Thursday, December 18, 2008

I had an interesting chat with a friend of mine about the state of showbiz in the recession. All around, I'm hearing anxiety and fear due to the economy tanking. Networks have been firing employees and blaming the downturn, though as DMc remarked yesterday, they likely would have made those cuts without a recession to blame. Certainly Corus didn't need a downturn to fire dozens of employees last year, including beloved veteran network execs like Shelley Gillen.

What I hadn't heard till yesterday was a convincing explanation of why the downturn had to affect my own neck of the woods. Canadian broadcasters already make the absolute bare regulatory minimum of homebrew drama, preferring to air American shows they buy for more money than home-made shows cost to make. They could make less by petitioning the CRTC to allow them to air fewer hours of original drama. But I'm not sure how well that conversation would go. They would be asking a Canadian government agency to allow them to ship jobs and money out of the country. That doesn't sound like a winning argument.

The convincing reason to panic is simply the credit crunch. Producing movies is the same business as producing clothes. (One reason why so many of the great names of the early days in Hollywood started in the rag trade.) Unless you're a studio, you don't start with the money to make a movie. You start with a script, a director, and a cast. You sell your package of bankable elements to distributors in the various territories. (I'm making these numbers up; I haven't been in foreign sales for a decade.) The contract with the British distrib gives you a "minimum guarantee" (m.g.) of X number of dollars. Say Great Britain comes in for 15%, and Germany for 20%, and Japan for 15%. Say you wind up with 70% of your budget presold. Often a foreign film won't be able to presell the US market for any kind of reasonable price. How do you make your movie?

You take those contracts to a bank. They "discount" your contracts (as they would in the rag trade), and give you cash for your contracts (taking a small fee). That leaves you with a 30%+ "gap."

Now you need "gap financing" to "bridge the gap." Gap financing costs more than discounting, because it's riskier. What if the movie stinks? The presold territories have to pay anyway -- their contracts don't promise a good movie, only a movie based on the script, starring the stars, and directed by the director. But you'll have trouble selling the unsold territories. So the bank is going to want to see territories worth, say, twice as much as the bridge money it's fronting.

In years when credit is loose, banks love gap financing. They charge a lot for it. Charging for financing is their business. But now that credit is tight, banks are wary of gap financing. They might only gap 10%, and they might demand, say, three times the gap in territories. They'll make less money, but they won't get left holding the bag.

You don't have to go to a bank for gap financing. You can find your own money from investors. They might take, say, a 30% piece of the movie's gross revenues in return for bringing 30% of the budget. If the movie's a hit, they'll do better than the bank. The bank gets paid the same fees whether the movie is a hit or not. Investors get a share.

But when credit is tight, there are fewer investors around, and they're more demanding. If they do put money in your movie, they might want, say, 45% of the revenues for their 30% contribution.

One reason Canada has a film industry is that government subsidies and regulatory protection help bridge the gap. If you shoot your movie in Quebec, you wind up with federal and Quebec subsidies amounting to 25% of your budget. Canadian distributors and broadcasters have to buy a certain amount of Canadian films, so they'll contribute another 9%. That 31% can solve a producer's gap problem right there.

TV is financed along similar lines. The Canadian broadcaster provides a much, much bigger chunk of the puzzle. Instead of 9%, you could be seeing anywhere from 30-45% from broadcasters, which could be topped up by the CTF envelope to a max of 25% of budget; so potentially 70% of budget. (Even more if they take an equity position, as CTV did with CORNER GAS.) So financing Canadian TV, if you have a broadcaster, is much easier than financing Canadian features. But you still have to find that remaining 30%+. That usually means a foreign sale, unless you can wangle a US broadcaster on board up front. If you can get a US broadcast partner up front, of course, you're laughing. Even if you get a lousy license fee, you're now selling a "US" series overseas, and you'll get more for it.

I've been fortunate in that all three of the series I've staffed had US sales. GALIDOR and NAKED JOSH were sold up front to FoxKids and Oxygen; CHARLIE JADE sold to Sci Fi after we made it.

So the Canadian TV market shouldn't be in as much danger.

But here's a bigger reason I'm not panicking.

Movies and TV are two of the best industries to be in during a recession. Why? Because movies and TV are cheap entertainment. Compare a night at the movies to a night out to dinner. $12 a ticket versus $30-60 a person? How about nightclubs? Let's not even think about ticket prices for rock concerts or theater.

TV, of course, is even cheaper. For about $60-80 a month, you can get cable or satellite with premium movie channels, and no babysitter to pay. I told my exec at The Movie Network that they ought to be taking out full page ads in the papers, saying "You know you're not going out tonight. What's on TV?"

That's the economics of entertainment. But there's also the appetite. In a downturn, people desperately need to take their minds off their problems. The movies boomed during the Great Depression. The Warner brothers were in the red in 1929, but cleverly invested more and more money in their movies. They did better in 1930, and even better in 1931 and 1932. The lousier the economy was, the more people wanted to see Cary Grant playing a millionaire or Fred Astaire dancing in a top hat.

And reruns won't cut it. People will fix their old car instead of buying a new one. But no one wants to see last year's AMERICAN IDOL, and there's a limit to how many times you can watch HELLBOY 2 before you really won't be satisfied with anything less than HELLBOY 3.

So I'm not extra worried about finding work this year. And maybe you shouldn't be, either.

(I think. God willing.)

(There's a huge irony. When I was in school, the safe jobs were in banking, insurance and real estate. Who knew that showbiz was a more reliable choice? And nobody's outsourcing screenwriting to Mumbai.)

There will be changes in the type of entertainment that gets greenlit. I am told that Harvey Weinstein recently stood up in a crowd of producers and said, "We're not looking for artistic integrity any more. We're looking for commercial integrity."

In other words, Harvey, of all people, is looking for popcorn movies. Your MEAN STREETS style idea might not be the way to go these days. Think about your AMELIE or WHILE YOU WERE SLEEPING or OCEANS 21.

The credit crunch will initially hurt movies and, to a lesser extent, TV. But in the medium run, people's appetite for filmed entertainment will, if anything, strengthen. And that appetite will pull in whatever money there is.

UPDATE: Looks like I'll be talking more about this on various CBC Radio stations tomorrow morning. I'll post times as soon as I know them.

Labels: financing

7:18 AM

4 Comments:

I really enjoy your blog, but I have to wonder about this posting.

I suspect the movie industry will fare better than TV. TV requires advertisers to make money. Advertisers are corporations who are making a lot less money. Will they still pour advertising money into TV to reach bigger audiences who have much less disposable income than in the past?

People will be looking for the cheapest consumables in a recession and one wonders if advertising will be all that effective (unless advertising a sale). Sure, there are a few companies that will profit mightily, but I doubt they'll need to advertise much ("we sell the cheapest wieners at Loblaws"?).

Canadian Idol was shelved due to lack of advertising, and that show had great ratings. What about shows wih mediocre ratings?

In my view if the advertising dollars dry-up, TV production will thin. Big audiences with empty pockets aren't particularly attractive.

Good movies will always make money because they get their money from the consumer directly.

Your thoughts?

By  dingus, at 1:10 PM  

Companies still need to advertise, even when there's less disposable income. I don't think they'll be throwing vast amounts of money around, like in the past, but if companies know that people are watching television, that's an audience they must try to reach if they want to sell their product. I think what will happen is advertisers will focus their money a little more towards those that will more likely be buying their product. Basically, if you want to stay in business, you still need to advertise, or you might as well close up shop.

By  Tim W., at 4:58 PM  

Thanks, Alex! You've convinced me to pitch my book as a TV show instead of a movie. Coincidentally, a Toronto-based production company optioned the rights to my book and recently asked me to write a TV pitch along the lines of "Sex and the City on a plane."

If you get a moment could you pls check out my blog and give me some feedback on my pilot outline?

Much obliged!

-Ellen aka the blogger formerly known as "Queen of Sky"

By  In Joy, at 5:30 PM  

I completely agree with your assessment. And I believe the Canadian networks' reticence to produce their own product will further help us as well -- by sending us onto the web and into independent distribution where we'll be free of their controls and influence.

For those concerned about commercials -- companies constantly need to remind people about their products and services and they will begin migrating to places where what they sell can be integrated as product placement or otherwise showcased.

The current TV ad model is dying and taking networks who don't change with it.

By  jimhenshaw, at 11:51 AM  

Post a Comment

Back to Complications Ensue main blog page.