Tuesday, August 24, 2010

Sun Setting On Studio Accounting?

Another victory for profit participants in Hollywood the other week, when veteran actor Jack Klugman won a “multi-million dollar” settlement from NBC Universal over unpaid royalties from the TV series Quincy, M.E. He was entitled to a quarter of the show’s net profits, but sued NBC when they didn't provide him with accounting statements. Amazingly, NBC’s lawyers had earlier refused him access to the accounts which he subsequently filed suit to get. Last month Don Johnson won a $23 million settlement for unpaid profits from his Nash Bridges series, and other cases are in the pipeline. If more such cases get to court it could spell big trouble for the studios and lift the lid on their accepted business practices.

For some in Hollywood whose mantra is “So sue me”, the idea of adhering to contract terms and paying partners an equitable share would be a new business concept. For many years the concept of “studio accounting” has been prevalent and accepted as just the way things are done. Producers and other participants had to accept that their movie or TV show might never be declared to have made a “profit” even though it’s been cranking in the bucks for years, and that the only way to really get what’s owed in the end is to commission regular audits on studio receipts and hold rights-holders to account under their contracts.

Sure, there may always be some grey areas but there’s really no reason why movie and media accounting should be any less specific than in any other business, where fairly clear determinations get made every day. So, can the movie business decide that adopting clean and transparent accounting practices might be a good thing to do?

There are a bunch of similar cases in the pipeline. We know a company specialising in the management of legacy media rights – the trail of revenues owed to producers and other participants on historic movies, shows and media assets – that’s gearing up a number of cases against studios and TV companies to recover unpaid revenues on properties they manage. Examples include simple non-observance of agreements and the usual non-provision of accounts, as in the Klugman case, to the interpretation of revenues owed on movies that are sold as part of a packaged rights deal.

One favourite is the transfer-pricing fix where a studio or holding company sells a property to a subsidiary company – a TV network, for example - at a less than market price, thereby creating a loss-making show which then has no “profit” left over to pay the show’s creators or producers. That was one of the main factors in the $270 million verdict against Disney/ABC in the recent “Who Wants To Be A Millionaire” case. That's elementary financial window-dressing and we’d like to think that the room for this sort of thing is squeezing tighter and tighter as it all bubbles up to the surface.

Juries don’t like to see people getting ripped off, which is one reason why it seems imperative for the studios to try and settle these cases before they get that far. But they can’t stop the tide, and we’re cheering for the little guys on this one.

It’s something we like to talk about because we firmly believe that if you construct a transparent platform for investors to participate in then people on all sides of the deal can make money fairly or, at the worst, get a fair accounting of where the money went. And we also think that the movie business is one of the best opportunities for investors to get into a real alternative investment with terrific potential to make them money regardless of what’s happening on Wall St.

The Out Of Obscurity team.

Monday, August 09, 2010

What's In A Commitment?

So, you’ve put your heart and soul into getting your movie made. You’ve called in favours and run out of friends and family members to rope into your venture. Finally you’ve cracked it: after hundreds of mostly dead-end calls, meetings and follow-ups you’ve got the money. It’s not yet time to relax but closing on important investment capital is a great achievement.

You’ve got a commitment of the financing you need to make your movie, that’s great. However you’d better tie that commitment down and convert it to cash as fast as you can because things have an unfortunate habit of unravelling in the movie business. Nowhere is this more painful than when the money falls out.

We’ve all seen it: we’ve had promises, commitments, sure things, cheques in the mail and proof of funds that somehow didn’t quite make it to cash in the bank as promised. Investors have a habit of getting cold feet in any walk of life, but maybe more so in the movie business where the lure is so seductive but the financial reality can be stark. If there’s any part of the process where we all need to do our jobs like superstars it’s in absolutely securing the money we need to make our movies.

There are many ways of getting investors comfortable with the prospect of investing in your movies. It’s not always profitable but we all know that’s not why most investors come to the movie business in the first place. We actually heard a speaker at a conference last week say that you should let your potential investors know that indeed movies don’t make money but they’re a great way to write off tax liabilities! A bold suggestion and maybe a touch risky. Otherwise, there are lots of ways to get people comfortable enough to make the pledge and stick with it including the U.S. government’s Section 181 tax incentive, and structuring preferred repayment out of revenue, not “profit”. Finally, aligning your investor’s interests clearly with your project’s will ensure that he achieves his goal along with yours. This could be for him to become a recognized media investor, get close to celebrities, gain visibility for his other business interests or any number of things. You need to be very aware of what’s going to float the boat of every investor you’re approaching and try to help them get there. Once they can see they’re investing in something that benefits them in some way, regardless of pure financial performance of your movie, they’re likely to stick with you.

Here’s a few real-world few examples from our own experience of how things sometimes don’t quite hit the deck as planned:
- A $250,000 investment into our movie fund from a Middle Eastern investor was confirmed not only by his broker but his bank confirmed it had been “sent”. Sadly, and suspiciously, something went wrong and the funds never arrived.
- After multiple term sheets a European investor confirmed his offer of a significant investment into our company. Despite signed contracts the investor then hid behind the “I pushed as hard as I could but my committee wouldn’t approve my suggestion” ruse, maybe you’ve heard that one before.
- We had two separate letters confirming a $5 million investment for a movie production. Solid, written commitments helped us to put together significant project elements and were looking forward to getting the production rolling. However in both cases the investors melted away, one through business reasons and the other, we think, because he was a lying fraudster in the first place . . . All the more galling because the starlet we had lined up for her breakthrough role as our lead loved the script and is now a superstar.
- And, we’ve come across a whole bunch of big-talkers promising everything from movie investment money to business partnerships which didn’t happen. Sometimes there’s a hint of innocence about the over-promisers and bigger-uppers, but they generally fall into the category of people who put more effort into talking themselves up than they spend getting things done.

Undoubtedly, episodes like these will be no surprise to those of you going about financing your movies and perhaps the business does attract more than its fair share of people making big claims. So it’s even more important to try to qualify your potential investors, just as you would with anyone you’re getting into business with.

Simple values always hold true: is this a good deal; is this person an honest partner we can trust; and do we want to be in business with these people if things get tough? Of course it can be hard to tell and raising money is tough, and we all kiss a lot of frogs along the way.

So what’s in a commitment? – you’ll know as soon as the money hits the bank.

The Out Of Obscurity team.

Sunday, August 01, 2010

Independent Film In The Rat Race

This week we’re pleased to present our first Guest Blogger on Movie Beach, please feel free to post your comments. We’re always interested to hear suggestions for topics you’d like to see covered in the areas of movie finance, investment and film-making in general, so let us know what's on your mind.

The film industry is in an interesting state right now. With studios leaning more towards known material such as sequels, remakes and books we are seeing a trend that is opening doors for independent filmmakers to make their mark and join in the race. It was just a few years ago that independent films started to become more than just a straight-to-DVD commodity that was lucky to get any attention. It became an important necessity for an industry that could no longer afford to risk making films that weren’t guaranteed blockbuster status.

Hollywood’s overall box office numbers may have be down a smidge earlier in the year, but studios are bringing in nearly the same amount of revenue on higher ticket prices and half the number of movies that were being made ten years ago. In other words studios want a guarantee that a movie is going to make money or the project will die. There are a few exceptions though. Sometimes movies get made with questionable scripts, but it’s the star power that gets attached that green lights the movie and guarantees a big opening weekend and profit. A perfect example would be a movie that premiered last Valentine’s Day (I can’t seem to remember the name of it). It was the perfect example of a movie that had an All-Star cast, a proven director, a perfect release date, and was guaranteed to be a money maker. It’s too bad the film was terrible. It’s movies like these that prove that independent film-making can continue to blossom and prove they belong by creating telling works of art with actors who will give their right arm to start their career.

While everyone seemingly has a script in Hollywood, this is the time for action. Studios are constantly looking for independent films that show great story, production value, and are entertaining. Independent movies that show potential for box office success have studios clamoring and bidding to get their hands on them and shove them in theatres. In today’s market studios don’t want to take the risk of financing a project with a new film-maker, but they are willing to buy a final product if it is filmed properly and acted well. Some of these movies’ budgets are less than the cost of a new car, have actors working for free, and DP’s running around with standard light bulbs and cardboard reflectors. While this may not be the most attractive way to create a film it’s a win-win situation for new film-makers who just want to create and studios who are only looking to buy.

Before running into the forest at night to shoot the next big horror movie, film-makers should seriously consider the many resources online that can help prepare for an independent movie. Sites like Outofobscurity.com can help find financing, and Zoetrope.com and Massify.com can help in getting feedback and reviews on your script. Screenplay competitions like the Nicholl Fellowships in Screenwriting and BlueCat are two of the most well known, but be leery of others and do your research. Use sites like Actorsaccess.com for casting, and if you don’t want to pay for the account fee then go old school and start posting auditions on Craiglist.com. The resources are out there, they’re just not the big budget ones. Besides, nothing is more liberating than being your own boss: that’s why it’s called independent.

As an independent film-maker you can write your script, cast your actors, guerrilla shoot it on a beggar’s budget and find the success you are looking for. In order to do it though there are sacrifices to be made (most of them financial), and absolutely no guarantees. If you believe in your script, your actors, and most importantly yourself, your chances are a lot greater than if you gave up and didn’t make your movie at all. Creating an independent movie can end up being one of the most satisfying things you do in life. Success itself is dependent on preparation, quality and a little bit of luck. So while the rat race may be a clogged maze of big budget films, the independent film-maker can think outside of the box and still finish with a movie in theatres.

Christopher Ray Allison
The Out Of Obscurity team