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Hollywood film financing, distribution model evolves as online services abound


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Hollywood film financing, distribution model evolves as online services abound

With new digital platforms connecting producers to audiences and investors, independent filmmakers are finding cracks in the traditional Hollywood studio model.

Rather than pitching a film at festivals to attract a studio buyer or going to banks for bonds against equity, tax incentives and foreign sales on what is typically a high-risk venture, a filmmaker can pitch a concept on a crowdfunding site, market on social platforms and partner with ticketing platforms for other sales and marketing opportunities. Success here can prove an initial baseline demand for the film, which can attract further investment.

"There are a lot of great ideas to make it easier for people to enjoy a lot of content and access more traditional venues in nontraditional ways," Bennett Pozil, a film financing executive at East West Bank, said in an interview. "At the end of the day, we’ll find out what that model becomes."

Go big, or go digital

Hollywood studios have been shifting to big-budget, low-risk franchise films in light of tightened foreign investment from China, which has impacted funding for middle-budget film slates and to streaming platforms taking more small-budget projects, Pozil said.

Since 2010 the box office for sequels has almost doubled, and since 1997, the number of major studio theatrical releases has dropped by 1.8% each year on average, according to data from Kagan, a media research group within S&P Global Market Intelligence. Since 2014 there has been a more rapid decline, with 484 theatrical releases in 2014 dropping over 7% to just 449 films in 2016, then rebounding a little to 465 films in 2017.

At the same time, with fewer studio films being picked up, the budgets for major studio releases have been increasing. The total costs of the 484 films released in 2014 were $14.65 billion, while the costs for 449 films in 2016 were $15.79 billion. Smaller independent studios still made the most films — 332 in 2016, for example but the total cost of those films was just $3.95 billion.

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Buy the ticket, take the ride

Fewer studio films and higher budgets are driving independent producers to leverage opportunities outside of the legacy film model. The new opportunities grew from online ticket sales and seat reservations, allowing companies like Atom Tickets LLC and MoviePass Inc. to launch third-party ticketing platforms. Atom focuses on the social experience, providing in-app tools for picking and buying movie tickets in a group. Helios and Matheson Analytics Inc.'s MoviePass is a subscription ticketing service, providing three movie tickets per month for a $9.95 fee.

In the U.S., online seat reservations and ticketing are new to a mature industry, with only about 20% of tickets being sold online, compared to 80% in China, where the industry is younger and more digitally savvy, Atom co-founder Matthew Bakal said in an interview. Bakal expects the U.S. to catch up to China in about two years as more U.S. theaters add reserved seating and consumption patterns catch up, which will allow the digital platforms that depend on them to expand.

A key part of these new platforms' business is providing targeted digital marketing for studios and filmmakers; producers can now partner directly with ticketing and social platforms rather than lean on a studio for marketing. Part of MoviePass' stated mission is to drive attendance to small and independent titles. The company claims to be responsible for 30% of the box office for certain films it advertises.

"We want people to explore the smaller films. The big blockbuster flicks don't need MoviePass to help them. Disney does absolutely fine without MoviePass," MoviePass CEO Mitch Lowe said in an interview.

Indie, darling

Before filmmakers launch a DIY marketing campaign, they need production funding. Crowdfunding sites specializing in film, such as Forest Whitaker-backed Juntobox, which partners with Indiegogo Inc., are already bringing films to market.

Independent film producer and investor Justin Begnaud is one example of this. Begnaud combined online marketing and financing tools with traditional business maneuvering to make "Super Troopers 2." His team secured a contract with 21st Century Fox Inc. that required the filmmakers to raise the marketing money in exchange for studio-backed distribution in 600 to 800 theaters.

Rather than fishing in the traditional channels for funding, Begnaud put the film on Indiegogo. About $5 million was raised in a week, and people started linking the Indiegogo campaign across social media, said Begnaud.

"It just started sparking like wildfire. The interconnectivity of the marketing was insane," he said.

The crowdsourcing demand created a proof of concept, which the filmmakers brought to private equity firms to secure additional funding, and Fox decided to bankroll further marketing and expand the release to 1,200 screens. The film cracked $15 million in its opening weekend, doubling internal estimates, Begnaud said.

These new models have so far worked best for existing intellectual property, like Begnaud's sequel to the cult classic "Super Troopers" or the crowdfunded film adaptation of TV series "Veronica Mars." But the opportunity could expand as the model becomes more mainstream and more celebrities and social media influencers leverage the tools, supported by the rise of new cross-platform content companies, such as Studio 71, film professor and entrepreneur Frank Chindamo said.

Studio modeling

New opportunities aside, getting a film in theaters still depends on well-connected and well-funded studios. However, that too could be changing with enterprises such as Tugg, a platform that connects filmmakers to theater operators for distribution. There could be more "four-wall" opportunities in the future, where the filmmaker rents a screen directly from the theater owner. Fathom Events, for example, distributes films and other content on theater screens under four-wall arrangements.

Historically, four-walling requires a filmmaker to guarantee a certain audience, which was difficult in a pre-digital age. But Begnaud said with the growth of online demand, those opportunities could be opening up. But Ted Mundorff, CEO of independent theater company Landmark Theatre Corp., said four-wall arrangements can be very expensive. "There's not some big successful four-wall story out there. You're going to get hammered up front," he said.

For anything bigger than four-wall deals, it is very difficult to distribute a film without an established distribution partner, Mundorff said, pointing to "The Passion of the Christ." The 2004 American biblical drama film directed by Mel Gibson attempted to distribute independently on "studio terms" for the theaters and ended up suing Regal Entertainment Corp. on the revenue share.

For the foreseeable future, many filmmakers will be tied to the old studio models for theatrical release, Mundorff said.

Nonetheless, MoviePass' Lowe is optimistic. "I think we're finally at a point where the innovative minds are starting to work on the theatrical experience," he said. "If you look at these last 20 years, all the innovation has been on the streaming side, the subscription side, all the other ways to consume entertainment, not in the movie theater. Right now, what is fantastic ... is we're all now focused on the theatrical experience."