Tuesday, August 19, 2008

CHAPTER #47: CABLE & VIDEO / DVD (8/19/2008)

Chapter #47

“Maximize Revenues”

The cable and video/DVD industries, if your film becomes a movie, will want to license it. Let’s understand a little more about these two revenue sources.

Cable networks have a voracious appetite. They program 24/7/365, which translates to almost 9,000 hours/annum. This means that each cable network sets aside a large amount of funds to either purchase or make movies to fill this 9,000 hour/annum void. But how do you get some of this money and who do you call?

First, you should understand that the cable industry breaks down into six categories, which a cable subscriber receives when purchasing the “basic package”, which is usually comprised of 50-60 channels, from a cable operator for $30-$80/month. The five network categories are:
1. LO/PA

LO (Local Origination) or PA (Public Access) are those blurry, poor quality cable channels that program those stupid talking head interview shows with a woman talking to a plant, or a local yokel demonstrating the best yoga position for guzzling wine --These channels are mandated by law to be free for the public to use. Why?

When a cable operator applies for a cable franchise for a community, in return for the quasi-monopoly the FCC (Federal Communications Commission) dictates that the cable operator must provide free access to the facilities (equipment and studio) for the community’s constituents to produce it also must set aside at least two channels, LO and PA, for these community producers to air their shows for free. Thus, the local high school game or the city council meeting is seen.

SHOW ME THE MONEY: Although it is easy for independent filmmakers to air their film on these channels, there is absolutely no money permitted to be made on a LO or PA channel.

Lease Access channels have slightly better programming than LO/PA channels and you actually see telephone numbers superimposed on the screen that create subtle infomercials (advertising is strictly forbidden on LO and PA programs) and ads. Lease Access channels are where you see people peddling everything from real estate, to furniture, to naked massage parlors.

SHOW ME THE MONEY: You can rent (lease) these channels from your local cable operator ($50-$200 an hour) cheaply, show your movie or program, sell ads to the local gas station or psychic at $25-$100 for :30 seconds and even display a phone number. These channels were becoming a cottage industry until the late 90s, when the Internet popped up and killed it.

All other cable channels with commercial programming (which means they run ads), fall into the basic cable category. When you subscribe to cable, you’re usually offered a “Basic Package” of 40-50 channels. Aside from the 2-3 LO/PA and the 3-4 Lease Access channels, a majority of the other channels, except for pay-cable and PPV, are called basic-cable networks.

SHOW ME THE MONEY: Basic Cable networks license feature films from independent filmmakers, but pay very little ($10,000-$100,000) for multiple non-exclusive airings, unless they get the movie for the 5th Window (Chapter 46), before it airs on any pay-cable network. These basic cable channels are:
1. Independent Film Channel (516-803-3000)
2. Sundance Channel (801-328-3456)
3. A&E Network (212-210-1400)
4. USA Network (212-413-5000)
5. Lifetime (212-424-7000)
6. WTBS/The Superstation (404-827-1700)
7. TNT (404-827-1717)
8. Family Channel (212-782-0600)
9. Bravo (516-803-4500)
10. Disney Channel (818-569-7500)
11. Nickelodeon (212-846-8548)
12. History Channel (212-210-1400)
13. Sci-Fi Channel (212-413-5000)

$10,000-$100,000 sounds like nice money, but it may not be enough to pay back your investors. The real money ($5,000,000-$20,000,000) is in procuring a pay-cable, not basic-cable, sale for your movie.

Pay-cable is where the big bucks are. However, (SECRET) Pay-cable networks only buy movies and the problem is you’ve made a film. Once again, there is a big difference between a film and a movie. I’m repeating solely due to the importance of the concept that “you’ve made a film” and a “film becomes a movie when it’s in a movie theater” --in front of a paying audience. Movies are not free and when a film is in a movie theater, there are newspaper ads. When there are newspaper ads, the consumer subliminally believes that the film, now a movie, has a dollar value which is the ticket price of almost $10.

The problem for pay-cable networks is, the Major Studios’ (20-30 movies/year each) movies when combined with the Mini-Major and Independent Distributor’s movies and a couple of Foreign Flicks, amounts to only 250-300 movies/year --and this ain’t enough movies to satisfy each of their programming needs of 9,000 hours/annum.

For feature film producers, pay-cable channel sales are where the big dollars ($5-$20 Million) are. This assumes that when you get a distributor (Chapter 48), to make your film into a movie, you are able to keep the 5th Window’s revenues (Chapter 46) for yourself. The pay-cable channels are:
1. HBO (212-512-1000)
2. Cinemax (call HBO)
3. Showtime (212-708-1600)
4. The Movie Channel (call Showtime)
5. Encore (303-771-7700)
6. Starz (call Encore)

HBO owns and buys for Cinemax. Showtime owns and buys for The Movie Channel. And, Encore and Starz are really the same company. So actually, there are only three companies that dispense the big bucks: HBO, Showtime and Encore/Starz. Further, each of these networks demands exclusivity for the pay-cable window. So, you can only sell to one of the three.

SHOW ME THE MONEY: For you, the independent filmmaker, with a darling film that has never had a national newspaper ad campaign, there probably won’t be a pay-cable sale. However, if you get a distributor with a P&A budget, there will be a big sale. But, in all likelihood the distributor, not you, will pocket the money from this sale.

PPV (Pay-Per-View)
There are approximately 100 million homes in America with TV. Of those homes, about 80 million subscribe to cable (80% cable penetration). And, 90% of the subscribers have pay-per-view capability, so about 72 million households in America can pay to see a movie in their living rooms before it airs on a pay-cable network.

SHOW ME THE MONEY: In the late 80s and early 90s, the studios thought they were going to make a killing in revenues thanks to 80 million homes with pay-per-view. They planned to make movies in the $3-$5 million range, put them in theaters with a one week $5 million advertising campaign, pull them and put them immediately on PPV while still fresh. The studios were sure that they’d get one out of ten cable subscribers to pay $6 to see a film that had been in a theater the previous week.

With 8 million PPV sales at $6 each this $3-$5 million one-week distributed movie would gross $48 million. Wow!

PPV bombed. Here’s why. You, the consumer, are lazy after a day’s work and feel it is a hassle to order a movie. You must memorize a phone number, get up from the couch, find the phone, dial it and then wait 10-30 minutes for the movie to be ready. Consumers at home want instant gratification.

However, PPV has found a small niche in the hotel/motel industry where a more sophisticated remote and cable box allows you to just point at the TV and--poof!--15 seconds later, the movie pops up. Although it lies under the category of Pay-Per-View it is actually called Video-On-Demand (VOD).

It is my opinion that VOD will get large, even humongous, but not until everyone gets a “digital cable box” at home that is as instant as the boxes in hotels. As of today approximately 50 of the 12,000 cable systems have them. However, cable operators are now feeling a need to update their boxes, because of competition from companies like DirecTV and EchoStar, that also distribute the same networks to your home but via satellite, and -THE WEB.

In the interim, the 2nd Window has been given temporarily to the VOD industry, along with nominal in-flight airline sales. This, in turn, has pushed the video/DVD industry to the 3rd Window with the 4th Window presently belonging to the PPV industry. The 5th Window now goes to the pay-cable networks with the 6th and 7th Windows, respectively, being occupied the basic-cable and terrestrial broadcasting networks.

Although there is no money from the public access channels and little revenue from lease access channels, there is some basic cable revenue and the big bucks from a pay-cable network. However this big check usually goes to the distributor, who put the P&A money into making your film into a movie.

Finally, although the Pay-Per-View initially bombed, thanks to the creation of the Web and broadband (Chapter 50) and the instant capabilities of VOD, billions in revenue will eventually flow to filmmakers. And, hopefully you will be ready with your film when that day arises.

If you make a film with a major release (1,000-2,000 prints), there is probably $50-$80 million in revenue from the video/DVD industry. Make a film with a limited release (20-50 prints), and there is probably $5-$8 million in revenue from the video/DVD industry. Make a film, however, with no release (no newspaper ads) and you’re lucky to get $10,000.

The video/DVD industry has been profitable in foreign nations for 30 years. It is only in the last 10-15 years that videos, and now DVDs, have become a massive revenue source for studios and moviemakers in America, with four categories of product:

1. SELL-THROUGH VIDEOS: These are the videos/DVDs (animation and family) that distributors believe will be more profitable by selling ($14.95-$19.95) directly to consumers rather than selling ($89.95-$109.95) to video stores for rentals.

2. DIRECT-TO-VIDEO (DTV): Also called “Made-For”. These are the low-budget genre titles (horror, T&A, etc) sold to Blockbuster or Hollywood Video ($19.95-$29.95) as shelf filler, that teenagers rent for $2-$3 for a 4-5 day period.

3. SPECIAL-INTEREST-VIDEOS: These are the how-to tapes & exercise videos (“Fonda Does Tai Bo”), auto repair (“Max Your Manifold”), cake decorating (“Martha Stewart Does Everything”), etc.--that are sold via infomercials and at K-Marts.

4. RENTAL VIDEOS: These are the videos/DVDs of movies (those newspaper ads), sold to the 25,000-40,000 video stores for $89.95-$109.95 each, that consumers rent at $3-$4/day.

There are approximately 25,000 video/DVD stores, mostly owned by chains like Blockbuster and Hollywood Video with full shelves that don’t buy just anything. (SECRET) Video stores, just like pay-cable networks, want movies….not films.

SHOW ME THE MONEY: If your film becomes a movie (full-page newspaper ads) there will be 20-30 cassettes (selling at $89.95-$109.95 each) sitting on Blockbuster’s “New Releases” shelves --Twenty cassettes times 25,000 stores, times $100 amounts to $50,000,000.

Now, let’s assume you have made a film (no newspaper ads). It’s a good film. It’s played at Sundance, got honorable mention in Berlin, won the first-time filmmaker’s award at Houston, got a screenwriter’s award at Philadelphia, but, for whatever reason, it didn’t get a distributor. You bombed. But, it ain’t that bad.

There is still money to be made. You’ll find a small video/DVD distributor to design and mail a flyer ($2/each) to 25,000 video/DVD stores, offering the tape at a lower price of $29.95, in the hopes of getting one out of five stores to order one cassette each.

SHOW ME THE MONEY: With one out of five stores ordering one cassette each, it means you will sell 5,000 units at $29.95, which is a gross of only $150,000.

But these stores don’t buy non-distributed, no-name films at retail. They get them at wholesale, 40% off. So, subtract $60,000 from the $150,000. This leaves $90,000. Wait, it gets worse. The video/DVD distributor spent about $50,000 for marketing, which he subtracts from the $90,000. That leaves only $40,000.

Now, do you think the video/DVD distributor, knowing that he stands to recoup $40,000 after expenses, will pay $40,000 for the video rights to your film? He will probably offer you $10,000, $20,000 at the most!

So, if your film plays at a couple of acclaimed festivals and wins awards but doesn’t get a theatrical release…then my gut says you’ll be lucky to get $10,000 from the North American video/DVD industry. But, if you know how to maximize revenue (Chapter 46), you’ll combine this video/DVD revenue with a late night cable sale ($50,000-$100,000) and 5-10 sales ($5,000-$50,000 each) to foreign nations (Japan, Germany, France, Korea, England, etc), that love American independent films, and generate $100,000-$500,000.

Now, I know what some of you are thinking: “Well, how about those made-for-video things?” Yes, there are films produced solely for home video/DVD (video rental), and they’re profitable if manufactured cheaply. Technically they are called direct-to-video (DTV).

When someone announces that they are making a film for the home video market, they are telling you right up front, (SECRET) “That this film sucks. It might even be a piece of shit.” However, skew it to a demographics, make it cost-effectively ($75,000-$150,000), put someone in it (a name, but only a “B” name), have lots of T&A, action or horror, and sell it as a genre product. Then, when combining the video/DVD revenues with foreign market sales, you’ll probably make a small profit.

Have you heard of David Heavener? A video/DVD with his name on the box will sell 15,000 units at $30 each, grossing $450,000. How about Cynthia Rothrock or Shannon Tweed? These names will sell 20,000-25,000 units, grossing $600,000-$750,000. Names like Andrew Stevens, Harry Hamlin or Jason Priestleycan get you 1-2 cassette sales per store and your movie will garner 25,000-50,000 units in sales, generating over $1,000,000.

How about Lorenzo Lamas? Rutger Hauer? Eric Roberts? Mickey Rourke? Increasing name recognition produces more and more cassette sales. And in the past two years the black hip-hop video market has been profitable. So get a rapping name like Master P, Snoop Doggy Dog, Doctor Dre, Jay-Z or DMX and you should profit.

All video/DVD distributors are members of the Video Software Dealers Association (VSDA), a trade association of video retailers and distributors. The VSDA has an annual convention in Las Vegas where all video distributors rent space, display their forthcoming titles, and try to sell to video storeowners.

The VSDA convention puts 150 video/DVD distributors together in an exhibit hall for one week. This presents a wonderful opportunity for new filmmakers to meet every video distributor at one time.

If you want to make big bucks from the video/DVD industry, then make sure you get a theatrical deal with a film distributor who (big point) permits you to keep the video/DVD revenues. And, if you don’t get a theatrical distributor expect little to no revenue. However, if you manufacture your film cheaply, win some festival awards, or at least have a recognizable name, you could generate a profit when combining the video/DVD revenues, with a cable sale and foreign revenues.

More and more I’m sure that you are seeing the importance of obtaining a distributor with a P&A budget to ensure profits. Therefore, let’s now learn about the world of distributors –how to get one, how to negotiate and how to ensure profit.

1. Watch HBO, Showtime and Encore/Starz
2. Order 2 PPV movies from your cable system
3. Count DTV videos at Blockbuster
4. Attend the next VSDA convention