Feature Film Investment - the biggest gamble?
by Paul Spurrier
N.B. This article was written in relation to feature film investment in the U.K. and U.S.A. It was not written in relation to any individual project or company, and some of the advice given does not apply to the Thai market. However I include it, as some of the basic points are universal.
David Picker, head of production at United Artists, MGM, and Paramount, once remarked that if he had reversed all his decisions in other words, if he had not made the films he did, but had instead made the films he had rejected he would have had about the same level of success.
And William Goldman in his bible of the film industry Adventures in the Screen Trade continually stresses that the only single rule that can be applied to the filmmaking industry and its decision-making process is that Nobody knows anything.
William Goldman is not saying that film industry executives are idiots. Some of the best financial brains in the world have been employed by Hollywood. He is pointing out that in film production, success is almost impossible to predict, and that no-one can guarantee a blockbuster.
One only has to look at films like Ishtar, Heavens Gate, Waterworld, Batman and Robin and 1941 to realise that even the best filmmakers working with the best actors can produce spectacular flops. It would be easy to blame such failures on the script, but many failed films have been written by top writers, and have been approved by script-readers and studio executives who have previously demonstrated their ability to pick a winning script. When Hudson Hawk was at script stage, it was fought over by the film studios; the script was bought for a record price; it was given a top-notch cast; it failed abysmally.
Would you have invested in a film by Steven Spielberg straight after the success of Close Encounters of the Third Kind?
...Or in a film by Kevin Costner after Dances with Wolves
...Or in a film starring John Travolta straight after Saturday Night Fever and Grease?
If so, you would have lost your investment.
There is no such thing as a sure thing.
Whatever anyone tells you, or however good it looks on paper, investing in feature films is one of the highest risk investments you can make.
It will always be a gamble.
Veteran producer and director, Roger Cormans recent autobiography is entitled How I made a hundred movies in Hollywood and never lost a dime. In this fascinating book, he tells how he managed to find niche markets for his films, which demanded little quality and almost guaranteed profits. In the late fifties, Corman produced films for drive-in cinemas. He discovered that teenagers would watch exploitation films almost regardless of the quality, and moreover he discovered that the major studios considered such films beneath their quality threshold. There was a gap in the market, which he filled. When this market dried up with the demise of the drive-ins, he turned to the home video market. In the early days of home VCRs, there was an extraordinary demand for new films a demand that the Hollywood studios could not fill. There was also a demand for the horror and slasher films, which the studios were reluctant to produce.
Roger Cormans success was the result of his filling a gap in the market, which the major Hollywood studios were either unwilling or unable to fill.
But most of these gaps have now been filled. When United Artists produced Silence of the Lambs they proved that studios now would and could produce scary films better than anything that Roger Corman could make. The Scream series of films, with high budgets and star actors have helped to fill the niche that was once only catered for by low-budget independent horror films.
Hollywood studios now spend a lot of effort trying to find the gaps in the market and filling those gaps quicker than anyone else can. Niche markets are no longer dismissed by the studios, but actively pursued.
There are few modern-day Roger Cormans finding any success.
It is possible to regain the investment in a film before it has even been made. If a production company has a project based on a best-selling novel, or with a star who is currently at the peak of their fame, or with a very successful director, they can often sell the screening rights to television stations and to foreign cinema chains even before the film has been made, sometimes even covering the entire costs of the production. In other words, the production company can be guaranteed to break even before they have started shooting.
The problem with this is that no private investor is going to get a chance to invest in such a film, because the production company doesnt need your money.
If the project really is a sure thing, you can bet your life that you wont be given a chance to invest in it.
Offers to invest in feature films.
Recently we have received a number of offers to invest in feature films.
They will usually refer to films like Halloween, Blair Witch Project, Dirty Dancing, Rocky, Porkys, and The Brothers McMullen, showing that these films made an incredible return on investment. They inevitably fail to mention the thousands of other films whose titles you have never heard of, and which remain unseen on the shelf.
Sometimes these offers are dishonest. But often they reflect the companys real enthusiasm and confidence. Few filmmakers embark upon a film project without believing that the film has a chance to break box office records and to win them an Oscar. One has to applaud such faith and belief. However, as an investor, one should not allow oneself to believe that such projects are any more likely to return a profit.
No self-respecting filmmaker makes a film thinking it will flop. But most films do flop.
Sadly, many of these unsolicited offers look clearly dodgy and tend to give the concept of private investment in feature films an even worse image than it deserves.
This is a pity. Whereas with the stock market, private investors can become involved even with very limited capital, the world of feature film investment is very hard for the private investor to penetrate. It is almost impossible for the private investor to invest a small amount of capital in a legitimate feature film.
Over 80% of films made do not get any form of cinema release.
The reality of film production is that most films do not get seen by anyone anywhere. They simply sit on shelves. They not only fail to produce a profit, but they return none of the original investment.
Over 90% of the market is controlled by the Hollywood studios.
The private investor generally only has a chance to invest in independent films films not financed or produced by the major Hollywood studios. However over 90% of the cinema market is filled by the output of the Hollywood studios, which means that at very best an independent film can only target 10% of the market. There are certainly exceptions to this, where an independent film can be bought by a studio and released as one of their productions, but this is rare. This 10% of the market is probably more competitive and fought over than the other 90%.
Few films ever show a profit.
In 1988 Art Buchwald sued Paramount Studios for stealing his idea for Coming to America. He won the case, and was awarded a percentage of the profits. In spite of the fact that the film grossed over $200m at the box office, Paramount claimed that it had still not paid off its costs. The accounting methods of the Hollywood studios are complex to say the least, and certainly not friendly to third-party investors.
If James Cameron ever directs Titanic 2, you are unlikely to be given a chance to invest in it. When a film has a famous writer, director, producer or star, it will usually be able to find finance from studios, from presales, or from credit lines with merchant banks. Thus, any film you are given an opportunity to invest in will generally be a project which has failed to find finance through traditional sources. You have to ask the question, If none of the experts have confidence in this idea, why should I? This is a valid question, and certainly the result is that any film seeking private investors is likely to be an even higher risk venture than most. The only counter-argument to this is to refer back to William Goldman Nobody knows anything. E.T., Raiders of the Lost Ark, Rocky and many other films were rejected by a number of studios, to their eternal regret.
Profits projections and business plans are usually worthless.
Often a production company seeking investment will produce a very convincing set of figures based on potential sales. These will show the amounts of money that the producer expects to receive from the different revenue streams. You will see that how much money the Australian television rights will provide, and what the producer expects to earn from the sale of home video rights in Italy, etc. Bold producers might even include figures for sale of merchandising rights, the soundtrack album sales etc. etc. These figures are all utterly worthless. It is impossible to create a financial model for a film, since each one is absolutely unique. A film might turn out to be dreadful, but if one of the actors subsequently lands a major role, it might sell worldwide. On the other hand, if the film is excellent, but comes out at the same time as another film with a similar subject, it might fail to sell anywhere. Anyone who tells you Dont worry. We can sell the video rights for x amount even if the film is dreadful is deluding you and possibly themselves.
The film might not even be completed.
Big budget films have many methods of ensuring that a film, once started, is completed. Insurance policies cover everything from the injury of an actor to the laboratory losing a piece of film. Contingencies cover any unforeseen expenses (for example if it rains every day when you are meant to be filming outside). And completion bonds ensure that if the director or the star becomes a megalomaniac and goes over budget and over schedule, he can be replaced.
However on low budget films, these security blankets often do not exist. Insurance policies, contingencies and completion bonds can be very expensive, and if the budget does not stretch this far, you the investor are taking this additional risk. Whilst rare, it is true that if the main actor has a nervous breakdown, or the film negative is destroyed in a motor accident (it has happened), there is a chance that the production will run out of money and never be completed.
Investors generally have no creative input.
If your motivation to invest in a film is because you think you could do better, or because you fancy yourself as a director, or because you want to have a say in how a film gets made, you will be disappointed. Unless you are investing a major percentage of a films budget, you are unlikely to get any say whatsoever in the casting, scripting, production, or marketing of a film. Running a film production is not dissimilar to running an army, and such things can never be democratic. Any filmmaker who allows his/her creative decisions to be ruled by the investors is unlikely to be someone with much creative talent. The film Ed Wood provides many humorous examples of historys worst filmmaker who would cast the investors friends or children in a film to attract their money, with disastrous results.
If you want to direct or produce a film, you should do so. If you wish to invest in a film, you must expect that you will not have any say in how the film is made.
Questions you should ask when considering an investment in a feature film:
Can you afford to lose all of your investment?
A sensible gambler does not gamble any more than he is prepared to lose. This is also a good rule for film investment. In all likelihood you will never see a penny return on your investment. If this will cause you to suffer financially, or cause you to resent the investment and feel bitter about it, you are making a mistake. This does not mean that you shouldnt get excited by the chance of success, just as you might when backing the outsider in a horse race it just means that you should be realistic about the odds.
Are you getting a fair equity share?
This is something you should determine from the producers. It simply means that if the budget is, for the sake of simplicity, £100, and you invest £1, are you are getting a 1% stake in the film? If not, you should ask why. It might be that the administration costs of finding the finance are reducing your stake, or that the production company is awarding itself the lions share of the equity. If this is the case, you should question the fairness of the deal.
How much money is the production company investing of its own money?
It is certainly not always the case that a production company or producer will invest their own money in a film. However, if they are not, it is reasonable to ask why you should have confidence in their venture, if they themselves do not have enough confidence to risk their own money.
What happens if the film never even gets made?
Many films never even reach the filming stage. The producers might fail to raise enough money, or they might discover that someone else is making a very similar project and abandon it, or the lead actor might get a better offer a week before shooting begins. What happens to your investment? You should get it back, but is that guaranteed? And if so, what happens to any interest that has accrued?
Does the idea or plot of the film appeal to you?
In the final analysis, instinct is probably as valuable a way of evaluating a film project as any other. If nothing else, a film project can take a long time to reach fruition. If you are going to follow its progress, you might at least be sure that the subject matter vaguely interests you.
Is there any strategy for the distribution of the film?
The actual making of a film is often the quickest and simplest part of the process. The marketing and distribution of the film is complex, and more importantly it is the only way you stand a chance of recouping your investment. So it is worth asking, Why will anyone want to see this film? What type of person will want to see it? In which countries might it be of interest? Are there any other films that have been made that are similar which have been successful? As mentioned above in the facts section, you should take with a pinch of salt any figures that you are given, but you should at least feel that the producers have a strategy for the marketing of the film. You dont want to think that once the film is finished, they are going to sit and think Now what?
Finally, do you know whom you are dealing with?
This should be true of any investment, but it is always worth checking that the company actually exists, that the address is legitimate, and that you have a means of contacting the producers. This is all obvious stuff, but it is amazing how few of the unsolicited offers that turn up in our e-mail actually include a name, an address and a phone number. You have the right to expect a prompt, helpful, honest, and informative response when you contact the production company. If they do not return your calls before you have invested your money, they are certainly unlikely to behave any better after they have received your money!