Wednesday, January 15, 2020

The Risk of Film Distribution Pre-sales

Pre-sale as a strategy to finance movies is risky business – to the producer on the one hand, and the distributor on the other (in particular, for independent foreign distributors who are worried about losing money). While pre-sale serves to reduce the risk of loss for the producer, it reduces the potential for future income. Meanwhile, a distributor only receives its money back or make a profit if the film is successful.

Independent films that are not of high quality content have a very hard time in the international marketplace, and having acclaimed actors attached to a bad film does not necessarily guarantee a film’s box office or VOD success. It really comes down to making a good movie. Thanks to social media, if a movie isn’t good, people find out quickly and lose interest. No one is going to watch a bad movie because it has a star actor in it. In addition, piracy, which is rampant in some countries, is making pre-sales buyers reluctant to bid for films without a clear audience. If the distributor can’t determine who that core audience is, they’re probably not going to get involved with the project. 

Since a distributor is bearing the complete risk of loss, the price the distributor will be willing to pay to acquire the film at the script stage will be much less than if the film is completed (when the distributor can better evaluate the potential success of the film). However, if the film is completed and gets raving reviews, a distributor will be willing to pay much more money for it, since there will usually be competition and a bidding war among territorial distributors who are gambling on the fact that the film will be profitable when released and that the premium price they pay to get in early on the process will pay off.

If the film turns out to be a failure, having already essentially cashed out, this is no longer the producer’s problem. But with films that have gone to achieve breakout success, producers have found themselves shortchanged. If the film is a hit, the producer would be far better off if it were financed without pre-sales.

In most cases, no matter how well a film performs in a given territory, the only money the producer will get is the minimum guarantee. From the revenues of the film, the distributor recoups the payment of the minimum guarantee and deducts any P&A costs. The distributor also deducts a distribution fee, calculated as a percentage of box office revenues. The size of the distribution fee generally increases with the amount of the minimum guarantee, since the distributor’s risk of not recouping the advance is greater. The distributor will usually recoup all those costs before the filmmaker can see any overages, despite the movie reporting high grosses at the box office.

Before a film is produced, it is difficult to guess how it will perform in the market, no matter how good the script and execution or how attractively it is packaged and marketed. The arrival of better predictive tools, such as at Slated, may help solve this by providing both sides of the negotiating table with a more reliable yardstick by which they can value film rights at the script stage.

But how does a sales agent apply statistical (comp) data to an esoteric, unique project that a first-time filmmaker is trying to make with no names attached? It is hard. First-time filmmakers will usually find it difficult to finance their films through pre-sales. With no track record of successful films to their credit, a first-time filmmaker may not be able to persuade a distributor that he knows how to pull all the right elements together and make a good movie. Of course, if the other elements are strong, such as the story, acclaimed screenwriter and star actors, the distributor may be persuaded to take the risk.

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