Over at gawker.com they’ve had a recent spat of articles on the film industry written by Edward Jay Epstein.
In the first piece on independent cinema, he argues that Avatar’s huge success is one cause of the death of independent film financing. Citing one example, a film was offered that could earn back 100% profit, but was turned down by big studios so they can seek even greater financial returns by blockbusters like 2012.
Epstein goes on to explain that the major source of funding for indie filmmakers was through pre-selling the distribution rights to foreign territories and using this as collateral to borrow from banks. Due to the large amount of indie distributors in the U.S., these deals were passed assuming there would not be difficulty in finding a release Stateside to pad promotion in other parts of the world.
For the independent distributors in the U.S., the major funding came from deals with cable companies like HBO. However, cable companies realized they didn’t need as many films to keep subscribers and less cash went to these distributors, like New Line Cinema, Fine Line Features, Picturehouse, Warner Independent, Fox Atomic, Paramount Vantage, and Miramax: all of which have gone under or have been bought out by the big guys since the cable company cutoff their cable deals.
And on the Netflix front, Epstein says they don’t have the type of collateral to compete in the long run with cable. Currently they’re still doing most of their business with DVDs mailed to subscribers because of a legal loop-hole:
It gets its DVDS from wholesalers and even retail stores. It can then rent them because of a court-approved “first sale doctrine,” which says that once a person buys a DVD, he can re-sell it or rent it out.
However, this “first sale doctrine” does not apply to streaming films, where Netflix is trying move it’s business. Thanks to a deal with Starz, Netflix has acquired the digital streaming license to many newer films from Disney, Sony and other studios. However, both cable companies competing with Netflix’s (why subscribe to HBO when you can rent their content through Netflix?) and the film distributors are invested in closing Starz’s sub-lease agreement with Netflix.
Epstein says Netflix can’t compete with HBO, who is rolling out its own streaming services, but since Netflix’s main business comes from older titles, it won’t necessarily die out.
It’s interesting to consider the film ecosystem and one area’s shift causes such drastic consequences. Especially in regard to the first piece: what’s going to happen to independent films now that drive-ins are dead, independent distributors are an endangered species, and less money is available at major studios for smaller films?
I imagine one of these major blockbuster films is going to flop and that’s when studios will watch their budgets. Carolco Pictures (Terminator andTerminator 2) collapsed due to Cutthroat Island and all it would take is the failure of a 2012 or a Transformers to kill a company. With smaller budget films like District 9 (it had a $30 million budget, but that’s small compared to the $200-400 million summer blockbusters) and Paranormal Activity, there are obviously companies thinking of their wallets.
Also, the independent distribution market will come back at some point (maybe with the aforementioned blockbuster flop). Right now one business model has disappeared, but someone will find a new one.