Saturday, January 7, 2012

Brands, Budgets, & Bankability Still Don’t Explain Why Studios Are In Crisis - Part 3

In today's media world a mindset of one-step deals and the demeaning practice of sweepstakes pitching (where scribes must prepare ideas to win a job) has become commonplace. There is no shortage of competition for those gigs because good jobs are harder to find. Agents say that whenever possible, they’ve become de facto producers who take client-generated material to build packages with agency-repped filmmakers and cast. Studios and financiers don’t mind this, because their focus is readying tent pole films that studios feel will perform overseas.

The strain on the feature business is evident at all the agencies including CAA. That agency ended the year with a flurry of exiting agents, with rumors that others may follow in the next few months. Once famous for finding jobs for long-timers, CAA now has a partner in TPG and a long roster of agents who have built up salaries in flush days that are not currently justified in an era of diminishing returns in the movie business and less money to go around.

While global box office has become a more dominant part of the revenue stream of many studio successes, the flattening of DVD revenues created a hole that still hasn’t been filled. Shortening theatrical windows and even issuing major movies day and date in theaters and home viewing at premium price points seems inevitable, but not when major theater chains assume an over-my-dead-body position. That is understandable: the theater chains own the real estate and the screens, and they clearly will lose some moviegoers who’ll wait to rent a DVD.

Magnolia Pictures and Landmark Theater chain co-owner Todd Wagner suggested redrawing the revenue relationship with exhibitors and cutting them in on ancillary revenue streams or giving gross percentages. Which is why most of the deals at Toronto were day and date VOD-centric. The Weinstein Co launched a division dedicated to VOD releasing.

For indies, an intriguing case study happened quietly with Margin Call, the J.C. Chandor-directed financial crisis drama that Lionsgate and Roadside Attractions released in October and got on as many as 350 screens. Even though major chains AMC, Cinemark and Regal usually won’t release films that open simultaneously on VOD,  Roadside Attractions paid $1 million to four-wall the film in AMC and Landmark Theaters. The film, which cost $3.4 million to make, has grossed close to $10 million between theater and VOD receipts. The success didn’t make the theater lobbying NATO happy, and several rival distributors said that the film would have done much more business with a traditional platform theatrical release, one that would have created more awards season awareness.

But Margin Call insiders said that paying $10 million in P&A would have made those higher grosses very expensive and the film less profitable for a film that was acquired for about $1 million. The split with cable companies brings back 60%-70% to the film, which is better than the 50/50 split with theaters with a much smaller P&A spend. “It all becomes about the P&A. We all know that unless you can spend $20 million or $30 million, why bother?” Wagner told me. But with VOD, “you reach the entire country, cable companies promote your product through running their own spots, there is a frictionless collections process, and most importantly, I don’t have to run a TV commercial. I believe there is a huge mass of movies this model makes sense for.”

Even though the reshaping of the independent sector is already underway with day and date theatrical and VOD releases, studios have yet to find common ground with exhibitors on feature films. Moguls want to believe people would pay extra to watch films premiere at home in a timely fashion. But at what price point?

Every other media – from publishing to music to television – have responded to the digital age with new and successful revenue initiatives. It has been much harder for studios to crack that model because exhibitor resistance has shackled the majors to an arcane system where VOD and DVD releases still come weeks later. Universal Pictures chairman Adam Fogelson got shut down cold by the major theater chains when he tried to test the viability of premium VOD by offering home viewing of Tower Heist in Atlanta and Portland three weeks after the film’s theatrical opening, at $60.

This was as bold as when Disney shrank the window of Alice in Wonderland, but Disney knew what it was doing by trying with a film theaters had to have. Theaters decided they could live without Tower Heist (it turned out that many moviegoers felt the same way), and Fogelson had no choice but to scrap the test. Exhibitors were conciliatory in rejecting Universal (whose Comcast owners are clearly invested in fostering this business), but this will be a hard battle to win.

Clearly something or someone has got to give in 2012. Things could get worse for everyone in the movie biz — and not just agents – if the business keeps contracting and/or buyers keep disappearing. Summit Entertainment and Lionsgate may merge, but not if Summit and Miramax marry first. Relativity Media may not find new financing. Other companies are less publicly in trouble. The resurgence of deals at Sundance and Cannes was fueled by new buyers like Open Road and FilmDistrict which has at least temporarily left the distribution business following the exit of Bob Berney. But who knows what 2012 will bring?

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