Feast or famine

Feb. 19, 2002

By Stephen Galloway

This week, as the global indie film community gathers for the American Film Market (Feb. 20-27 at the Loews Santa Monica Beach Hotel), one question lingers: Have we escaped the shadow of Sept. 11?

The answer, according to most attendees, is a guarded yes.

"For many players that do not have studio product, it's going to be a blowout, and you are going to see a lot of companies go out of business," says Michael Mendelsohn, chairman and CEO of Patriot Pictures and president of Union Patriot Capital Inc., which manages $275 million in production financing for several major banks. "The go-go years are over. A lot of the players that hung on are going to go out of business after this market."

On the other hand, Mendelsohn acknowledges, "The flip side is that you are going to see companies emerge to take up the slack of the Miramaxes and New Lines, and do what those companies did 15 years ago" -- that is, become effective mini-majors, buying and releasing smaller pictures -- "because there is no distribution mechanism left in the domestic market if you don't go through the major studios. You are going to see some investment shift toward domestic distribution."

That promise of opportunity has raised hopes for many, and, according to AFMA figures, sellers will exhibit 419 films this year -- 5% more than last year, with 244 at the market for the first time.

"We have twice the number of appointments that we had at the AFM last year," says Franchise Pictures chairman Elie Samaha, whose company will debut six films. "That's very exciting when you consider that back in November people were wondering if there was even going to be an AFM."

"Barring any tragedy between now and the end of February, the effects of the 11th will be there, but they will be minimal," says Artisan Entertainment CEO Amir Malin, whose company is bringing titles to the market this year through its foreign sales agent, Summit Entertainment.

"We certainly will be past it in the next few months,"
says CAA's international head, John Ptak. "(Sept. 11) exacerbated an economic pullback existing already, but the market needs product."

Speak to most AFM regulars, and they will tell you that they are cautiously positive about this year's event. With good reason: Buyer registration is up after sagging slightly last year; TV networks and territorial distributors are hungry for product once again; and many of the factors that inhibited the film industry last year -- such as the dreaded writers and actors strike that never took place -- are things of the past.

"(Last year) was challenging for many of us selling movies," says Kathy Morgan, chairman of AFMA and president of Kathy Morgan International. "The anticipation of the strike became a de facto strike. Then the major studios rushed pictures into production, so we couldn't get the stars. As we got closer to the strike date, the bond companies were reluctant to bond movies. Finally, after Sept. 11, there were fears of traveling. But all that's changed."

"I'm optimistic," says WMA's independent division head, Cassian Elwes. "All these distribution companies around the world need product to feed into their systems, and they are going to look at their portfolios and realize they don't really have any movies for the end of next year because they didn't buy any last year. They are going to come to the AFM looking for product."

"In this climate of doom, what is nice to remember is that admissions have gone up, which means that the foundation of our business is solid," adds Christian Halsey Solomon, CEO of Helkon International Pictures. "DVD software and hardware sales are also up, and television viewing is stable, which means we have an audience, and that is crucial. True, video sales have plateaued and TV ad sales are down. But as this compares to other businesses and the economy in general, we haven't suffered as much as other business sectors."

But there is nonetheless a dark cloud hovering over this generally rosy picture.

"There's been an international economic meltdown," says producer and producers' rep Jonathan Dana. "The economy is in global recession, so people are paying their bills slower, and that means they are unlikely to buy."

"European television is very depressed," adds Rick Sands, worldwide distribution chairman for Miramax Films. "A lot of the distributors that have bought and released movies have not been able to sell them to television, either for pay TV or free TV. If they are unable to license television rights, then they will be unable to come and buy more movies. That is the key to successful licensing and selling during the AFM."

The German film market -- already battered by the drop in the Neuer Markt -- has been especially hard hit. That territory, which used to constitute some 15% of worldwide revenues for sales companies, has swooned to between 8% and 10%.

"How are these buyers going to show up with money?" asks Sands. "Where are they getting their money from? I don't think this AFM will be any better than before for Germany."

Nor is Germany alone. Throughout Europe, major territories are feeling the pinch from a retrenching TV market.

"Canal Plus is not prebuying any more movies from the independents for France, which is brand new," says one seller of the most significant TV entity in that country. "A picture now has to do 200,000 admissions in France before Canal Plus will buy it -- which means art house films are finished for the French market."

In Italy, the seller adds, "RAI and MediaSet, the two free TV consortiums, haven't bought from the independents in months. And many indie sales agents have a lot of movies available."

Europe may be further impacted by the most significant financial shift to affect it in years: the cross-continental rollout of the euro. But just how that will change business remains one of the great imponderables for the near future.

"The transfer to the euro is a good thing," believes Jere Hausfater, president of the motion picture group, worldwide distribution and acquisitions for Intermedia. "It will bring some stability to the currency and give it more power against the dollar."

"The euro will make life for everybody much easier, because the currency variations of the individual territories have made things difficult in the past," agrees Philip Von Alvensleben, co-president of Myriad Pictures. But, he says, "That is provided it does not go down further (against the dollar)."

Since its semiofficial introduction two years ago, the euro has, in fact, sagged against the dollar, giving European buyers far less purchasing power at markets such as the AFM. (Since January 2001, the euro has slid from .95 to about .86 against the dollar.) Because of this, some worry that its long-term effect could be disastrous.

"It's too early to tell," says Nick Meyer, co-president of Lions Gate Films International. "Customers will be trying to explain to people the importance of the currency and trying to get them to take that instead of dollars. It will be a very interesting market for that."

Europe is not the only arena facing difficulties. The Japanese yen remains weak against the dollar, recently hitting a 30-year low; and as a whole, Latin America may be thrown off-kilter by the ongoing crisis in Argentina.

"Argentina, hopefully, will not bring down Brazil and Mexico, but they tend to be linked," Meyer notes. "Latin America is so often linked together, and so much of our business on features involves pan-Latin rights, which means that those deals are affected by revenues over the whole region. Usually, somewhere between 4% and 7% of worldwide revenues comes from Latin America -- and that's a big chunk of money."

Thanks to factors such as these, many AFM vets admit their general good feelings about the upcoming market are far from being rock solid. But perhaps the most mixed feelings about the upcoming AFM come from one of its most seasoned players, agent Ken Kamins, head of ICM's international division and the man who brokered some of the key deals for New Line's "The Lord of the Rings" trilogy.

"There are two very positive situations going on that I believe will have an impact at the AFM, going forward," he says. "First, there is a tremendous need for product on the part of the individual territorial distributors, especially for films to be released in 2003. It is my belief that that overriding need for product will supersede any emotional impact that Sept. 11 had on buyers."

Second, Kamins says, echoing a view iterated by many others, "the success of 'The Lord of the Rings' will have a tremendous impact on the independent international business for the next three to five years (as the next two films in the trilogy roll out). You have a number of territorial distributors who took a huge risk with New Line who have been proven right. They will be flush with cash."

But there is a potential downside to this market, too, Kamins admits. "Here are the negatives: First, there is a clear movement toward contraction in the international, independent supplier business, that is the makers of films, with Intermedia acquiring IEG and Spyglass. Second, the film divisions of the major conglomerates have been very slow in making payments, which indicates the parent companies are facing a cash crunch. Third, with rare exceptions like 'T3: The Rise of the Machines' (the new 'Terminator' movie starring Arnold Schwarzenegger), domestic distributors have shown an unwillingness to pay advances for domestic rights. They have determined that the value of their distribution systems and name is great enough to a sales company that P&A commitments should be sufficient in acquiring domestic rights."

Because of this, Kamins says, "I'm neither optimistic nor pessimistic about this market -- I'm observant."

Ultimately, much will depend on the product available -- and the quality of that product, in the words of Artisan's Malin, is at the very heart of the matter.

"The issue is whether the content will be available,"
Malin says. "What is happening now is that there is less availability of financing in the worldwide marketplace for independent films. Entities that two or three years ago were financing films are no longer doing it, or like Canal Plus, they have formed ongoing studio relationships. Therefore, that product is not going to be available to independent distributors. With less to choose from, inevitably there will be less quality. That means less business."

And there's the rub. With the banking community increasingly reluctant to come forward with money after making several bad investments and with the merger of significant suppliers such as Intermedia, Spyglass and Graham King's IEG, a vast question mark hovers over whether there will be enough supply to meet the demand.

"Product will make it a good or bad market," says Joe Drake, president of Senator International. "What has been most notable in all markets for the past six or nine months has been the dearth of good product. The question is, whether we can stimulate enough movies so that there is high-quality product to meet the demand."

For those who are putting the product together, there is no doubt: The product will be there. That's what CAA's Ptak believes emphatically. "It's a buyer's market," he says, "but the opportunities are there."

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