Meeting of the Minds

Feb. 22, 2000

Meeting of the Minds/ A cross-section of Hollywood players discuss indie film financing, the foreign markets and the promise of the Internet.

By Stephen Galloway

As the American Film Market (AFM) celebrates its 20th anniversary, its members are facing challenges unrivaled at any point in the organization's history. Will DVD and the Internet replace the dwindling revenue stream from video? Will insurance money provide a genuine boost for film financing? Will the demand for studio product help or hurt the independents? These were some of the questions that The Hollywood Reporter's Stephen Galloway asked five AFM veterans at a recent roundtable discussion. Mark Amin, chairman of Trimark; Jonathan Dana, producer and producer's rep; bankers Mike Mendelsohn, president of Patriot Advisers, and John Miller, managing director of Chase Securities; and Steve Stabler, founder of Destination Films, attempted to provide some answers. The Hollywood Reporter: Just before we all sat down, Mark Amin said something interesting, that his company is the only true independent left. Is that fair?

Mark Amin: For me, the definition of independent is that the company has to stand on its own two feet based on the economics of the motion picture business and doesn't have a diversified base of revenue or a rich parent company to fall back on. Destination Films is also a true independent, even though it is not playing with its own money. It is playing with other people's money, [whereas] I and my family own 50% of Trimark. Can you imagine what Bill Mechanic (chairman of Fox Filmed Entertainment) would have gone through if he was playing with his own money on "Titanic"?

Steve Stabler: I can and I do. Every time I make a decision about spending money, I feel like I am spending my own money even though it is a fund, because if the money goes away and doesn't come back, we've lost all the opportunity we had.

Jonathan Dana: Anybody with any sense has to be rooting for Destination and Trimark to succeed.

THR: Can they in today's environment?

John Miller: You know, the economics of the movie business are so horrific right now. The amount of capital it takes to stay in the game and to get the home run is a huge challenge. But you have to root for the Destinations and the Trimarks, because without them, it's going to be impossible for the independent to find distribution.

THR: When you say the economics are terrible, why is that? Is it because of the cost of making movies, or are there other factors?

Miller: The cost is part of it, although that seems to be leveling off a little bit. It is more the marketing costs and what it takes (to launch a film) in a crowded field. You figure that to open a film today in wide release takes $15 (million) to $18 million, and if it's not working, it's gone! We did an in-depth survey with MGM before Credit Lyonnais sold it, and I think the cash-on-cash recoupment for a major studio is about 1.5. That means that, on average, after five or six years, you would get back one and a half times what you invest. But that was five or six years ago.

Mike Mendelsohn: What is it now?

Miller: Much less. I bet between one and one-point something. The marketing costs have driven it back.

THR: You're saying that over a five-to-seven-year period, if I invest a dollar, I am only going to make just over a dollar back again?

Stabler: Yes, but if you are lucky, you will have a library with some assets.

Miller: Jim Robinson (chairman of Morgan Creek Prods.) has always had one of the best business plans in town, because right from the beginning, he said, "I am in a singles business; I want to make a million, lose a million and cover the overhead." Then "Ace Ventura" comes along and $100 million falls on the table. The upside is that when Robinson was looking to acquire MGM, two investment banks valued his library at $200 million. He invested $60 million of his own money at one time and has gotten all of [it] back, plus some -- and an asset that is worth well into nine figures.

THR: Why is the asset worth so much?

Miller: There is an insatiable appetite for programming. Content is king and it will always be king. The problem is staying in the game long enough to build a library and to have that "Ace Ventura" and that "Robin Hood: Prince of Thieves" that come along every 10 or 11 films.

Stabler: That's exactly what we believe in, and exactly what we have tried to put in place at Destination. Our goal was to hit singles and doubles, so that nothing we made would kill us; (and to) create an asset base and eventually [hit a home run]. There is more need for product every day, with multiplexing and cable, and the more product you can create, and the longer you can stay in business, the better chance you have.

Miller: If you had asked me three years ago what was possessing (majority shareholder) Kirk Kerkorian to invest so much money in MGM, I couldn't have answered. But today, given the AOL/ Time Warner merger, he has an asset worth substantially more than he has invested in it.

THR: Is the Internet providing added demand for content?

Miller: It will. There's an Internet company in our office every day asking, "Where can we get rights? Are there any libraries available? Is Trimark for sale?"

Amin: In terms of actual content, the Internet is having virtually no impact on the marketing and the publicity side. But sometime over the next two to four years, you are going to hit a critical mass and everybody will be able to see VHS-quality, full-swing movies through the Internet. It's already having a huge impact on short films.

THR: But there is no money in that.

Dana: No, nothing?

THR: Mike, how is the Internet impacting you?

Mendelsohn: We started out financing movies like "Reservoir Dogs" -- a $1.5 million movie. What we finance these days are [two kinds of films]: $90 (million) to $110 million pictures like "End of Days" and "Air Force One," and movies for $50,000 to $250,000. You see now really big and really small. I'm talking to a company right now that specializes in doing $50,000 to $250,000 movies. I think it has something that can be shot digitally and play on the Internet. You can make money on that because, say, [a company like] American Express needs productions and is willing to promote, just as in the old days, when you had "Texaco Presents" a certain TV show. These companies are willing to promote filmmakers to do $50,000 to $250,000 movies. Plus, "The Blair Witch Project" has created an entirely new confidence in the lottery system of filmmaking, where a person can make a movie for $35,000 and make millions.

Miller: Chase Capital is looking at [a new enterprise that would] finance films in that $250,000 range with big-time directors attached, made for the Internet. The start-up enterprise will own the Internet rights to the product and the director will own everything else.

Dana: This is probably not much different from when they opened the Oklahoma border and the first person that stuck a pin in the ground got the land. It's very much like playing Monopoly. This decade, it's the Internet, but these conversations are very similar to ones that we would have had 20 years ago talking about cable.

Miller: But is it going to save anything? I don't think so; I think it provides a huge opportunity for people who own libraries and have catalogs. It is another window of exploitation. On new product, eventually it will cannibalize the existing video window and the existing pay-television window and some other things. Ultimately, it's going to be on-demand video.

Amin: But I believe ultimately it will help the [independents]. It's going to open up Hollywood. Hollywood has always been perceived as this fortress that you just have to knock on for a long time to get into it. I think this is going to open it up. If you look at the history of the movie business, whenever a new technology or new means of distribution has emerged, new players have emerged. It is also going to open up new shelf space for product, and the more shelf space you have, the better for independents.

THR: What do you mean by shelf space?

Amin: Places to show your product. Take a look at the existing media. You have, what, 25,000 to 30,000 screens and 80% are usually taken up by three, four or five movies -- and everybody is fighting for the rest. Well, now you are going to have unlimited access when it comes to the Internet. And, while you cannot get a movie into the home video marketplace for less than $150,000 (in marketing costs, etc.), it right now runs anywhere from $2,000 to $5,000 to put a digitized movie on the Internet.

Miller: But how do you create an awareness of the site?

Amin: Well, that's a different story. Marketing is always going to be a challenge.

Stabler: The advertising challenge will still be the same. No matter what happens at home, people will always have a desire to go out for an expensive evening of entertainment, which is what motion pictures will always provide.

Amin: If you look at what happened in the exhibition business in the 20 years since cable and video came, at first the fear was, why would anybody want to go [to theaters anymore], the biggest boom in exhibition, because it expanded the whole business. Today, 80% of movies lose money theatrically, but on video, cable and foreign [revenues] are subsidizing it.

Mendelsohn: And the Internet will also revitalize the TV industry. TV sales on advertising were down to dangerously low levels, and the fear was that the Internet would kill TV. But in fact, it's saved TV because all these Internet companies advertise on TV all the time.

Amin: That's the Trojan horse. Let me remind you of all those ads run by MTV, the "I want my MTV" ads. Remember when MTV couldn't get cable system operators to carry MTV? When it started buying ads on regular conventional TV telling the kids to call cable companies and say, "I want my MTV"? As soon as MTV got the carriage, you didn't see any more of its ads. Yahoo! [and other Internet companies] are very singularly focused on getting money from movie advertising, because that is one of the biggest items on network and cable television.

Miller: The problem with the Internet is that, while you may have infinite numbers of channels, there are only so many hours a day for people to watch things. We shouldn't all think that just because there is an Internet, there is infinite distribution and that that is going to change things for the guys walking down the halls of the AFM.

THR: These guys are suffering. With the collapse in video, their revenues have dwindled. I suppose some of them are now getting into the split-rights business, doing deals with the studios.

Mendelsohn: I believe we are witnessing the peak power of the studio system. The future is going to become more fragmented, just like the computer business. Look what Amazon has done with book distribution. The low threshold for probability for the studios has created great opportunities for independents in terms of financing pictures -- where the studio might distribute them in the U.S. and Canada, and the foreign partners can now distribute them territory by territory.

Miller: But for the average guy schlepping around the halls of the AFM, those studios don't want his product, because unless they feel that product is going to generate a certain level of boxoffice, they are not interested. The problem is one we run into all the time: You can take one producer into Universal and it will be there to support him. And you can take the money but want to lose the producer. They are very selective about whom they want to be in business with.

THR: Are the insurance companies just as selective?

Stabler: The insurers are still willing to write the paper, it's just that Chase and other banks won't take it.

Miller: Because the minute [the insurance companies] started lobbing grenades and saying, "We aren't going to pay up," there was no business. It's part of their culture (not to pay). I was warned about this and I am eating crow today because I felt that if you really do your homework, insurance companies would behave correctly -- but they do not. They are amoral.

Stabler: There are still underwriters who write the paper, but because there is now the possibility that the insurers will not pay when the time comes to pay, there are no lending institutions that are willing to accept that paper.

Dana: OK, but it still boils down to: Where are the movies? Who's in them? What are the stories?

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