How the Credit Crunch is Killing Hollywood Films

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Article on how the glut of films and the credit crunch is effecting Hollywood, by Lauren A. E. Schuker and Peter Sanders.

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HOLLYWOOD — When Meg Ryan and Antonio Banderas signed up to star in an independently produced comedy-action movie called “My Mom’s New Boyfriend,” the film’s backers figured they had a slam dunk — a modestly priced film with bankable stars that would surge at the box office.

The producers say the $17 million movie scored well in test screenings in the U.S. this spring and did decent business in Spain, Israel and Russia. But the U.S. distributor, Sony Corp.’s Sony Pictures, quietly sent the movie straight to DVD on June 17. “I believe that three years ago this movie absolutely would have been on screens, if for no other reason than the actors involved,” says George Gallo, who wrote and directed the film.

These days, scores of films such as “Boyfriend” are finding there’s no room at the multiplex. The reason: Hollywood is flush with roughly $13 billion to $18 billion in financing for movies that poured in over the past few years, according to bankers and producers, vastly expanding the number of pictures getting made. The flood of money is paying for films made by both relative newcomers and veteran film investors and producers.

That dynamic has turned movie distribution into a free-for-all, with too many films vying for too few slots in theaters each weekend. Last year, more than 600 feature films — mostly independent movies not produced at a major studio — were released theatrically in the U.S., up from 466 in 2002, according to the Motion Picture Association of America. That’s an average of 2.6 more movies every weekend that are battling for the public’s attention.

But those figures are just for the films that make it to the silver screen. Many more films, such as “Boyfriend,” with big-name actors or directors never make it to theaters. More than 3,600 feature films were submitted for consideration at Sundance Film Festival this year, and while many of those are tiny digital flicks that never have a chance of commercial release, the number is up from about 2,000 feature submissions just five years ago.

The frothy marketplace means more choices for movie fans, and more headaches for a struggling industry. In 2007, domestic box-office revenue totaled $9.68 billion, up from $9.3 billion in 2006, according to box-office tracker Media by Numbers. Box-office revenue has grown since 2005 because of higher ticket prices, but attendance started dropping last year. This year, attendance is down 4.74% from the same time a year ago. Lower attendance should trim box-office revenues for 2008 to around $9.6 billion, Media by Numbers projects.

Today, the credit crunch is putting the brakes on outside film financing. But Hollywood executives fear the glut created by the recent spate of overproduction is going to be felt for at least a couple more years. Some people say the worst of the oversupply problem is still about a year away.

“We’re at the top of the curve heading down,” says Hal Sadoff, head of international and independent film at ICM, one of the major talent agencies in Hollywood. “We’ve seen many of these financial institutions, private-equity firms and hedge funds pull away from the industry. But the films that they have advanced are still in production, and it will take another six to 12 months for the market to regularize again.”

Amir Malin, who acquired, marketed and distributed the hit indie film “The Blair Witch Project” and now runs media-investment firm Qualia Capital, says that the market for such films will get tougher before it gets easier. “The worst is yet to come,” he says.

The havoc in the movie business was evident in April, when the release schedule was packed with a bevy of big-star vehicles hoping to beat the onslaught of summer blockbusters. “Leatherheads,” a $60 million football comedy starring George Clooney and co-financed by Universal Pictures and Relativity Media, took in just $31 million domestically and about $9 million overseas. The Al Pacino thriller “88 Minutes,” financed for $26 million by Millennium Pictures and released by Sony Pictures, took in just $17 million or so at the U.S. box office.

And then there was “Smart People,” starring Sarah Jessica Parker, Dennis Quaid and Ellen Page. The star-packed comedy about a dysfunctional family seemed promising, especially given its modest cost of $8 million. Its backers, including Bill Block, who runs a financing outlet called QED International, expected the movie to make about $20 million. “It was a terrific cast and everybody loved the script, so we thought, ‘Why not?'” says Mr. Block. But the film grossed less than half of that, making $9.5 million in domestic theaters. “I think it’s just tough out there right now — especially for the upscale adult picture,” Mr. Block adds.

The competition is especially brutal in the market for small movies. Oscar-aspiring independent films — that is, films not produced at a major studio — were once seen as the most attractive segment of the movie industry. That’s because sizable profits could be made on films that required relatively little investment. That calculus prompted all of the major Hollywood studios to launch divisions aimed at exploiting the market.

But the flood of indie films has driven up marketing costs, as each film spends more to compete. Last year, top-flight casts didn’t prevent movies such as “In the Valley of Elah” and “Things We Lost in the Fire” from getting drubbed at the domestic box office. This year, a huge roster of titles, big and small, will compete for audiences, including “Changeling,” starring Angelina Jolie and directed by Clint Eastwood; “Burn After Reading,” a Coen brothers film with Brad Pitt, George Clooney and John Malkovich; and “Milk,” a Gus Van Sant picture about Harvey Milk, a pioneering gay politician in San Francisco.

Scaling Back

To avoid collisions, studios are rapidly scaling back the number of films they’re releasing, particularly smaller specialty movies. Time Warner Inc.’s Warner Bros. closed two of its art-house labels, Picturehouse and Warner Independent Pictures, this spring. In June, Viacom Inc.’s Paramount Pictures basically absorbed the majority of the staff at its specialty label, Paramount Vantage, into its main studio, cutting about 50 employees. News Corp.’s Fox Searchlight, which has had big indie hits with “Juno” and “Little Miss Sunshine,” has only six titles scheduled for release so far this year. (News Corp. also owns Dow Jones & Co., publisher of The Wall Street Journal.)

Indie films aren’t going away, of course. But some studios have concluded that the most-expensive films — blockbusters such as “Iron Man” and “The Dark Knight,” which often cost well over $150 million each, not counting millions more in marketing outlays — can be less risky than art-house releases such as last year’s “A Mighty Heart.” That film lost about $15 million for its backer, Viacom Inc.’s Paramount Vantage.

Studios aren’t the only ones pulling back; so are many of the individual producers who armed themselves with easily raised moviemaking funds. Producer Sidney Kimmel announced this year that his production company, Sidney Kimmel Entertainment, would scale back its releases to two films a year from five. Mr. Kimmel was hit hard when his most-recent picture, “Synecdoche, New York,” starring Philip Seymour Hoffman, failed to find a distributor at the Cannes Film Festival this spring. In late July, Sony Pictures Classics bought the film, just giving its backers a portion of the revenues. Even with that, the film’s backers will likely take a loss on the movie, which cost about $20 million. Executives at Kimmel Entertainment, however, say they recouped a substantial part of the film’s cost by selling off the international rights.

Film-financing outlets are also moving toward larger projects. Grosvenor Park has financed more than 400 film and television productions over in the past 20 years. Donald Starr, chairman, says he lent money against the foreign sales for “Powder Blue,” a small picture costing just under $10 million featuring starlet Jessica Biel that finished filming last September and is beginning to look for a U.S. distributor. Mr. Starr estimates that Ross Dinerstein, the 29-year-old producer and one of the main financiers of “Powder Blue,” could lose about $7 million on the movie.

“The amount of sales that these films generate is just too small to be worth it,” Mr. Starr says. “In any other business, if something doesn’t make back its price, you stop making it. But for some reason in the film industry we keep making more of these movies.” But Mr. Dinerstein says he won’t lose money on the film. “Our initial goal is to break even and anything after that is icing on the cake,” he says.

Few Bites From Buyers

Major film distributors are being far more cautious in acquiring independently financed films for distribution, a situation that has dramatically slowed business at major film gatherings such as Sundance in January and Cannes in May. At Cannes this year, there was very little buying, with distributors shunning films such as Steven Soderbergh’s “Che,” starring Benicio Del Toro.

At Sundance, highly anticipated films drew few bites from buyers. John Sloss, a veteran entertainment lawyer who brought 19 films to Sundance this year, says he only sold five by the time the festival finished.

Another factor in the pullback is a rise in marketing costs. A decade ago, campaigns for independent movies were driven by free publicity and word of mouth. The crowded market is prompting distributors to spend big to distinguish themselves. According to the MPAA, the amount of money the indie labels at the major studios were spending on marketing shot up 44% to $25.7 million in 2007 from $17.8 million in 2006. Since 2002, that marketing spend has doubled, driving up competition for all films trying to gain traction in the marketplace.

The rising costs are preventing some smaller movies from reaching much of an audience. Avi Lerner, who produced “My Mom’s New Boyfriend” along with scores of theatrical and direct-to-DVD movies, says higher costs have created insurmountable obstacles for his films in recent years. “Obviously, the main problem is that big studios have unlimited money to pay for [marketing] and nobody can compete with that,” he says. “Even if you spend $10 million to $15 million on marketing — which used to be enough in the past — in today’s market that’s nothing against $70 million-plus that the studios can spend on their big movies.”

Many of the specialty labels at major studios passed on distributing director Sidney Lumet’s film, “Before the Devil Knows You’re Dead.” So, the producers chose to release it with THINKFilm, a small distributor that has struggled financially in recent months. THINKFilm opened the movie last fall with a “platform release” — starting with two screens and expanding over time to about 320 theaters. Producers Michael Cerenzie and Brian Linse were hard-pressed to find financing for the movie when one of their equity investors dropped out; at one point, Mr. Linse had to borrow $180,000 against the equity in his Hollywood Hills house. In the end, Capitol Films, a company owned by THINKFilm’s parent, paid for the $18 million picture.

“Financing this movie was a real struggle,” says Mr. Linse. “It’s hard for people to imagine since we had actors like Ethan Hawke and Philip Seymour Hoffman, but it was really tough.”

The film, which also starred Marisa Tomei, grossed a little more than $7 million at the domestic box office. That’s partially because THINKFilm spent less than $1 million in advertising on the movie, so despite strong reviews, it got lost in a crowd of pictures that opened during Oscar season.

Yet it is increasingly common to see critical darlings of the festival circuit get trampled. “Son of Rambow,” a coming-of-age comedy about two boys in England who dream of filmmaking, was a darling at Sundance in 2007, where it was reportedly sold for distribution for about $7.5 million — one of the largest buys at the festival that year.

Vantage released the film in May 2008 to top-notch reviews. But it flopped, grossing just $1.78 million. The film was put out via a platform release on the same day that Paramount’s “Iron Man” hit theaters in early May. While “Rambow” added screens through May, it never gained traction in a month that was chock-full of blockbusters, from “Indiana Jones and the Kingdom of the Crystal Skull” to “Sex and the City.”

“‘Son of Rambow’ is the poster child for a movie that would have worked five years ago but fails in today’s marketplace,” says Mark Gill, a veteran film executive who isn’t affiliated with the movie. “It got great reviews, audiences really liked it, it was well-marketed. It had everything going for it, and yet it didn’t work, because there is such a glut of movies and a mass of clutter right now that nothing can break out in this climate.”

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Brian M Logan
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