Indie-Film Shakeout: There Will Be Blood

Update: An earlier version of this story was inadequately sourced and Universal was not given an opportunity to respond to speculation. In addition, Focus Features' new film slate for 2010 and its global distribution capabilities are competitive strengths that should have been noted. We sincerely regret the errors.

The economic recession may be ending but the independent film industry's shakeout continues to roll, as we were recently reminded by Disney's October decision to gut its Miramax division, cutting staff by more than 70%.

It’s just the latest move in what has already been a bloodbath. Over the past 24 months the indie film industry — responsible for recent Academy Award winners like Slumdog Millionaire, There Will Be Blood, and Juno — has lost dozens of key players on both the front and back end of the production process.

Mark Gill, who served as president of Warner Independent Pictures and Miramax/LA and is now CEO of the indie-film production and financing company the Film Department, estimates that of the 38 indie-film financing firms — the so-called front end — that existed in 2007, only 11 remain. And they are mostly sitting on their hands. While Wall Street investment in independent movies totaled more than $2 billion from 2005 to 2007, according to Deutsche Bank, it has plummeted to practically nothing since then.

It's just as rough on the back end. Small distributors like ThinkFilm, which released the popular documentaries The Aristocrats, Born into Brothels and Murderball, are struggling, while financially stronger studios — the Hollywood heavies — are scaling back. Just two years ago, each of the six major studios had at least one specialty film division that bought indie films at events like the Toronto International (TIFF) and Sundance festivals, arranged for them to be shown at movie theaters and marketed them to the public. Today only Twentieth Century Fox, Sony and Universal still have specialty divisions — Disney does, too, but in name only. Paramount closed Paramount Vantage, Time Warner shut down Warner Independent as well as Picturehouse and absorbed New Line into Warner Brothers, Disney has radically reduced Miramax, and Universal sold Rogue.

How important were those specialty arms? In 2007, they accounted for more than 30% of indie box-office revenues. The big studios' specialty divisions were also key players in film-festival bidding wars, often paying between $2 million and $10 million per film. This year the highest price paid for a film at the Toronto festival was $1 million by the Weinstein Co. for Tom Ford's A Single Man. "Indie Bloodbath" was how influential movie-industry blogger Anne Thompson described the dearth of high-priced sales at the festival.

While Toronto festival co-director Cameron Bailey is optimistic that by year's end money spent to acquire 2009 TIFF films will be comparable to that of prior years, others say he's dreaming. "Usually there would be one film that came close to a double-digit million-dollar sale, if not hitting that," says Ted Hope, a 20-year veteran indie-film producer whose credits include 21 Grams and The Ice Storm. "Then you would have four or five films in that $4-to-$6 million range and four to seven films in that $1-to-$3 million range. Now we likely have just three or fewer films in the $1-to-$2 million dollar range."

Lower sale prices aren't just a bummer for indie filmmakers; the prices also undercut the economics of American filmmaking, denying investors the sale price needed just to break even. Hope says some sales do happen for less money but they are not true business deals. "The international films can sell for low six figures to what buyers remain here precisely because they are subsidized by their local governments."

So is what's happening just a recession rut? Partly, yes, but the business is also changing in fundamental ways. Just look at the way indie filmmakers raise money today. In the past, they would "presell" their movie to foreign distributors, using not much more than a script and a cast list. That meant certain funding for the filmmaker no matter how good or bad the film turned out to be. The filmmaker could then go to a private investor who, knowing that the movie was already presold to foreign territories, would view it as less risky and invest. With money from both foreign rights and private investors, the filmmaker could then secure a bank loan for the remaining funds.

That funding model is now dead. One reason is the foreign presell market has dried up — foreign governments now prefer to focus on their domestic film industries. Another reason is that U.S. films are often priced too high for investors to make money on, a problem that has intensified with dropping DVD sales around the world. Without being able to presell foreign territories, everything falls apart. "Imploded is the word I would use," says Roger Smith, senior motion-picture analyst at Global Media Intelligence.

Nor is there any encouraging news from theaters. From 2001 to 2005 independent film made up around 25% of the total domestic-box-office gross. That percentage has dropped to 18% for year-to-date 2009.

So how will the indie-film shakeout ultimately play out? Given falling revenue, poor economics and a dearth of new indie projects, financial investors will likely limit commitments to commercially viable films — those offering strong potential for ancillary sales in video games and merchandise. That means more projects directed at the end market for those products — teens. But for hard-core indie investors, those who love taking risks on creative projects and look to hedge their bets by investing across many films, that game is over for now. And indie fans will soon feel it.