June
20 LAFF: Keynoter Stern Lays Out Indie Landscape

 Making Smarter Movies

- or -

“I Need the Eggs!” – Now What?

Remarks by James D. Stern

Chairman & CEO, Endgame Entertainment

As Prepared for Delivery to the Los Angeles Film Festival

June 20, 2009

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I know some of you were expecting Mark Gill to be back today and deliver a follow-up to last year’s speech, but unfortunately, on the way over, Mark was struck by a piece of falling sky.  He was rushed to a Cineplex, where doctors have strapped him in a chair and ordered him to watch ‘UP’ in 3D for the duration of the festival.

So I was asked to fill in and address the question, what does it take to be a filmmaker or financier in these difficult times? 

Well, that’s easy.  You need to be as sly as a fox, as slippery as an eel, as thick-skinned as a hippo… and as rich as Sidney Kimmel.

But if you don’t meet those qualifications, don’t worry – it works just as well to be crazy as a loon. 

Remember the end of Annie Hall?  Alvie Singer turns to the camera and tells the joke about a guy who goes to a psychiatrist.  He says, Doc, my brother’s crazy.  He thinks he’s a chicken.  Doctor says, why don’t you turn him in?  The guy says, I would, but I need the eggs.

That sums up why I’m in this business.  Same for most of my friends.  The way we feel about making movies is irrational, crazy, absurd… but we get by because we need the eggs. 

The Lumière brothers were the first to suggest that cinema is an invention without any future.  They should know.  They invented it – and then wisely moved on to more sensible things, like inventing medical forceps. 

Some of us aren’t so smart.  When I left school, I knew exactly what I wanted to do.  I immediately started working in theater in New York City.  I lived on a steady diet of MSG-laced Chinese food in a studio apartment on the Upper West Side about the size of this lectern.  Then I kicked around in the real world, eventually went to a fancy business school, and after graduating promptly refused to take any job that would have me – because all I could think about was producing and directing.

In other words, I needed the eggs. 

Last year up here, Mark Gill delivered a pretty sobering argument that the sky is falling.  And a year later he looks pretty smart. 

That wave of more than $15 billion dollars of slate capital from Wall Street from 2005 to 2008 left us with a torrent of movies. Thousands of films got made last year in a world that had room for just hundreds.

A friend describes this problem as a simple equation: Access to capital + low barriers to entry = glut of subprime movies. 

Subprime?  Excess inventory?   Sounds like we’re upside-down on the mortgage and it’s time to mail in the keys. 

An astonishing 9,293 films were submitted to Sundance last year.  Of those nearly 10,000, only 218 were screened.  Of the lucky handful to get bought, so far only three have been released theatrically.

It’s pretty obvious:  Indies are in a world of hurt.  When the financial crisis hit, any awards that independent films were winning suddenly were not enough to appease corporate paymasters, who in turn severely damaged labels like New Line, Warner Independent, Paramount Vantage, PictureHouse and so on.

With fewer U.S. distributors, financiers were badly burned when the financial crisis turned global, and foreign markets no longer could be relied on to mitigate the risk of not having U.S. distribution.  Those markets used to be the backstop of smaller films.  But they started choosing to run their own affordable domestic movies instead of independent American films.  And since those markets need big studio titles to drive ratings and ad revenues, what suffers is… the indie.

On top of that, a stronger dollar cuts foreign buying power, restricting the group of banks still willing to lend to independent producers.  This makes pre-sale financing, and gap financing, almost impossible to get. 

So, in technical terms, the market for independent films really, really sucks!

This is all such depressing stuff.  But wait a minute!  Box office is up!  Isn’t it? 

Not really.  Those statistics are obscured by the fact that there are two movie industries in this town that we tend to lump together.  The first one – studios – is by and large a vertically integrated business mostly concerned with film as part of a merchandising industry.  And the second – the focus of this conference – generally makes single-purpose films that we call independents. 

Let’s compare apples to apples between the two sectors over the past two years.

From January through May 2008, four studio films grossed more than $100 million dollars.   This year, that number is eleven.  Almost triple.

Meanwhile, in the same period, the number of indies that grossed over $1 million dollars went from 16 to six.  Less than half.

OK, great.  Now I’ve basically one-upped Mark on pessimism.  But I still need the eggs… and now my head hurts.  Really hurts.  Like sitting-through-Land-of-the-Losthurts!

But guess what?  Despite it all, I absolutely believe there’s not just hope, but huge opportunity out there.

That’s not to say I have the best track record as an Oracle.  Several years ago, I tried to hire a wonderful person I’d worked with before.  She was appreciative but said she had an offer to help start a company that would rent DVDs through the mail.  I said, “Are you insane?  That will never work!”  I couldn’t imagine people waiting two or three days to see a movie.

Uh… the next dinner’s on her.  The insane idea she described, called Netflix, has shipped not one but two billion disks, and raked in an $83 million dollar profit on $1.4 billion dollars in revenue last year.  They’ve got a gigantic database of what people like, and almost scary tools to predict what they’re going to want.

My original problem with the idea was that no one would wait for a movie in the mail.  Now they won’t have to:  The next big revenue source, I believe, will be streaming video.  It’ll give ADD types like me what we’re looking for: Impulse purchases!

With streaming, we’ll all have the biggest video store imaginable, crammed into our little TV remotes, enticing us every time we turn on the set to make an impulse buy. 

As these services create real revenue – and according to a pretty thick 2009 Morgan Stanley report, it’s not far off – innovative, forward-looking companies like Netflix will be in the thick of it.  Not just with the content – but with the knowledge to connect it to the appropriate audience.  They won’t be alone.  VUDU, Hulu, Amazon, Apple, Time Warner, Comcast and others will join in.

Provided they actually pay us for our content in appropriate ways, these are the once and future friends of independent film.

All well and good.  But while we wait for this new revenue stream to lift our boats, it’s our job – in the words of William Faulkner – not just to survive, but prevail.

To survive, we need to pay careful attention to the fundamentals of business. 

To prevail, we need to experiment to see what’s new that works. 

A couple of weeks ago Variety ran an article about one of those experiments. Summer Hours from IFC and The Girlfriend Experience from Magnolia were released simultaneously in theaters and on VOD.  The numbers were solid for both - no evidence that either release cannibalized the other.

That doesn’t surprise me.  The truth is, people will always want to go to the movies, because normal folks, not just teenagers, need to get out of the house.  Nothing at home can match the communal experience of bon-bons and popcorn and the fat guy next to you hissing at the terrorists when they take Miley Cyrus hostage.  Hey, the other night I went to the ArcLight, and when the usher came out to start his spiel, the audience started chanting his name: “Dave, Dave, Dave!”  No way you’re getting that at home.  Unless of course you invite Dave over.

And then there’s IMAX and 3D to give local theaters two more distinct advantages.

Meanwhile, the home theater experience is getting better and cheaper.  This is good news.  Maybe once in a while, instead of loading the minivan, driving and parking, buying popcorn and tickets, a family might rather stay home one weekend, invite the kids’ friends over and pay, say, fifty bucks for a new release on opening night – in high def and 7.1. 

Let’s say they make this decision for premium video on demand maybe six times a year.  At fifty bucks a pop – those are big numbers.

The point is, people will go to the theater.  People will watch at home.  And both are good for our business.

So yes, there’s hope.  Morgan Stanley says a new world of streaming content-on-demand will reach some level of critical mass – in two or three years.   My good friend Michael Barker at Sony Classics almost agrees.  Here’s what he says about a conversation shift he noticed in acquisition meetings at Cannes this year: 

“In the past, the meetings have been completely about the films.  This year, most of the conversations were about new technologies, and where’s the new revenue that’s going to replace DVD?  It’s really about where we are three to four years from now.”

Morgan Stanley says two to three. Barker says three to four.  Either way, by then Mitt Romney will be running against Sarah Palin for the Republican nomination!

What do we do now?  Here’s a suggestion. 

Remember Herschel Walker?  He wasn’t just any football player.  He won the Heisman Trophy.  One time, a team traded eleven players to get him.  He did 1,000 pushups and 3,000 situps every day.  And boy, you could tell just by looking at him.  No one messed with Herschel.

One year with the Dallas Cowboys he got this crazy idea for off-season training.  He asked the Ft. Worth Ballet Company if he could dance with them.

The mental image of this massive guy decked out in ballet gear made some people snicker.  (Out of earshot, of course.)  After all, this was 20 years before Dwayne Johnson did The Gameplan.  But Herschel stuck with it, worked hard and got pretty good.  Even The New York Times was impressed. 

But that’s not why he did it.  He did it for football.  This chiseled Greek statue of a man told his coach he did it because, “I have to use a completely different set of muscles when I dance.”

We’ve got to be willing to build a different set of muscles in this business.  The way we operate is being dissected and reassembled in front of our eyes. The other day, my friend Glen Basner told me that everything we’ve learned about financing films over the last 15 years we have to forget.  Which of course is uncomfortable, but it’s a window of opportunity to develop the muscles we’re going to need to dance this new dance in the coming years.

To accomplish that, I believe there are three hard rules that we, as independent filmmakers, need to obey.

Rule One:  Make Smarter Movies!

That’s not the same as making better movies.  Everyone says make better movies, and everyone wants to.  But that’s like a director telling an actor to act better.  Sounds good, but what does it mean?

I do know what it means to make smarter movies, though.  And that’s what we should be doing.

I don’t mean run out and make The Seventh Seal Part Two: Revenge of the Reaper! (Although I might actually pay to see that.)

What I mean is crafting a disciplined process that results in a smarter product. Smarter process means designing movie projects with really clear target audiences in mind from the very beginning.  Doing that takes coordination among all parties involved, from finance to creative to production to marketing to distribution. Having a clear target in mind determines the process and the range of budget that needs to be financed.  

(By the way, it’s no accident we named our company Endgame – because it’s something every smart movie needs.  We don’t always get it right, but the intention is always there in our films.)

So that’s a smarter process.

Smarter product means films with a distinctive appeal that’s built right into the movie.  This doesn’t mean you need to pander to your audience. 

Why did Shakespeare write Macbeth?  Well, let’s see.  What was going on in 1603? Queen Elizabeth dies.  A Scottish King succeeds her and unites the crowns. The Black Death breaks out – again. 

So Scots and death were hot topics.  Shakespeare wasn’t just a pretty face.  The Bard wrote the greatest plays ever, and he made them smart.

Patrick Goldstein of The LA Times describes the difference between “making better movies” and “making smarter movies” this way:

“The real problem with the indie business isn’t quality, but discipline.  We have a generation of filmmakers who feel entitled to make personal films… and a generation of executives who’ve been willing to essentially use specialty films as a loss-leader to launch their division or win awards.  If people in the indie world want to start making money again, they have to start treating their investment like a truly precious natural resource, not like Monopoly money.  Discipline is not antithetical to art.”

Patrick is absolutely right.  We need discipline, starting with costs.  Without it, our resources will dry up.  We need to trim away anything that doesn’t strengthen the content.  From the days of Homer, that’s what people have paid for. 

That’s why I’ve never been a big believer in spending heavily on the technical aspect of movies.  I know that’s counterpoint to what a lot of people say, but I think movies can look terrible and get an audience, and movies can look terrific and not. 

On Broadway we had a saying, if you’re talking about the sets after the show, you’re dead.  Well, if people walk out of a movie saying, “I didn’t really buy that relationship between Julia Roberts and Clive Owen – but wasn’t that tracking shot fantastic?”… you’re gonna be dead anywhere in America except maybe at Hollywood ArcLight.

When I started Endgame I told everyone I wanted to make movies I would pay to see twice.  Give me Slumdog over Transformers any day.  Give me movies with stories and ideas that people care about. 

You say, yeah, but kids today expect SFX.  Well, my kids are 9 and 13.  My daughter has watched Twilight seven times.  It has the worst special effects in the world.  The ridiculous way that guy runs looks like the track star with blurry legs in that Verizon commercial.  But does she really care that the special effects in the nextTwilight movie will be any better?

As if. 

What she cares about is how Robert Pattinson fights off the werewolf guy for Kristin Stewart. 

For studio films, I’ll concede that 3-D could well be a happy exception, and that’s a different discussion.  But I can’t see anyone making a 3-D version of Rachel Getting Married.

The rule is, don’t compete where you can’t.  Don’t worry about SFX in small movies.  You’re not going to blow holes in Avatar.  Don’t try.   The Coen Brothers used shopping carts as dollies in Blood Simple.  Guess what?  That’s a movie I remember.

Rule Two:  Respect the money! 

Not just the talent. 

There’s some good to be said for the auteur culture in filmmaking.  But like it or not, making a film is not just a collaborative art.  It’s also a business – a matter of finance, logistics, planning and execution.  What Orson Welles said is truer than ever – a painter needs a brush, a writer a pen, but a filmmaker an army. 

For a long time in Hollywood it’s been hip to disrespect the money. 

A director told a friend of mine, “You know, when they decided they had to make money, they screwed the whole thing up.”  This attitude plays out every day. 

Here’s a recent scenario I observed. 

The director describes one type of film to the financier and goes off to make another film altogether.  The cut comes in and the financier says, “This isn’t what I signed on for!”  Whereupon the director informs him it’s the movie he wants.  Heavy hitters on the management side of course stand by their client. 

A movie becomes a war.  Disaster ensues.

The point is, talent and money have to be on the same page.  If you as a producer buy a giraffe and the director brings you a giraffe, it’s your fault if you decide you now want a zebra because market conditions have changed and zebras are in.

But if you’re a director, don’t sell a giraffe, deliver a zebra – and think that’s okay.

Another example.  A really good movie went way, I mean way, over budget not too long ago.  And when the financier said he could no longer fund it, the director – quite famous – said, no worries, I quit.  Now try finishing and promoting it without me.  The financier caved, the film was finished; it was great – and guess who lost a boatload of money. 

And that – a good movie losing money – is the one unpardonable sin in our business.  Everyone’s going to make mistakes and occasionally make bad films.  But if a movie really works – but then people don’t get their money back – financiersdon’t understand.  We have to make sure that, especially when we get it right, everybody gets paid.

Here’s an absolute truth – any financier who tells you he cares only about your vision, your story, your movie; that he doesn’t care about the money…

Is lying. 

Here’s the dirty little secret.  Money doesn’t need the eggs.  Money has options. Lose someone’s money on a movie deal and they’ll take the option of never coming back.  To them, it will never be, “That was a bad deal.”  To them, it will forever and always be, “That’s a bad business.”

On the other hand, in Vegas, no one leaves a table when they’re winning.  If a project is structured and financed so everyone wins, they’ll all come back again.

Mistrust has been built up over the money for decades in this town, with legitimate concerns on both sides.  We could use a little of that Obama-in-Cairo spirit around here.  And we’d all better get on the same page right now, because for the next couple of years, all of us – talent side, money side – are going to need success where we find it.  Things are gonna be tight.  Which leads us to…

Rule Three:  Before Rolling Cameras… think ‘Market.’

Most businesses have a complete plan from the start of a project, which includes the whole chain from manufacturing through distribution. 

Ours typically does not.  It should.  And it should include marketing. 

Years ago, Francis Ford Coppola predicted a day when anyone could make films because technology would lower the barrier of entry to practically nothing.  He was right.  And he could say the same thing today about marketing.  Technically, there’s nothing standing in the way of my nine-year-old son making and marketing a movie today.

I was blown away when I found out that the # 32 film on the all-time documentary box-office list is a little 2005 film I’d never heard of, called The Wild Parrots of Telegraph Hill.  (It’s about wild parrots living on Telegraph Hill, by the way.)  Can you imagine how tiny the market sliver is of people willing to take a night out to go see this peculiar-sounding film?

Well, the filmmaker did imagine them.  Rather thoughtfully, in fact.  And then proceeded to use viral marketing to rally those people into the theater, by making the film an event for every bird-lover on God’s green Earth. 

Audubon Society members.  Bird-watching clubs.  Breeders.  Veterinarians. Humane Societies.  Feather-fancier magazine subscribers.  There are a lot of people out there who really love birds.  And I think every last one of them went to this movie.

And, I’m happy to say, number 72 is a movie called Every Little Step, which I directed and produced, still in release so we hope it’ll climb higher.  Maybe even past the parrots.

In that film, we juxtapose the original construction of A Chorus Line, the musical, with the 3,000 dancers who auditioned for the revival on Broadway.  Now, 16 million people have paid to see that play on Broadway.  No telling how many more have seen – or been in – productions at community theaters and schools.  Not just here.  Japan has a community obsessed with that musical.  UK, Germany, same thing.  So we had a desirable, targeted brand for that movie before we started shooting. 

Our job was to first make a movie, and then drive people to see it – social-networking sites, building word-of-mouth with targeted email blasts. 

You can go on Facebook and see how many people love A Chorus Line.  And we did that.  But why stop there?  We also saw who listed Chicago in their top fifty films and targeted them, too.  And so on.

I remember not too long ago on Broadway, we used to send out volleys of expensive fliers that mostly ended up in the trash.  On the flip side, sending an email is practically free. 

And it works.  Facebook and e-mail just got a dark-skinned guy with the middle name of Hussein elected U.S. President.  I don’t know about you, but I was getting about four emails a day from the gentleman.  Also his wife, his daughters, his friends and, if I recall correctly, a Portuguese water dog looking to be adopted.

You can target market segments as long as you’ve created something appealing to them.  Bob Berney has been brilliant at this, honing in on audiences of all kinds, from The Passion of the Christ to My Big Fat Greek Wedding, which he made a destination for Greeks everywhere.  Both were targeted destination movies.

At the other end of the scale, Laika Studios made Coraline, and with the intricate details of her button eyes, and stitched nose, it was first marketed to sewing and knitting clubs!  It’s going to be Focus Features’ second all-time top performer behindBrokeback Mountain.

You can also consolidate these slivered segments, by the way.  Ira Deutchman at Emerging Pictures says his network of theaters does well with Jewish, gay-themed and French films, plus those that are spiritual and have “Wedding” in the title. That’s why I have great hope for our upcoming film, The Holy Unsanctified Parisian Wedding of Yitzhak & Muttle.

Point is, when industry produces a firehose of content, we have to be smart in other ways to get the word out so our little droplet gets noticed.  For those of us who can’t afford to blast TV ads like a blunderbuss, it takes a bit more thought, but with new media comes new ways for a small film to connect. 

One thing my 13-year-old actually might care about is a short form of the nextTwilight movie.  She might care to watch that scene each time a particular ringtone hits her iPhone, for instance.  Or use some bitstream subscription to watch her favorite scene over and over and over and over and over and over and over.

Already today, our kids spend a third of their time interacting with electronic devices, mostly online.  Filmmakers need to recognize and in the future be able to take advantage of it, looking for what David Pogue of The New York Times calls the “AppStore effect.”

When programmers write iPhone applications, Apple encourages them to set a low price – like one dollar.  So the huge majority of programs in the online AppStore are impulse buys.  As Pogue says, nobody blinks at a buck.

In the past nine months, iPhone and iPod fans have downloaded more than one billion apps.  These huge numbers revealed the App Store Effect, which says:  If you cut the price of a software program by half, you sell a lot more than twice as much. If you cut it to one-tenth, you sell a lot more than ten times as many. 

And so on.  It’s counter-intuitive, but this principle has paid off beyond anyone’s wildest dreams.  Some iPhone programmers have become millionaires within months, one buck at a time, because of this powerful math. 

In the case of films, the AppStore Effect will have you buying a title at home, or even on your iPhone, for, say, four bucks a pop.  Four dollars.  Four dollars.  Four dollars.  It adds up. 

No one knows where this will lead, but it doesn’t sound bad to me.  In fact, it reminds me of Malcolm Gladwell’s observation that the greatest concentration of wealth in history occurred in the 1860s and ’70s – when the American economy went through its greatest transformation yet.

The railroad was built – the Internet of its day.  Wall Street emerged – better access to capital.  Industrial manufacturing started in earnest – plenty of jobs all around. In those twenty narrow years the rules that governed how the economy functioned were broken and completely rewritten. 

Here’s something amazing.  Of the 75 richest people in world history, 14 were born within nine years of each other during this span. 

Rockefeller.  Carnegie.  Morgan. Eleven others.  They built fortunes and empires almost beyond comprehension, in some cases in fields that didn’t exist when they were born.

Gladwell says that if they’d been born in 1840, they would’ve lost out by being too young; they couldn’t make anything happen.  If they were born in 1820, they would’ve been too old; they wouldn’t be open to big new ideas.  So those 14 folks were lucky to be born at just the right time.

I think we’re that lucky.  Are we going to be the next robber barons?  Probably not. But the economy is going through a huge upheaval because of technologies that didn’t exist when we were born – or even when my 9-year-old son was born. 

The opportunities are – to use a word that’s almost never used right – awesome.  I don’t see anyone in this room too young to take advantage of them.  And because in this business we tend to be unafraid of new technology – in fact, we like it – we’re not too old, either. 

In the meantime, we need to cut costs.  Mitigate risks.  Target our audience.  Watch where the deals are taking the industry.  Experiment intelligently.  Basically, learn to use new muscles.  And we’ve got to do this together, not at cross-purposes.

We also need to keep our perspective.  Things are rarely as bad or as good as they seem.  When he was head coach of the Chicago Bulls, Phil Jackson told me he’s made it a principle not to get too high in victory or too low in defeat.  He says that’s the way to get through a season.

In the 1990s, The New York Times declared Broadway dead.  It’s doing pretty well for a corpse – the past nine years have been some of the best in its history. 

Making films is no different.  We’re cycling through a tough period.

But it’s a point of creative destruction, which almost always ends up improving things, sometimes dramatically, as Malcolm Gladwell pointed out.

So:

            -If we stick to the basics – good business, smart movies…

            -If we learn from the past and welcome the future…

            -If we gather the eggs we need where we find them…

We’ll be better than fine.