Currency Can Kill Your Movie

Hedging currency for a film production is one of the toughest decisions a producer makes. It’s the practice of managing losses, as opposed to capturing gains...

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Be Warned – What 2011 Means for Filmmakers

by Jeff Steele

I feel that last two years of financial volatility have abated enough to get some clarity on what filmmakers should be looking for in 2011.  Obviously, life has yet to return to normal, but that’s not going to happen in 2011, nor 2012.  Our national debt and deficit are going to continue to take their toll on every facet of our lives.  Foreboding as that sounds, there is comfort to be found in the certainty of the onerous things to come: 1) you can manage your expectations appropriately, which is good for your emotional well being; and 2) you can plan your finance and production life accordingly, and possibly avert some unnecessary debacles.

The national debt’n'deficit crisis is a financial maelstrom of unimaginable size and severity that has caused (and will continue to cause) the value of the dollar to slide against most major currencies and the dollar index; the dollar index measures the value of the dollar against a basket of major currencies that includes the Euro, the British pound, the Canadian dollar, the Japanese yen, the Swiss franc, and the Swedish krona.  But this is not all bad news.  It’s better to know you’re going to be in a storm for a few years and act accordingly, than to hold off each day until the sun comes out tomorrow.

For producers, this can be a valuable guide for deciding where to shoot your films.  In short, stay local in 2011 and 2012.  The diminishing buying power of the US dollar means that if you leave the country, then you’re going to pay more for less.  But within the USA, a dollar is still mostly a dollar.  I say mostly because you may not get as much for your dollar in major urban production centers like Los Angeles and New York City as you might in places like Michigan.  These variations can add up quickly for things like travel and living expenses in your budget, as well as rentals and food costs.  Star salaries, above-the-line costs, and post-production/CGI won’t be effected because they cost what they cost.

Canada, whose dollar is at parity with the US, is another good choice to shoot in.  Like the US they have great tax incentives, you’re pretty much dollar-for-dollar, and like NYC and L.A., Toronto and Vancouver are convenient and have better resources, but can be slightly more expensive.

These currency fluctuations can certainly be contained by locking-in your currency rates (i.e. buying all your currency ahead of time) or by using various hedging instruments.  These currency products can be purchased on margin ahead of time for as little as 10% of your currency requirement; nonetheless, that’s still a lot of money to have to come up with before the film’s financing closes.  This is why many filmmakers don’t truly lock-in their budgeted exchange rates until near the end of their financial closing.  This is a very risky strategy because closings can take 6 to 12 weeks, and anything can happen to the value of your budgeted exchange rate during that time.  The Euro is certainly having its own problems and has its own decline, but the dollar is declining faster and therefore shooting in Europe is a very costly proposition.  Volatile currencies like the South African rand are very hard to pin down and can vary wildly from your budgeted exchange rate.  These variations are generally fractions of percentages, but when multiplied by hundreds of thousands, or millions of dollars of production spending, you can very easily wind up with a $250,000 hole in your budget just as you’re about to close your financing.  This will not inspire confidence in your investors.  Anybody that is wealthy enough to invest in a movie is going to understand currency risk, and they’re going to expect you to as well.

In addition, foreign buyers and distributors become more reluctant to pre-buy territories when the exchange rates are unstable.  What a film costs today could swing severely against the buyer when the film is delivered eighteen months later.  That sort of uncertainty causes buyers to opt for buying completed films, rather than taking long term risk.  On larger deals, a hedging instrument would be used, but not so much for smaller projects.

Domestic distributors will continue to be a scarce commodity, as will the availability of the tens-of-millions of P&A dollars that are required to release a film into the US market.  Many finance people will claim to be on the verge of creating a P&A fund, but that is as close to it as they will get.  Nonetheless, having a P&A fund will be the cool thing to be on the verge of in 2011.  Just to be safe: raise 200% of your budget and use the other 100% for marketing.  If you’ve already raised your funding, then shoot it for half.  [Update: See my comment below for an important caveat.]

State tax incentive programs will continue to take a beating from the fiscally conservative legislators and governors who happen to now be in power.  Arizona’s program is gone.  Michigan’s new governor does not support it, nor do the controlling members of the assembly.  If MI’s program is not completely jettisoned, then I suspect they will probably discontinue any incentives for non-residents.  I can’t imagine California’s incentive will go unchecked either.  I haven’t heard of any producer who shot in CA for the incentive; it’s more like gravy for the productions that were going to shoot here anyway.  Legislators probably won’t kill the program, but perhaps they could cap how much can be applied in any given year (e.g. cannot offset more than 15% of one’s tax liability, but can carry-forward the balance.)

VOD and video technology as a whole will continue to make major inroads.  2011 will be the year of the Great VOD Wars:  Netflix vs. Vutopia vs. Hulu vs. GoogleTV vs. AppleTV vs. YouTube vs. Amazon vs. Mubi vs. SnagFimls vs… Facebook?  In the absence of theatrical distributors and P&A dollars, VOD will continue to mature into a more quantifiable presale option.  The major VOD distributors will continue to cannibalize each other in the fight for premium studio content, but the longtail nature of the platform should also allow for more acquisitions across a broader spectrum of films: mainstream indies, art house films, docs, niche and hyper-niche, etc.  Don’t expect this revenue to cover any significant portion of your budget, but fortunately the cost of producing these films will also continue to fall in these hard times — that’s also good news.

The mantra for surviving 2011 and 2012 will be to swing for singles and doubles, not for fences.  If you really know what your doing (or surround yourself will people who do), then it’s a great time to enter the film market.  Star salaries are and production costs are falling, technology is advancing.  Deals are getting done and films are getting made.  Bottom line: People need to work.  If you’re smart, nimble, and shrewd, then there’s business to be done in 2011.

  • http://www.filmnewshub.com Matt

    Great write up and advice!

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  • http://www.freskoimageworks.com Francisco Escobar

    Just wanted to let you know that this article was very informative and very helpful. Many thanks for your insight and you candor.

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  • BenL

    Very interesting take on the macroeconomics of film finance. I believe there is a limit to the doom and gloom as the dollar weakens foreign currency reserves that hold dollar denominate debt will also see a change in value. Nobody wants to see their portfolios sag. This scenario reminds me of the “tequila effect” (Peso devaluation and S.American currency ripple effect).
    In any case, great post. Thank you.

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  • http://www.aegisfilmgroup.com arianna

    Could not agree more. We are in pre-production on a project shooting in Ireland this spring and it’s been a struggle to keep the budget from going south. We have a great risk management team at JP Morgan/Chase but overall, our slate has several European based projects which will be challenging over the next two years. Excellent article. Reality is a geezer in this business.

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  • http://www.odethemovie.net BrianMathewKowalchuk

    Agreed also.
    I’m applying for Canadian financing and it looks like a pretty cool situation.

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  • David W

    You can still come to Connecticut. We have a new governor…but still proudly boast the bumbest legislature in 50 states…get that 30% tax credit while you can

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  • Patrick Blackard

    Jeff: The rest of your article is good insight, but for the causes of our “financial maelstrom,” I would look to:
    1. The collapse of our $8 trillion housing bubble, and
    2. The outsourcing of perhaps 20 million manufacturing jobs. These folks, who used to make $20-30 per hour plus benefits, are now making minimum wage if they indeed have jobs, which greatly reduces their contribution to GDP and their ability to consume even movie tickets.
    The debt is important, but we’ve had high debt before and grew out of it, and more high-paying jobs would solve the debt problem faster than anything else.
    On that note, I applaud your advice to shoot local!

    Patrick Blackard
    Gaffer, Texas

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  • Jeanette Villafane

    Very informative! It provided me with a new prospective on shooting locations. Love that you keep the tone of the article optimistic and promising.

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  • http://www.herfilm.wordpress.com Kyna

    Yes, interesting article! I’ve got a two-pointer plus a question:

    1) I’d add just an interesting bit about state-based tax incentives for film, seeing as how the Iowa Film Office’s “Iowa Film, Television and Video Project Program” has gone through a complete meltdown due to mishandling of its funds in allocating incentive money and in evaluating filmmakers’ expenditure claims for tax incentives. It’s now shut down until 2014, but before it did shut down in 2010, it had THE highest U.S. state incentive program for film, at 50%.

    2) About Canada, as I understand it, U.S. productions that go there in hopes of taking advantage of provincial tax incentives for productions have to adhere to specific regulations in terms of above the line and below the line talent, needing to have a certain number of them be Canadians, in order to qualify for the incentives. I wasn’t sure if you were talking about provincial tax incentive programs or other types of funding which qualify Canada as being somewhat advantageous for American filmmakers. Also, of course, like the States, the provinces all have there own incentive plans for film productions.

    Question!
    In terms of P&A dollars and working with distributors, how beneficial would you think it to set aside a fee and budget for a Producer of Marketing & Distribution (PMD) to handle these issues instead of filmmakers going it alone, or having a specific producer on the project (or even outside person) handle distro & marketing??? Do you have any thoughts about the future of this newly developing producer title? I see it a lot of places now: PMD this and PMD that, presumably because the marketing & distro landscape has changed so rapidly and drastically in the past several years.

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    • Jeff Steele

      Kyna,

      If you raise P&A money along side your production money, then yes, somebody on the team should have a granular knowledge of how it should be spent. That person should oversee the marketing and distribution, just as the Line Producer oversees the production.

      Most producers have development executives. Most active production companies have production executives. But very few companies have in-house distribution/marketing executives (those that do, generally just handle deliverables and collections.)

      You are correct in that producers need to be much more attuned to the marketing and distribution of films: just as post-production starts in pre-production, marketing and distribution must start way before production. A film is a product launch, and no product should go into production without knowing how it’s going to be marketed and distributed. Unfortunately, most producers are too focused on getting the film into production that they don’t bother to look beyond the wrap. The buyers who pre-buy the film certainly want to know what producers have in mind (beyond just making a one-sheet.) That’s why films with US distribution already in place get higher licensing fees — they can reasonably presume that the film will get some level of exposure.

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  • http://www.ffradvisor.com/producers.html Troy Allen Dyer

    Macro and micro make me consider the most creative players in the biz. I’ve admired Ryan Kavanaugh for his creativity (cutting slate deals, cornering the Hollywood financing market with $10B+ of hedge funds through Elliot and other managers, knowing ancillary markets make up 75% of revenues compared to 25% from box office, eliminating pay-or-play, partnering with NetFlix for online, Keyur Patel for Hindi, Technicolor for tech, FilmNation for foreign distribution, offering participation instead of up-front salaries to actors, producers and directors). My only concern with indie, specialty or studio financing deals is that they all lack the same creativity. The outdated financing methods of current productions still has too many players, too many complex parameters and too much fat being trimmed by middle-men, banks, financiers and friction caused by the dragging paperwork pile and pain-in-the-ass production deadlines. I see a simplification of financing, protection of producers from creative accounting practices (which all studios eventually fall prey to), and risk management for investors so their capital is no longer at risk. Creativity is key. I’ve started a company to eliminate the downside market risk of film financing (to protect investors from the production costs), so they do not lose their investment dollars. I haven’t heard talk about the P&A cost side of the equation yet, but it won’t be long before someone smart looks at that side of the business and begins to commoditized those costs in order to limit big studio risk for big-budget film’s advertizing costs. In the meanwhile, it makes sense to try to first stop the low-budget investors from becoming gun shy with too many unrealistic projections of profits, and start protecting their principal. Our firm is able to just that, and it’s not rocket science. It uses tax law that’s been on the books since 1964, and stays true to corporate best practices, hereto forgotten by the film industry…

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    • http://www.nevermorethefilm.com larry olson

      like your view of simplification of a complex biz. can we connect offline or can you direct me to your website?

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  • http://Www.ufofilm.com Phillip roth

    While the outlook for the dollar is still uncertain all the smart money in 2011 is looking at the euro-dollar exchange to go down to around 1.21 to 1 from the present 1.30 to 1 by July. Having produced the bulk of our productions at our Bulgarian facility over the last 10 years I have been on the frontline of riding the dollar debacle. This year has started to see a turn around with a lot of former Michigan and Louisiana productions finding there way here with all the incentive uncertainty and liking the idea of raw saving vs. Complicated incentive and tax packages. The bottom line is that on a direct comparison Bulgaria is at least 25% cheaper after the Louisiana or Michigan credit or rebate for films budgeted in the under 7 million range. If the dollar continues to strengthen that could increase to around 32% by summer of 2011.

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  • Mark Jones

    I hear Sycamore Entertainment is raising a large P&A fund and that they
    also have in house distribution and marketing people.
    anyone heard of them?
    sycamoreentertainment.com

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  • http://NOMPCo.com Stan Gill

    Great insight there Jeff.

    Now I’m wondering, using your article advice, if I cut an average $10m production in half – $5MM development/pre-production, production, post-production; with $5MM P&A?

    I’m looking at a big picture (no pun intended) with developing a new slate of feature film projects and a new company.

    And, of course for me, all of this inside the Louisiana film tax incentive structure.

    Just got back from New Orleans, doing some prospective development work, and I still find the La. program enticing.

    Distribution will definitely be a hurdle for me as it will be a new adventure in my career.

    Thanks for the continued excellence and insight!

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    • Jeff Steele

      I want to stress that producers can’t arbitrarily cut a budget in half without completely reworking their entire business strategy, creatively and financially. A film should be made for what it costs and the P&A budget needs to be appropriate for the market and audience that the producers and their investors are trying to reach.

      It’s going to cost a producer at least $20m to release a film theatrically in the US in any significant way. $10m will get you a limited release but minimal exposure or penetration. $5m would be more appropriate for a home video release (DVD, VOD, etc.) This leaves the producer with a dilemma: make a film for $10m and take your chances on getting a domestic distributor, or make your film for less (i.e. lower production values and cast) but have some P&A money to play with. That P&A money could be used to build an audience and visibility that might ultimately attract a distributor, or it could be used to kick start a small platform release that will hopefully attract distributors.

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      • http://NOMPCo.com Stan Gill

        I wouldn’t arbitrarily cut the budget in half. I’m looking for target areas which would work financially.

        Completely agree with, “A film should be made for what it costs and the P&A budget needs to be appropriate for the market and audience that the producers and their investors are trying to reach.” That’s exactly where my analysis is taking me.

        As for your $20MM, $10MM and $5MM analysis, that gives very good insight into the realities of the distribution path.

        Realistically speaking, I don’t see getting investments in $10MM+ projects in an 0ut-of-the-gate production venture. However, your comments definitely give me ideas on how to approach a film package.

        Lots of thinking to do.

        Thanks, Jeff!

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  • LfO

    It’s probably also worthwhile stating that the half dedicated to marketing for film wont be elligible for tax rebates/offsets etc as most of these incentives apply to production spend.

    Also on a smaller budget – if there are any ATL caps, they will affect you more, since on a smaller budget, there is usually a bigger portion of your budget dedicated to cast.

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    • http://NOMPCo.com Stan Gill

      LfO,

      Great points there.

      They were certainly on my radar.

      Thanks!

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  • http://www.santelmoproductions.com/index.html Ginger Gentile

    I loved your mix of good and bad news, however there is one country where the dollar is still strong (and rising in value): Argentina.
    “Argentina has a long history of filmmaking, it has wonderful crews who’re very experienced and hard-working, great locations, and while there’s no tax breaks it’s relatively cheap to shoot there.”
    – James Ivory, six time Oscar winning director, who shot “The City of Your Final Destination in Buenos Aires.
    Not only is James Ivory getting into the act, but John Cusack and Viggo Mortensen are filming movies down in Argentina, and there is generous government funding to be had for features and docs, including TV series (if the director is a citizen or resident of Argentina) and tons of informal ways that costs can be reduced.
    Buenos Aires has been voted the best location double in the world by Variety Magazine and is home to tons of US expats for supporting roles and extras.
    I’m from NY and have made my entire film career down here, and invite all indy producers to talk to me about how we can make their film dreams a reality. We’re used to filming with no money and making it work!

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  • http://www.talkinglens.co.uk raza mallal

    Great article Jeff. Some very valid points that we independent film makers should not ignore, especially in today’s volatile climate.

    We at Talkinglens Productions , in England, struggled for 6 years getting our first $5m movie financed. The next one, this year, took 6 months to secure 50% without even having any cast attached. How bizarre! I look forward to meeting you during this year’s AFM.

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    • Jeff Steele

      Good luck on the raising rest, especially the final 10%.

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