DealFatigue

The Coen Brother’s Burn After Reading starring George Clooney and Brad Pitt is an awful movie that, despite being awful has been critically acclaimed (for the most part; my opinion notwithstanding). The budget for the picture was $37 million and as of this writing, has already grossed over $57 million during its theatrical release. The picture stands to make substantially more when (and if) it goes into wider theatrical release internationally and through ancillary exploitation on video and pay/free TV.

This disconnect of a mediocre film doing well at the box office got me thinking of my UK client Fred Hogge’s post on his blog cinelogic about how box office success builds audience interest regardless of the merits of a particular motion picture. With respect to the interest in the latest Batman sequel, Fred said:

The Dark Knight, just won big. Sure, it helps that they opened on over 4000 screens, but people are excited to see it. The reports coming back from those that have are overwhelmingly positive. So more people will go. And this is regardless of all the side-bar hype, largely focused on the late Heath Ledger, his death having, sadly, been turned into a marketing tool.

I responded that:

The general public follows weekend B.O. performance like a Wall Street stock index for one simple reason. People like horse races and the weekend box office is just that. This isn’t about quality pictures; it’s about “who’s winning now.” B.O. stats used to be restricted to Variety and other trade publications. Now they’re found in virtually every major news source around the world (at least those in countries that distribute motion pictures from the West).

To be sure, more people will buy tickets to a movie based on a horse race mentality because they “heard” the movie was good (just based on the initial B.O.). The fact that the horse race might be a fiction or, to be more charitable, of limited use as a barometer of [sic] quality picture is largely irrelevant to most of them.

There really is no accounting for taste. Which is why bad movies with “bankable” stars are easier to finance and distribute than high quality, material-driven pictures with little or no recognized talent attached. Indeed, that why Beverly Hills Chihuahua was - as Variety put it - “top dog at the box office” this weekend.

Then again, it might be really, really good despite the bad reviews. I’ll have to see it and get back to ya on that.

Tags: Actors, Celebrities, Distribution, Film, Financing // Comments

No matter our behavior, the economy fluctuates from boom to bust on a fairly predicable basis. However, the severity of a bust is based in part on group (read: global market) psychology and bad, unregulated choices (don’t get me started on so-called “free market” thinking!).

Right now, the group think is pretty pessimistic and we’re in dire need of the equivalent of a global prescription for Prozac. A downturn is not a question at this point; only the extent of the damage and the timing of the recovery remain up for grabs.

The bail out measure before Congress will by no means prove to be a panacea. I keep hoping they will find a better way since the legislation - despite all the money - will not alter the landscape of losses or willingness to lend. However, it will remove a barrier to lending and mitigate some of the negative thinking. So, the sooner Congress works it out, the better for all of us.

I was recently assured by an elder statesman in the business that the industry will continue to flourish as it has in prior recessions and during the Great Depression since people continue to spend on entertainment as an escape from bad news. Peter Bart smugly approved in his column in Monday’s Variety:

Compared to the turmoil on Wall Street, Hollywood seems like an object lesson in prudent management. That’s why billions keep flowing into the movie business even when other industries are starved for capital.

OK, I know that’s really not the reason. Sucker money traditionally flows to Hollywood because investors want to meet girls, attend parties with movie stars and say they’re business partners with Steven Spielberg. Nonetheless, it’s still surprising to count the big bucks involved in the DreamWorks deal or in Ryan Kavanaugh’s Relativity Media or in Media Rights Capital’s portfolio at a time when the rest of the economy is locked in a liquidity crisis.

Suddenly, Hollywood’s managers seem downright austere compared with the crazies at Lehman Brothers. And movie-star salaries are pathetic relative to Wall Street payouts.

I’m not sure I agree since the entertainment business - like most businesses - requires access to credit to run. MGM is already struggling to service its existing debt and like the banks and other financial businesses, may be unrecognizable from its present form down the road.

Even before the current market crisis, Dave McNary wrote in last week’s Variety :

Start with plenty of labor unrest, add in the global credit crunch along with the consequences of too many movies in the market, and combine that with foreign distributors getting cold feet for anything but blockbuster Hollywood product.

“Any one of these factors would depress the business, so having all of them at once was something of a perfect storm,” notes Charles Heaphy, senior VP at City National Bank’s entertainment division. “This is like being in a rowboat while there’s a hurricane going on.”

With respect to startups, Jason Calacanis wrote:

It’s my believe [sic] that the economic downturn will be much worse than it is today, and that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and cross 80% of them off the list, because they will not make it to their next round of funding or profitability.

Tough times like these will require media and entertainment companies as well as startups to rethink their strategies for investment and growth for the foreseeable future.

It all sounds really, really bad.

It’s not enough that it’s hard to finance movies or a good idea; contend with getting distribution or vacillating VC’s; now you’ll have to work that much harder to even find potential investment let alone actual investors.

But the news may not be all bad. Money abhors a vacuum. There’s a lot of money out there sitting on the sidelines and plenty of people looking for places to put it; some of it from the most unlikely of places.

I’ve spoken to personal money managers whose sole duty is to make at least 20% on client money in good times and bad. Some of this money previously invested in oil, gas and securities but with these markets in turmoil, these investors are now looking for new investment opportunities. If bank financing dries up, private equity (e.g., hedge funds) - already a big player in motion picture financing - will likely replace it. Moreover, I recently had several discussions at the Toronto Film Festival and elsewhere with several emerging market financiers who all viewed the current US economic situation as a unique investment opportunity.

Let’s hope their optimism is contagious.

Tags: Equity, Film, Financing, Independent Film, Start-ups, Venture Capital // Comments

A friend of mine was fired last week.  Nothing unusual, given the current economic climate unless you consider that he was terminated from his own company.

“B” started the business several years ago.  As time passed, his company prospered and he was able to open a second office and then a third.  Later this year, he successfully sold his business to another company with the understanding that he, along with his employees would continue working at his newly acquired company.

I don’t rep him and don’t know any of the particulars of his deal which leaves me free to speculate about it here.

Buyers frequently require that founders remain with an acquired company for a period of time as a condition of purchase. Aside from assets and revenues, often what a buyer is buying is the founders’ good will, business relationships and brain trust. So it’s good business for the founders to continue working with the company after it’s acquired by someone else. Unfortunately, it’s been my experience that such arrangements rarely if ever work in practice because of a clash of cultures and a fundamental mismanagement of each party’s expectations.

1. Founders hate “working for the Man.” That’s why they went off on their own in the first place. Founders are by definition entrepreneurial so they naturally resist taking cues from someone else about how to run - what was until recently - their own company.

2. Buyers want the entrepreneurial benefits of independent thinking without its costs which can be based on erratic, random and emotional factors.

3. Founders take risks; they execute. Gut feelings can outweigh financial and legal risks. (See #2 above). However, they can be horrible team players especially when they’re no longer the quarterback. (See #1 above).

4. Buyers tend to be more organized and institutionalized. They tend to integrate uniform and consistent protocols ranging from hiring practices to the brand of coffee in the break room.

I like to think that both parties have only the best of intentions about working together but it behooves everyone to plan well (and negotiate accordingly) for divorce prior to taking any merger vows.

Tags: Start-ups // Comments

There’s nothing new about lying during negotiations. Almost sixty years ago, Budd Schulberg wrote What Makes Sammy Run, a novel about an agent who lies to get ahead in the movie business. There have been a number of other works published or produced on the subject as well. More recently, I wrote about it here.

Then as now, negotiating is nothing less than a confrontational (and largely, animal instinct-driven) struggle for limited resources. There’s only so much pie to go around and a rep wants the client’s slice to be as big as possible; not just for the deal on the table but to set precedent or the quote for other deals down the road. These precedents greatly influence, if not become the floor to subsequent negotiations, taking into account the project’s budget and vintage of the quote. Agents, managers and sometimes, lawyers have an added incentive since their fees are based on a percentage of what the client makes on a particular project.

It’s only natural then that some reps feel that they have an absolute obligation to their clients (and to their law firms or agencies) to maximize their slice-to-total-pie ratio even if it means lying to the other side about a material term.

I suspect it was that desire that recklessly drove one particular rep to repeatedly lie to me about his client’s quote during negotiations; the first time by more than double the actual quote.

The rep stalled over days when I asked for documentary backup to the quote (a pro forma request usually provided on demand or verbally confirmed by the studio or network business affairs exec who initially put the quoted deal together). And when the days of stalling turned into weeks, I suspected the worst and only pressed harder. He ultimately confessed that he had misquoted the figure and that his client’s quote was really [a number that was about a third more than the actual figure].

I was furious. When I insisted on seeing the prior deal, the rep had the gall to blame me for drawing negotiations out.

The rep’s actions were particularly dumb since a quote is one of the easiest things to verify. When I told the story to R, a manager, former agent and friend, he laughed and said cynically, “he should have only lied to you about things you couldn’t check.”

Ultimately, the debacle left my client with substantially more leverage and the moral high ground to close the deal on more favorable terms.

“So why am I still angry?” I asked.

“Because you caught him lying and had to do something about it.” R said.

This business is based on trusted relationships meticulously built over time. Like deals drafted on a napkin over lunch back in the day, a rep’s integrity and reputation can still go a long way to closing deals faster and on better terms today.

In contrast, lying makes deal making harder; can polarize the parties; and makes the negotiations feel more like protracted litigation. Lying can kill a deal and, even in the best of outcomes, slow things down.

In this instance, we were lucky. The rep’s lies (not to mention the endless delays caused by his stalling) ended up costing our clients only time and money. It cost the rep much, much more.

Tags: Agents, Career, Lawyers, Negotiations, Representatives, The Culture, Web // Comments