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Jeff Steele

Jeff Steele

Posted: January 14, 2011 01:10 PM

I feel that last two years of financial volatility have abated enough to get some clarity on what filmmakers should be looking for in 2011. Obviously, life has yet to return to normal, but that's not going to happen in 2011, nor 2012. Our national debt and deficit are going to continue to take their toll on every facet of our lives. Foreboding as that sounds, there is comfort to be found in the certainty of the onerous things to come: (1) you can manage your expectations appropriately, which is good for your emotional well being; and (2) you can plan your finance and production life accordingly, and possibly avert some unnecessary debacles.

The national debt 'n' deficit crisis is a financial maelstrom of unimaginable size and severity that has caused (and will continue to cause) the value of the dollar to slide against most major currencies and the dollar index; the dollar index measures the value of the dollar against a basket of major currencies that includes the Euro, the British pound, the Canadian dollar, the Japanese yen, the Swiss franc, and the Swedish krona. But this is not all bad news. It's better to know you're going to be in a storm for a few years and act accordingly, than to hold off each day until the sun comes out tomorrow.

For producers, this can be a valuable guide for deciding where to shoot your films. In short, stay local in 2011 and 2012. The diminishing buying power of the US dollar means that if you leave the country, then you're going to pay more for less. But within the USA, a dollar is still mostly a dollar. I say mostly because you may not get as much for your dollar in major urban production centers like Los Angeles and New York City as you might in places like Michigan. These variations can add up quickly for things like travel and living expenses in your budget, as well as rentals and food costs. Star salaries, above-the-line costs, and post-production/CGI won't be effected because they cost what they cost.

Canada, whose dollar is at parity with the US, is another good choice to shoot in. Like the US they have great tax incentives, you're pretty much dollar-for-dollar, and like NYC and L.A., Toronto and Vancouver are convenient and have better resources, but can be slightly more expensive.

These currency fluctuations can certainly be contained by locking-in your currency rates (i.e. buying all your currency ahead of time) or by using various hedging instruments. These currency products can be purchased on margin ahead of time for as little as 10% of your currency requirement; nonetheless, that's still a lot of money to have to come up with before the film's financing closes. This is why many filmmakers don't truly lock-in their budgeted exchange rates until near the end of their financial closing. This is a very risky strategy because closings can take 6 to 12 weeks, and anything can happen to the value of your budgeted exchange rate during that time. The Euro is certainly having its own problems and has its own decline, but the dollar is declining faster and therefore shooting in Europe is a very costly proposition. Volatile currencies like the South African rand are very hard to pin down and can vary wildly from your budgeted exchange rate. These variations are generally fractions of percentages, but when multiplied by hundreds of thousands, or millions of dollars of production spending, you can very easily wind up with a $250,000 hole in your budget just as you're about to close your financing. This will not inspire confidence in your investors. Anybody that is wealthy enough to invest in a movie is going to understand currency risk, and they're going to expect you to as well.

In addition, foreign buyers and distributors become more reluctant to pre-buy territories when the exchange rates are unstable. What a film costs today could swing severely against the buyer when the film is delivered eighteen months later. That sort of uncertainty causes buyers to opt for buying completed films, rather than taking long term risk. On larger deals, a hedging instrument would be used, but not so much for smaller projects.

Domestic distributors will continue to be a scarce commodity, as will the availability of the tens-of-millions of P&A dollars that are required to release a film into the US market. Many finance people will claim to be on the verge of creating a P&A fund, but that is as close to it as they will get. Nonetheless, having a P&A fund will be the cool thing to be on the verge of in 2011. Just to be safe: raise 200% of your budget and use the other 100% for marketing. If you've already raised your funding, then shoot it for half.

State tax incentive programs will continue to take a beating from the fiscally conservative legislators and governors who happen to now be in power. Arizona's program is gone. Michigan's new governor does not support it, nor do the controlling members of the assembly. If MI's program is not completely jettisoned, then I suspect they will probably discontinue any incentives for non-residents. I can't imagine California's incentive will go unchecked either. I haven't heard of any producer who shot in CA for the incentive; it's more like gravy for the productions that were going to shoot here anyway. Legislators probably won't kill the program, but perhaps they could cap how much can be applied in any given year (e.g. cannot offset more than 15% of one's tax liability, but can carry-forward the balance.)

VOD and video technology as a whole will continue to make major inroads. 2011 will be the year of the Great VOD Wars: Netflix vs. Vutopia vs. Hulu vs. GoogleTV vs. AppleTV vs. YouTube vs. Amazon vs. Mubi vs. SnagFimls vs. Facebook? In the absence of theatrical distributors and P&A dollars, VOD will continue to mature into a more quantifiable presale option. The major VOD distributors will continue to cannibalize each other in the fight for premium studio content, but the long tail nature of the platform should also allow for more acquisitions across a broader spectrum of films: mainstream indies, art house films, docs, niche and hyper-niche, etc. Don't expect this revenue to cover any significant portion of your budget, but fortunately the cost of producing these films will also continue to fall in these hard times -- that's also good news.

The mantra for surviving 2011 and 2012 will be to swing for singles and doubles, not for fences. If you really know what your doing (or surround yourself will people who do), then it's a great time to enter the film market. Star salaries are and production costs are falling, technology is advancing. Deals are getting done and films are getting made. Bottom line: People need to work. If you're smart, nimble, and shrewd, then there's business to be done in 2011.

 

Follow Jeff Steele on Twitter: www.twitter.com/@FilmClosings