Thursday, August 14, 2008

CHAPTER # 46: WINDOWS (8/12/2008)

Chapter #46

“The Revenue Flow”

Everyone wants movies. You’ve made a film. (Question) When is a film a movie? (Answer) When it’s in a movie theater. (Why) Because when it’s in a movie theater, there are newspaper ads. When there are newspaper ads the consumer thinks that the film, now a movie, has a value -- The $10 ticket price for admission. Now everyone from cable networks, to video/DVD distributors, to hotel/motel owners will pay money for your movie.

AUTHOR’S NOTE: This is a very important chapter. Especially, if you want to be able to make deals and become a Hollywood player. Read it carefully.

Television networks want movies!
Basic-cable networks want movies, but before they’re on television!
Pay-cable networks want movies, but before they’re on basic-cable!
PPV companies want movies, but before they’re on pay-cable!
Video/DVD stores want movies, but before they’re on PPV!
VOD networks want movies, but before they’re in video/DVD stores!
And, theater owners want your films – but before everyone!

As you can see there is a pecking order in Hollywood and each buyer (aka: licensee) wants your film (caveat..if it becomes a movie) for a specific “window”.

A “window” is a precise period of time, usually in months, when a company is permitted exclusivity to acquire revenues from either the screening, renting or selling of your movie for their specific (video, cable, broadcasting, etc) industry.

Thirty years ago a distributor would place your film in theaters, pay for ads and keep it there as long as the box office receipt revenues were greater than the ads expenses. Then, when the glamour of the film wore off and the ad costs were more than the box office revenues, the distributor pulled the film and sold it to a television network for airing 15-24 months later.

This 15-24 month period, from when a film was in a theater to when it appeared on television, was the “window”. And, Producers, thirty years ago, received revenues from theatrical distributors, television networks and eventually some nominal dollars from the foreign market

Over the next thirty years, however, this 15-24 month window became further divided into sub-windows as new revenue sources appeared. Thus, today, producers generate revenues from PPV/VOD (Pay-Per-View & Video On Demand) companies, video/DVD distributors and cable (pay or basic) networks, a well as the theatrical distributors and broadcasting networks. Further, foreign market revenues have exploded from nominal dollars to mega-bucks during this period.

The typical flow of revenue, from the six sub-windows, to a producer for a distributed feature film in North America will look like:

1st Window (1-2 months) THEATERS
(Miramax, New Line, etc)
2nd Window (2-3 months) VOD
(Hote/motel owners, etc)
3rd Window (4-6 months) VIDEO/DVD (Fox Video, Live Video, etc)
4th Window PPV (1-2 months)
(cable and satellite operators)
5th Window (4-5 months) PAY-CABLE
(HBO, Showtime, Encore, etc)
6th Window (3-6 months) BASIC-CABLE
(A&E, Sundance Channel, etc)
(ABC, CBS, NBC, etc)

Further, besides these sub-window revenues, there are additional dollars from ancillary markets (merchandising & licensing, music rights, publishers, educational markets, airlines, product placement, etc.) and from the foreign market. But for this chapter I’m referring to only revenues from the windows within North America.

Now let’s take a look at how, if you take one piece of this window puzzle out of context and give it a higher (closer to theatrical release) window, the entire revenue flow disappears.

Let’s say a couple of years ago, in search of $10 Million, you flew to Atlanta, Georgia. You get off the plane and run into Ted. You know Ted Turner, the former owner of (6th WINDOW) basic-cable (TBS, TNT and CNN) networks.

You pitch him your $10 million idea and he stops you stating, “Karma. Karma”. Remember Ted lived with Jane Fonda. She taught him Karma. Ted goes on, “I feel Karma. I’m sure your idea is great. Don’t even tell it to me. Not even the title. It’s a done deal. I’ll give you the $10 Million. All I ask is that you get a distributor.”

You are ecstatic. All you have to do to get $10 Million from Ted’s TBS Network, to finance your film, is to get a distributor. Then I’d instantly get on a plane and go to any theatrical distributor and offer them the following, “IT’S FREE! IT’S FREE!” “PLEASE, PLEASE”, “PLEASE DISTRIBUTE IT!”

I don’t know about you, but if I could get $10,000,000 to make a film, get an opening title credit and a nice salary --and all I had to do was get a distributor then I’d be on my knees begging them to take it for free if needed.

IMPORTANT POINT: Due to the excessive cost of prints and ads, 80% (that’s four out of five) films today lose money during their theatrical window. I repeat, four out of five films lose money. That is correct. Four out of five films lose money. Bummer! However, that is only during the theatrical release window.

Guess what. The distributor, even offering the free deal, will probably pass. For, as soon as the distributor hears that Ted (TBS Network) is financing the film the deal is killed and it is nothing about personalities or egos. TBS is a Basic-cable (6th WINDOW) network and Ted wants a movie for TBS. Ted is not a movie distributor. Thus, he will give you the money to make a film if you get a distributor, who pays for the P&A (so it’s not really free), to make it into a movie.

The distributor knows, what you don’t know but do now --that the basic-cable network will only give you the money if it jumps a couple of windows and obtains exclusivity for a 60-90 day period (aka: the 2nd WINDOW) after it’s in theaters. Then the basic-cable network will broadcast it 20 times/month and promote it as a TBS Exclusive. Now, the problem the distributor faces.

Distributors know (I realize, I’m repeating but it’s a very very important point) that 4 out of 5 movies lose money during the theatrical window but eventually profit from the “back end” revenues they garner from the VOD (2nd WINDOW), Video/DVD (3rd WINDOW), PPV (4th Window), Pay-cable (5th WINDOW) sales that follow. However, when a Basic-cable network’s (6th WINDOW) airings jump to the 2nd WINDOW. This instantly kills the 3rd, 4th & 5th WINDOW revenues. Why?

Would you, the consumer, rent a video/DVD after you saw it 20 times on a basic cable network? No! Would you, the subscriber, be happy with HBO or Showtime who charge you $15/month for movies be happy if you see things that have already aired on a basic-cable network 20 times last month? No! I hope you’re getting the point.

Hence, the only chance the distributor has to profit, on the above deal you’re offering them, is by hoping that either (A) the movie gets an excellent box office gross or that, when combined with a (B) foreign revenues (assuming the distributor kept them) and (C) a broadcasting sale 15-24 months later, will generate a profit.

IMPORTANT POINT: (SECRET) Each industry (broadcasting, basic-cable, pay-cable, video/DVD, VOD, PPV) has an established window --Break the order and lose all the revenue.

Thus, if you let a tv network (ABC, NBC, CBS, etc) air the movie before it is on basic-cable (6th WINDOW) it kills the basic-cable sale.

If you let a basic-cable network (USA, A&E, Sundance, etc) air it before it’s on pay-cable (5th WINDOW) it kills the Pay-cable sale.

If you let a pay-cable network (HBO, Showtime, StarZ, etc) air it before it’s in video/DVD stores (3rd WINDOW) it kills the video sale.

If it’s in video stores (Blockbuster, Hollywood Video, etc) before it goes on VOD (2nd WINDOW) it kills the VOD sale.

Even worse, if you let a tv network (7th WINDOW) air it before it’s in video/DVD stores (3rd WINDOW) besides killing the video sale, it kills the PPV (4th Window), pay-cable (5th WINDOW) and basic-cable (6th WINDOW) sales.

If you can learn how to put the windows together, in a manner that satisfies each of these projected revenue sources, will enable you to become a global producer like Joe Roth, Arnon Milchan, Nik Powell, Brian Grazer or Ed Feldman and be able to finance big budget movies.

FOR EXAMPLE: Secure 10% of your film’s budget from a broadcasting network upon guaranteeing them exclusivity for the 7th WINDOW. Then get 15% of your budget from a basic-cable network that wants 6th WINDOW exclusivity. Next, get 20% of the budget from a pay-cable network that wants exclusivity for the 5th WINDOW and an additional 35% of the budget from the video/DVD distributor who wants the 3rd WINDOW.

This all assumes that you get a theatrical distributor with a solid P&A budget and you have just procured 80% of your movies financing.

Secure the remaining 20% from a combination of (A) a theatrical distributor who loves the project; (B) an investor who hopes that the audiences come in droves; (C) a foreign sales agent that lays it off with pre-sales to maybe five (Italy, Germany, Japan, England, Argentina) of the thirty nations and keeps the remaining 25 nations as guaranteed profits, even if the film bombs in North America; and (D) a co-producer with government financing, if the film is shot in their nation, or (E) a bank that does “Gap Financing” (collateralizes unsold windows and markets).

Get the picture? Can you see the pieces of the revenue puzzle? Are you seeing how to put this puzzle together to finance your film? Can you see how to maximize revenues after your film is in theaters? If so, you are starting to think like a dealmaker and welcome to Hollywood.

If your film gets a distributor, and becomes a movie, there will be excellent revenues from the cable (pay or basic) and/or video/DVD industry, that each want exclusivity for the 3rd Window. Therefore, it is important to obtain a more in depth understanding of these two industries who are competing for product (your film, that becomes a movie) for airing or renting.

1. Read movie posters looking for co-producer or co-production names. Then guess which territory or window was that name respresents.