AFM's Future in Doubt as Schlock-Merchants Get Squeezed Out

Illustration by: Rafael Alvarez

Plummeting DVD sales, disappointing VOD returns and shifting demographics are squeezing the market's traditional merchants out of the business: "Buyers are more selective, and competition is greater"

This story first appeared in a special American Film Market issue of The Hollywood Reporter magazine.

On the surface, the indie industry, the bedrock that supports the American Film Market, has had a solid year. The hits, big and small, have been many: from Lionsgate's young-adult smash Divergent and EuropaCorp's brain-bending actioner Lucy to the money-spinning Liam Neeson machine, which delivered StudioCanal's Non-Stop; from the low-budget, high-return horror flick Oculus from Sierra/Affinity to the low-budget, high-return faith-based drama God's Not Dead from Pure Flix Entertainment.

All this before Nov. 21 and the global box-office onslaught that will be Lionsgate's The Hunger Games: Mockingjay — Part 1.

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But delve below the surface to the small- and medium-size independent companies that aren't tied to studios or networks and don't have deep-pocket equity backers — the type of companies AFM was created to showcase — and the foundations of the business start to look a little less sound. That's where the schlock lives: the action/horror/thriller/war movie/shark attack/zombie/splatter features, made by the bucketful, that for many years were the cinematic sludge on which AFM rested.

It's down there that a seismic shift is underway.

Over the past five years, the DVD market, which used to gobble up those lower-tier titles as fast as the industry could produce them, steadily has declined. Figures from market analyst SNL Kagan show physical sell-through and rental revenue in the U.S. from DVD and Blu-ray discs fell from $18 billion in 2009 to an expected $10.6 billion this year.

VOD has been hailed as the indie savior, and sales have risen. SNL Kagan figures show that online revenue, including revenue from Netflix-style streaming sites, online rentals and digital sell-through via iTunes, has risen nearly $7 billion since 2009 — but for most indies, it still doesn't fill the gap left by the fall of DVD.

"There was huge hope the VOD business would make up for the lost revenue from DVD sales," says Scott James, president of Artist View Entertainment, now in its 24th year. "But to be honest, we haven't seen that happen."

Avi Lerner, whose company Nu Image makes large-budget and microbudget movies, says the problem has been aggravated by rampant piracy, the type that, he believes, hurt his movie The Expendables 3 earlier in the year. "It's like a double whammy," says Lerner. "Not only is the business tough anyway, the buyers are more selective and the competition greater — and the fallback on DVD no longer enough — but now on top of that is piracy, which is like a cancer that is killing them at the same time."

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AFM managing director Jonathan Wolf says that while it is true that sellers used to be able to produce a $5 million horror film and make money just in video, "Today, you could never do that."

"What we're seeing is that [movie] budgets either go up or down," says Wolf. "Companies are either focusing on the lower end or the higher end. We will have more bigger companies at AFM than ever before, and we've had to expand into bigger suites to accommodate them. At the same time, we've had much more demand for the smallest of our exhibit space. We've launched a program of minibooths — very small, less than 100 square feet."

Wolf estimates that 30 to 40 of these small companies will attend AFM for the first time, though he notes that 35 or 40 small companies that attended last year have dropped out.

"You need to adapt, and if sales are going down, your budgets need to reflect that as well," says Paul Hertzberg, president and CEO of CineTel Films and chairman of the Independent Film & Television Alliance, the group behind AFM. "You need to be smarter. You need to get subsidies or tax credit money or equity or anything that keeps the production values and quality up and gives you a shot to do well."

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For CineTel, success has come by shifting in recent years from movies for theaters and DVD sales to movies for television that then can be sold worldwide for all markets. "We produce a lot for the Syfy channel," says Hertzberg. "Having a TV partner helps us have reasonable budgets."

Buyers still will prebuy, says Christian de Gallegos of International Film Trust, "but they're definitely more content-focused. It has to be a package you know will come out and be a successful film. They don't take risks that they took in the past on bigger-budget movies. It has to be the best of everything — a great script, at least one A-list star and it has to have a proper wide release [in the U.S.], which means at least 2,000 screens simultaneously."

Movies can't depend on simply being in the action or horror genre. Instead of "generic pap, going straight to video," says sales veteran David Garrett of Mister Smith Entertainment, the market now is looking for "theatrical events, something that will create a cosmic shift, something audiences haven't seen before. It used to be, however the film did in the theaters, you could always ship a few hundred thousand DVDs, chuck them into a pay TV deal and a free-TV package and make your money back without thinking. Nowadays, if it doesn't work in the cinema, it's not going to shift many units in the ancillary markets, either."

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You have to put as much on the screen but do it for less to survive, agrees Lawrence Meyers of the Meyers Media Group. "Movies that cost $20 million now have to cost $10 million," he says. "You have to make up for it with different tax deals, co-production subsidies and shoot in places where it costs less."

An example is The B Team, starring John Cleese (Monty Python) and several former Baywatch stars, which Meyers will offer at AFM. The action comedy is being shot in Hungary and Croatia and is tied to a Spanish tax deal. "That means putting in some Spanish actors and using Spanish department heads to make it a true international co-production," says Meyers. "You have to use soft dollars and be more creative."

International buyers, meanwhile, are taking fewer films and demanding quality over volume.

"Just five years ago, we made most of our money on the little films, the action titles, splatter, whatever. We'd come back from the market with 50 films," says Andreas Klein, CEO of German distributor Splendid Film. "Now for those small titles, it's hardly worth paying to get them dubbed [because] the revenues are so low."

Adds Lisa Wilson of The Solution Entertainment Group: "I've been doing this 40 years, and there have been times, literally, I couldn't write the deal memos fast enough. During the time DVDs were strong, people were buying movies by the pound. You could sell anything. Now it's changed. The international distributors want to be more like domestic distributors and for the most part don't buy until there's a finished movie. They say they can wait."

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Notes Jason Moring of Canadian production and sales outfit Double Dutch: "Companies that set up during the boom years that are used to substantial minimum guarantees are reeling now because they aren't getting the money, they aren't hitting their targets." He says he has survived by "getting producers to be realistic about budgets"and not going after titles that are "highly leveraged."

Another shift that has hit AFM's traditional base has been in cinema demographics. If you're making a revenge thriller, a gore splatter-fest or anything starring Jason Statham, the audience you're targeting is men — and young men at that. But the young-male demo, once thought to be the box-office and home entertainment sweet spot, isn't filling cinemas as it once did. Guys are too busy playing video games or watching pirated movie streams to get off their couches.

Young girls, or older women with their dutiful spouses, are in. While Sylvester Stallone, Arnold Schwarzenegger and Jean-Claude Van Damme used to rule AFM, now the smart money is on Shailene Woodley and Scarlett Johansson or, for the 60-plus crowd, Diane Keaton and Maggie Smith.

"Women are making the decisions about what films to see [in theaters], and they are more fanatical," says Garrett. "If you are given the choice of a film targeting just young women or just young men, you would 100 percent go after the film for young women."

Klein of Splendid Film admits that he has brought on female acquisitions execs because "I know my taste for action films isn't what the market wants right now."

Says Wolf: "People have been predicting the death of the AFM since it began. The fact is, as the marketplace changes, some companies are able to evolve with it and some aren't. There is a cycle of life that is in play here, too."

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