The Tao of Movie Investment – Part 1

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Hundred million dollar budgets. Fifty million dollar openings. Billion dollar profits. Investing in movies sounds like a sure bet, but the field is far from simple.

According to an August 2008 story in The Australian newspaper, the local mining industry generated a return on investment (ROI) of 160 percent, or $1.60 returned for every dollar invested. By contrast, the ROI in the Australian film industry has been as low as -21 percent, meaning average investment as a whole not only failed to generate any return but the operations of the industry cost a further 21 percent. Few movies make their money back, let alone reap Hollywood-style profits.

So which is the better investment? Not so fast – remember that some movies, just like some mines, strike pay dirt. If you'd invested in Titanic (1998) you would have received a little over $9 for every dollar you put in (900 percent ROI). For Crocodile Dundee (1986), USD$13 (1,300 percent ROI). For The Blair Witch Project (1999, the first sleeper hit of the web age), a whopping USD$7,103 (710,300 percent).

As Lorenzo di Bonaventura told us, "There are huge returns. It's a high risk high return business." As the former head of Warner Bros Pictures and now an independent producer behind this year's Star Trek, Transformers: Revenge of the Fallen and GI Joe: The Rise of Cobra, di Bonaventura's seen films achieve and fail from every side of the fence. And while he says it's indeed easier to get films made in the hundred million dollar club once you have a Hollywood track record, that's no guarantee. "One of the things that makes my job exciting is that the risk is difficult to assess each time," he says. "You don't know if you've been successful until you get it in front of an audience, and you can be wrong. In fact you will be wrong if you do it enough times."

So just like a mine hitting a big commodity strike when the market price is right, contributing factors can ensure a film bombs and takes your house with it or sets you up for life, and those factors are a lot less tangible. "It's not for the faint-hearted," is how Jason E Squire, a teacher with the University of Southern California's School of Cinematic Art sums it up. "You have to be comfortable with uncertainty."

A casual glance at the films showing at your local multiplex reveals several distinct but fairly rigid business models for films. We're all familiar with the overcooked blockbusters that appear during the northern hemisphere summer when hundreds of millions of North American and European teens are on school holidays. With as much spent on advertising as making them they succeed almost through brute force.

They're expected to make most of their cinema revenues in just a few weeks, often before word gets around about how terrible they are. That's not a sarcastic jibe either. The 'drop off' – a percentage of the decrease in audience numbers – is a keenly followed accounting science. Such films are carefully crafted for their cross-market appeal, often with video game, fast food restaurant and action figure licenses tied up before a story is even considered.

At the other end of the scale is the cheap long shot. Like most long shots, many cheap movies fail because small producers or backers simply can't spend enough to promote them. Sometimes a film just 'catches on' with good word of mouth, critical acclaim or a strong hook giving it unimaginably strong theatrical business. In recent examples like Slumdog Millionaire (2008: 2,400 percent ROI) and Mamma Mia! (2009: 1,100 percent ROI), filmmakers have enjoyed the absence of a studio marketing committee breathing down their necks, but success for financiers is a very rare exception.

Seeking the sure thing

Sorting out which direction to go with your movie investment funds is no small task. Firstly, investing in movies directly is only really possible at the low, independent end where you know a producer or filmmaker who needs the money for a passion project. Strictly speaking, big American blockbusters aren't open to public investment because the studios are owned by global entertainment and media conglomerates, so putting your money in films means you'll also be exposing it to the fortunes of everything from Chinese subscriber TV and alcoholic beverages to theme parks and consumer electronics.

So while there's no sure thing, certain films improve your chances if you have the means and access. At the end of 2005 the Christian research foundation Dove revealed that movies with G ratings were eleven times more profitable than those with the US R rating (equivalent to Australia's M or MA15 ratings). Such numbers explain the computer-animated family films that have been crowding the action blockbusters out for the last few years and unsurprisingly, the Dove report went on to reveal that production of G rated films had risen 38 percent on the previous year.

Then there's the increasing tide of quirky family dramas that come with a distinctive Sundance Film Festival flavour. Small, adult-targeted, cheap and – thanks to the explosion in influential festivals over the last decade or so – big business.

But not everyone's happy with the new paradigm. As far back as 1997 Steven Spielberg was lamenting the decreasing number of film styles. He likened the American film industry to India, saying 'there’s an upper class and a poverty class and no middle class. Right now, we’re squeezing the middle class out of Hollywood, and only allowing the $70 million plus or the $10 million minus films.' One wonders what Spielberg thinks about the $200m budgets that are routine today, or whether he can see the irony in a recent injection of capital into his studio (Dreamworks SKG) by an Indian investment group.

But what makes film investment even more difficult is that a producer or financier can spend a considerable amount of money on a film and be left with nothing to show for it but cans of celluloid. Without an adequate deal from a distributor a film can gather dust, seen by nobody. In a crowded market there's every chance a film simply won't get a distributor willing to make their own investment (by taking it on).

Worse still for your pride if not your money, you can sign on the dotted line only for a distributor to change its mind about the profit potential or go bankrupt, deciding not to put a cent into screening or publicising your film even though it holds the rights. Plenty of films are famous for their losses such as Cutthroat Island (1995: ROI 10 percent).

But it was Zyzzyx Road (2006: ROI.0015 percent) which was screened only once in a single cinema to comply with Screen Actor's Guild regulations and made just $30. Even the director of the world's most profitable mainstream film isn't immune, with The Blair Witch Project co-director Daniel Myrick's $8m thriller The Objective dumped in a single theatre and returning a box office gross of $95 earlier this year.

If you get that far and your film reaches screens, the next hurdle is to connect with audiences. Veteran screenwriter William Goldman once said 'nobody knows anything', and you can see the same unpredictable audience behaviour here at home. High profile Australian releases with big names, critical acclaim and huge publicity efforts like Jindabyne (2006), Romulus My Father (2007) and Two Fists, One Heart (2009) all failed to take off as hoped while the AUD$1.6m Samson and Delilah (2009) was edging towards a box office take of AUD$3m by the end of July almost completely on word of mouth alone.

The Movie as an IP Asset

There's a lot more to a film than the cinema. With the arrival of TV, film financiers finally got a second bite at the cherry with advertising revenues flowing back from broadcasts of the movie. Since the VHS and pay TV era the life cycle of a film has grown exponentially, and examples abound of movies getting a new lease of life in media other than cinema screens. Long after director Ed Wood was dead and buried, cult horror fans in the 1960s drove popularity of his magnum opus Plan 9 From Outer Space through the roof after the camp late night horror movie broadcasts of the era. Today many films are quickly rushed through a short theatrical run, distributors well aware they'll make their profits from DVD sales.

For starters, forget the conventional wisdom that movies can make their money back on the first weekend. The big Hollywood tentpole releases can make their budget back in just a few weeks, but remember only half the box office goes back to the studio as profit, the other half split between exhibitors (cinemas) and distributors. Transformers: Revenge of the Fallen, the biggest hit of 2009 so far, had taken $727m worldwide after three weeks of release. That's more than triple the budget but it was a return of only $1.72 for every dollar invested by the studio, nothing to write home about in Hollywood accounting.

The real money, according to a 2005 Slate.com article, is in TV licensing, the ongoing payments from networks to broadcast the movie. That year, box office receipts totalled USD$23.3b while TV movie sales was worth USD$17.7b, but remember, you only have to pay to make a movie once, the economics become obvious.

With ninety-year old back catalogues, the major Hollywood majors can keep themselves in production cash thanks to a steady revenue stream from TV sales. But not even the star names of Spielberg and partners Jeffrey Katzenberg and David Geffen could assure the future of Dreamworks, formed in 1995 and burning through capital so fast that in 2009 it signed a deal for an US$825m funding injection from Mumbai-based Reliance Big Entertainment.

"The real goal of any ongoing company is to enhance the library," says USC's Jason E Squire. "It's the evergreen part of the business which provides reliable cash flow so future revenues of film entertainment can help finance a debt."

So it's understandable how studios panic at any impact on the cinema/DVD/TV business model. Despite more free to air and pay TV channels than ever before, TV has been losing eyeballs to other technologies at an increasing rate, and in May this year the LA Times reported that while cinema attendances were up about 15 percent on 2008, DVD sales were down by almost the same percentage, causing a panic among studio executives.

Once again the misguided predictions of what sells come into play, and though it doesn't help much, 'make a good movie' is the only good advice there is. While the 2008 Paramount releases Iron Man and Indiana Jones and the Kingdom of the Crystal Skull performed similarly at the box office, the former (regarded by audiences and critics as the better movie) did much better on DVD.

It's also not just about the amount but the period of the return. "It's a myth that most films don't make money," a screen analyst told the New York Times in 2002, "The real question is: How long does it take for a film to make money?" Jason E Squire calls the theatrical release the 'loss leader' of the value chain.

Success down that chain can also be made more likely depending on the deal hammered out at the beginning. Often it can be a self-fulfilling prophecy, a distributor or backer taking extra care releasing a film they think will be a success, the effort leading to the success they were chasing.

Sometimes, as the producers of Australia's Samson and Delilah have found, when a film catches on you've got a much better chance of getting the sort of DVD and TV deals that will ensure a better return for longer. Nothing breeds more success like success, but the business model – in this case, your budget – is critical. As producer Kath Shelper says, she and writer/director Warwick Thornton were free to make the film they wanted from the money they raised, whereas many filmmakers get their initial funding from DVD distributors and other 'downstream' financiers.

"We were lucky to not have to [get financing] and because of the success of the film theatrically we're actually getting a really great DVD deal out of it, a lot better deal than we would have got at script stage because of the nature of our film," she says. "If you'd read the script you probably would have said 'who's going to go and see this?' But now it's out there and getting well received it's a better time to do a deal."

Read part 2 of The Tao of Movie Investment here.

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