious. Both major Australian chains (Hoyts and Greater Union) offer premium services with large recliner seats and free popcorn. US theatres are establishing concierge desks, seating escorts and in-house Starbucks outlets to give cinemagoers an experience they can't match in even the swankiest home theatre.

Of course, audience numbers at cinemas have fallen during the last decade (even though revenue has bucked the trend over the last few years and increased slightly, giving us an apparent market of fewer people buying more tickets each year). But with so many more avenues, films can enjoy a much longer life than ever before, in many cases making their money and achieving most of their popularity long after a cinematic run.

The spectre hanging over all this is piracy. The easier it gets to digitise a film for distribution, the easier it is to copy illegally. One thing many observers believe is missing is a 'magic bullet' – a high quality, legitimate alternative for people who want to watch movies on their computer or digital video device like the iTunes store is for music.

It's hard to find statistics on how much iTunes has slowed the extended demise of the music industry that's been going on since the arrival of file sharing service Napster, but there are few options as easy. Supported by iTunes' enormous branding success that makes it virtually synonymous with buying music online, users simply select a song and click 'buy'.

Of course, the iTunes store sells films too, but as an April 2009 LA Times story explained, the contractual obligations that see a film go from theatres to DVD to Pay TV to free TV keep it out of the 'library' phase where online services can offer it as a download for a long time, often several years. Are compulsive PC bound movie fans going to wait that long or turn to pirate peer to peer services where movies can often be found as soon as they're released?

The Commodification of culture

In the end there may only be one innovation that keeps audiences coming back and makes films a good investment and that's telling new and compelling stories, something the Hollywood system is notoriously bad at despite its creative accomplishments. "For me the innovation in filmmaking is in story telling, not the tools," says Kath Shelper. "It's in how you tell it and the story you want to tell. That's what sets [a film] apart from anything else."

To USC's Jason E Squire such creativity should be a foundation stone rather than an innovation. "I don't know if that would be innovative because you'd assume people have always been doing that," he says.

An investor can look upon a movie as a large public company. You have a chairman (producer) who oversees the big picture of steering the product to market, the CEO (director) who leads a team of department heads to craft it into a certain form and a small army of specialists with diverse skills to carry out the director's wishes. Once capital's involved in the operation the venture usually lasts for a year, it can cost several hundred million dollars at the upper end of the scale and it has a very short shelf life, unlikely to see a return for several years.

The small, independent movies from DIY auteurs are more like Microsoft or Google – two guys tinkering in a garage. Find the right two guys and your fortunes will follow them into the stratosphere, but for every tech start-up that made people rich there are countless more that lost a lot of shirts. Throwing your lot in with either model is incredibly risky and like all investments, a safer bet is to diversify.

Maybe the reason movie profit is so wildly unpredictable is because when they're made with honesty and intellect we should consider them contributions to human culture instead of commodities with investment utility like mobile phones or bananas. At the independent end of the spectrum producers are often creative stewards, more interested in art than glued to their Blackberries talking numbers. "I'm no expert in the business side of feature films," admits Kath Shelper, "I approach the films that I want to make as art rather than commerce. I come from the other end, making films I want to make and justifying it in a business sense."

Shelper's philosophy might serve as a surprisingly effective signal of investment potential. Critics and more discerning fans alike lament Hollywood studios for churning out broad, asinine comedies like Wild Hogs (2007: 317 percent ROI) and Night at the Museum (2006: 522 percent ROI), but maybe we can forgive them. After all, the earnings from such efforts go towards terrible investments but visionary pieces of art like The Assassination of Jesse James by the Coward Robert Ford (2007: 50 percent ROI) or films that enter a much-loved historical canon like Grindhouse (2006), which barely returned forty cents for every dollar and went straight to DVD in many global territories.

Success in films can be gauged in many ways and if you're only looking at the bottom line, you'll likely do poorly in the short term. Robert Zemeckis' groundbreaking live action/cell animation noir comedy Who Framed Roger Rabbit and Eddie Murphy vehicle Coming to America were both released in 1988 made similar money theatrically, but which one do movie fans remember 21 years later? There's no such thing as cultural investment but if you'd thrown your lot in with Zemeckis and his creative team you'd have enjoyed a better return over time for your money because ultimately, the market knows and rewards quality.

Like most investments, fly-by-nighters are extremely lucky not to get seriously burned. The secret is to know your target industry. Be film literate, read the movie magazines to see who's doing what, which directors are getting attention and which studios or production companies are doing well. And keep in mind the best and brightest in the business both here and in Hollywood have gone broke trying to second guess the market. Like filmmakers themselves, the secret might be to find a project you like with a story that grabs you and people whose success you want to share.

There's absolutely a market for film investment, with so many poor wannabe directors and producers clamouring for what little money the government doles out. Connecting with them is the biggest challenge, and it's one the Screen producers Association of Australia (SPAA) is taking seriously. The Association runs a conference once a year for the higher, more pro end of TV and films, but the SPAAFringe conference (held every October) is the place for independent filmmakers to meet collaborators or backers.

A successful part of the festival so far has been The Melting Pot, an open forum where participants stand and tell the whole crowd what they're looking for. It's a great way of connecting the right people and the online version will be live very soon.

Australia

33 Australian-made films were released here 2008 versus 158 that originated in the US. But it's not just a matter of numbers – with only 20 million or so people, we have neither the potential audience nor the self-supporting financial structure of a studio system.

The Rudd government is mostly arts-friendly, with the national screen funding body (Screen Australia) offering a producer rebate where qualifying films can claim back 40 percent of their production costs. But without the back-up of a studio library bringing in steady revenue, most Australian financiers or producers are exposed to a huge amount of risk. That's especially true when they're competing against more expensively marketed, far flashier product from a market (the US) that shares our language and business infrastructure, making us a tailor made audience for them.

According to The Australian, 2008 would have been a year of record box office lows for our films if not for a film called – ironically – Australia (financed by a Hollywood studio, even more ironically). Without the backing of an established industry, almost every Australian film is an investment 'one off', and failure to turn a profit can mean unadulterated ruin for backers.

But it's not all bad news. The philosophy above – good stories well told – is as true at home as it is anywhere. An unknown filmmaker named Greg McLean showed them all how it was done in 2005 with his grisly horror thriller Wolf Creek. Costing AUD$1.38m, it went on to earn almost $6m locally and AUD$34,720,480 globally (2,500 percent ROI).

Of course hindsight's always perfect, and after Wolf Creek many local critics and filmmakers said it was just what Australia needed, a movie for audiences instead of the endless string of movies about impoverished suburbanites and struggling minorities that seemed to be made for social workers.

So once again Kath Shelper's (Samson and Delilah) advice might be the only yardstick for what will work. "It's a very personal thing," she says, "it's a heart, soul and instinct thing. If something can keep my interest I think other people are going to be interested in it as well."

It cost how much?

Any time you read about how many hundreds of millions the latest Hollywood blockbuster cost to make, it's usually the production budget – the amount spent before a single film print is copied or advertisement written. In today's world where Hollywood studios routinely spend as much marketing films as making them, the return on investment (ROI) mentioned throughout this article is really the return on production cost (ROP).

It might be simple to account for marketing costs as well (and drastically downgrade the profits of most films), but the waters are further muddied by the business structure. Strictly speaking, a studio makes a film, and then everything from copying prints and booking theatres to advertising is the job of the distributor.

After studios, distributors and theatre chains were broken up by new antitrust legislation in the late 1940s, the lines were clearer. But over the last 15 years the Hollywood studios have not only been buying the distribution companies but abandoning any pretence about separation, rebranding them in the parent company's name. Such finely enmeshed corporate structures makes the accounting of who pays for what even more labyrinthine.

Add to this mix, Hollywood's often Byzantine accounting procedures designed to maximise or sometimes minimise profits. The novelist Winston Groom reportedly cried foul when the film made of his book, Forrest Gump, in which he held 'points', supposedly failed to make a profit, despite worldwide box office of US$677 million. One can then readily see how establishing hard-and-fast ROIs is more difficult than making a good film in the first place.

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