Investing in Motion Picture Productions

A motion picture produced on a budget of just $140,000, "Texas Chain Saw Massacre" grossed $30,859,000 at the U.S. box office, making it one of the most successful independent films in cinema history. Can the investor today equal that performance? With 400 films released each year, the answer is "Yes," provided you follow these cautious guidelines. Making motion pictures can be addictive. Many directors, writers, actors, actresses and producers become hooked by their art form. It's hard work and a lot of fun. The environment of creating something good makes participants feel great. The financial rewards can be stunning. That's why you – the investor – want to step back from the picture-making scene and insulate yourself against that climate of addiction. The most logical way to do that is to retain an experienced attorney who specializes in the critical contracts that are the backbone of making a motion picture. Even if you hold an MBA from an accredited school with motion picture roots like UCLA's Anderson School of Management, you need solid legal representation. Your goal should be to invest money with as much control over what happens to that money as your attorney can possibly negotiate. Mark Litwak, the New York attorney who moved to Los Angeles in 1979, published a book of more than 60 essential contracts almost 20 years later, based on his experience. Contracts for the Film & Television Industry is published by Silman-James Press. It's a good reference, but you don't need it just yet. And when you do need it, you can order a CD-ROM from Hemstead Entereprises, Inc., owners of the Mitwak copyright. The CD costs $149.95 plus shipping. It lets you fill in the blanks with essential information in 60 different contracts. Before you get to that stage, back off and get a better perspective on what's entailed in this lucrative but perilous investor atmosphere. This writer's experience dates from the 1960-1970's when we wrote film scripts for Gordon Parks Jr. who directed Superfly to critical acclaim, bought a ranch in Kenya with the profits, then died in a plane crash at Nairobi. Yes, you want to protect your assets with an attorney experienced in the field, but even more so, you want to establish from the outset the controls that protect your money. That's done with the first two contracts. You begin with an option (contract one) to acquire the rights to produce a copyrighted work, and tied to that option contract, is the detailed contract (contract two) that covers just about everything but the kitchen sink, and if you are cautious, you will want the kitchen sink included, too. Those two legal instruments are the soul of your investment. The first is called Option and Literary Purchase Agreement which includes Exhibit A, the actual Purchase Agreement, Exhibit B, a short form of the option that's filed with the U.S. copyright office, and Exhibit C, the short form copyright assignment. Your option is generally good for one year and usually, for a price, can be extended. The option allows you time to raise production money. What kind of production money are we talking about? The answer is that this is not a nickel and dime deal. It's big money and each year it seems to get bigger. Relying on information put together by Barbara Somlo, Kumar Rajaram, and Reza Ahmadi at the UCLA Anderson School of Management, movie releases at theaters are generating about $10 billion a year in revenue, up 80 percent from a decade earlier. The cost of producing these films rose on average to $98 million, up $48 million from a decade earlier. The major component of these costs is the development and production budget, which is were you the investor should want to place your money. Obviously, if roughly 60 percent of the costs are yours, you would be entitled to 60 percent of the returns, or better, depending on that all-important attorney's ability to negotiate contracts. The Motion Picture Association of America (MPAA) reports that only 19 of the 483 movies released in 2004 generated a profit higher than $50 million. Still, how profits are measured in the industry has always been a rather nefarious question and is likely to remain so in the foreseeable feature. What you want to avoid is the perils of distribution (what happens after you produce a film), because there are 7,000 theaters out there and selecting a distribution pattern is an art unto itself in which no sane investor would ever wish to become involved. It's pretty obvious that once you've invested in the production of a product, you want to step away from what happens to it, because that's beyond your control. Distribution of a motion picture is handled by such domestic distributors as Buena Vista (Walt Disney's distribution arm), Columbia (Sony's distribution arm), Dream Works and Warner Brothers. The distributor secures rights from the producer (you and your partners) in another all-important contract. (This is where you really need that professional attorney.) The distributor undertakes marketing (including advertising in television, local and national media), and develops a distribution plan that specifies how many and which theaters to screen a new movie. That is done is conjunction with exhibitors, who own the theaters. These are, for example, AMC, Regal, AVCO, General Cinema, and Mann. At this point you – the production investor – are out of the picture, so to speak. Just how and where and how long a film shows is one of the most complex arts ever devised. It's done different ways by different companies and is subject to constant revision. Weekly reports on motion picture revenues have become a staple of entertainment reporting on television. But forecasting results based on complex models is a field betterleft to the professionals. To demonstrate how far off these professionals can be, take a look at some examples of missed box office forecasts for opening weekends: Forecast for X-Men, $29.5 million. Actual box office, $54.5 million. Forecast for The Mummy Returns, $50 million. Actual box office, $70.1 million. Forecast for Star Wars – Episode I, $150 million. Actual box office, $105.7 million. So you're looking at errors of as mush as 40 percent. On the other hand, production costs aren't any where near as complicated, and that's where you should want to invest. Now you're competing with major studios for the rights to make a copyrighted work into a film. What's the competition? The competition for raw material (copyrights) comes from the big guys ― Walt Disney, Sony Pictures, Warner Brothers and Dreamworks. And from hundreds of independent producers. The independents range from major companies just below the rank of the well-financed, all-purpose studios, to medium and small continuing companies, to firms that fold up their tents after just one production. There are many thousands of films produced each year worldwide that do well, make money, and create income opportunities. The word "opportunity" is what you're looking for – "Texas Chain Saw Massacre" would have never attracted the big guys. Out of necessity, films are now financed in a variety of complex ways including major studio backing, joint ventures, outside private or public investors, limited partnerships and pre-sales of ancillary and distribution rights, among others. Regardless of how a film is financed, though, all parties involved normally have a good idea of the principal revenue-producing areas from which their investment will be recouped and, they hope, a profit made. They usually are also familiar with the various stages of production that ultimately lead to the release of a finished motion picture. Again, you need professional help in such endeavors. What can you expect to pay for an option? Usually, about 10 percent of the ultimate price of acquiring motion picture copyrights. A copyright to be acquired for $600,000 would cost you $60,000 for a one-year option. Though the stakes are high, the returns for a blockbuster hit can be monumental. In 1976 only one film had generated over $100 million in U.S. and Canadian box office receipts; by 2000, close to 200 films had reached the $100 million mark. Considering also that foreign markets can equal or surpass the U.S. and Canadian gross (the film Titanic grossed over $1.8 billion worldwide, with Star Wars: Episode I-The Phantom Menace at $920 million), the profit potential for a hit can be astronomical despite the high cost of producing a film as well as the odds against box office success. Blockbusters aside though, there are many thousands of films produced each year worldwide which do well, make money, and create income opportunities, both in the initial year of release and for many years afterward. The initial market for any film is the exhibition in U.S. and foreign motion picture theaters. Films are then released as DVDs, videocassettes and laserdiscs for purchase and rental, with subsequent sales to pay-per-view, to pay cable services (HBO, Showtime, Disney, The Movie Channel, etc.), to the television networks (ABC, CBS, NBC, FOX, etc.), to local television stations or basic non-pay cable services (USA Network, Lifetime, etc.) and to foreign television and cable stations. Soundtrack albums and singles are also often released with many of them becoming major chart hits, in turn creating additional income from such ancillary sources as U.S. and foreign performance income from radio, television, cable and theater performances, worldwide mechanical royalties from tape and CD sales, download and streaming royalties and commercial advertising fees, among many other sources. Agents, managers and entertainment lawyers specialize in securing rights to creative material. If you are serious about securing the rights to a copyrighted work, you should contact an experienced professional like Arent Fox to help you. Do not bid on motion picture rights without such help. Helpers include groups like Arent Fox, Chicago; in New York, William Morris Agency and Curtis Brown Ltd.; Irene Webb, Los Angeles; Paul D. Supnik, Beverly Hills, Mark Litwak, Santa Monica, Lloyd L. Rich, a Denver attorney practicing publishing and intellectual property law, and scores of capable others. All of these people and companies are in a position to help the investor. Each can found through directories on the Internet or good old-fashioned telephone books. But until you locate a copyrighted work that you'd like to acquire, there's not much point in contacting them. The fundamental question you need to answer is whether you and you alone (or in conjunction with partners of a like mind) are willing to risk hundreds of thousands of dollars to make millions of dollars. To do that, you've got to trust your instincts. Walk around a bookstore; find a story that you think will make a good movie. Then act on your instinct. One new place to look for movie copyright investment is the advertisements on eBay, where the "other" category takes on fresh meaning coined in that word "opportunity."