Ad-Sponsored Movies, A Global Netflix And The Future Of Entertainment
By: Dorothy Pomerantz- CONTRIBUTOR
In today’s Hollywood, business models are changing so quickly that it can be hard to keep up. Traditional gate keepers, like studios and broadcast networks, are getting pushed aside for new digital entrants. Advertisers are abandoning the 30-second spot in favor of making their own movies and TV shows. Production is fleeing Los Angeles and rich investors are once again sinking their hard earned cash into Hollywood money pits.
Entertainment lawyers are the men and women who sit at the fulcrum of these change and try to negotiate deals as the world changes around them. Schulyer Moore and Matthew Thompson , both partners at Stroock & Stroock & Lavan, are two of the biggest lawyers in Hollywood. Together they have done deals worth over $2 billion including the RatPac deal to finance 25% of every Warner Bros. film, cobbling together $30 million from 40 different sources to finance Lee Daniels’ The Butler and structuring Mark Burnett’s deal on his amazingly successful miniseries The Bible.
I sat down with Moore and Thompson to get a glimpse of the future of Hollywood. Over coffee in their Century City high rise office, we discussed finance, movies that are basically long ads and the coming death of the broadcast networks.
Matt Thompson and Schuyler Moore
Money is coming back to Hollywood.
When the economy crashed in 2008, Hollywood got hit just like everyone else. The business has never offered a stellar return. Most movies tend to lose money and slate deals, where financiers invest in a group of films hoping any hits will outweigh the misses, don’t always work out. Rich individuals, who have always liked to put some money into movies for the fun of it, looked for safer pastures.
Today, Moore and Thompson say the money is back.
“There’s a lot of money looking for a home and for various reasons, entertainment is considered an interesting investment,” says Thompson. “I didn’t say good.”
Some billionaire are making smart, carefully structured investments that will likely make them lots of money. James Packer, who ranks 208th on our recent list of the world’s billionaires, is one of the men behind the RatPac Warner Bros. deal. (You can read more about it here.) Two of the slate’s initial films were the massive hits Gravity and The Lego Movie. (The dud Grudge Match was in there too but luckily, it didn’t cost too much to produce.)
But not everyone is inking such great deals. Hollywood studios are notorious for funky accounting that keeps even the biggest box office hits from ever showing a profit. So investors who stand to take a share of the net often walk away empty handed. As long as someone is willing to make this kind of deal, it’s going to be hard for more serious investors to negotiate better terms.
“Money is coming back here because people are feeling optimistic and the entertainment industry is fun,” says Moore.
Netflix has already changed the way we think about consuming TV shows. It’s made binging a thing and we all now take it for granted that we can watch our Netflix shows wherever we want, whenever we want. But as Netflix expands internationally, it’s going to spur an even bigger change in how films are sold internationally. Right now producers sell off foreign rights territory by territory to hundreds of smaller distributors. The local distributors who handle home video are about to go out of business as studios instead make one deal with Netflix to distribute their films internationally.
“This is going to be a profound change,” says Moore. “The prices in local markets are going to go way down.”
That means it will be even harder for indie movies that rely on pre-selling foreign rights to get the money they need for production costs. That in turn will lead to more filming in movie tax havens and less money to talent up front.
Advertisers are getting creative.
The 30-second ad is almost dead. Trying to capture eyeballs when people are either forwarding through the ads or looking at their phones just doesn’t work anymore. In order to reach customers, advertisers now want to be in the content business. They want to finance movies that highlight their products.
Moore was an innovator of the branded movie. He was one of the producers on the film Goal. The 2005 soccer movie was 70% financed by Adidas in return for 70% of the screen time featuring Adidas good like shirts and shoes. The film didn’t do very well but it paved the way for more advertising sponsored entertainment. The most recent example of a movie-as-advertising: The Lego Movie. The 90-minute film is essentially one big ad for Legos but you won’t hear audiences complaining. The film has earned $360 million at the global box office so far.
“The Lego Movie really tripped that wire,” says Moore. “We’re on the cusp of a huge wave of equity from what would have been advertising dollars that are getting squeezed off of the TV.”
Expect every toy company that isn’t there already to jump into the film making business. The problem is those films have to be good. For every Lego Moviethere’s a Battleship. Luckily for the studios, marketers tend to measure return on investment in eyeballs, not dollars. That means the studios can offer them crappy terms on the financing of the films and no one will say a word.
Home video isn’t making up for DVD money, yet.
DVDs were once the safety net of the movie business. Even a bad movie could earn back its money on DVD. But that market dried up years ago. Now with things like iTunes rentals, Netflix and video-on-demand, home video money is slowly starting to come back into play.
“It’s flattening,” says Moore. “It’s no longer going down.”
What needs to happen for that downstream revenue to mean something again? Companies like Netflix have to dramatically increase how much they charge.
“What would you pay for Netflix?” asks Thompson. “You’d pay $20 per month and it would triple their revenue.”
Another way for studios to increase the home video money? Close what Moore calls “the piracy window.” That means offering movies at home earlier for a premium price. The lag between when films are in theaters and when they are available at home gives pirates a chance to thrive. Have movies come out at home and in theaters on the same day (but at vastly different prices) and you close that window. So far theater owners have been reluctant to agree to this idea. They are afraid of losing butts in the seats and hungry mouths at the concession stands. But soon, they may not have a choice.
Broadcasters are a dying breed.
The broadcast networks used to be the only game in town. Now they compete against on-demand viewing that is often better or cheaper. Media dollars are following viewers way from the big four.
“It’s a slow death but it’s a death,” says Thompson. “There will always be some form of broadcast TV but the model will look very different.”
As ad dollars follow the eyeballs, the broadcasters will have to come up with new models for making money. Cable networks are likely to start offering standalone online offerings as cable companies transform into high-priced pipes carrying massive amount of Internet data into our homes. The broadcasters will have to adjust.