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VOD ‘Definitely Not Offsetting Decline on DVD’

Finance panel says lack of historical data is obstacle for projections

It’s fairly well-accepted that subscription VOD platforms are helping to ease the pain from declines in DVD sales. But for Hollywood, the question has become “Can that happen fast enough?”

DVD does seem to be going away, and it is being replaced by this new digital format, and there will be the question of ‘Well how much dollar for dollar are we making up? ’ ” said Eli Baker, a partner at fund Hemisphere Capital Management. “And the answer is that it’s very difficult to pinpoint.”

Baker spoke on a panel at the Film Finance Forum West presented by Winston Baker in association with Variety on Tuesday.

Hemisphere operates in the somewhat safer space of the studio tentpole, and has co-financed pics including “The Smurfs,” “World War Z” and “The Adventures of Tintin.” The globally commercial nature of those projects have helped Hemisphere hedge its bets against declines in disc sales (Blu-ray still shows signs of growth), but it’s still paying close attention to how digital streaming platforms are changing the value of its content.

“I don’t know whether we’re at an inflection point, but clearly there’s a reason to be optimistic,” Baker said.

These streams are becoming a more vital resource for financing, especially in the independent sector. But with only a few years of historical data from SVOD players like Netflix, it’s hard for both financiers and film execs to quantify just how many digital dimes they can rely on. And with many financiers more risk-averse than before the 2008 financial collapse, there’s less of an appetite to lend or invest against unpredictable cash flows.

“Now what we’re seeing is something really meaningful,” said DreamWorks CFO Larry Wasserman at Tuesday’s panel. Wasserman noted that while SVOD and other digital platforms barely factored into financial modeling a decade ago, they could now help a “good title” earn upwards of $10 million for DreamWorks or a comparable situation.

But, Wasserman also pointed out, those platforms are “definitely not off-setting the decline on DVD.” Homevideo could typically earn between 70% and 80% of the box office before 2008, but at least two panelists said they now use estimates of between 50% and 60%.

If digital dimes ever end up making up for lost analog dollars, it likely wouldn’t be for years. And that means that Hollywood has to adjust its cost structures to account for revenues that have changed drastically since DVD’s heydey.

The two biggest areas that need fixing: Production and marketing budgets.

While the studios are playing mostly in the tentpole big-budget space, budgets of $150 million and up can’t save a picture. “Jack the Giant Slayer” is the most recent example of this: The Warner Bros. pic opened to under $30 million million at the domestic box office on a budget of nearly $200 million. (And therefore likely upward of $100 million in P&A on top of that.)

“You really need to adjust the cost side of the business,” said Scott Parish, CFO and COO of Alcon Entertainment (not about “Jack” specifically). “You can’t rely on an opening weekend anymore … especially for younger-skewing movies … the word gets out, and you see the falloff happen a lot quicker.”

Two big places where belts need to be tightened: Upfront talent deals and P&A.

While the industry has seen a slight surge in the number of P&A funds looking for films, more money doesn’t mean more butts in seats (or in front of a computer).

“I think there’s a lot of room for innovation on the marketing side,” said Doug Hansen, president of Endgame Entertainment and CEO of Endgame Releasing. Hansen pointed toward social media as one example of a cost-conscious way to create buzz around a film.

“There’s a lot of money spent (in marketing) that just gets blasted out, and if we could only be more laser-specific to … hit the right people for movies and save some money on that side, or at least be more efficient on what you’re spending (so that) you’re really hitting the right people.”

Wasserman and Parish said their respective films “Transformers” and “The Blind Side” illustrated this point well. On each film, the executives said, upfront talent deals were cut in favor of making participants like Sandra Bullock “true equity participants.”

“If we can take this SVOD bump and keep the cost of talent down … to me that’s a win,” said moderator Clint Kisker, director of finance firm Screen Capital Intl.

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