Film School - Film Finance, Part One

There are a couple of rules that I've learned regarding filmmaking in general and independent filmmaking in particular. They aren't terribly important to remember, largely because if you're contemplating taking on the journey of an independent filmmaker in the first place, these rules will likely be lost on you regardless of my input. They are quite simple though.

Rule #1: Films Lose Money.

While it may seem counter intuitive to read that, it is unfortunately for many an intrepid filmmaker, a very serious financial reality. I have seen and heard countless stories of would be producers and filmmakers making all manner of terrible financial decisions based on the patently false notion that their particular film will be the next “big indie” sensation. Almost without fail, those films and the associated filmmakers, financiers, producers, actors and everyone else involved end up facing the harsh truth of this business, films lose money. Which nicely leads me to...

Rule #2: Filmmaking is a terrible way to make money.

Though you'll never hear this in film school, I always make it a point to start my filmmaking seminars with this same point because, I feel it is important to stress that you have to be cognizant of both the creative and the business side of things to even have a shot at making it in this business as a filmmaker. If it weren't so distressing, it would almost be amusing to me at how quickly financial reality goes out the window when people start talking about making a film. When you live in Los Angeles, you can literally throw a rock in any direction and it will bounce of the head of at least a dozen people that “have a great idea for a movie.” But inevitably when I ask them “how much will it cost” they will come back with all manner of sums seemingly pulled from thin air.

It is interesting in the regard that I'll hear people throw around huge numbers as if they were some sort of commonplace thing. So many times I've heard things like “It's not a special effects heavy film or anything, I could do it on a small budget, like $10 million” to which I always ask “when is the last time you have seen $100,000 in one place at one time?” When people start throwing these numbers around without context, it has the tendency to separate reality from the dollars that are being discussed. That separation lends itself very well to a great deal of self denial and disillusionment. As such, I like to try and give the would be filmmakers of the world a dose of perspective that they won't soon be getting in any film school.

The most important thing to take away from all of this is that filmmaking, first and foremost, is a business. As it is generally a large undertaking that requires a substantial amount of time, material resources and personnel to do well, it tends to require extensive capital to execute properly.

For the sake of perspective, here are some comparable figures:

- Average theatrical film budget: $40 million

- Average cost to build a 20 story office building: $34 million (250,000 sq./ft. @ $137 per sq./ft.) 

- Estimated (by me) cost to build an equivalent structure to the Sistine Chapel and hire an artist to paint the ceiling: $8 million     (assuming $5 million construction) 

- Average cost to start a Subway franchise: $149,000 

- Average cost to start and equip a 4-piece band, record an album and go on tour: $12,000.

So, why point this out?

I do so because in all of these instances (well, except the Sistine Chapel one anyway) there are investors who are looking for what's called an “ROI” or Return On Investment. The funny thing about filmmaking is that, for the most part, a film is widely considered a “success” if it is able to recoup the cost to make the film and pay back the investors at all. If you contrast that to the other business models above, you'll very quickly start to see the disconnect. And, that disconnect I'm speaking of is found quite often in what I'd call the “legitimate” filmmakers and producers out there. For the average “indie” producer that has no meaningful professional experience, that disconnect is magnified ten-fold. For instance, a contractor building a $34 million dollar office building won't even consider breaking ground unless he or she is reasonably certain that their efforts will garner a sales price that is at least 20% higher than their building costs. Meaning, they aren't doing squat until they know with pretty reasonable certainty that they are going to clear around $7 or $8 million profit right out of the gate. The person who sets out to build a Subway sandwich shop will generally be able to count on a $3500 to $7000 dollar net profit per month, per location back to the franchisee (the person buying the franchise.) At that rate, they will be earning sheer profit (assuming a $149,000 buy-in) after only a couple of years. Even our fictional band would be breaking even with 1200 direct album sales to their fans. Now, while not exactly easy, a band with some hustle can pretty readily pull that off. The broader point being that in all of these instances, with the exception of the filmmakers, there is a reasonable business expectation to clear a profit.

Those reasonable expectations are built on a foundation of solid principles which is readily backed up with simple math. If the aforementioned investors spend a certain amount, within a well understood marketplace, based on other comparable numbers, they will make more than they spend. And therein lies the trouble with most new filmmakers. For the most part, their understanding of the film market ends with “If they spend a certain amount.” By and large, they don't understand the marketplace, they rely on skewed numbers that are not representative of their situation (i.e., using box office numbers of tent pole films as a guidepost to their indie drama), and they have only the vaguest idea of where the money will come from even if they succeed in putting their film project together. Even the film schools don't have a clue here, as they literally keep churning out filmmakers that lack these skills. With all that in mind, let's take a look at some of the real numbers out there. First of all, the film market is grossly over-saturated. As the cost of acquisition has come down somewhat, at least in a limited “indie” sense, more and more films are coming to the market place. To put it in perspective, there are probably 5,000 films with “significant” budgets being produced every year worldwide. I say “significant” because it's hard to draw a bright line and say everything above a certain dollar amount is a “real” film. I'll quantify it a bit by saying that, of the 5,000 films being produced, these are by and large films that have professional crews, at least a plausible shoot schedule and more often than not, some noteworthy talent attached. These are all fairly significant distinctions to make, because there are a real glut of films below those thresholds that are a large cause of the excess of film product on the market.

Below the 5,000 films with “significant” budgets, there are easily another 50,000 a year produced by “independent” filmmakers at all levels, including the various film schools out there. Of course, the bulk of these projects are purely amateur trash, but there are enough “passable” films in that mix to really drag the market down as far as what the different territories around the world can mine at the various film markets. In effect, the combined global film production is creating something on the order of 55,000 titles a year, of which only 200 to 300 will receive some level of theatrical release in the United States. And, out of those 200 to 300, maybe only 20 to 30% will return a noteworthy profit. The theatrical release is important to note because, while many filmmakers still mistakenly believe that they will be able to recoup in the home video market, the lack of a theatrical release pretty much dooms a title right out of the gate, as far as home video is concerned. The simplest way to demonstrate this is to honestly look at your own or your friends rental habits. If there is a couple looking to rent a film to watch for the evening (regardless of whether it's Netflix or Blockbuster) I would wager that 9 times out of 10, that couple will rent a film that they missed at the theater. There are myriad reasons why people might pass on a film during its release window, but at its barest form, the amount of advertising that goes into the theatrical release translates into significant numbers in home video. Lacking that marketing push, most films will languish at all stages of the distribution cycle, including when trying to generate distributor or sales interest, and continue on downstream to the consumer. In short, for an expensive movie to make money, a theatrical release is a make or break component.

Without that release and the marketing press that goes with it, most independent films are going to find themselves buried in a glut of similar product with no real distinguishing characteristics. Barring a strong showing at a name film festival, the chances of recouping even modest investments in film are exceedingly small. While there are some people that seem to do well in certain genres, for the most part, the field is flush with players and low on strong content. As most people who set out on this film making journey tend to have some notion or desire that they are going to make money (even if unacknowledged) the reality is that most independent film producers have no functional understanding of any of the true financial aspects of the film business. I'll tell you what though, keep reading and you will no longer have to include yourself in that group!

There is a sum I came across some years back and I'm not entirely certain of its origin, but it always stuck with me. Whoever had committed it to written form had postulated that the anticipated revenue from an independent film over the course of 10 years was around $1.5 million dollars. As in, if a distributor did an acquisition deal on a “good” indie, or a studio took a flyer on a new director, they could basically count on generating at least $1.5 million through their various methods of exploitation. I think this figure is likely plummeting these days, but it's a nice bench mark to use to help understand the rudiments of modern film financing. The rough idea behind that sum is that, for the most part, if a production company produces a film for around that amount, it is likely that they will reasonably be able to recoup their investment over a long term exploitation cycle. This is especially pertinent to first time filmmakers, because they are an unproven entity. As such, for a company to take on that risk, a filmmaker needs to be able to demonstrate that they can deliver a quality product within realistic budgetary constraints. The broad point being that, even if the filmmaker makes a picture that isn't a breakout success, the film company should be able to mitigate the financial effect of that in the long run. Keep this concept in mind, I'll expand on it further on.

I think it's important to point out that filmmaking is very much a learned skill that generally requires years of experience to do well. While there may be stories of young filmmakers coming up out of film school and doing well, in comparison to the vast numbers of people trying to “make it” in this racket, the successes are exceedingly rare. I equate the whole thought process to one that is similar to playing the lottery. Unfortunately there is a whole process of rationalizations and justifications that seem to go along with the decision to pursue filmmaking that would make even the most die hard lottery player blush. If I had a dollar for every time I heard an aspiring filmmaker relate how “they always knew they should be making films” or “it's just a calling” or some variation on that theme...well, I'd have a lot of dollars.

I'll sum up this thought with, honestly look at yourself in the mirror and ask yourself why you want to make films. There's nothing wrong with wanting to make money, but counting on this business as a ticket out of a ho-hum life is almost guaranteed to lead you down a path of disappointment. I'm not telling you that you shouldn't pursue your dreams, I'm telling you to pursue them with your eyes wide open and to give yourself the best chance to do what it is you want to do. Even still, I think I could tell aspiring filmmakers that this path would lead to the pit of hell, at the end of the day, almost everyone of them will still say “I want to make a film anyway.” To that I say “excellent!” It takes a certain degree of a “devil-may-care” attitude to overcome the natural objections of everyone in your life, including even me at this point. If not for boldness, nothing worthwhile would have ever been done in this world. So, here you stand, I'd like to first welcome you. I'd next like to offer you some very serious advice as you get rolling. If you're going to go after a professional career as a filmmaker, but you are coming from a place where you have no experience or familial connections in the film industry, I offer you this...

Either: Adopt a “Vegas” mentality or... Don't spend any money.

If you've ever been to Vegas (or any gambling town) you are probably familiar with the notion of setting aside a certain amount of money that you don't mind losing. Obviously you don't want to be burning next months rent and (hopefully) most of you wouldn't / won't. So, with that in mind:

First, if you're going to use your own or a friend or relative's money, don't spend it unless you wouldn't otherwise mind setting it on fire. Seriously. And, second, NEVER and I really, honestly, sincerely and wholeheartedly mean NEVER use a credit card or personally borrow money at interest to finance a film. Using your credit cards or personal lines of credit will be one of the worst possible financial decisions that you will ever make. Please, please, please don't do this. I don't care what your film school buddies might say, and, yes, I know that Kevin Smith did it, and yes, I know that it worked out pretty well for him. I'm sure it's worked for others too. I don't care. Borrowing money on your own credit to make a film is a great way to end up bankrupt. Just don't. The repercussions of that decision will follow you longer than you might be able to imagine at this point.

The other option?

Don't spend any money. Sounds simple enough, right? I sincerely mean it. These days, with camera, editing and finishing technology where it's at, there is almost no reason for a first, second or even third time filmmaker to be expending any significant amounts of money to make a film. In short, make inexpensive films. By that, I mean, learn and understand film manufacturing and distribution logistics first and then apply those to your particular situation.

If you can get your head wrapped around that stuff and you still make a quality film, you'll be well positioned to carve out a realistic career in this industry. Like I said early on, it takes significant experience and expertise to make a movie that a large number of people will enjoy. For the most part, the people doing well in this business have been part of the business for a very long time and it's rare that someone like a film school student will stumble into it. What my courses and what this book will give you is a thorough foundational understanding of the film business from concept to completion. But, having the information is not enough, you still need practical experience in actual execution. That is up to you. I'll give you the tools, but only you can go forth and build. Let's get started then!

Continue this film school course on film finance in part two...

-Danny