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Why Films Under $2m Can’t Catch a Break

by Jeff Steele

One of the things that bigger-budget producers unknowingly take for granted is the availability of different types of financing.  Terms like gap and presales and tax credits and equity are freely bandied about as if they’d been around since day-one.  Broad-stroke percentages outlining a film’s capital structure are exuberantly scribbled across the backs of napkins in bars around the world:

FINANCIER: So how much do you need?

MIDDLE MAN: (gesturing to his napkin) That’s the best part! See here,  if you put 10% into escrow, I’ve got a guy who’ll match it, then just some soft-money-presales-n-gap and we’re there.

FINANCIER: (handing him two bags of cash) You’ve got yourself a deal, my friend.

But any ultra low budget producer (under $2m) can tell you with frustrating familiarity that the financing structure for their films fits on something much smaller than a napkin… a postage stamp: 90% equity + 10% tax credit.  That’s pretty much it.

“My film’s only 500k and the potential upside is so huge and no investor, packaging agent or lender will even talk to me. Why?”

The truth is that

Don't use this one....

  • lower budget films are just too combustible: 90% fall apart prior to completion,
  • if they’re under $2m then they can’t get a completion bond (no bond = no lenders), see previous,
  • they generally have lower budget lawyers (who aren’t adept at closings),
  • their paperwork is usually in more disarray (I once spent 6 weeks cleaning up a film’s chain-of-title, just so I could proceed with the financing, which then took an additional 8 weeks), see previous,
  • the cash-on-cash returns don’t justify the overhead/resource costs allocated to finance them (it requires the same level of commitment to close a low budget film as a higher budget film), see previous,

    ....or this one!

  • unless they’re creature features, they generally don’t have marketable stars that sales agents can provide bankable estimates for (which is the foundation upon which more complex financings are predicated),
  • did I mention they’re too combustible and end up costing time and money?
  • contrary to popular opinion, they’re not going to perform like Paranormal Activity, Blair Witch, or Greek Wedding (note: never ever include those films in your prospectus, ever!) It’s comparable to using the Lottery as an example of how to get rich quick.

That being said, there is still a place and a market for low budget indies; it’s just a different type of lottery than higher budget indies: i.e. they have worse odds and lower returns (cash-on-cash).

Just to be clear, this is not about bashing low budget indies – I’m just frankly addressing the question that has been posed to me several times a day since starting FilmClosings.com: why won’t I consider them or why are they so hard to finance?

Despite the fact that I personally only consider projects over 3 million, producing low budget creature features for Sci Fi Channel was one of the best experiences of my life.  Alas, that model just doesn’t work anymore.

There is some good news: budgetarily speaking, $250k is the new $2.5m.  That’s right.  Due to the down economy, and advances in cheapening technology, you can now create for $250k what was once the purview of $2.5m films.  In addition, once your film is complete you don’t have to try very hard to sell $250k+ in foreign territories, so that makes for a pretty good return on a $250k film, even after you net-out the costs-of-sales.  So there’s your light at the end of the tunnel.

33 Responses leave one →
  1. March 16, 2010

    Makes depressing reading, of course, but file it under “things I should know before thinking my small budget project will be easier to finance in a crisis” or “things not to say to financiers that show I’m a total wannabe”.

    On a sidenote, I often see comments on the p2p message boards about how it’s easy now for film-makers to make movies as they need less. The idea is that it’s OK to download Avatar and than won’t affect indie movies. Maybe I’ll send them here from now on.

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  2. March 16, 2010

    This is why our film production and distribution company does films over $5 million dollars and it is easier to get better actors to play these roles. Even though some low budget films have good story lines, its harder to sell them to an investor since many investors that we deal with want actors that are bankable. Its nothing personal to the filmmaker, just business since many of these investors want their money back and then some more.

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  3. Jon permalink
    March 16, 2010

    “contrary to popular opinion, they’re not going to perform like Paranormal Activity, Blair Witch, or Greek Wedding (note: never ever include those films in your prospectus, ever!) It’s comparable to using the Lottery as an example of how to get rich quick”

    And say it again! If I see another plan citing one of these three movies as an example I’ll… I’ll… OK, I’ll just gloss over it like all the other times, but come on people, these were all products of millions and millions of dollars in marketing. This is not the indie norm and not realistic comparables. Of course you can make a better movie than at least two of these (you figure out which two) but that’s not what knocked these out of the park.

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  4. Andy Halmay permalink
    March 16, 2010

    This was an interesting eye-opener but there would be cases when some light reference to Paranormal and Blair Witch, etc., might be appropriate. There will always be well-heeled folks who are attracted to Las Vegas and long shots.

    When talking R.O.I. there are excellent examples to bring up, such as the German film, The Lives of Others, made for $2m, picked up an Oscar, and grossed around $90 million.

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    • March 17, 2010

      @Andy,
      Including long shots in your comparables only undermines their validity, and is insulting to the reader. You can wow your investors with tales of long shots over drinks, but leave them out of your business plan and pitch. They’ll respect you more for it. A finance plan (and business plan) are meant to demonstrate a realistic potential upside, while also managing expectations. Dumb money is not only more trouble than it’s worth, it’s also more inclined to sue.

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    • March 22, 2010

      Not to mention, how reliable can investors be if the “long shot” is what wows them? Shouldn’t indie producers watch out for certain investors as much as investors should watch out for producers?

      I found the article fascinating. Thanks for an excellent discussion.

      I do have a non-rhetorical question (see my above questions). Because box office cuts and video rentals are down the line for producers and most money tends to go to the distributor anyway, is it not an immediate goal to sell the distribution rights? If this is the case, and because I see most films at Sundance (I also understand that Sundance could be considered an outlier) being sold for 2-4 Million, it appears that there is a slightly greater risk in producing an indie for much more than 5 Million. Perhaps then, there’s a magic number between 3 and 5 Million that works toward both odds? Or maybe I’m mistaken. I’d love to hear what others think about this.

      -Andy

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  5. Michael Umansky permalink
    March 16, 2010

    Speaking of that spark at the far end of the tunnel, are you now considering $250K funding? :)

    On a slightly different note, does anyone ever consider funding a slate of films, say 3 to 5, whose total budgets would be over some (your?) minimum? Statistically speaking, it only takes one out of five films to be successful to make the total ROI or more.

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    • March 17, 2010

      Sorry, Michael, I am not considering $250K fundings.
      The issue isn’t about the quantity of money being deployed; it’s about the quality of product you get for it, and its chances for success in the current marketplace. If what I’m seeing in the marketplace tells me that lower-budget films aren’t recouping their investment, then doing more of them only increases the odds of losing even more money (while further saturating the market with non-performing product.) Assuming your 1 in 5 statistic is correct, who’s to say that it’s not actually 2 in 10 (with the last two films being the performers?) Will your investors stick around through 8 flops in row, just to see if the last two hit? That seems more like betting on a roulette wheel that’s having a run on reds. MGM might have some thoughts on this 1 in 5 statistic.
      Don’t get me wrong, there are still success stories, but there are just fewer of them.

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      • Michael Umansky permalink
        March 18, 2010

        Thanks for your answers. I sincerely wish I could afford to pay your fee as that would mean that I was funded gazillion dollars :)

        I completely agree that quality of the product is what makes the ROI more of a reality rather than wishful hoping. And we all know how incredibly hard it is to improve production values in a low budget indie. But there are ways. I’ll know better when I’m done with my zero budget WW2 feature film this summer :)

        Thank you for very informative articles.

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  6. March 16, 2010

    Yeah The Lives of Others (The Secret Lives of Others, I thought it was called) was great, but you said it right there, it won an Oscar. I can’t imagine any investor taking you seriously if you told them your film is going to win an Oscar.

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    • March 17, 2010

      @Ant
      “Award” is not synonymous with “profit”.

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  7. Richard permalink
    March 17, 2010

    Mr. Steele,

    Thanks for the great article about $2M films not catching a break. At the end of the article you mentioned that films in the $250k range are now what $2.5 M films used to be and that getting a foreign deal was easier (but not guaranteed of course).

    My question is was that $250K figure the all in cost, or cash of $250K plus deferred payments? We are working on a film that is $250K all in including deferred payments and it is a horror/thriller with some actresses that have been on TV.

    Not trying to get my hopes up, but wanted to know that $250K movies really have a chance, thanks.

    Have a great day and thanks for sharing your knowledge,

    Richard

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    • March 17, 2010

      @Richard,
      If you want to return your investors’ money (with profit), then it should be $250k all-in. It’s a catch-22: you get better service and talent when you pay for it. However, the more fees that you can defer = the more production value that you can put on the screen (better VFX, exteriors, builds, practicals, creatures, etc.) If you have to compete with thousands of other $250k films, then your best bet is to look like a $1m film (and sell yourself accordingly.) The only way to achieve this is to (1) start post in prep: post production starts in pre-production, and (2) defer fees to post recoupment (or post-recoupment + premium.)

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  8. March 17, 2010

    What’s always fascinating about hollywood is the obsession with cash vs. IRR. I suspect the IRR on independent films made with established producers on average beats studio movies any day.

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  9. March 18, 2010

    Jeff,

    I love your posts but wanted to inject what we are doing as a solution in whole or in part to what people could use to help build their case now that the Ulmer scale is no longer valid and now that pre-sales are harder to achieve to mitigate some of the risk.

    We built a crowdfunding platform that allows producers to presell units of their film (dvd or download) in advance on a worldwide basis. What we also did was build an internal deferral model that also allows producers to source from the community things that they may need help with while getting up and running and while in production, post and delivery. This model can demonstrate a number of things:

    1. The true market demand for an unmade film in advance
    2. Its can provide full or partial financing of a film in advance by pre selling units.
    3. It can provide hard data analytics as to where the market demand is coming from from people in both the freemium and pay side of engagement with the filmmaker
    4. It can identify new partners and service providers through crowdsourcing
    5. it can turn all the fans into marketers as they are both engaged emotionally but also rewarded financially for talking about it.

    Our system coupled with the traditional system is what people at SXSW, Sundance, Tribeca, Berlin and other major arenas are now talking about as the new hybrid model for finance and risk mitigation.

    We believe that that 250K being the new 2.5M should and will go back to what it was before using this system. We also believe that this system will enable a lot of the “sleepers” that people do want to see based on our research.

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  10. March 18, 2010

    “You’ve got yourself a deal, my friend.” Jeff, do you mind if I use that bit of dialogue in a new script I am writing? (By the way, the script’s title is I Got What You Need Right Here. It’s a romantic comedy set in Hollywood about a low budget indie filmmaker who falls in love with a major entertainment agency’s managing partner, and ends up working as a clown for a travelling circus company.)
    Any A List casting suggestions for the filmmaker role?

    Seriously, I liked this blog, Jeff. Didn’t know you couldn’t get a Completion Bond if the film is budgeted lower than $2M. And I agree about not referring to the above-referenced films in your written pitch.

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  11. March 19, 2010

    Okay Jeff, with regards to my depression as a producer, it’s actually quite good tonight considering I’ve read another great article of yours and I’ve had an adult beverage.

    THE best line: “Paranormal Activity, Blair Witch, or Greek Wedding (note: never ever include those films in your prospectus, ever!) It’s comparable to using the Lottery as an example of how to get rich quick.”

    I can’t remember how many projects I’ve passed on as a producer where I read a business/finance plan include just those three films. Today’s “Blair Witch” is “Paranormal Activity.” Tomorrow’s “Paranormal Activity” will be … ? Don’t expect marketing efforts like these for your film guys & dolls.

    One thing I have discovered reading your blog Jeff is I ‘have’ done my homework and you provide the details on the finer points. Gives me a better outlook on my abilities.

    I completely agree with you today’s $250k project is yesterday’s $2.5mil project. However, I have noticed the quality is far, far from a ‘feature film’ feel. Less expensive technologies help a broader spectrum of projects see the light of day however, the down side is it increases the ‘crap factor’ exponentially.

    You couldn’t be more right on with, “Dumb money is not only more trouble than it’s worth, it’s also more inclined to sue.” I know. I’m in Federal court right now. Though I have a great team of lawyers and while I don’t like being sued, I know I’ll prevail in the end. My mistake? “Dumb money.”

    Well, after 27 years in the biz, I have to learn something new.

    Keep writing!

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  12. March 23, 2010

    Hi Jeff,

    I will dare to be the opposing view here. I absolutely agree that there are a large number of filmmakers who do not do their homework and jump headfirst into producing films without the right experience to make a solid film at any budget level.

    But I don’t agree that Ultra-Low Budget films are as risky as you propose. The problem is that the lesser experienced filmmakers are usually the ones making the Ultra-Low Budget projects thus making the risks higher.

    The key is investing in a solid team that knows how to make these lower budget films. There are probably a handful of strong filmmakers who do know what they are doing at this level of filmmaking (Karin Chien and myself, etc.). And we like making the lower budget films because they tend to allow for greater control creatively and business-wise. They also allow for great dramas to be made — a genre that can be very hard to sell.

    Tiny budgets also allow for films to actually get made in a timely manner. I have a number of larger budget projects that sit on a shelf collecting dust as the larger actors are approached and the pre-sales are negotiated and the gap financing is located, etc. On those projects, I spend countless time and money in meetings and at markets and spinning my wheels for years without much to show for it.

    Whereas, since I do have the know-how to make a strong film on a low budget — yes, the feared $250k, I go out and I make those films as I push my larger projects. I am in post on a great film made for $115k and I am gearing up to make another one this fall for $150k. And they are good. I am not delusional. Instead I take the risks to my own financial status in order to build product for my company.

    Do I like making films for this low of an amount? No! It’s back-breaking work for typically no upfront gain. However, it is an investment in product for my company that over time allows me to build a library of strong product. And honestly, where would I be without these little gems? I’d be another producer walking the halls of the Cannes market shopping my wares and praying someone else will help me make my film.

    I’d rather be making great films that I know my team can make on a dime because I know we have the ability to be successful. We have the know-how and the drive to make it happen. And we are able to introduce new, incredible talent to the world — talent the larger budgets can’t afford to invest in.

    It sounds like if people who do have resources actually teamed with filmmakers who do know what they are doing then some really great films could be made on the Ultra-Low Budget model. I actually do know how to handle chain of title appropriately and cleanly! (Ask my foreign sales agent…) So if anyone is interested in backing films from teams who do know they are doing at a low budget then I have a film for you. I believe this is an untapped arena that could be lucrative if handled correctly and intelligently.

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    • March 24, 2010

      @Jane You are abosolutely correct. There are extremely professional and efficient ultra-low-budget producers out there that are just as effective as any high-budget indie producer.

      In fact, probably even more so because you generally can’t throw money at problems to make them go away. I have not been addressing this demographic because I’ve been laying a lot of foundation in these posts. I plan to raise the level of discussion into more nuanced topics that you’ll find more relavent to your skillset.

      Paramount has jumped on the $1m band wagon, and other studios will follow. As I said in this post, $250k is the new $2.5m, so if you already have that infrastructure (and relationships), then you’re ahead of the curve and this is a good time for you: there is a great convergence of accessible technology, distribution, and production values, coupled with lower cast costs, that will all work to your benefit.

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      • March 24, 2010

        One thing to remember is a producer with a smaller budget is worth their salt when they can get accomplished what a producer with a larger budget just relies upon money to solve the problem – creative or logistical.

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  13. Chris Long permalink
    March 24, 2010

    Hi,

    I just read your article, and your points are valid, if you assume that all film makers are stupid. We all don’t have problems organizing, or doing paperwork, or contacting and getting bonded by a insurance company. The real problem is that finance companies or investors are relying on a model of financing a film is out dated. Everyone wants a movie star in their film because they do believe that will bring in dollars. And for the last five years its just been the opposite. The real true hits have been with unknowns and great subject matters.

    If you really want to help film makers you should get with the times and take chance on film makers who are interested in bring new subject matters to the screen . Instead of re-do another remake of a relic project.

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    • March 24, 2010

      @Chris- Most of your points are valid… and since I don’t assume that all filmmakers are stupid, my points remain valid, as well. All generalizations are disproven by their exceptions, except the ones that aren’t. That said, not all filmmakers are stupid, and nor are all financiers geniuses.

      FilmClosings.com blog postings are to help guide filmmakers through the current transition from the “outdated model”, to whatever the next model may be.

      In the meantime, “today’s model” consists of stalled lenders, cash-strapped buyers, and scarse equity. Filmmakers need to avoid certain pitfalls when dealing with financiers, and to bridge any mistrust or misunderstandings that exists between them, by helping each side better understand the other.

      I don’t know where, how, or with whom you’ve been making your movies, but star-driven valuations have not been part of mainstream indie financing for over 5+ years.

      Financings are predicated on foreign presales, and presales are predicated on:
      1st: the script
      2nd: the producer
      and then
      stars and directors (in no particular order).

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      • John permalink
        March 24, 2010

        Hey Chris et al.

        I’m sure these comment sections on the blog are moderated and I thought it was pretty cool that Jeff let your comment be in here and took the time to respond. So many places like Huffington Post would never allow a comment like yours to go through about Arianna.

        kudos to Jeff. I don’t know any other site like this where a financier is willing to share intel on the state of the industry like this.

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  14. March 29, 2010

    But you still have to find the $250K…. :)

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  15. February 13, 2011

    Jeff, I love the part about the “cash in brown paper bag”.
    We’ve discussed the same syndrome in our prior blog “the Death of Dumb Money for Film Finance” on google.

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  16. May 6, 2011

    Hi Jeff,
    Love your blog and the exchange of ideas. The particular film I am trying to get funded could go either way, 2Mil or 250K depending obviously on how many bells and whistles I put on it and who is in the cast. Would I be better off holding out for all the stars to align or just getting the film done? It is a very unique and specialized subject matter that I am uniquely qualified to produce and once done I’ll never get another crack at it.

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    • Jeff Steele permalink
      May 9, 2011

      Just get the film done; you’ll find your luck along the way. The stars won’t align themselves; you have to put an object in motion first.

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  17. frank permalink
    October 1, 2011

    Great post Jeff!! I was just wondering though. You say that any indie film under 2 million cannot get a completion bond. Is that some sort of financial rule etched in stone? I mean, if you had a 1.9 million dollar budget and everything else was in place, would they not give you a completion bond? And if so, why? Can you please elaborate on this point a little bit.

    Thank you

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    • Jeff Steele permalink
      October 3, 2011

      Nothing in Hollywood is etched in stone – there are exceptions to everything. Bond companies don’t like bonding films under $2m for many reasons, but it mostly comes down to:
      1. Fees: Their average fee is between 2% – 3% of the budget. So it becomes pretty insignificant, given the amount of work they have to undertake.
      2. Cost of doing business. There are hard costs associated with doing every deal (e.g. legal) that don’t get covered by 3% of a low budget film.
      3. Combustibility: Most low budget films fall apart before they close their financing or go into production, so that becomes a lot of wasted labor.
      4. Risk: Most low budget films are made by less experienced or less scrupulous filmmakers who are prone to cutting corners and making mistakes. As insurers, bond companies don’t take-on undue risk.

      Exceptions are usually favors to higher-budget filmmaker clients who happen to be doing a low budget film that needs bonding. Either way, just call them and see if they’re interested; if business is slow then anything’s possible.

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  18. October 13, 2015

    Has anyone found any proof/market analysis?

    Would love to see a study?

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