From Brian Newman’s mailing list
Bye Bye Equity PieDecember 9, 2020
Another week of Covid-19, another accelerated demise of a business model seemingly central to the life of the movie industry. You would think in light of the
hand-wringing and
gnashing of teeth caused by the Warner’s decision to launch its entire slate on HBO Max that I’m thinking of windows again, but no, folks – I’m talking about the death of equity financing for films. Or once again, I’m writing about something no one wants to discuss.
Like so many accelerated changes, this is a death that was coming prior to the virus; a change that had been happening for at least a year or longer, but that can no longer be ignored. It’s also so shocking that when I discuss it with my friends and colleagues – or bring it up on panels – I get the long, blank stare of disbelief.
So, let me turn to two recent pieces that kinda flew below the radar, but speak directly to the reality we face. As Exhibit A, I give you James Schamus during a virtual keynote Q&A at the Film London Production Finance Market (back in Oct) as
reported in Screen:
Schamus pointed out that the competition between the streamers is taking place “in the absence of a time-honoured approach to the financing and selling of independent media”, with “egotistical, bloviating, ridiculously self-centred individuals and family members who’ve made it in the used car business, the laundromat business, real estate, whatever business” no longer putting their capital into independent film.
The former Focus Features boss noted there are now only “a tiny handful of gatekeepers” financing independent content. “They have very little incentive to acquire more than a tiny handful of things, especially feature-length films,” Schamus said. That was Schamus speaking about independent media. Exhibit B would be Richard Rushfield in
The Ankler speaking about Hollywood (just yesterday), which is now facing the same death thanks to the Warner’s announcement:
“beneath the surface of people trying to make movies and do well for each other, there's the real Hollywood, which is a business of fleecing the arrivistes for every penny they've got while they still have stars in their eyes.”In both instances, you have some super smart folks reading the writing on the wall for those of us not willing or able to slow down and look more clearly at what’s going on – as the industry has shifted to SVOD and original content, there’s no longer any incentive for equity investors to get involved, because there is no upside.
What Warner’s made abundantly clear this past week was that there is no path to profits (much less riches) for investors in their individual movies; all in the hopes that Wall Street investors will take a chance on their overall fortunes as tied to HBO Max (so far, Wall Street doesn’t seem super-impressed, but business writers
are giddy). In this particular case, they only gave their investors, folks like Legendary Entertainment, about 90 minutes notice before they announced that there would be no back-end, and those partners are hoppin’ mad.
But it’s not just Hollywood. The fact is none of the major streaming services have much appetite for buying finished feature films anymore. While it was always a precious few who got lucky and sold Netflix for the big bucks out of Sundance, you’re increasingly seeing a world where they don’t bother to compete for indie or other arthouse films – and especially not documentaries, anymore. Nope. It’s all about originals and series now. Yes, there are exceptions, but they are increasingly rare, and Covid-19 has only accelerated this trend.
Time was – just about two years ago, even – I could honestly look an investor in the face and say that while the film business was a tricky one, and a bad investment most of the time, there was a path forward to potentially recoup your investment. That’s not a pitch I think I’ll be making again anytime soon. But while coronavirus has brought this trend to the fore, it was happening B.C. Over the past year, it’s become increasingly apparent that one can’t produce “on spec” anymore – you have to work on commissioned work, where distribution and financing are locked-in from an early stage. That’s because you can’t count on a decent sale – because not only are the major buyers (SVOD) not buying, that also trickles down to the mid-tier buyers. It becomes really difficult to see a path towards recoupment. Now that we can add that it’s impossible to get insurance for an indie film, and if you manage to get it made, there might not be any buyers, the dynamics around investment are going to change/disappear, and fast.
This is a profound shift, and the implications are still being sorted out. While there will remain some exceptions – most smart producers and talent will have to move to a model that relies a lot less on equity. The smart equity that remains should probably be focused almost solely on IP development and early-stage financing, where the dollars needed are lower, and the “out” is more focused on an early pre-buy or commission, with a smaller profit margin. I think a lot of companies will go out of business as well, because the profit margins on commissioned work (and TV in general) are much lower. An entire eco-system of support for indie films – from programs like Catalyst at Sundance, to Impact Partners for docs, will have to be re-thought (oh wait, that was
already underway). Efforts like the DPA’s
waterfall guidelines (which just came out in September (!)) will need to be re-written. Heck, the definition of indie film will have to change (again), once you can’t make much of anything as an independent anymore (if you want to reach an audience and recoup; there will always be soft money docs and crowdfunding, but that can’t sustain an industry). And while the industry will adapt, I think it will lead to a lot more safe-choices and thus less surprises and less artistic risk being taken.
Of course, this brings many opportunities as well. I can think of many ways to “bridge” this gap, and coming from the branded entertainment world, that’s near the top of my list. But it’s also a very tough puzzle to figure out – and those who can do so will be best positioned to thrive for the next five-ten years, before this all shakes out again and we try to build another new model. In the meantime, we need to add to our list of conversations to be openly had – and problems to solve – what to do when the equity vanishes?
