focus on indie films films research.pdf · the rise of independent film companies the industry in...

A N A L T E R N A T I V E I N V E S T M E N T O P P O R T U N I T Y

Focus on Indie Films:

Small Budgets Can Mean Big Returns

A Confidential Report on the Rise of the Independent Film Company

Prepared for Clients ofThe Financial Partners Network

J A N U A R Y 2 0 1 9

Financial PartnersNetwork

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Table of Contents

Research..................................................................................2

Alternative Investments: A Growing Trend ........................3

The Rise of Independent Film Companies .....................4 The Industry,The Market, Distribution Strategy

The Growing Success of Indie Films, Observations ........7

How Independent Films are Financed and Why You Should Participate .........................................9

Common Methods Used by Producers to Finance Independent Films ...........................................10

What to Look for When Investing in an Independent Film ......................................................11

Conclusion ...........................................................................12

References ............................................................................12

ResearchThis report is based on a compilation of secondary research about the independent film phenomenon, gathered from various sources. See References at the end of this report.

Secondary research involves the summary, collation and/or synthesis of existing research. Secondary research is contrasted with primary research in that primary research involves the generation of data, whereas secondary research uses primary research sources as a source of data for analysis.

Common examples of secondary research include:

• Textbooks

• Encyclopedias

• News articles

• Review articles

• Meta-analyses

• Studies & Reports

When conducting secondary research, authors may draw data from published academic papers, government documents, statistical databases, and historical records.[1]

2

Alternative Investments: A Growing TrendAccording to the Huffington Post, investor allocation to alternatives will grow nearly 10 percent per year for the next five years, reaching $13 trillion in volume by 2020.

For high-net-worth investors, it’s not a question of if you should buy alternative investments. Rather, it’s “which alternative investment asset type” will work best for your particular situation and long-term investment objectives.

To be clear, an alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and cash. Furthermore, due to the complexities surrounding alternative investments, they’re generally held by high-net-worth individuals or institutions which qualify as accredited investors (individuals whose net worth is $1 million or more).

Accredited investors are those who can demonstrate an annual income exceeding $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income in the current year, or satisfy other requirements.[2]

THEATRICAL46%

DIGITAL HOMEENTERTAINMENT

36%

PHYSICAL HOME

ENTERTAINMENT18%

$35.91 $36.43 $38.42$38.82

$40.58

$12.30$15.12

$18 .08 $24 .53 $32.12

$29.76

$15.68$18.55$21.00$25.85

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0

600

500

400

300

200

100

0

2013 2014 2015 2016 2017

ONLINE SUBSCRIPTION VIDEOCABLEDIGITAL TERRESTIAL TELEVISION (DTT)

SATELLITEINTERNET PROTOCOL TELEVISION (IPTV)THIRD PARTY PREMIUM

PHYSICAL HOME ENTERTAINMENT DIGITAL HOME ENTERTAINMENT THEATRICAL

2017 Global Theatrical & Home Entertainment Spending [3]


Source: 2017 THEME Report

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The Rise of Independent Film CompaniesThe IndustryIn 2017, the U.S. and worldwide box offices grossed $11.1 billion and $40.6 billion, respectively. Overall electronic sell-through (EST) spending rose nearly 6 percent for the year, driven by a 12-percent increase in theatrical purchases.

The theatrical experience is a vital connection between audiences and creators. But beyond the box office, audiences are not limited in how they can enjoy their favorite movies. In fact, films today not only have a second screen, but a third and fourth. In 2017, global home entertainment consumer spending increased by 11 percent to $47.8 billion, and in the U.S., the home entertainment market increased 5 percent over 2016, to $20.5 billion.

Global Theatrical & Home Entertainment Spending [3] (in Billions)

THEATRICAL46%


36%

PHYSICAL HOME

ENTERTAINMENT18%

$35.91 $36.43 $38.42$38.82

$40.58

$12.30$15.12

$18 .08 $24 .53 $32.12

$29.76

$15.68$18.55$21.00$25.85

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0

600

500

400

300

200

100

0

2013 2014 2015 2016 2017






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2013 2014 2015 2016 2017

THEATRICAL46%


36%

PHYSICAL HOME

ENTERTAINMENT18%

$35.91 $36.43 $38.42$38.82

$40.58

$12.30$15.12

$18 .08 $24 .53 $32.12

$29.76

$15.68$18.55$21.00$25.85

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0

600

500

400

300

200

100

0

2013 2014 2015 2016 2017




Other Data Points Suggest There is an Industry Explosion:

• The number of subscriptions to online video services around the world increased to 446.8 million in 2017 — a 33 percent increase compared to 2016.

• Online video content viewing continued to increase in 2017, reaching 167.5 billion views and transactions — a 41-percent increase compared to 2016.

• Americans now spend 49 percent of their media time on a digital platform. With more stories and more storytelling mediums than ever, our industry continues to adapt to an ever-changing world.


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In a wide-ranging report on the future of the entertainment industry, PricewaterhouseCoopers expects on-demand, digital delivery of videos, movies, music, games and eBooks to explode in the next few years. ...PwC forecasts global entertainment and media spending is expected to rise to $2.3 trillion by 2018 and should outpace consumer spending.[4]

THEATRICAL46%


36%

PHYSICAL HOME

ENTERTAINMENT18%

$35.91 $36.43 $38.42$38.82

$40.58

$12.30$15.12

$18 .08 $24 .53 $32.12

$29.76

$15.68$18.55$21.00$25.85

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0

600

500

400

300

200

100

0

2013 2014 2015 2016 2017





Global Pay TV and Online Video Subscriptions [5] (in Millions)

The MarketThe strategy of making films in well-established genres has been proven time and again to be a smart and sound choice for production. Traditionally, the fortunes of independent filmmakers have cycled up and down from year to year. More than half of Oscar-winning Best Pictures over the last 30 years have been independent films.

The recent success of independent films, such as Moonlight, Spotlight, Birdman, The Hunger Games, The Help, The King’s Speech, The Kids Are All Right, The Hurt Locker, Slumdog Millionaire and others, has ensured the independent segment will continue its upward trend.

The strength of independent films was reaffirmed at the 90th Academy Awards, when the Oscar for Best Picture went to The Shape of Water, the 12th independent film to win that award in the last 13 years.

Distribution StrategyThe motion picture industry is highly competitive, with a significant portion of a film’s success relating to the skills of its marketing strategy. The best strategies capitalize on various theatrical and video-on-demand (VOD) distribution channels, including both submitting the film to the most prestigious and successful annual film festivals, and using best efforts to negotiate with a distributor upon or near completion of principal photography prior to entering any film festival. This strategy maximizes the producers’ bargaining power and increases the potential profit a film may earn.[6]

There is an insatiable demand for more movies due to the increasing number of platforms for viewing films. Around the world, people are watching more movies than ever before, on more mediums than existed just a short time ago.


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The Growing Success of Indie Films, ObservationsUntil 2014, film festivals were essentially the theater systems for the independent distribution community. Things have changed radically over the last few years because of the rise of Netflix and Amazon in this field. The coming work that’s happening at Google and Facebook will change it all again.[7]

Hollywood, California has been one of the most prominent landscapes for the film industry since the early 1900s. It’s hard to believe that this same monstrous city was once just a small village, home to the first directors in independent film. Independent Film also known as “Indie Films” have been fairly prominent throughout the years. However, these independently directed films have recently taken the world by storm. Movies such as The Perks of Being a Wallflower and Juno have greatly expanded the popularity of Indie Films in the past decade.

But what exactly are these “independent” films that are completely changing the industry? Independent films are movies made by directors and companies that are not part of the “Big Six” or six major film studios currently dominating the movie enterprise. These types of films are usually low-budget productions with less known actors. However, these movies tend to have a greater focus on the individual characters and offer a more “personal” experience then an IMAX or blockbuster film would.

So why the sudden interest in Indie Films? Independent films have been available for decades now. However, since the turn of the century, these small-town films have begun to make their mark on today’s mainstream media. With wildly popular movies such as the independent film Boyhood racking up nominations at Academy Award shows, it’s easy to see how much excitement these films are generating.

Financial PartnersNetwork7

As far as the “big six” are concerned, they continue to spend hundreds of millions of dollars in films to date. However wildly popular those films are, even these companies seem to have an interest in the independent style of movie-making. Many of the large corporations have built or purchased smaller studios to accommodate their own independent film ideas.

From 5-minute films to 3-hour epics, it’s plain to see these films are a force to be reckoned with, each film coming with a voice that demands to be heard. With independent film continuing to break the boundaries and challenge the ideals of blockbuster movies, it’s safe to say we’ll be seeing those same films in award shows and on the big screen alike.

With a new age of filmmaking rapidly approaching, who knows what independent movies will do next![8]

Indie films have dominated Oscar races in recent years. However, they’ve become an increasingly endangered species in the traditional Hollywood studio system as the major studios have turned their attention to franchise pictures that generate multiple sequels and spinoffs.

That has created a big gap for independent producers to make movies targeted at grown-up audiences, the kinds of films that typically attract Oscar attention.

“It’s become much more pronounced as we see (the major Hollywood) studios headed toward Transformers 99,” said Jonathan Wolf, executive vice president of the Independent Film & Television Alliance.

Indeed, 78 of the 125 Oscar nominations of 2017 (62 percent) were for movies produced by companies outside the six major studios, according to the Independent Film & Television Alliance. That’s 31 more than in 2016 and 20 more than in 2015.

Even as studios produce fewer adult dramas, new deep-pocketed buyers have emerged, notably A24, Amazon Studios and Netflix.


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Having more distributors is good news for independent producers looking to make ambitious bets, said John Penotti, president of Sidney Kimmel Entertainment, which made the best-picture nominee Hell or High Water.

Deep-pocketed financiers including Molly Smith’s Black Label Media and Gigi Pritzker’s OddLot Entertainment have stepped in to fill funding gaps. New distributors including A24 and Amazon Studios have been scooping up indie projects at festivals including Cannes and Sundance.

Last month, Megan Ellison’s Annapurna Pictures, known for making Her and Zero Dark Thirty, announced that it would start distributing and marketing films.

“The pendulum has swung in a massive way with the advent of more distribution outlets,” Penotti said. “That’s a terrific inducement for independent producers to be bold.” [9]

How Independent Films are Financed and Why You Should ParticipateIndependent films typically cost far less to make than studio films, but can sometimes find a widespread audience and big profits despite their modest budgets. The difference between an independent film and a studio film is that the companies who finance an indie usually do not have distribution channels. Generally, that makes independent filmmaking very risky, since there is no guarantee that your finished film will be shown on screens. But the big risk brings big rewards.

Critically-approved independent films like Slumdog Millionaire, which was made for $15 million and grossed $370 million after winning the Oscar in 2008, is one of the best examples of how big the profit margin can be. Of course, finding that next big indie film isn’t easy.[10]


Naturally, not all independent films are going to be Academy Award material, but a good portion of indie films make money. My Big Fat Greek Wedding, made for $5 million with a largely unknown cast and released in 2002, had a box office take of more than $368 million. The movie did not win major industry awards, but it was such a cult favorite with audiences that a sequel, My Big Fat Greek Wedding 2, was released in 2016.

Common Methods Used by Producers to Finance Independent Films1. Rich Uncle: The simplest and easiest way producers finance a feature film is to use

money they already have — either personal funds or funds contributed to their film project by friends and family (like a rich uncle), with no expectation of a return or profit. Essentially, this means “gifts” rather than investment or loans. Of course, if they are self-financing, this is the method they’re using. In practice, the contributors to the financing often receive some form of acknowledgement or “special thanks” in the film’s credits.

2. Single Active Investor: This method of financing a film involves bringing in an inves-tor who will share in the rewards when a film is finished and successful. This method involves a relatively simple contract between producer and financier. The agreement will detail the financier’s investment in the project as well as the expected return on that investment.

3. Studio setup for in-house production: This model for financing is very simple. A producer sells the project to a major or mini-major studio, which then develops, finances and produces it.


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4. Studio Production, Finance & Distribution Deal: In this scenario (sometimes called a “PFD Deal”), a motion picture studio (either a major or a mini-major) agrees to fi-nance a production in exchange for the right to distribute the film through its existing distribution network.

5. Negative Pickup Deal: Now we’re getting into some of the more complex approach-es to financing films. Essentially, a Negative Pickup Deal involves borrowing the money to produce the film, using contracts from the pre-sale of distribution rights in enough territories (and for enough money) as collateral for the loan.

6. Investor (Equity) Financing: This is the truly technical, tricky and exciting area of financing films. With equity financing, a producer essentially uses investors’ money to make a movie, paying the investors back from the proceeds. For most film offer-ings, the offer must be made privately, to a limited number of prospective investors. Next, the investors must qualify. For most exemptions, this means that they’re either Accredited Investors, or there are fewer than 35 non-accredited investors. Finally, most exemptions require a disclosure document containing all material information that would help investors make a fully-informed decision about the opportunity. This is typically called a “Private Placement Memorandum,” sometimes called a “prospec-tus” or an “offering circular.” [11]

What to Look for When Investing in an Independent Film• Typical budget range of $5 to $20 million

• Management of project by business people who budget and monitor the use of funds

• Commercial potential of script

• Demographics: A story that resonates with both men and women


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• Contemporary yet timeless story to ensure long “shelf life”

• Appeal to audience that watches movies in a variety of mediums

• Interesting location with lots of possibilities for variety of scenes

• Cast with actors that appeal to men and women; does not need to include major stars or household names to be successful

• Ability to sell the movie to domestic and international markets

ConclusionInvesting in independent films can be extremely rewarding. There are risks, but there are ways to minimize the risks and increase the chances of reaping big rewards. Partnering with experienced film industry and financial professionals is the best way to ensure success.

References 1. “Secondary Sources,” wikipedia.org

2. “Three Trending Alternative Investments for 2018,” Telemus Capital, telemus.com

3. “2017 Global Theatrical & Home Entertainment Spending,” data from IHS Markit, chart from Motion Picture Association of America’s 2017 THEME Report (Theatrical and Home Entertainment Market Environment)

4. “Streaming Movie Revenue Forecast to Surpass Box Office Totals” (TheStreet Investment Alert)

5. “Global Pay TV and Online Video Subscriptions,” data from IHS Markit, chart from Motion Picture Association of America’s 2017 THEME Report

6. Motion Picture Association of America’s 2017 THEME Report and FilmProposals, a company that reports on the independent film industry

7. Interview with Noah Cowan, executive director of SFFilm, jonlevytlb.com, 7/2/18

8. “The Rise of Independent Film,” article, connectionsacademy.com, 6/26/17

9. “Oscar nominations show rise in indie movies,” Ryan Faughhnder, Los Angeles Times, latimes.com, 2/24/17

10. “How to Make Money Investing in Independent Film Makers,” zacks.com

11. “The Modern Movie-Making Movement,” Brubaker Unlimited LLC


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