Disc revs mitigate financial risk for low-end indie distribs

The market for independent film finance is showing tentative signs of recovery, and DVD revenue is one of the primary reasons, say industry leaders on the eve of the 23rd American Film Market.

After two or three years of decline following the collapse of the European television market, “The buyers are coming back and prices are firming up a bit,” says Morgan Rector, who heads up entertainment lending at Comerica bank.

On top of that, he says, “The DVD phenomenon is a tide raising all boats” as it creates an additional revenue stream in which a significant piece of the pie comes back to independent producers.

As DVD sales grow throughout the world, the format “has helped tremendously” in keeping deals alive and generating renewed investment interest, says financier Lew Horwitz. “Prices are still down and pre-sales are difficult, but there is significant additional interest from various buyers, and we’re hoping that will continue to grow.”

Though DVD rights are lumped together with VHS in the homevideo category, “The buyer is able to pay more since he perceives that rights package as more valuable,” Rector says.

Soft options

Still, times remain tough, and veterans of the scene agree that indie producers who succeed will be the ones who are tenacious and innovative in putting together funding. With the drop in pre-sales eating away at collateral, Horwitz urges producers seeking bank loans to take maximum advantage of the soft money alternatives, and plans to emphasize the topic when he moderates AFM’s kickoff financial seminar the morning of Feb. 21.

Bennett Pozil, entertainment lender for Paris-based bank Natexis Populaires, also stresses the value of soft money. In what he characterizes as “an extreme example,” one of his clients, Seven Arts, recently funded two-thirds of a $10 million South African production called “Stander” with a combination of location-based subsidies, a U.K. sale and lease-back, a Canadian cross-treaty and a German tax credit. Pozil will be a panelist at the AFM morning financial sesh, where questioners can pry out the details. “It’s not rocket science,” Pozil says. “It’s all pretty easy really, but in today’s distribution market, it has to add up.”

Meanwhile, the DVD phenom certainly has its cheerleaders. Consumer appetite for purchasing titles in the format is creating “the first major paradigm shift since the home video boom of the ’80s, and a total revitalization of the opportunities for independent producers,” according to Eric Parkinson, former CEO of Hemdale.

Parkinson recently became owner and prexy of Fayetteville, Ark.-based Hannover House, a book publishing company now involved in video and film distribution.

His vendor relationship to Wal-Mart, the powerhouse discount chain that leads worldwide DVD retail sales to consumers, gives him an up-close look at the nuts-and-bolts impact of the format.

Its strength begins at the retail level, he says, where the slim, compact DVD format allows retailers to stock twice as much product in the same amount of shelf space, “and inherent in that, they’re able to carry a more diverse selection.”

The same factor, coupled with an industrywide policy of lower, uniform pricing and simultaneous release to all retail outlets, from video chains to mass merchants to grocery and bookstore chains, has expanded the market.

“With bookstore chains getting aggressively into DVD sales and skewing their product mix toward the esoteric, we’re developing a more sophisticated consumer who wants to purchase something other than ‘Scooby-Doo,’ ” Parkinson says.

A theatrical release is still vital to a title’s ancillary success, but DVD revenues are mitigating the risk, especially for low-end indie distribs, says Parkinson. “It’s much easier for a producer to predict what video revenues are going to be. It’s making the whole business viable and healthy again.”

In one example, Parkinson expects his company will net profits of $1.1 million from distributing surf comedy “Off the Lip,” an acquisition, after a 100-screen theatrical release beginning June 6. Of that, he says, about 90% will come from video — a profit margin two-thirds larger than he could have realized with VHS alone.

Though the fractionalization of the consumer’s entertainment dollar makes the current cycle very difficult, indies are well-positioned to react quickly and flexibly, says Jean Prewitt, president and CEO of the American Film Marketing Assn. “The people who are really good at creative financing are not looking to any one source.”

AFMA chairman Kathy Morgan adds, “Our members are extremely resourceful, but right now we’re all kind of scratching our heads looking for the deal du jour.”

She observes that co-productions are increasingly popular, even among former competitors, and that casting remains key to arranging pre-sales.

Through her sales company, KMI, she recently arranged financing for New Line production “The Butterfly Effect” based on the appeal of its star, Ashton Kutcher, only to see the newcomer’s stock go up when “Just Married,” another Kutcher vehicle, that debuted at the top of the box office in January.

“Our producers were really just guessing that he was going to break out,” says Morgan. “Now everyone thinks I’m smart, and that’s the fun of our business.”

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