Saturday, August 30, 2014

An approach for funding independent films...via Netflix

The business and process of funding, making and distributing motion pictures is going through changes at least as wrenching as those caused by the rise of television after the Second World War:

  • Technology has changed everything from movie production to theater projection. You can buy a camera that will give you images that stand up quite nicely in a movie theater for the same price as a big screen TV from a few years ago. Editing and color correction that once required hundreds of thousands of dollars of equipment can now be done on a PC that you buy from Amazon. The only company that still makes motion picture film is Kodak, and they're still in the business only because the big U.S. motion picture distributors agreed to buy a minimum quantity of film per year. Film is almost completely phased out as a delivery medium for theaters; it's been replaced by digital projection.
  • International revenues from movies are starting to exceed domestic revenues. In particular, China has become the single biggest and most important international movie market. Dialogue-heavy movies tend not to do well in China and some other markets, so the major studios have shifted their emphasis to expensive, special effects-heavy movies like Marvel's superhero series.
  • The shift in emphasis from plot-driven to action-driven titles has dramatically decreased the amount of funding available for smaller, more literate movies that were once the "bread and butter" of the major studios. There are still a few producers who make these kinds of movies (Megan Ellison's Annapurna Pictures is a good example,) but by and large, the major studios acquire these titles for their prestige and award-winning possibilities, not with the expectation that they'll make much money.
  • Most of the major studios have shut down their independent divisions, or as in the case of Universal's Focus Features, have radically reorganized them to fit better with the studios' new international emphasis.
  • Streaming and Video-on-Demand have largely supplanted, although not totally replaced, DVDs and Blu-Ray discs for home video distribution. The studio revenues from streaming and VOD are significantly less than what they made from physical media, but consumer preferences (a shift back to movie rental after years of purchasing DVDs) have forced the studios to adapt.
All of this means that if you make small, independent movies, it's getting harder and harder to get them funded and onto movie screens. Note that I didn't say "get them distributed." It's easier than ever to get independent movies into consumers' homes, with Netflix being by far the biggest outlet, while Amazon, Apple iTunes, Crackle, Epix, Google Play, Hulu Plus, Redbox Instant, Sony Unlimited Video, VHX, Vudu, Xbox Video, Yekra, YouTube Movies and others also stream movies to consumers. Some of these distributors selectively license titles, while others are open to anyone.

For independent producers, the problem isn't finding distribution--it's making money. Let's take a movie that costs $1 million to produce (including post-production.) You send the movie to Netflix, but they offer you only $1,300 for the rights plus a bonus based on the number of times your movie is watched. Apple's iTunes and Amazon won't pay anything upfront, but iTunes will sell your movie for a 30% commission, and Amazon will take a 15% commission. Unless your movie is very popular, none of the three will do any promotion for you, and the promotion they will do is limited to preferred placement of your movie on their websites and apps. That means that you've got to budget a significant amount of money for promotion, which may include:
  • Submissions to film festivals
  • "Four-walling" (renting) theaters to get a theatrical release and reviews
  • A social media outreach campaign
  • If you happen to have a well-known actor or two in the cast, queries to radio stations, local and national daytime news shows, daytime and nighttime talk shows, syndicated daily entertainment shows and celebrity/entertainment magazines.
There's no single rule of thumb that says how much you should budget for your promotional campaign, but for a $1 million movie, the very least that you should expect to spend is $100,000. If you've got a lot of well-known actors and a strong pitch, you could end up spending $1 million or even more (but in this case that's good news, because it means that you're getting lots of coverage.)

So, let's say that all-in, you've got $1.25 million in the movie and promotion. You've got to get back at least that $1.25 million just to break even, and you and your investors would certainly like more. Let's take a simple case: You price the movie at $10, and you sell 60% of your total sales through Apple and the remaining 40% through Amazon. To break even, you need to sell a little under 165,000 copies. 165,000 is a high but not completely unreasonable number if your promotional campaign is successful. However, you have to raise the $1.25 million at the very beginning of the project in the hope that you can sell 165,000 or more copies at the end.

There may be another model, at least for some distributors and filmmakers. Netflix has built a very successful business using an "all you can eat" subscription model. With its recent price hike, Netflix charges $8.99 per month in the U.S. The company has 48 million subscribers worldwide as of their last financial quarter. The cost of the infrastructure and bandwidth to serve those customers is factored into the $8.99 price.

Netflix could create a second tier--call it "Netflix Premiere"--that would offer exclusive new movies 30 to 90 days before they're available through any other outlet, for an additional $5/month. If 10% of Netflix's subscribers sign up for the Premiere service, that would be an extra $24 million of gross revenue each month--largely incremental revenue, because the infrastructure and bandwidth are already paid for. A hefty portion of that $24 million could be used to fund new independent films. If Netflix reserved 70% of the revenue for film production, that would result in $16.8 million that the company could use to fund films each month. To a studio, $16.8 million is chump change, but to independent filmmakers, that could represent two or more complete films.

Netflix could distribute the money in two ways:
  • It could be an investor in a film (for example, funding half the film while other investors and distributors fund the remaining 50%.)
  • It could fund the entire cost of the film, and own the film outright when it's complete.
Netflix would have the exclusive first distribution window in either case, as a condition of the producers accepting its funding. It's very unlikely that any film funded by Netflix would get domestic theatrical distribution because of the first-showing restriction, but there's a good chance that at least some of the films would be picked up by other streaming and VOD distributors. There might be some opportunities for hotel and airline distribution as well, not to mention international distribution in markets where Netflix either doesn't do business or doesn't exercise its first-showing right.

For the first year or two, Netflix would have to underwrite the Premiere service, acquiring and showing movies until its subscriber base covers its costs. After that, however, the Premiere program could underwrite at least a dozen independent films a year, and potentially many more. This approach certainly won't fix the independent film funding problem, but it will put a dent in it, and if it's successful, it'll encourage other companies to launch similar programs.

Saturday, August 23, 2014

Opening Schrödinger's Box

Robin Williams's suicide has gotten me thinking a lot about death (more than usual,) which got me thinking about Schrödinger's cat. Physicist Erwin Schrödinger proposed his "cat-in-a-box" as a thought experiment, and an analogy, to explain some of the "spooky behavior" (to quote Einstein) of quantum physics. In the experiment, a cat is placed inside a box, into which has already been mounted a capsule of poison gas and a hammer with a trip mechanism, connected to a radiation detector. The box is closed, and if the radiation detector senses the decay of a single atom, it trips the hammer, the gas is released and the cat dies. Assuming that you can shield the box from all sources of natural radioactivity, to which we're exposed all the time, whether the cat is alive or dead at any given time is a probabilistic exercise. Schrödinger argued that while the box is closed, the cat is both alive and dead at the same time. We don't know the cat's true state until we open the box, at which time we can definitively learn whether the cat is alive or dead (if it's alive, the probability that it's dead is zero.)

Schrödinger was illustrating a paradox of quantum physics, which is that a subatomic particle is in all potential states simultaneously until it's observed or measured, at which time it collapses down to a single state. Let's now use that subatomic particle as an analogy for a human (or animal, or plant) life. While the box is closed, the person is alive; when it's opened, they're dead. So, alive and dead aren't the states that we're interested in. When the person is alive, the have the potential to do an enormous number of things. A baby has the potential to do just about anything. Circumstances (where they're born, how wealthy their parents are, the quality of their schools) can either limit or enhance their potential, but they still have enormous potential. As time goes on, choices they make and choices made for them can further constrain their potential, but even a career choice made fairly early isn't necessarily constraining.

For example, Michael Crichton, author of "Jurassic Park" and many other works, originally wanted to be a writer but switched to anthropology while at Harvard, then attended Harvard Medical School and got his M.D. degree, but wrote novels while still in school. "The Andromeda Strain," which he wrote in 1969, was the first of his books to be adapted into a movie. He started writing television screenplays in 1978, and directed his first film, "Coma," that same year. He was also a father, and given that he was married five times and divorced four, a not-so-successful husband. He could have made a career out of any one of his pursuits, but he was able to do all of them in a 66-year lifespan.

We retain the potential to do many different things throughout most of our lives. We may be temporarily trapped in a job (or lack of a job,) a location or a relationship that limits us, but there's usually a way out. Going back to Robin Williams, even if he had early-stage Parkinson's Disease, he still could have worked for several years, and then turned his attention to his family and to charitable causes, as Michael J. Fox has done very successfully. (I'd argue that the work that Fox has done since largely leaving acting behind, like the work that Bill Gates has done since leaving Microsoft, is far more important and useful to society than the work that he did in his first career.) For Williams, however, depression was the limitation that he couldn't escape or control.

To return to Schrödinger's metaphor, when we die--when the box is opened--all of our potential is gone. We no longer have any options. Our quantum superposition collapses down to one state. We've all heard the saying "Where there's life, there's hope." A more accurate version is "Where there's life, there's options."

Tuesday, August 12, 2014

Robin Williams: A light in the dark

Like a lot of people, I'm still trying to process Robin Williams's apparent suicide. I spent most of my adult life in the Bay Area, and several years with some attachment to the comedy scene, so it was impossible not to have some contact with Robin Williams. I remember in the early 1980's, I was at work when word broke that Robin was going to do a set at Foothill College, a community college in Los Altos Hills. My recollection is that the concert, which was held in the college's stadium, was free--just show up. His opening act was singer Bobby McFerrin, and as I recall, the two of them were working out material for a tour that they were about to begin. This was a few years before McFerrin's "Don't Worry, Be Happy" became a hit, and for most of us, it was the first time that we'd heard McFerrin. It turned out that McFerrin's improvisational singing was a perfect match for Williams's improvisational comedy. It was a wonderful performance by both of them, and I remember it thirty years later.

About ten years later, I met Robin's first son, Zack, and his first wife, Valerie Velardi, both of whom were very kind to me. I visited their home in San Francisco and saw Zack's bedroom; Robin had made sure to equip him with the newest and best Apple Macintosh computers. Zack could have been spoiled, the son of show business royalty, but he was totally down-to-earth.

Robin Williams's struggles with drug and alcohol addiction are well documented. There was a darkness to him that was rarely visible in public but that became more readily apparent in private interchanges with his friends. I won't go further. When I first heard that he died yesterday of an apparent suicide, I was shocked, but the surprise was lessened when I heard that he had been struggling with depression. As someone who's dealt with depression for most of my life, I know how quickly and easily it can turn into a struggle to stay alive. Depression warps your perception--it makes you think that things will never get better, and that death is the only escape. Anyone who thinks that this was a voluntary act on his part doesn't understand depression at all. It isn't something that you control--it's something that controls you.

We've lost one of the best comedians of our lifetimes, and someone who could have had many more years of productive life. On the other hand, his pain is over. The pain of severe depression is overwhelming and excruciating, and it's really impossible to understand if you haven't gone through it yourself. I hope that we use this loss as an opportunity to better understand depression and suicide. More people die each year in the U.S. from suicide than from auto accidents, but the media rarely cover it out of fear that it will encourage more people to take their own lives.

We need to start paying attention to depression, and to recognize that it's a medical condition in the same way that heart disease or cancer is a medical condition. It's important for us to remember how much joy Robin Williams gave us for so long, but it's equally important for us to use his death as a catalyst to learn more about depression and make mental health as important as physical health.

Saturday, August 09, 2014

Sisters have to do it for themselves

I just read an anonymous post on titled "What It's Like Raising Money As A Woman In Silicon Valley." The article details the sexist gauntlet of groping, marriage propositions and insults that the author had to run as part of the process of raising money for her company. Her experience is hardly unique; there's an ever-growing body of documentation of the sexist, racist and bigoted atmosphere that non-male, non-white founders are confronted with in Silicon Valley. My stomach churned as I read her article, partly because of her experiences, and partly because I saw some of my own past behavior reflected in the men that she dealt with.

Women have never had an easy time in Silicon Valley, whether as an employee (of which there are few) or as a C-level executive (of which there are much fewer.) Women have been concentrated in marketing, PR and HR positions, and people in those positions, male or female, rarely get an opportunity to run technology companies. Female software developers and hardware engineers have always been rare, and have had to put up with a disproportionate amount of sexism because of their rarity.

Social scientists say that it's much easier to pass laws than it is to change how people think. The proof of that is easy to see: Civil Rights legislation made segregation illegal 50 years ago, but racism is still easy to find. The first sexual harassment trial in the U.S. was 40 years ago, but there's still plenty of sexual harassment to go around. We can't legislate away racism, sexism or bigotry--but we can do an end run around them.

Women can't depend on male-dominated venture capital firms to change the way they do business--only four of the top 100 venture capitalists on Forbes's Midas List are female, and only four more made the magazine's "long list." There are a handful of seed and VC firms run by women, such as Golden Seeds and the Women's Venture Capital Fund. We need a lot more. We need women who have been successful in business and finance to step up and help other women succeed. For that matter, we need a lot more African-American-, Hispanic- and Asian-run seed and venture funds. All of these groups face discrimination from the VC community. That's not to say that every seed investor or VC partner is a sexist, racist or bigot--far from it. However, the investment community is largely an "old boys' club," and if you're not male, white and under 40, you're going to have a hard time finding funding, no matter how good your team and ideas are.

Los Angeles and New York have been making a strong push to compete with Silicon Valley for startups and technical professionals. One way that they could succeed is to help build a community of seed and venture funds in their cities to serve underserved groups, like women. Silicon Valley VCs often make it a stipulation that out-of-town startups must move to Silicon Valley in order to get funding, and the vast majority of startups offered money with that condition agree to move. Startups offered money by Los Angeles- and New York-based investors with similar stipulations are very likely to move as well, especially if they can't find funding in Silicon Valley.

As the number of investment firms targeting women, African-Americans, Hispanics and Asians increases, founders will be able to bypass investors who engage in sexual harassment, racism and bigotry. Those investors will see their deal flow diminish, and they'll be forced to either change their behavior or get out of the business, because at the end of the day, another song title describes what's most important to them: "It's Money That Matters."

Saturday, August 02, 2014

Beware the Monoculture: The risks of focusing on San Francisco and New York

I just finished reading a good analysis of the market opportunity for valet parking startups, written by Charles Hudson. He writes that the real competition for these startups may be public transit, Uber, Lyft and ridesharing services. In San Francisco, where he's based, he notes that these services have cut down on the use of cars, and therefore, the need for parking. However, it was while reading his post that I realized that San Francisco is primarily representative of San Francisco, and that extrapolating from the San Francisco market could get startup founders, as well as investors and analysts, in trouble.

San Francisco has been a parking nightmare for decades--at least from the time that I moved to the Bay Area in 1983. It's hard to find commercial parking, and it's expensive when you do find it. On-street residential parking is a nightmare. On the other hand, despite the many complaints about the Muni bus system, San Francisco has a very good public transit system, with busses, subways, streetcars, cable cars and trains. It was an early Zipcar market, and it's also the home of both Uber and Lyft. The availability of so many transit options grew out of the natural limitations imposed by San Francisco's geography and the concentration of startup talent.

You don't have to go very far to find a counterexample to San Francisco. Los Angeles is much bigger and more spread out than San Francisco, even though its downtown is smaller than San Francisco's. Los Angeles's public transit options range from poor to nonexistent. Cars are essential for getting around Los Angeles--its geography shapes the market for transit options just as surely as San Francisco's does, but in a different direction.

That illustrates a problem that many startups are faced with: There's demand for them in the area where they were founded, but demand tapers off dramatically when they move into different markets. For example, meal delivery services have flourished in both San Francisco and New York. Even though New York is much bigger than San Francisco, both cities have highly concentrated populations and multiple transit options. Both cities also have a proportionally large population of high-income earners, who can afford to pay for convenience. However, conditions are very different in, say, Omaha, Denver and Dallas. That limits the growth potential for those delivery services--they may do very well on the coasts, but find limited viable markets in the rest of the U.S.

There are many other services that you can think of that take advantage of the population concentration, transit options and high-income populations of San Francisco and New York, but that may not play as well in other places. There are also services that target other unique market characteristics--for example, a dating service that targets techies might be very successful in New York and San Francisco but less so in Pittsburgh or Cleveland, which have much smaller young techie populations.

You might say "We did lots of customer development and found that there's high demand for our service." That may well be true, but where did you talk to potential customers? If you only talked to them in your home city, you've probably got a biased sample. It's important to talk to people in multiple cities with different underlying conditions. Only then can you begin to understand where your service will and won't work. That, in turn, will help you to more accurately gauge your Total Available Market, and you'll be able to launch in the markets where your business is most likely to be successful. In short, successful customer development requires that you not only get out of your building to talk to customers, but that you get out of your home city as well.