The 401st Blow :: Thoughts On Media

This Is The Right Time To Make Movies

Posted in Data Analysis, Distribution, Economy, Financing, Theory by Noah Harlan on May 31, 2009

This is a great time to make a movie.

There, I said it. I’ve been thinking it for a while but somehow hadn’t gotten around to putting it on paper (or in bits & bytes, as it were). Those of you who know me have heard my argument but I think it’s a good thing to say out loud, so say it with me:

This is a great time to make a movie!

I am not talking about creatively – though it is certainly a great moment creatively. Political and economic turmoil, changing technology, further democratization of the tools, declining costs of equipment (hello: RED, D90, GH1) all contribute to a fertile landscape and there are some tremendous advocates for the new models and methods of connecting to your audience. In particular I recommend following the smart work and writings of Ted Hope, Lance Weiler, Scott Kirsner and others.

But this piece is not a rah-rah, buck up and smile argument for creators (Ted’s been doing a great job of that). This is drawn out of conversations I’ve been having with people about why it is a great time to invest in media and content creation. While I believe this to be the case for all media and I am developing a number of cross-platform and transmedia projects, I am going to focus largely on film here. I believe the arguments I am laying out extend to other forms of content.

Let me also note that, though films can be made for virtually nothing, not all films should be made for virtually nothing. I love and admire amazing ultra-low-budget work like Shane Carruth’s PRIMER and Jake Mahaffy’s WELLNESS, however, like your choice of equipment & location, the method needs to match the intention (WELLNESS on IMAX is as absurd as BATMAN on DV).

Those films succeeded because they were coherently conceived to work at the budgets they were using and because of the intelligence, guile and creativity of their directors. That being said, sometimes you have to raise more money and when you do, you have to convince those you’re talking to why it’s a good investment. This piece is trying to address the question of why film is a better investment right now than it has been in some years.

It’s All About Timing

For the past twenty years we’ve seen an increasing number of films being produced and, more importantly, released. This has created an over-saturation of the marketplace that raises the hurdle for each individual film to succeed.

Most businesses have a saturation point for incoming capital. If you have a McDonald’s on three corners of an intersection then the law of supply & demand will likely not sustain all of those businesses. You have over-saturated the marketplace and a Darwinian contraction will take place. If you were to approach investors about opening a fourth McDonalds you would likely find it hard to explain the rationale for the investment. (Starbucks is a great example of oversaturation and contraction as elucidated by Lewis Black).

In a business plan for a traditional company you will have sections that deal with barriers to entry for your competitors, market demand and a void in the market that needs filling. Recently I was talking with an executive at a cosmetics company about a new line of products they were launching. She explained in remarkable detail each part of the market that was currently being served and then showed the specific niche that they were looking to step into. She laid out the rising demand in the segment, the other products that existed and what her company would bring that was different and compelling to the consumer. In essence, she explained how many people wanted her product and how FEW other people were providing it.

In film, our business plans have tended to put forward a nearly opposite argument. We have tried to show our investors how MANY films that are like ours exist and make money. We try to make our product seem as similar to other products in the market as possible (while maintaining that we’re unique enough to be marketed). If you’re making a small horror film you’re going to cite SAW and BLAIR WITCH and others to say to potential investors: “little films can make money so invest in a little film”.

This argument here can be defined as:

MARKET = DEMAND * PRODUCT

Where the product is your film, the demand is the audience’s prior desire for films similar to the product, and the market is the potential success of that film. We make the assumption that the product is singular and therefore its success is solely dependent on demand (ie: multiply demand by 1).

The problem here is that you have defined the market by removing the dimensions of time & quantity from the equation. If there were only a single film in the marketplace then this equation would work well, but what if there are many films? The demand should be split amongst them. In fact, the equation should be more like:

MARKET = DEMAND / PRODUCT

Where product is now ALL the films in the marketplace which meet the demand. We can agree that the distribution will not be even amongst all product but framing the equation like this can properly ratchet the risk.

But we still have a problem of time. If all films were released on a sequential timeline then this equation would work. This equation would describe a situation where we have 10 films, all horror, all budgeted under $1M, all released in one window (weekend). This is a saturation problem. We also need to account for the frequency of those releases since those 10 films spread out over a year might well work just fine. We focus so much on whether ANYONE will be interested in showing up that we don’t think about how many films that audience can show up for at once.

Our investment equation should really look like this:

MARKET = TIME * (DEMAND / PRODUCT)

Point 1: Film production does not respond to market saturation but film distribution does.

The Glut

I often describe the film industry as a thousand-watt bulb out on the porch on a warm summer night. Every moth for miles is attracted to it and they all will come crashing into it without much thought. The perception of glitz and glamour, the publicity, the myths, the artistic aspirations, the self-aggrandizing, the political posturing all contribute to that bulb and lure people from all corners into the industry. This means that when money is available, money will pour into the film industry.

Point 2: The production of film will expand to absorb all available capital.

The consequence of this is that there has been a glut of films produced and released over the last decade. In particular, while the number of studios films has declined slightly the number of independent films has grown substantially.

The number of MPAA & Indie releases per year, 1999-2008

The number of MPAA & Indie releases per year, 1999-2008

In 1999 there were 200 MPAA films and 256 independent films released theatrically (this includes foreign, docs, etc…). By 2007 those numbers had shifted to 188 MPAA films and 396 independents and in 2008 the MPAA released only 162 features while 444 independent films entered the theatrical marketplace. (note: the drop in MPAA features last year can partially be pinned to labor strife with the WGA and SAG). (source for all these stats is the MPAA)

This means we’ve seen an increase in the number of releases over all by 34% and independent releases of an astounding 73%. But when we factor in time we see how this becomes a tangible problem. The average number of independent films entering the marketplace per weekend has grown from 4.9 to 8.5. Factor in MPAA films and you have an average of nearly 12 films per week entering theaters.

Releases Per Weekend, 1999-2008

Releases Per Weekend, 1999-2008

The control point to pair that data with is the number of people going to the movies and that, unfortunately, has stayed nearly constant. In 1999 there were 1.44 billion admissions and in 2008 there were 1.36 billion, a decline of 5%. Though revenue has increased from $7.31B to $9.79B, that represents an increase of 33% which is roughly on par with the increase of total films (34%) but far behind the increase in independents (73%).

Point 3: We have been releasing too many films for the marketplace.

Putting aside the question of whether or not we can make 444 good films we have other problems. With so many films coming out each week it is increasingly difficult for each film to find its audience. Theater programmers know that there is a new crop of films coming down the pipe next week so if you don’t perform right away then you are pushed out by the wave of product behind you and there are more films competing for limited attention from reviewers, bloggers, and the general white noise of promotion.

Look at the case of the Israeli film BEAUFORT last year, which, the same week as receiving an Academy Award nomination, was pushed out of New York theaters to make way for new content. If a nomination can’t keep you an extra week then the marketplace is oversaturated.

You may now be saying: ‘but Noah, you’re only talking about theatrical and theatrical is dead.” You’re partially right. I am focusing on theatrical as those numbers are the easiest to find and break down but these issues extend to other mediums. We have to assume that each individual watcher is going to consume a finite and roughly constant number of films each year, regardless of platform. Perhaps they’ll watch a few more if they can get them easily at home, but that adds to the argument I’m making about the future. The place of consumption of content may evolve (TV, Cable, VOD, theaters, Internet, etc…), and the specific form of that content may evolve (featurettes, shorts, multi-part serials, ARG’s) but the consumption itself will still take place.

Furthermore (and I acknowledge this as an aside), I believe the theatrical market will continue to exist for a very long time and the reason has nothing to do with technology or cost. It’s about human nature. Teens want to get together, away from their parents but are too young for bars so they go to the movies. Parents want to give their kids to a sitter and go tune out for a few hours on a Friday night. People on dates don’t know what to say to each other and would rather sit in a movie and have something to discuss over dinner. The theaters are going to be just fine but we have to evolve our thinking about the economics of our content.

The Thinning Of The Herd

Since the number of films has been growing and we know that production expands to absorb all capital we can take a look at the production of films versus the stock market:

Releases of MPAA & Indie Films vs. the Dow Jones Industrials (DJIA)

Releases of MPAA & Indie Films vs. the Dow Jones Industrials (DJIA)

We can see that the expansion of independent films tracks pretty closely to the performance of the economy (as measured by the stock market). I will make the assertion that as new forms of media become monetizable that the cache of film will move across to the new media in a largely similar fashion.

What anyone who has tried to finance a film in the past nine months has encountered is the contraction of capital. The economic turmoil has contracted the amount of available capital and, following our axiom of available capital, that should lead to a significant contraction in the production of films. This will affect both private financiers (think: your uncle Morty the dentist) and independent financing companies who depend on wealthy private investors for their funds.

Point 4: Less free cash means fewer movies.

The Interregnum

Our industry managed to walk into two different buzzsaws at once. Before the financial crisis reached its climax in September we were already in the throws of our own economic turmoil. We were seeing the decline of one set of business models and the emergence of a new one, which we couldn’t model with any degree of accuracy.

As an industry we all know where we’re headed. Things are moving towards digital distribution. What we don’t know is what that model will be. You have ad-supported models (Hulu, Snag and YouTube), download to own (iTunes, CreateSpace/Amazon), online rentals (iTunes, Jaman), VOD (cable operators) and subscription services (Netflix) all competing to provide content. Ultimately we’ll see a combination of these services but the lack of consolidation and evolving pricing models make it hard to project the revenues for a given project. The only consistently emerging piece of data seems to be that the pricing model for a single DVD will not hold up in a digital distribution marketplace. Prices will be less and per-unit revenue will consequently be less.

But do not lose hope! We are also seeing the declining need for intermediaries for independent films entering the marketplace. Where once we needed sales agents to broker deals with distributors who would then broker deals with fulfillment companies who would broker deals with points of sale who would sell to the consumer, we now can sell directly and circumvent many of the middlemen. We can refocus our costs towards marketing and targeting our audience. The incremental cost of making your content available to a worldwide audience is crashing towards zero and this is a good thing.

Point 5: Digital distribution means a global audience for the same cost as a local audience.

Kevin Kelly’s idea of artists needing 1,000 true fans willing to spend $100 each is spot on but when you have a global audience you may be able to accomplish the same thing with 10,000 less-true fans willing to spend $10 or 100,000 casual consumers willing to spend $.99.

Where once the idea of reaching tens of thousands of consumers was an incredibly remote possibility for independent artists it now happens all the time, just look at YouTube. Jaime King got to 6,000,000 (by his estimate) viewers with STEAL THIS FILM and the incremental cost to him was virtually zero.

In the next 24 months the ability to monetize online revenue in a meaningful way will become a reality. I make this guess about timing by looking at the uptake of other related technologies in recent years. Consider that YouTube was only created in February 2005 and was ubiquitous by 2007. Netflix was created in 1997 and had shipped a billion DVDs by February 2007; they shipped their second billion in the next 26 months. Hulu went live barely one year ago and is now a top online video destination.

Whether it’s through iTunes, Hulu, Netflix or Vodo, it’s coming and the numbers will be substantial enough to at least make up for, and likely far exceed, the revenues from media distributed through traditional bricks & mortar channels with it’s production, packaging, shipping and storing requirements.

What we must do is to reorient our business plans to look at the remarkable moment we are in and how new content, professionally produced and financed, can have a more successful life than ever. A moment with this much possibility has not existed in the content world in a very long time.

The Key Points

So let’s summarize the key points at work here:

  1. Film is a risky investment. It always has been and it always will be. It is only a question of how to mitigate and evaluate that risk. (I say this because I believe if we are not up front with our investors we are bound to get into trouble down the line – also because some offerings require disclosure).
  2. The contraction of capital means there are going to be fewer films made right now. If I can make a film right now it will enter the marketplace with less competition than at any time in the last ten years.
  3. The cost of production is lower and incentives are better than they have been so your dollar will get you more than at any time in the recent past.
  4. The films being made right now are going to be entering the digital marketplace roughly in line with when we will expect the consolidation of that marketplace to take place. These films will ride the first wave of global digital distribution revenue. We have geometrically larger audiences with geometrically lower cost. The decline in per-viewer revenue is irrelevant.
  5. Whether you are making a traditional 90-minute feature or a ‘new media’ work, we are ALL in a new distribution model. As filmmakers we need to not cling to the arguments of past success but instead look at the future and show where our products can exist and thrive. (HT: Scott Macaulay for helping to clarify that point)

So get out there. This is a great time to make films.

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16 Responses

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  1. Jentri Chancey said, on May 31, 2009 at 12:47 pm

    Love your points, Noah. It’s always empowering to know what’s so, so that we can step up and do something about it. Thanks for taking the time to post this information, and pour a little more optimism into the mixing bowl.

  2. […] This Is The Right Time To Make Movies « The 401st Blow :: Thoughts … […]

  3. todd said, on June 1, 2009 at 4:16 am

    thank god for you sir – incredible job

  4. […] r­es­t i­s­ her­e: Th­is Is Th­e­ Righ­t Time­ To Make­ Movie­s « Th­e­ 4… Share and […]

  5. Infogle said, on June 1, 2009 at 4:34 am

    this information helped me a lot – nice outframe of things.

  6. Noah said, on June 1, 2009 at 6:44 am

    I think that might be overstating it but duly appreciated. Glad you enjoyed it!

  7. Lorie said, on June 1, 2009 at 1:25 pm

    Wow, Noah, I think you’ve somehow been rummaging through my own mind and have written a kickass summary of the current state of things. I found myself thinking, ‘yes, yes, oh, and that, too, yes definitely!” as I read your points. I’ve applied a lot of similar analysis in the business plan I’ve just completed for the indie feature narrative I’m producing. Thanks for sharing your thoughts; it’s a boon for me to see another producer explain his take on these trends, especially when I so agree with him!

  8. Lorie said, on June 1, 2009 at 1:27 pm

    Oh, and would you consider answering the Meet The Producer… questionnaire I present on my blog? I’d be so delighted to read your responses. If you’re game, pls contact me at loriemarsh at yahoo dot com. Thanks.

  9. Cut the crap! » Under Construction said, on June 1, 2009 at 2:42 pm

    […] it’s for real. Check MY WORK for earlier activities. Or read this interesting article about this being the right time. Hell yeah! Subscribe to comments Comment | Trackback | Post […]

  10. Lisa Y. Garibay said, on June 1, 2009 at 5:15 pm

    This is an amazing piece, Noah. Thank you for being so smart and so encouraging!

  11. Noah said, on June 1, 2009 at 8:16 pm

    Thank you for giving it a read and leaving a comment. I hope it’s helpful.

  12. Big Fuzzy Muzzy said, on June 8, 2009 at 8:13 pm

    Noah – think you highlight some great points – every creative industry has found some of its greatest moments of opportunity in periods of economic downturn – on one hand because of the points you raised (those periods reduce competition and are generally transformative for distribution mechanisms), and on another because of those periods putting a lot of people under the gun financially, which gives rise to innovation

  13. Noah said, on June 8, 2009 at 9:23 pm

    BFM: I think you hit it pretty squarely on the head.

    Turmoil + Adversity = Innovation

    Thanks for stopping in and commenting…

  14. Jane Kosek said, on January 24, 2010 at 6:50 pm

    Great summary of what we are experiencing. I heartily agree and continue to make films in this recession period. I will post a link to your piece on my blog!

  15. Movie. Or not. « Toxic Blog’s Bag said, on February 9, 2010 at 7:08 pm

    […] move into the next round of Toxic Bag projects, here’s some stuff I’m thinking about: This is a Good Time To Make Movies is a great look at where indie film is, by Noah Harlan. And Jane Kelly Kosek at All About Indie […]

  16. Christopher said, on March 1, 2010 at 10:02 pm

    Wow, incredibly insightful… Thanks!


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