Will the troubled U.S. dollar sink dealmaking at the Marche du Film?


After a desultory Berlin, American producers and sales agents are approaching Cannes with an unusual degree of trepidation, despite some recent news that should work in their favor.

"I feel I have been so beaten up and battered in the marketplace over the last two years -- and Berlin, in particular, was a brutal market -- that after Cannes I'll breathe a sigh of relief," says Richard Guardian, co-president of Lightning Entertainment, an international sales agency.

Two major factors -- along with a host of minor ones -- are likely to determine whether Guardian and his peers perk up after Cannes.

The first is the plunging dollar. But that is only one element of a broader malaise that has pervaded the U.S. economy and is already impacting film sales at the top markets.

Just as the dollar's value creates winners and losers in the economy as a whole, so it affects buyers and sellers.

On the negative side, the weak dollar -- which at press time was trading at a record $1.59 per euro, compared with 90 cents five years ago -- is forcing Americans to spend more than ever before just to sit at the table in Cannes. Indeed, Keith Kjarval, founder and CEO of Unified Pictures, estimates it will cost his small company "somewhere in the neighborhood of $200,000" to send six to eight staffers to Cannes.

The dollar's diminished buying power is also forcing independent producers to shoot in the U.S. rather than abroad, where the tax benefits and subsidies they once relied on so heavily have had to be abandoned because of the sheer expense of hiring local labor and equipment.

"There's been a big shift of production back to the U.S.," notes Schuyler Moore, a leading entertainment attorney and financial specialist with Stroock & Stroock & Lavan.

But in most other ways the weak dollar has benefited American sellers, making their movies -- like all U.S. exports -- much cheaper for foreign buyers.

"It has probably saved us, in many ways," says David Garrett, president of Summit Intl. "With production costs going up, that has allowed us to carry on selling at price levels that otherwise would have been hard to sustain."

"It has been a tremendous boon for us," adds Cassian Elwes, co-head of William Morris Independent. "Because the dollar is so weak, it is cheaper to shoot in America, and the exchange rate when you sell abroad has been fantastic for the foreign sales companies."

So far, most insiders say, the film business has not been affected by broader problems in the economy related to the subprime mortgage crisis and the American credit crunch. In fact, some argue that the worse the economy gets, the better things will be for the film business.

"A bad economy always helps the film business because people are looking to run away, and movies give them the place to do it," argues Avi Lerner, co-chairman and CEO of Nu Image/Millennium Films.

But in time, many believe, the U.S.' economic woes may also spill over to the indie world, as borrowing money becomes more expensive and as the relatively freewheeling hedge funds that have fueled at least some independent production start to feel the pinch.

So far, the hedge funds largely have put their money into studio slate deals. But some hedge funds also have invested in independent product, and a tightening of hedge fund money could have a ripple effect on indie film.

"Finance companies such as Grosvenor Park and Aramid are backed by hedge funds," notes D. Jeffrey Andrick, managing director of Continental Entertainment Capital. "In a more volatile hedge fund world, you may very well see a trickle-down of that volatility into companies like these."

For now, the greatest element of volatility is not related to credit but to one specific company: New Line. Its recent demise is the second major factor shaping this year's Marche. Unlike other major studios, New Line built its business on foreign sales and had several long-running output deals that guaranteed a steady stream of major titles to distributors in leading foreign territories.

Time Warner's decision to effectively shutter New Line (at least as a stand-alone entity) will be felt throughout the international business, insiders say. The company will no longer be buying independent product that it can release domestically, and much more important, it will no longer be supplying films. This means the foreign distributors that have long depended on New Line for a string of A-list releases will soon have to fill their pipelines with other product.

"There's a slate of movies, between 12 and 15 films a year, that New Line was providing to the international marketplace," says Hal Sadoff, head of international and independent film for ICM. "They had output deals with several very big, strong independent distributors that will now need additional product to fill their slates. And that's going to be good for some independent foreign sales companies."

Others are more skeptical, however, primarily because they doubt the ability of the independent marketplace to step in and supply the kind of movies New Line was providing. Big-budget, star-driven pictures have always found willing buyers, but those movies are in short supply, and foreign distributors might have trouble finding replacements now that New Line has gone.

"What the buyer is saying is, 'If I am not going to get this tentpole picture, then I am not going to buy just any film,'" observes Brian O'Shea, executive vp worldwide distribution for Odd Lot Intl. "The value of tentpole pictures has changed in terms of the ancillary markets. Not every picture can lead to the kind of deals that they do."

New Line's partners, he continues, are hungry for big-budget films that have a major domestic release -- the kind of release that generates business across the board, in the theatrical arena, in cable, in pay TV, in DVD. "Without that," he says, "independent product becomes much less attractive."

Until Cannes, it is impossible to know how attractive the independent product will be. But insiders keeping a sharp eye on the field say they have not seen a huge amount of A-list titles heading to the market.

"Is there a crop of (big) films heading to the market?" asks Rich Klubeck, a partner at UTA. "This year that's a wide-open question. The consensus so far is that there's no clear group of (big) films headed for Cannes yet."

The danger he and others see is that if the marketplace cannot supply these films, foreign buyers will turn elsewhere, adding to one of the problems that has dogged the market, at least from the Americans' point of view: the growing appetite for foreign-made films.

In Japan alone, Garrett points out, locally made product now takes up some 50% of screen time, and independent distributors frequently have to wait a year or more before screens are available.

Japan, which has long been considered the second or third most important market for Hollywood movies outside North America, is emblematic of a global shift toward indigenous material.

"New Line is not our direct competitor anymore, but the Japanese companies are our competitors, the Koreans are, the French companies are," says Kirk D'Amico, president and CEO of Myriad Pictures. "Japan has a very solid business making local productions at budgets that are able to compete with American films.

"We've got a world competitive market out there, so it is not just about what is happening in Los Angeles. We are up against Hong Kong and Korea and the French and international co-productions. It is really very competitive out there."

That competition is pushing the independents to spend more and more on marketing, just like the studios. Indeed, the more the studios spend to fuel their major films, the more the indies are having to spend to allow their own releases to be seen.

"On one side of the spectrum, you have the studios and their tentpoles, and on the other you have local productions," says Jere Hausfater, CEO of Essential Entertainment, a year-old distribution, production and finance company. "And the space where we live in the middle is being compressed. To make enough noise, you are competing with the studios' spend, and it is very difficult for an independent distributor to compete with that."

Just how difficult became apparent at Berlin in February, when -- even with the help of the weak dollar -- sales were below expectations. That came on the heels of a slow Sundance Film Festival.

Most worrying of all was that sales prices drooped compared with those from a year or two ago.

"Territory by territory, we were down," D'Amico says. "We have seen an overall decline of 20% in (the prices at which films are sold) in the U.K., compared to a year and a half ago; in Germany, they are down

10-15%; France is off a similar percentage; and Spain is really down -- maybe 20-30%."

On the upward side, "Korea is ticking up a little bit, and some of the smaller Asian territories like Singapore are ticking up. But Taiwan is still a mess and Hong Kong is a mess because of China. Other territories like Thailand are not as strong as they were. It is not a good picture out there."

For D'Amico, this is directly tied to the American economic crisis.

"People are very uncertain about the future," he says. "First, there was overcapacity because of all the hedge fund and private equity money being poured into Hollywood. Then there was a slowdown. You still have banks lending their traditional gap financing (the amount of money needed to cover the 'gap' between the money a producer has raised and the amount he needs to fund a film). But you have a tightening of the equity markets and even the mezzanine markets below them. And that's having a real impact on (independent film)."