The Money, Honey
Published on June 13th, 2011 | by Rachel Chu0
The film world, for all its glitz and artistic glamour, has to pay its bills just like the rest of us. Films—even indie and experimental—are terrifically expensive to make, bring in no income until completion and distribution, and even then their earning potential is unpredictable to say the least. Traditional film finance is a single project proposition. Money is raised based on preliminary arrangements, a film is made and the hope is that the initial investment will be recouped from revenues and a nice profit will be realized. (Doesn’t work out that way most of the time, but that’s another story.)
Depending on your level of interest, dear reader, in film financing, here’s a primer to bring you up to speed on some of the current modes of raising capital for filmic pursuits. The process of how a film is financed can be as complicated and nuanced as any plot in the film itself. This snapshot hopes to clarify, encourage and promote exploring the lesser known, albeit crucial, side of making a movie.
Slate Financing: This flavor of funding came into being around 2004, and is closest to the traditional vanilla financing. It involves a slate (hence the name) of a dozen or more films from a major studio-distributor, hundreds of millions of dollars, and a complicated financial structure that’s familiar ground to the Wall Street crowd – hedge funds, private equity firms, investment banks, etc.
It goes something like this. The investment group and the studio agree to co-invest in a slate of some ten to thirty films. The investors have some say in what those films will be. They share in all types of revenues from those films worldwide, including box office, DVDs, television, merchandising, etc. Depending on the structure, investors can be:
1) Senior Debt – Paid first, at a specific rate of return, usually around 12-20%.
2) Mezzanine Debt – Next to be paid, at a higher rate of return than senior debt in exchange for the higher risk.
3) Equity – Paid last. Assumes the highest risk but has the greatest possibility for upside, as equity shares in profits with no ceiling.
The studio in a slate finance deal, in contrast to traditional single-film finance, has significant skin in the game. In addition to putting up a major percentage of the production costs up front, the studio commits to providing theatrical distribution. The studio gets to deduct a distribution fee around 10-15% and marketing costs off the top before investors get their split.
Many factors make slate finance deals appealing to the financial world. On the deal level, the diversity of the films involved theoretically makes slate financing less risky than single-film financing; one runaway hit can make up for lackluster performance by other films. On an organizational level, most studios are now part of massive media conglomerates that are public companies. Public companies have SEC financial reporting and disclosure requirements, giving investors more transparency. They also tend to be managed by sophisticated corporate executives of the type you’d find in any big company in America regardless of industry. And psychologically speaking, the investment must have tremendous appeal, being both sexy and comfortable – you get to be involved in the movie business, in a lending structure that’s intimately familiar to you.
Slate financing tends to be harder to arrange for independent films, because of the essential link that is distribution. However, this financing structure is still rather young and it’s possible that a workable structure could be found for the indie world.
Product Placement: Why is James Bond driving a Ford and using a Sony laptop? Why is Bumblebee now a Camaro, instead of a Volkswagen Beetle? Yet another way to pay the bills. Our second flavor of funding draws money from a completely different sector – consumer goods. It can be used to supplement a primary financing arrangement described above. Product placement contracts are desirable because they bring in money without the expectation of repayment. In dollars, anyway. You might say it’s getting more blatant – or maybe we’re just more sensitive to it as a modern audience – but it’s not only a recent phenomenon. Frank Capra took product placement dollars back when movies were still black and white.
Makers of certain categories of goods seem to have a particular affinity for this type of symbiotic relationship:
Makers of “sin products”
- Alcohol: e.g. Singha beer in “The Hangover Part II”
- Firearms: Colt and Sharps in “True Grit”
- Tobacco: Mostly a thing of the past, as tobacco advertising is now one of the most highly regulated forms of marketing. These days, a character who smokes primarily suggests one of two things: a historical context or villainy.
Makers of luxury goods
- Designer apparel: Prada, right there in the title of “The Devil Wears Prada”
- Sports cars: Chrysler and Dodge in “Fast Five”
Morgan Spurlock recently took this form of financing to its extreme limits, by entirely financing his documentary (“The Greatest Movie Ever Sold”) by product placements. Among other things, he sold lead sponsorship – including a mention above the title – to POM Wonderful for $1 million. Other sponsors include Hyatt, JetBlue, Trident and Old Navy.
(In an unusual marketing twist, the film then turned around and gave the town of Altoona, Pennsylvania $25,000 for its police department, in exchange for the town changing its name to “POM Wonderful Presents: The Greatest Movie Ever Sold, Pennsylvania” for 60 days.)
On the other side of the spectrum, horror movies tend to have hardly any product placement at all. Despite the juicy target audience, it seems that the association with murder and gore is uncomfortable or distasteful for brands. (Horror films do have one compensatory quality; they are the only films that can open big without a major star in the cast.) “Saw 3D”, the seventh in the franchise, was completely scrubbed of all recognizable products. Earlier in the series, “Saw 2” and “Saw 3” had a combined total of four identifiable products. By comparison, “Kick Ass” and “Iron Man 2” had over 100 combined.
With print media on the wane and technology giving television-watchers the ability to fast-forward through commercials altogether, advertising that’s integrated with content will only become increasingly appealing to makers of consumer goods.
Crowdfunding: A new and exotic flavor of funding, also known as asking strangers on the Internet to donate money for your film. People who contribute have no expectation that their money will be returned. So why do they do it? A mixture of philanthropic and emotional benefits: they get to support the arts in a very specific and tangible way and, depending on the project, also get an inside look at the filmmaker’s process.
This type of funding conveys enormous benefits to the filmmakers. They are not racking up massive debts, and can hopefully maintain more artistic control of the project. They have a community of enthusiastic supporters to provide encouragement along the way. Digital content assembled for donors can be quickly parlayed into marketing materials once the film is completed.
The mechanism can be as simple as a website and a Paypal link. Or, there are websites dedicated to crowdfunding. At this year’s Tribeca Film Festival, three films raised money on a website called IndieGoGo. “The Bully Project,” which placed #10 in the festival’s 2011 Audience Awards, raised over $25,000 with average donations of only $80.
I poked around a bit on the site and it looks quite well-designed and easy to use. It’s free to sign up and create a campaign, and then the site charges a 4-9% fee on the money raised. It can be linked to social media sites like Facebook and Twitter, and the campaign itself can be updated by announcements to donors, pictures, videos and other bonus content. You can offer perks to contributors such as tax deductions, advance DVDs, or even a walk-on role or producer’s credit. In addition to indie film, IndieGoGo also supports campaigns for music, theatre and miscellaneous community projects.