Movie Finance's Holy Grail?

When deciding what movies to finance and produce, you’d think it would be useful for studios and producers to have a clearly structured way of assessing how they might perform at the box office. On the other hand you might think it’s a complete lottery and that movie-goers are just a fickle lot. However it would be the holy grail if a film-maker had a real formula to determine accurately the true revenue potential of his movie, and more importantly how best to tailor his work towards success during production.

One aspiring guru has come up with just such a formula and is hell-bent on applying his ground-up approach to identify success factors and weed out known mistakes in movie production. His revolutionary approach factors in certain features that he believes lead to a movie’s success such as character types and development, genres and storylines that resonate with audiences, it determines specific camera shots and angles and a myriad of other factors which together, he claims, can reliably generate profitable movies.

Would Hollywood listen to such a revolutionary concept that could potentially force it to change how it does business? Our friend Steve arrived in Hollywood last year to introduce his concepts but he found that few doors opened to allow him to get his message across. Many of you reading this won’t be surprised at the reluctance of insiders in any industry to be told what to do by a relative newcomer, and the thought of questioning the established beliefs in the movie business is certainly too much for many of its fragile egos. No producer wants to be told “you’ve got a pretty good concept there but step aside and let me rewrite your script and change a bunch of other stuff”. And, the thought of applying a scientific process with a checklist of criteria that need to be fulfilled probably sounds too much like regular corporate business practice, not something most Hollywood creative types are best at.

However, it’s a topical issue every weekend as the box-office numbers are pored over. This week, for example, the trades are focusing on the differing performances of Inception and The Sorcerer’s Apprentice. Inception, a thoughtful, high concept “thinking adult” kind of film they don’t really make any more, could have stumbled amid the summer popcorn audiences, but took in almost $63 million. And although The Sorcerer’s Apprentice looked like a slam-dunk for the summer crowd it stumbled at only $17 million. From a review of movies currently on release our friend Steve feels there are several obvious mistakes in some of the big movies out there which, by applying techniques determined by his model, would have been corrected as those movies were being made. And, although the studios’ current favourite survey partner CinemaScore does a remarkable job of predicting the performance and longevity of movies at the box office, their results are based purely on exit polls taken during the movies’ first-run weekend. Those movies aren’t going to get any better once they’ve been released, but Steve believes the studios ought to listen to him because his model will help them to make better movies and get them right before they’re released.

Many companies and consultants have tried to solve the problem of “how much will my movie make” with decidedly mixed results. Others have looked at the more oblique issue of “how can we present the best movie, with the right mix of talent, genre and time of release in the calendar, to ensure our best shot at a good result”? That’s daily business for the studios and some elevate it to a science. But they’re generally dealing with known elements: scripts rewritten to an existing formula and tailored to the whims of directors and stars, marketing departments doing what they know has worked before, and churning out genre fare to suit the perceived demands of the public. Maybe best known of the current number crunchers is Ryan Kavanaugh, whose Relativity group runs mind-numbing models to determine where to put its money. But is he beating the average, as you might expect with such an appliance of science? Quite possibly he is. But it’s going to take a strong will or a spectacular result to get a major studio to fundamentally change how they do things and apply Steve’s new techniques to their movie slate.

Steve believes that by applying real analytical techniques to movies at every stage of their creation he can ensure an absolute success rate. Of course this sounds fantastic and if he can prove his model’s capability he’ll see a rowdy line of Hollywood producers and studio exec’s develop outside his office. He has discussed his model with the few producers and studio exec’s who would agree to meet him, with similar results: they like his concept but aren't sufficiently convinced to put their money behind it, at least until it’s proven. He’s in a Catch-22 situation where he needs to prove his model but Hollywood isn’t listening to him or lining up to fund his efforts. He comments about a current studio blockbuster:
“It is clear they have no idea why "The Sorcerer's Apprentice" lost money. It is crystal clear to me. That means on the face of it I am better placed then Jerry Bruckheimer and Disney to understand what the movie-going audience is looking for. That is a sobering thought. What do I do with that?”
What he’s looking for is someone who can understand his modeling approach and the idea of a breakthrough concept, who’s prepared to back him to go make a movie that, in Steve's words, will "break the gut-feel mould of Hollywood movie selection and add some science to the process". We're watching eagerly.

The Out Of Obscurity team.

Travel Always

The other day we read a great piece in the Los Angeles Times about an uncle advising his nephew on the route he might take to drive across the USA from the East Coast to Los Angeles to attend the American Film Institute. We’ve spoken at one or two events at the film school here in LA and it’s certainly a venerable institution for an aspiring young film-maker to go to. Rather than zip across country on the Interstates the uncle, a noted film director himself, felt his nephew would be better off taking the slow roads where there’s more chance of discovery. Take your time he urged, meander through small towns along the way – heck, even take a couple of years to let the whole thing brew and soak up all the different experiences along the way. Don’t just go to film school in LA and learn how to copy other filmmakers but find your own voice and your own techniques borne of your own experiences. His underlying message: be an original voice, and find yourself through travel.

Funnily enough, that’s how Out Of Obscurity got started in the movie business, and I guess why that piece hit home. A few years back after living in various parts of the world, we bought a red Mustang rag-top and set off from New York to take the slow roads and drive right around the US. We covered just over 10,000 miles in 6 months and found ourselves in many small towns and byways along the way. We made some great friends and finished up playing music and watching the world go by for a month or so in the French Quarter in New Orleans. From there we hopped over to the Bahamas where we wrote our first screenplay, drawing heavily on our experiences from the road. It was picked up by a producer straight away, a minor miracle in itself, and we began working with agents and producers in LA.

And here we are: travelling has always been a part of our lives and we can’t imagine things otherwise. Travel always.

The Out Of Obscurity team.

A Square Deal In The Movie Business?

We were with a professional colleague the other day who’s raising money for a forthcoming marquee franchise property that’s being produced outside the studio system and is fully financed by equity capital from private investors. An intriguing combination as it seems to be every producer’s goal these days to have his movie 100% equity financed by a bunch of old ladies: however, few manage to pull it off. Our guys have raised $30 million so far and are on target to top $100 million to cover production and P&A on two movies in the franchise. It’s a powerful position, providing of course the distribution trail works out and the movie sells. But there’s a lot of confidence in their camp as the production and talent teams are second to none and the movie continues the legend of one of the all-time classics.

They have a revolutionary capital structure too, with investors guaranteed to be repaid capital plus profit first. In first position before any other entity, even the studio which eventually picks it up for distribution. That’s unheard-of in Hollywood and has been scrutinised to death by various parties to check whether it’s true or not. Not only that, but investors get provided with transparent financial statements and can - and do - visit the production any time to check on their investment. It’s a great concept to give investors exactly what you say they’ll get, and unusual only in that it seems so unusual to anyone familiar with Hollywood business practices. In most businesses you invest in some sort of promise and get to see how that pans out in practice and on paper. In Hollywood through the ages, however, investors have been surprised time and again on deals where they were promised some sort of “profit participation” only to be told “Sorry, your movie didn’t make a profit”. Examples are legion of blockbuster movies which have broken box-office records but never made a dime for their investors.

During the conversation our guy, who’s relatively new to Hollywood, asked in passing “Does anyone do a square deal in the movie business?”. As it happens the verdicts had just come down on two high-profile cases illustrating that very point, so-called “Hollywood Accounting”. The first featured the creators of the TV game show “Who Wants To Be A Millionaire” who sued Disney and ABC TV for unpaid profit on the long-running hit show: the jury awarded them $270 million. In the second case the actor Don Johnson sued the producers of his TV show Nash Bridges for unpaid participation and was awarded $23 million. Nobody knows whether these verdicts will stick on appeal, but they’re seen as the thin end of the wedge as there’s a steady stream of such cases coming through and no shortage of investors and producers feeling short-changed. They’re often settled out of court and in the wake of two such high-profile jury verdicts the studios will be seeking any way they can not to get back into court on subsequent cases. If things do take a turn towards business transparency this week’s verdicts could change the Hollywood landscape.

This is nothing new, of course, there are many ways for investors to lose money and a bad movie deal is only one of them. However it’s not simply that Hollywood is the bad guy, but it does seem somehow easier for investors to be seduced by the glamour of the movie business and scrutinise the terms of movie deals less thoroughly than they would on other investment opportunities. So we’re sure that there are indeed fair deals to be done in Hollywood and we’ve always believed in the merits of investing into quality movies in the right structure. We like to maintain a level playing field with our Movie Portfolio Fund, a feature we agreed on wholeheartedly with our producer friend. Give investors a fair deal and then sure, the movie business will still be highly lucrative if a little risky, but we’ll all share in the fun without feeling cheated out of the profit.

The Out Of Obscurity team.

Introducing The Pitch Page

Over at our websites for Out Of Obscurity and the Movie Portfolio Fund we receive a regular stream of submissions from people all over the world looking to make things happen with their movie projects. We’re never sure what we’re going to see in our inbox: as you’d expect missives can range from the fantastic to the forgettable. But there’s usually some sort of spark that, in the right hands and with the right backing, might just ignite into a flame of inspiration. Some projects come ready packaged with directors, crew and talent, some with a little or a lot of money, and some are just the germ of an idea. We respond to them all and we’d like to be able to help them all.

We also get a fair bit of traffic from people interested in investing in the movie sector, whether they’re industry insiders, money managers or just individuals looking for a smarter way to invest their money. As we’re fond of saying in this journal the movie business is a classic alternative investment sector, which can out-perform traditional investments whether conventional indices are going up or down.

So, we like to help out whenever we can by introducing film-makers to potential contacts that might help them in getting their movies made. But of course we can’t help everyone with a project, and some investors may be looking for something beyond our investment fund: that oddball movie project that nobody’s picked up on yet. Which is why we’re thrilled to introduce The Pitch Page, a dedicated forum where we post details on a bunch of project submissions that we receive. We’re aiming to give film-makers much-needed exposure to the community of movie business executives, producers and investors watching our site. It’s true that there are always more projects doing the rounds than ever get made into movies, but we believe there’s a great chance for movie business insiders to uncover some hidden gems from the world of creative talent we hear from every day, and we’re excited to see the Pitch Page take flight. Go on, take a look at The Pitch Page.

The Out Of Obscurity team.

Onshore: Offshore Synergies

Greetings again and a happy 4th of July to everyone out there, wherever you are. We’re a hybrid mix ourselves of International roots and travel along with a whole bunch of American influence in our lives and work, and we have our own reasons for joining in the celebrations on Independence Day. This year we took in a party down at Marina del Rey among the pretty yachts and quaysides, with a big fireworks celebration in the evening, it was quite a sight. It reminded us of other great nights around the world: fireworks at the foot of the Edinburgh castle in Scotland; crazy fiesta explosions of everything in sight in Valencia, Spain; Chinese New Year pyrotechnics in Hong Kong harbour; and nice things going pop the world over on countless nights in the company of good friends.

It’s good to be right here in the heart of the movie business and you never know who you’re going to bump into. The other day a friend arranged for us to meet up with a group to discuss raising finance for a great movie project of theirs and it turned out that we had real synergies in our work through some mutual friends in the Bahamas. Regular visitors to Movie Beach, if indeed there are any, will know by now that we’ll use any excuse to mention the Bahamas and our plans for global domination centred on our cozy little offshore HQ down in the islands. Out of Obscurity and the Movie Portfolio Fund are based offshore currently so it’s not such a stretch and we’re working on it, oh yes we are.

Anyway, at the time of writing we’re following up with our new friends to see what we may have in common to work on together. We believe there are real opportunities to match their proven ability to raise movie finance from domestic onshore investors and our offshore fund for international investors. It’s hard enough to finance movies at the best of times and investors are rarely faced with a level playing field when looking at different movie investment opportunities. We like to present investors with a transparent, flexible and tax-neutral opportunity to share in the upside of investing into movies as an alternative asset class. And if we can do that in partnership with our friends then so much the better.

We firmly believe in the merits of investing in movies as excellent alternative assets, and we surely believe in synergies involving our favourite island chain.

The Out Of Obscurity team.