Film buyers rethinking presales
Recovering market pushes international pace forwardInternational presales used to be the panacea par excellence for the always ailing indie film business. But during the past few years, the cure no longer worked, sending many struggling indies into a coma if not straight to the morgue.
Suddenly, there are signs of recuperation: Numerous film sellers report a pleasant surprise after the recent European Film Market in Berlin. Presales are back ... sort of.
Richard Rionda Del Castro, chairman of West Hollywood-based foreign seller Hannibal Pictures, was among those who experienced better-than-anticipated results, especially for the police thriller "Son of No One," starring Al Pacino and Channing Tatum.
Although prices paid by foreign-territory buyers remain "30% to 40% lower than two years ago," says Del Castro, his company was able to close deals covering much of Western Europe, Scandinavia, Eastern Europe and Latin America.
"I could see an improvement compared to the past two years," he says. "I would say it was four times bigger -- much better than it has been."
Says Stuart Ford, CEO of IM Global, which closed multiple deals for the sci-fi thriller "Skyline," "The presale market has definitely revived because, on the buyer side, they need movies for 2011, 2012, after holding their powder for the last two or three markets."
Adds Hyde Park Entertainment president Ashok Amritraj, "The trend has started where, for the right project, the presale market is coming back."
"For the right project," as Amritraj puts it, is the key phrase.
Presales might be back, but the practice is much changed from the 1990s and early 21st century, when almost any movie with a star, a name director or genre appeal sold for a healthy sum. Nowadays, it's all about the right price and the right financial model.
"The buyers are much more cautious in terms of what they are buying," Summit Entertainment co-chairman Patrick Wachsberger says. "They're doing better homework. They read screenplays now; they actually send us notes. The frenzy of getting to a market and doing your shopping the first day, buying 24 to 30 movies a year, has changed."
Although for major studios presales remain unnecessary or at best frosting on the cake, for most indie players they make the cake possible. The practice dates to the early '70s, when such indie producers as Dino De Laurentiis and Elliott Kastner discovered they could raise money by promising to deliver quality movies to theatrical exhibitors who weren't aligned with a studio.
Presales began to stall in the middle of the previous decade in the face of a sharp increase in the number of movies coming to market. That was caused by what Michael Roban of Los Angeles financier Cold Fusion called "a perfect storm of events that caused the old models of the film business to fall apart."
The increase in movies of all sizes and types was fueled by the expansion of studios into specialized distribution, the low interest rates that made borrowing cheap from a growing number of banks that fiercely competed for the business, an influx of hedge-fund money, tax rebates offered by Germany and other countries, state and national subsidies that paid back a portion of the cost of making the budget and a technological revolution that made the cost of cameras and going on location much less expensive. HDTV also eliminated expensive celluloid prints.
There also was an increase in money from DVD sales and aggressive expansion by foreign TV networks moving into film production, which led to more locally made movies in countries from France and Australia to South Korea. Some Hollywood studios also jumped into local production abroad.
Says Roban, "Production in most of the major territories was very robust."Soon, however, the law of supply and demand took over.
"More films got made than the public could absorb," says Jonathan Wolf, executive vp of the Independent Film & Television Alliance and managing director of the American Film Market. "Our industry is elastic, but not so elastic that it could absorb the huge spike in production. So what happened by 2006 was that levels were so high, buyers no longer needed to prebuy to guarantee product flow into their distribution pipeline."
Not only did they not need to prebuy, but they could get better prices, quicker delivery and greater assurance of what they were getting by acquiring finished movies.
"Typically, they only buy when they feel they have to, either because of a relationship with a foreign sales agent or just because the film is extremely compelling," Roban says.
Then the global financial-liquidity crisis hit. Tax breaks and hedge-fund money dried up, studios shuttered specialty arms, subsidies were slashed and TV networks cut spending as advertising sales slid. At the same time, revenue from DVDs began to contract, and piracy cut into sales. The inability to do presales forced some indies out of business. Wolf estimates that among the roughly 150 IFTA members, there has been about a 10% annual turnover during recent years, with 10-15 companies dropping out annually and another
10-15 new players joining, often driven by the need to sell a movie or a few movies they have produced. Many of those who remained stopped selling new movies and operated only to sell library product.
Adding to those woes, banks that had been wheeling and dealing pulled back from movie loans, went under completely or at the least became more conservative. What did go up were the discount rates banks charged to factor the presales contracts.
"If you had a $10 million presale, you used to be able to net 75%-80% on a discount basis with any of the banks," says Jay Cohen, head of film financing and packaging at the Gersh Agency. "Now you are lucky if you can get 50% on some of the buyers."
Part of the risk for banks and buyers comes from a spate of pictures that were presold but never got made or weren't what the buyers were expecting.
The presale market arguably hit bottom in May, when the economic crunch, bank crisis and oversupply of movies all were in play. "The joke last Cannes was, 'I can't even get the buyers who won't pay to buy,' " Cohen quips.
Things were much better in Berlin last month but not back to what they were. "You're still lucky if you can do 50% or 60% of your budget through presales, whereas it used to be you could do 100% of your budget out of foreign," he says.
Even after buyers sign a contract, some are refusing delivery. That might be because they don't like the way the picture turned out or feel the price they paid was too high, and this allows them to get out of a deal or force renegotiation.
Hal Sadoff, head of international and independent film at ICM, says that while in the past many indie films received much of their production funding from presales, banks now are insisting on more equity, tax credits and other mezzanine/gap financing.
"You can no longer rely entirely on presales," he says. "Where three to five years ago you could realistically get 30%-40% of the budget or more from presales, today you're lucky to get 15%-20%. You have to have more equity to close a financing arrangement than you ever had to have before."
With money from hedge funds and rich dentists ever harder to come by, much of that equity is coming from the same buyers who do presales. Buyers passionate about a movie are being asked not just for minimum guarantees but also to put in an equity kicker.
"It doesn't enhance the budget of the picture, but it does defray some of the risk from the distributor on their downside and clearly eats into the potential profits that might otherwise go to the producer," Loeb & Loeb attorney Craig Emanuel says.
The good news is some developing territories that had cut back because of the economic crisis have returned, though not always at the same prices.
Russia's Central Partnership paid about $2 million to Lionsgate for rights to the third installment in "The Chronicles of Riddick," starring Vin Diesel. (The latter declined to confirm the deal.) Three years ago, the Russians were buying everything for much larger sums; a year ago, they were rarely buying anything. Now, the Russians have come back in a more reasonable way.
There even have been signs of life from Japan, among the most problematic territories for presales not only because of the glut of movies but also because of local audiences preferring homemade movies featuring stars crossing over from TV. Last year, before Berlin, Japan's Pony Canyon paid Nu Image/Millennium more than $2 million for "The Expendables," starring Sylvester Stallone, whose "Rambo" movies have done well there.
The market is even more promising for Cannes in May and AFM in November.
"The omens for Cannes are very good," Ford says. "Business looks to be robust. We are not back to the feeding frenzy of a few years ago, and these buyers are cautious, conservative and acting prudently; this is still a buyer's market. But there are fewer sellers, fewer movies, fewer buyers, and it's making for a healthier, more balanced environment."
Scott Roxborough in Cologne, Germany, contributed to this report.