Thursday, July 15, 2010

Could the web reinvent film industry economics?


Last week, my friend and prolific film producer Elliott Kastner passed away. I will miss tea at the Wolseley discussing future models of film financing and bringing my favourite book, When Nietzsche Wept, to the screen. His work was impressive, but his business plan to create an online film financing platform could have changed the fundamentals of film as we know it.

Crowd-funding is not yet a common choice for film producers, due to secrecy around how films are made, financial regulation and the fact that most don’t know how to effectively rally a crowd. The amount available through crowd-funding is too small to influence any film with a budget of over $100,000. Studios aren’t even sure how to use social media to convert marketing into ticket sales.

However, with viral channels and increasing knowledge through companies like Kickstarter and Sellaband in other sectors, we could see models emerge where financial and other incentives, such as your name in the film credits, prove exciting enough for some to pay big sums.

Films are largely financed through multi-party agreements including finance from banks, foreign distribution territories, local government tax credits, emerging and developing markets and, increasingly, high-net-worth individuals. Some investments generate returns of 50-100% and recurring revenue streams from royalties, digital distribution channels and merchandising. One of my favourite films, Saw, cost around $1.2m to produce but raked in $103m. However, fewer than 1% of films make money, and investors are the last to get paid if there is anything left after distributors fees, loan repayments and the like.

There are companies emerging, such as Slated, that are trying to increase access to data, which helps better inform investment decisions. Its CEO Duncan Cork has said: “Without access to data, no investor can expect to beat the 1/100 odds. Unfortunately, studios are notoriously proprietary about their data, and few, if any, investors have access to real data before making investment decisions.”

If these companies succeed in setting up online systems that forecast the likelihood of success for films based on additional audience and relevant data, investors should make better decisions. Certainly, many new digital music businesses are finding the data itself to be their most lucrative area. The combination of online data collection and existing methodologies could broaden the appeal of film financing.

Moreover, online analytics platforms should help films with a higher likelihood of success get the financing they deserve. Given current market conditions, Hollywood and the independent sector might embrace the internet more than ever before if it means additional investment in film. In the future, you might buy a piece of the picture with your popcorn and see your name in the credits.
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