Home cooking

Studios feel squeeze as local fare gains bigger slice of B.O.

While Hollywood smugly totals up its overseas grosses, serious competition is looming. And some of that competition stems from the studios themselves.

Hundreds of millions of dollars have been pouring into local-language films, with a box office success that is starting to attract the kind of commercial investors, hedge funds and financial insititutions which previously would have made a beeline for the U.S. majors.

That’s great news for local producers and filmmakers.

But these native projects are cutting into the once-invincible American product. While studio tentpoles continue to dominate, some mid-range Yank pics are floundering in the wake of punchy local fare — for example, “Wedding Crashers” ($209 million domestic, $76 million overseas) and “Failure to Launch” ($88 million vs. $37 million).

And the new trend means competition is increasing between local and American films for release dates and screens.

In the past few years, the entire landscape of local-film funding has changed as wealthy individuals, private equity funds and banks give local filmmakers the resources to compete more effectively for their own audiences — without a concern if the film exports.

A few studios have embraced the trend. They have realized that they need to add local movies to their local pipelines, and if someone else helps pay for them, all the better.

Hollywood, accustomed to raking in money from overseas investors, is tentatively reversing the trend: Putting more coin and clout into native pics.

Fox latched onto the Russian smash “Night Watch” and is bankrolling the rest of the trilogy. It picked up worldwide rights during post-production to the Brit low-budget comedy “Confetti,” which music agent-turned-film producer Ian Flooks co-financed out of his own pocket.

Sony and Warner Bros. are the most aggressive of the Hollywood studios when it comes to local-language production, becoming more active than ever in recent years. Sony, for example, is producing local-lingo pics in 11 countries, including China, Spain, Italy and France.

A production entity is in the process of being established in Russia, where Sony has three pics underway. And the first co-productions from Sony’s operations in Mexico and India were recently released.

A pioneer was Columbia Tristar Film Production Asia, headed by Barbara Robinson. The Hong Kong-based offshoot scored with its first investment, “Crouching Tiger, Hidden Dragon.”

Warner Bros. in 2005 established a joint production venture with China Film and the Beijing Film Academy to create Warner China Film HG.

The shingle has the right to be treated as a Chinese company and make films that qualify automatically for local Chinese distribution. This avoids both quota restrictions on revenue-share films and the poor returns of flat-fee deals. Where necessary, shingle can be the local Chinese partner for incoming productions.

The company has so far been involved in nearly half a dozen pics including the forthcoming “Jade Warrior” and “Telephone 601,” which it is co-financing and co-distributing with Shanghai Film Group. It is also acquiring Chinese titles such as Ning Hao’s “Crazy Stone” for local distribution in China.

This indigenous trend echoes the strategy that has consolidated MTV’s grip on the international cable biz. In the late ’90s, MTV realized that there was a more efficient way of going global with its brand, by thinking local. It decreased U.S. exports and increased the development of local formats, forging a bigger global youth audience by catering to local tastes.

A Euro-based studio exec recalls attending an eye-opening presentation by MTV on the global youth market. Although the kids in MTV’s survey seemed alike in their dress style and leisure pursuits, they were actually consuming local versions of global genres and brands, rather than truly international products. “Everyone drinks Coke, but when you travel around, you realize it actually tastes different in every country,” says one exec.

There are a multitude of styles and motives in this emphasis on local films. Some investors see it as a matter of cultural pride. Others see it simply as a good fiscal bet. Still others take a long-range view, hoping that investment in the high-profile film biz will encourage other investments in the region.

Whoever the investor and whatever the motive, the numbers are impressive. Last year, the film arm of Rotana — begun in 2004 by Saudi prince and billionaire Al-Waleed Bin Talal — produced 22 pix, accounting for nearly 50% of the Arab film market.

Al-Waleed first came to Western notice as a key investor in media congloms such as Time Warner, Mediaset and News Corp. But now Rupert Murdoch, always among the first to sense shifts in the global tides, is poised to return the favor by investing in Rotana — recognition that globalization is a two-way street.

A handful of other examples:

  • Eduardo Costantini Jr. is partnering with the Weinstein Co. in Latin America. Their fund, worth up to $50 million, will finance production and acquisition of 14 Latin American pics over the next three to four years.

  • Paris-based Wild Bunch has a five-year venture with L.A.-based financiers Virtual Studios to invest x120 million in production, spanning both international English-lingo pics by auteurs such as Woody Allen and Abel Ferrara, and local French movies such as Patrice Leconte’s “My Best Friend” and biopic “Moliere.”

  • KTH, part of Korea Telecom, last year bought control of leading film production company Sidus FNH, while rival SK Telecom bought a 22% stake in talent agency and production house iHQ.

  • At least three new Mexican private equity funds, working out of Monterrey, Guadalajara and Mexico City, will begin to invest in pics, leveraging new tax incentives. Santo Domingo Films’ Alfredo Harp Calderoni, a high-net individual, already co-financed multiple Mexican pics over last year.

  • Boasting of $60 million in equity capital and bank coin, Global Entertainment (an offshoot of Chinese gaming mogul Johnny Hon’s empire) aims to finance and produce movie and TV content in China and India. First production is a 30-episode series “Da Ren Wu,” a martial arts action series starring Nicholas Tse.

  • Publicly-quoted Russian conglom Sistema is bankrolling Thema Production, with offices in Luxembourg, London and St. Petersburg, to finance and produce both international pics and Russian movies for the Russian market.

Hollywood is awash in hedge-fund deals and the new global trend is to create similar pacts. These are not like foreign funds of the past, which poured money into the pockets of the U.S. majors in return for a slice of studio action.

Now, the local-pic biz has a market-savvy sensibility; it’s no longer based on cultural subsidies, but on profits.

And those profits are local. Investors aren’t just gambling that the next “Y tu mama” or “Crouching Tiger” will become an international hit or provide fodder for a U.S. remake. It can be enough that the film will be a hit in its own territory, period.

Places like China, Japan and Russia see enough potential box office in their territories to warrant big investments.

But the deals raise serious questions. Talk of investing tens or hundreds of millions of dollars into emerging cinema markets seems surprisingly ambitious for some local industries that are used to making only a few films a year.

In addition, “the big question is whether there’s a market for all the product,” says Latin America producer Matthias Ehrenberg. Mexico’s has the biggest problems: large local P&A costs mean even big Mexican hits don’t always recoup.

And there is a danger of budget inflation. Already the Korean industry has seen producers rail against the growing wage demands of the top stars. It is now an expensive proposition to cast Ziyi Zhang in a movie when she can earn $2 million for a commercial.

As one studio executive muses, “By definition, when there are several buyers operating in the same market, you have a bidding situation. But I don’t anticipate that the prices are going to increase in proportion to the way they’ve increased in the U.S.”

There are a number of reasons for the sudden influx of money. Long-term interest rates are low and institutions have the potential to make more from film production than from other ventures. (Moneymen go through phases. For a while, it was shipbuilding, then the stock market. Now it’s film.)

In addition, “a lot of younger people with financial backgrounds are very keen and interested in films,” says Ehrenberg. For example, the Weinsteins’ partner, Constantini, studied both film and business in Buenos Aires.

Many foreign film funds were created to exploit tax breaks, but as governments such as the U.K. and Germany have closed loopholes, some investors have been willing to take on commercial risk without any tax write-off. This doesn’t necessarily mean investing equity — it could involve a range of complex arrangements, including providing bridge finance at higher risk than mainstream banks are prepared to take on.

At the recent Cannes festival, one key exec at a studio niche division said he’s never seen so many rich individuals who were eager to invest. There will always be outsiders who see the film biz as a get-rich-quick scheme — although that usually only works if you take a fat fee for spending other people’s money, rather than if you gamble your own fortune. For some, that risk is worth it just to meet actresses.

But others have more practical, long-term goals. They want to tap into the fact that because movies are so high-profile, they can use film funds as an example to lure foreign funding to other sectors.

Standard Chartered Bank (a U.K.-listed retail and investment bank with its principal operations in Asia) has opened a media and entertainment finance operation in Hong Kong. The bank wants to lend coin, and see a return with interest. No Asian bank has previously been a serious lender to its own industry, and the biggest Asian productions that have used bank finance have previously turned to U.S. or European lenders.

SC was persuaded to take the plunge not only because of the market size, but also the growing maturity of producers who are ramping up their budgets, using completion bonds and ditching some of the happy-go-lucky script-free practices of old. Its biggest prize has been to bankroll forthcoming Zhang Yimou pic “Curse of the Golden Flower.”

The film biz has always had allure, but the potential of new media output deals — mobile phones, Internet, VOD — make the opportunity for profits seem even vaster. The fact that these outlets remain just over the blue horizon makes them all the more tempting, and all the more perilous, for speculators.

(Patrick Frater, Katja Hofmann, John Hopewell, Ali Jaafar and Nicole LaPorte contributed to this report.)

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