Structure of Film Industry (Film)

History of Indian Film Industry

Structure of Film

Industry
Growing participation
of foreigners (export Consumption
and exhibition abroad) increasingly
Global (NRIs, Hollywood,
etc.)
The Production Phase includes every activity that contributes towards creating the
film. As the typical masala movie has a simple storyline that connects many professionally
performed songs and dances; music is of major importance - in many cases even more
important than the plot. Hence, in parallel, music scenes are written, choreographed, and
recorded and amount to a substantial portion of the budget (Garwood, 2006).

In Distribution and Marketing companies market the movies and sell film rights to
exhibitors, TV stations, and secondary market providers (DVD etc.). Different distributors
typically cover different regions, particularly in terms of the physical distribution of film copies
(Naachgaana, 2008a). Contracts with exhibitors

Physical distribution to theatres, TV and secondary markets (e.g. DVD, internet)

Sales & marketing decisions in the different distribution markets (location and
timing of release, no. of opening screens, advertising, prescreening for critics, etc.)

Exhibition of Bollywood movies is related primarily to theatres and TV stations (70% of

revenues).Exhibitors are often stand-alone local theatre operators or TV stations.
Major movie premiere as key release event.
Parallel and/or consecutive exhibition in TV and movie theatres
Continuing marketing (research) and promotion activities

The Consumption phase includes any business but primary exhibition, thus the sale of
DVDs, videos, soundtracks and merchandise. The secondary markets are becoming
increasingly important and offer still a lot of untapped revenue potential esp. with regard to
commercials and IT-related consumption channels such as internet (estimated at 46 million
users with an active user base of 32 million) (Ernest & Young, 2007a).

Release to secondary markets (e.g. DVD, video on demand, internet, mobile, etc.
Music is often released before the movie (advertising instrument & major revenue
source)
Sales and marketing of merchandise (soundtracks, gimmicks, etc.)
Resource Requirements

Pre -Production Production Post-Production

Definition All activities required Actual shooting of a Range of activities

to movie by required
prepare for shooting facilities and services

Activities o Storyboarding o Cinematography o Film processing

o Budgeting and o Direction o Editing
scheduling o Set creation o Digital
o Location scouting o Location intermediate
o Casting management o Special effects
o Choreography o Transfers

Facilities/service o Production o Sound stage o Equipment and

requirements services o Construction space: ADR,
o Casting agency services Audio transfer,
o Location agency o Support services DVD services,
o Planner (budgeting o Equipment for editorial facilities,
& scheduling) shooting scoring,
o Food and event screening rooms,
services sound editorial
o Hospitality and mixing,
o Administrative video services,
space digital
o Managers and intermediate,
technicians SFX, online
editing
o Technicians

As far as the areas of operation in the film production business are concerned, the following
table provides a comparison of the extent of activities in Bollywood and Hollywood, in terms of
number of studios and size of facilities.

Film Distribution & Marketing

Producers who treat film as a commercial enterprise start the distribution before they even
raise the funds for a film. Distributors want good films to distribute.

Distributors want exclusive licensing rights to carry a picture in their territory for the formats
that they support. A territory may be regional, spanning multiple countries. A format may
broadly consist of theatrical, pay television, broadcast television, home entertainment (VHS,
DVD, or Blu-Ray Disc), and Internet video download media. A distributor may acquire
licensing for many formats or just one.

Producers with worthy projects can approach distributors with their screenplay and ask them
to provide a letter-of-intent-to-distribute to at least a minimum release of their film. The
producer can then use these distributor endorsement letters to attract investment capital,
above-the-line cast members, and key production crew.

A typical scenario for independent film and television producers looks like this (highly
simplified):

1. You create a motion picture marketing campaign to sell distribution licenses to

distributors at a film and television market recognized by the International Federation of Film
Producers Associations (FIAPF), at major film festivals attended by distributors through either
self-representation in person or through the contracted services of reputable sales agencies
and producer representatives. Additionally, you should create either a motion picture web site
or a movie profile with a video trailer hyperlink on a high-traffic web site such as
MySpace.com and Amazon.com's IMDb Pro. Note: When you budget your production costs, try
to factor in that distribution licensing sales will be responsible for a minimum return of a
183% of your production costs. It is very important that your marketing campaign will sustain
your distribution licensing sales target.

2. Before you find a distributor, you must have a schedule of deliverables to give to the
distributor. Including the film master in an acceptable media and format, the deliverables
schedule will also include marketing elements that you have collected as you created your film
(such as movie trailers in different cuts, poster-sized key art, photographs, a behind-the-
scenes featurette, press articles, technical production fact sheets, music cue sheets, dialog
transcripts, etc.) Even though you finished post production before your movie was sent to the
film festival, this step may require both additional post-production (major, not minor) and
potentially lots of legal paperwork with respect to preparing releases and securing rights for
intellectual property, such as music and brand identities, used by the film. Gathering the
deliverables is the key to success for you as a filmmaker: A distribution license sale will only
close if the deliverables are accepted by the distributor in good order. The more quality in the
deliverables, the more likely the licensing sale will close.

3. Then, the distributor creates a totally new local-territory marketing campaign from your
deliverables. This may include a localized movie poster and the movie trailer translated into a
local language. Be prepared to support language translation questions from your
distributor. The local marketing campaign may provide release windows for the title to
rollout in different formats on different dates. Note: Distribution nowadays does not
necessarily mean theatrical distribution as digital downloads have begun to take over the
market. Because of digital piracy, traditional distribution release windows by territory and
then by format have become complicated: Recent titles have used simultaneous territory
releases to get a jump on the effects of digital piracy on future sales. The more experienced the
distributor, or the stricter the local copyrights enforcement, the less likely digital piracy will
impact the revenue generated by each distributor's territory.

4. The distributor may create prints - 35 mm film copies of the motion picture from your
master deliverable. The prints will then be delivered to the distributors contracted theater
chains and supported with advertising campaigns in local media outlets.

5. Depending on the licensed territory, the distributor may create local language versions of
your motion picture from your deliverables under your license. Local language versions will
either appear as subtitled motion pictures or as voice-dubbed motion pictures - depending on
the sophistication of the distributor. The dialog transcript and music cue sheet both support
this function. When the local licensing rights expire, the local language edition of your film
should revert back to you for future distribution and archiving. The elements used to create
the local language edition should be delivered to the production company or its delivery agent
on expiration of the license.

6. Depending on the licensed home entertainment format, the distributor may create the local
DVD versions of your motion picture from your deliverables. Sometimes, this requires
developing a separate local home entertainment marketing campaign from your
deliverables, which can result in an enhanced or extended version of your motion picture,
replete with Internet hyperlinks to contracted local product and service promotions. Then, the
distributor ships the DVD-video to retail outlets within his territory.

7. The distributor then accounts for the sales of your movie against costs for prints,
advertising campaigns, and other distribution expenses, such as returned home
entertainment units (eg. DVD breakage), local financing costs, taxes, customs duties, and
tariffs. Per your distribution license agreement, the distributor can then return any actual
positive net revenue from the distribution license to the production company directly, or to a
legal trust entity created to receive net revenue for the production company and for its
beneficiaries, such as equity investors, creditors, sales agencies, and talent guilds.
Distribution companies will return positive net revenue to encourage producers to provide
early exclusive access to their next motion picture: On the other hand, negative net revenue
accounting reports are very common in the early years of a multi-year distribution license,
and generally reflects the start-up costs for marketing a new motion picture. Such costs can
be reduced if a motion picture is one in a story franchise of multiple motion pictures: The first
picture will bear the brunt of the market introduction costs - and the subsequent pictures will
benefit from brand familiarity and mass media awareness with the story characters and its
elements.

8. If you do not use a legal trust entity to manage net revenue, the production company will be
responsible for the producer's net revenue distribution accounting. If there is any positive net
 revenue to share, then the production company will be responsible for distributing revenue to
your investors and creditors. It is recommended that an international entertainment
accounting firm be contracted to provide this service over the lifetime of all territorial
distribution licenses issued on behalf of a motion picture.

Film distribution
o Film distribution describes everything that happens in between production (making the
film) and exhibition (people watching the film in cinema, DVD, television, via the internet,
a plane or anywhere else!)

o Distribution involves all the deals done to get the film shown including the promotion.

Promotion
Promotion involves:

o Above the line advertising which will be funded as part of the project such as trailors,
billboards and various other spin offs e.g. McDonalds happy meal toys and in house
promotion of the film.
o Below the line publicity which is not paid for but generates mutual interests e.g. an
interview with a magazine or newspaper or reviews (any positive reviews will obviously help
the promotion of the film although any bad publicity will obviously have an impact on the
film.

Film distributers
o The key players in film distribution are the big companies which controls much of the
industry, control the distribution of their own products, and of others.

o Films are loaned out to cinemas for a set amount of time, release dates are secured and a
set number of screens and screen times.

Film Exhibition

This is the process of showing a film to an audience, mainly referring to a cinema

environment, but with the advent of new digital projection equipment and DVD players,
screenings in schools, colleges, art centres and outdoor venues are future possibilities.

A film production company sells or finances films. It is up to the production company or the
producer to look into the infrastructure required for the making of the film. All operations,
processes, etc. that have already been explained above are taken care of by the production
house. The film, after getting made, is then sold through distributors to cinema exhibitors.
Depending on the budget of the film and the kind of audience it is meant to target, the
number of prints to be sold is decided. Thus, the main customers of a film are theaters, single
screens, multiplexes, etc. Firstly, we shall take a look at an overview of the Indian film
exhibition market.

India is third in the list of the countries with the maximum number of single screen
theatres.
The Indian exhibition industry is characterized as traditionally being an unorganized
market.
o Highest number of theatre visitors annually in the world.

o High rates of entertainment tax ranging from 15% in Chennai to 60% in the US.

o It has traditionally followed unorganized funding routes with a lack of corporate

funding in the sector.

o Piracy of films is rampant due to the long time lag between release of films in the
metros and the tier II and III cities. This gives ample room for the release of
pirated copies at low prices in the market.

The film exhibition space in India Is primarily divided into two types, single screens and
multiplexes, with digital technology being a recent development that can be adopted by
either.

The distribution of theses theatres is divided among six territories: Mumbai, Goa; Delhi,
Uttar Pradesh; East Punjab; Eastern Circuit; Central Province, Central India, Rajasthan;
the South.

Single screens in India are seeing two main trends, consolidation and conversion, to
keep up with the growing competition from multiplex operators

o Consolidation: single screens are being bought by a single owner to be covered

under a single umbrella brand.

o Conversion: single screens are undergoing extensive renovation to attract

customers and getting converted to multiplexes.
 Exhibition

The exhibitor sells the experience of the film.

How might the exhibitor go about selling the experience of a film in different ways?

The exhibition of film primarily involves the ownership, management and operation of
cinemas.

Exhibitors have to deal with

o shifting market conditions
o strong competition
o efforts to achieve monopolization of the field
o government regulatory actions
o costly investment in new technologies.
Film Production Organizational Structure
Budgeting and its format
A film production budget determines how much money will be spent on the entire film
project. It involves the identification and estimation of cost items for each phase
of filmmaking (development, pre-production, production, post-production and distribution).
The budget structure is normally split into "above-the-line" (creative) and "below-the-line"
(technical) costs.

Above the line (filmmaking)

In feature-length narrative filmmaking, an imaginary line delineates those who have influence
in the creative direction of a film's narrative from others who perform duties related to the
film's physical production.
Above-the-line is a term that refers to the list of individuals who guide, influence and
hopefully add to the creative direction, process and voice of a given narrative in a film and
their related expenditures. These roles include but are not limited to
the screenwriter(s), producer, director, casting director and actors.
Often, the term is used for matters related to the film's production budget. Above-the-line
expenditures reflect the expected line item compensation for an official above-the-line
member's role in a given film project. These expenditures are usually set, negotiated, spent
and/or promised before principal photography begins. They include rights to secure the
material on which the screenplay is based, production rights to the screenplay, compensation
for the screenwriter, producer, director, principal actors and other cost-related line items such
as assistants for the producer(s), director or actor(s).
The distinction originates from the early studio days when the budget top-sheet would literally
have a line separating the above-the-line and below costs.
Below the line (filmmaking)
In feature-length narrative filmmaking, an imaginary line delineates those who have influence
in the creative direction of a film's narrative from others who perform duties related to the
film's physical production.
Below-the-line is a term that refers to the list of individuals who perform the physical
production of a given film, the post-production work and all of the related expenditures. These
positions include but are not limited to the following:
Assistant Director Graphic Artist
Art Director Hair Stylist
Line Producer Key Grip
Best Boy Electric Make-up Artist
Best Boy Grip Production Assistant
Boom Operator Script Supervisor (continuity)
C.G. Operator (television) Sound Engineer
Costume Designer Stage Manager (television)
Director of Photography Stage Carpenter
Camera Operator Technical Director (television)
Composer Video control (television)
Dolly Grip Film Editor
Gaffer Visual Effects Editor
Individuals considered below-the-line do not have any official influence on the creative
direction of the film. However, depending on the film director's discretion, they will still
influence certain aspects of the film's overall look, feel and tone through their work in their
respective departments.
The head of each department is known as a "key". These individuals are responsible for the
overall workings of their area, such as hair, make-up, wardrobe, grip and electric (G&E),
lighting and camera. The head of the camera department is the Director of Photography, also
known as the cinematographer.
Below-the-line costs include allowances for non-starring cast members and the technical
production crew and post-production team(s). Costs for locations such as filming sites, film
studios and sound stages with its related technical equipment are also considered below-the-
line expenditures. Crew travel expenses, catering costs, craft service and many other expenses
fall under the below-the-line banner. Keys will often move around their expenses to suit their
departmental needs unless absolutely necessary during production. In addition, below-the-
line costs include production insurance, errors and omission coverage (E&O) insurance and
other unforeseen expenses under the heading "contingency", which usually begins at around
10%.
Below-the-line costs are generally fixed, meaning they were already budgeted for a particular
department before principal photography begins in what is known as a "locked" budget.

Format
Film budgeting refers to the process by which a line producer, unit production manager or
filmmaker prepares a budget for a film production. This document, which could be over 150
pages long, is used to secure financing for the film and lead to pre-production and production
of the film. Multiple drafts of the budget may be required to whittle down costs. A budget is
typically divided into four sections: above-the-line (creative talent), below-the-line (direct
production costs), post-production (editing, visual effects, etc), and other (insurance,
completion bond, etc).
Target Viewers
With the era of marketing coming in, no matter what you are selling, the prime focus has to be
on two words Target Audience. Things aren't different for films either. In fact, filmmaking is
one of those businesses where understanding the target audiences is extremely important as
the fate of the film completely depends upon the audience's reaction. Besides, the news
spreads by word of mouth like wild fire which can either glorify the film or kill it completely.

In a country like India, where there is so much of diversity in the population due to socio-
economic and cultural factors, it is immense importance for filmmakers to classify these
audiences and understand who will be the right target for their films. And with the wide
variety of films that are coming up in Bollywood, we thought of giving you the classifications
and descriptions of the types of films that come out in Bollywood. But also note that this is
just a general analysis and there is a possibility that the films can be classified into further
sub categories.
So let's see what kinds of target audiences for movies exist in India and which of the recent
releases catered to each of the categories.

1. Pan-India Films - These are the kind of films that are accepted by all the classes. Be it
the big metropolitan city or the most rustic region of the country, people from both the
places easily relates to such films. Films like Rang De Basanti, Lage Raho Munnabhai
 and Lagaan are some examples of the films that fall in this category. The major reason
why these films connect with people of every class is because their message is universal.
The point which the filmmaker wishes to make is relevant to everyone, irrespective of
their lifestyle. Besides, the manner in which the story is presented onscreen by the
filmmaker is also acceptable as it makes sense to all kinds of audiences.
2. Masses - These are the kind of films that have been crucial for the flourishing of the
Hindi Film industry. The films falling into this category sell well among the masses. They
have elements of all emotions - drama, comedy, actions etc. and hence these films are
popularly known as Masala films. This is mainly escapist cinema and therefore is
popular among the masses as it takes the audiences in a completely different world
altogether. This world is full of colour, joy, music, love, tragedy and action. All the things
that an average person dreams of doing are done by the characters of screen. Everything
is larger than life, bright and everything ends well in these films. These films are
complete entertainers with a dose of everything. A maximum percentage of films that are
made in India come under this category. To name a few, recent films like Humko
Deewana Kar Gaye, Naksha, Fanaa and Golmaal will be the films that will fall under
the masses category.
3. Urban - This is one category that has come up in recent times. With the globalization
and change of lifestyle and values in the urban areas, there is a considerable difference
between the life in an urban city like Mumbai and any rural place in India. These days
 many films are coming up that are based highly on the "urban" culture in the most
advanced cities in the country. Films like Pyaar Ke Side Effects, Bas Ek Pal, Mixed
Doubles and Being Cyrus are some of the recent examples that fall into this category.
These films mainly have their target audiences from the urban sectors as only they can
relate to such films. These kinds of films also work in the semi-urban areas but may not
necessarily do well in the outskirts of India.
4. Festivals oriented - This is a new category of films that has come up in the Indian
cinema recently. Earlier, this kind of films was termed as "art films" but now they have
taken a different avatar altogether. With the participation of Indian films at the films
festivals world over being at an all time high, a new category of festival films is slowly
coming up and developing. Screening of these films at festivals provide them the much
needed exposure, something which many "art films" were deprived of in the past due to
audiences' inclination towards masala movies. Some of the films from this category
which released this year are 15th Park Avenue, 13th Floor and Quest. There are some
films which have been released in festivals but have still not released in theatres which
include Water, The Last Monk and Hope And A Little Sugar. It is not that this kind of
festival or art films didn't have a market in India. In the past and even presently, these
films have a niche market for themselves. Interestingly, one good change which is
happening is that some of the famous stars from the commercial Bollywood cinema are
now keen on being part of these films. The recent examples include John Abraham in
 Water and Nandita Das and Atul Kulkarni in Maati Maay, which is a Marathi film by
Chitra Palekar.
5. Low grade Sleazy films- The low grade, soft porn films has always had a small but
religious segment of target audiences. These films are mainly low budget, with hardly
any focus of creativity as the basic aim is to just sell sex. But though they have low
production value, these movies do make profits from smaller sectors and a select few
theatres in urban areas, which are devoted to play only sleazy films. The breakthrough
that has happened recently is that the budget and production value of some films in this
category has increased. Unlike in the past, these days you'll notice promotions of these
soft porn films is being done through mass media. In fact, some of the actresses who are
part of such C-Grade films are now getting publicity and becoming known faces. The
manner is which they do it though is controversial at times. Mona Chopra and Payal
Rohatgi are two actresses who have pulled enough of attention for themselves though
they mainly star in the sleazy films. This year's sleazy stock includes Bhokh-The Hunger
of Body, Chumbam- The Kiss, Free Entry, Haseena- Smart Sexy Dangerous, Husn, Love
and Betrayal, Item Girl and Kaamwali. Though all the classy audiences and most of the
masses may refrain even from looking at the posters of such movies, the producers of the
C-grade sleazy movies have also started to get greater exposure for their films through
mass media. Today, these films are getting the highest publicity among masses than
they ever did as the producers are ready to invest more for the promotions.
Looking at the above categories, one of the conclusions that we reach to is that today, every
kind of film has an audience for it. It is just up to the filmmakers that they set their target
audience well and work on selling their films to that particular set of viewers. The way you
market your film has also become an important aspect apart from what the content of the
movie is.

Overseas Business Structure

Global film production
Globally, over 3,200 feature films were made in 1997, slightly up on the previous year but
down on a recent high of 4,564 films produced in 1990. In the worlds regions, there have
been mixed experiences.

Film production in the EU has once again risen, to 666 films in 1997 against a revised 645 in
1996. The lions share of this growth comes from France, which actually hides a drop in
countries such as Spain, Italy and Germany. This is not necessarily a bad thing, as film
production levels that are too high are as damaging as those are too low due to the
distribution bottleneck it causes. Irish production is rising again after reduced fiscal
incentives led to a drop in 1996. Total Eastern European production has remained fairly
stable, although this masks substantial drops in Hungary and Czech Republic, more than
made up for by an increase in Russian production.

South America is seeing something of a production boom, backed up by increased success at

the box office and positive state support. Brazilian drop in films produced is more likely to be
an aberration than a confirmed trend. Argentina, Venezuela and Mexico all saw rises in
production levels. US feature film production fell to 676 in 1997 in wake of a restructuring of
US majors production sources. Canadian film production rose to 65 films.
Despite widespread economic crisis, feature film production in Far East was largely unscathed
in 1997, actually rising slightly to 663 films although predictions for this year are far worse.
Asian production was more quickly affected and this shows up as a drop of 15 films in the
countries where information was found in 1996 and 1997. The number of films produced in
India rose to 697 in 1997, from 649 in 1996. However, there is still some way to go before
producers regain the high of 948 films produced in 1990.

Global film co-production

During 1997, the number of European co-productions dropped sharply, from 253 to 226
features, after several years of growth. Growth in French co-productions was outweighed by
falls in Italy, Germany and UK. However, the 1997 level is still above that of 1994. A reason
for this drop may be found in criticism of co-production schemes such as Eurimages for being
too rigid and over-dependent on rules. The burgeoning number of domestic and international
sources of finance becoming available to producers could spell an end to political pan-regional
schemes.

Countries tend to have favoured trading partners for co-producing films. Nordic countries
have very close production ties and common production schemes. Hong Kong producers
mainly co-produce with Mainland China, a trend which is likely to develop as the two
economies become more integrated. The large French feature production sector has spawned
a set of satellite producers who only exist to co-produce films with larger French producers.
These satellite producers are found in countries such as Belgium, Luxembourg and
Switzerland. Austrian and German producers have a similar symbiotic relationship.

Co-productions are not as common throughout the world as in Europe. For example, while
Asia produced around 845 films in 1997, only 14 of these were identified as co-productions.
US distributors and producers invest heavily overseas in the form of output deals, presales
and one-off film projects yet the USA is rarely a co-producer of films in the sense of shared
financial, technical and artistic resources.
India is slowly opening up, with giant NFDC establishing co-production partnerships around
the world. Australian producers only collaborated on 3 co-productions in 1997 out of 34 films
made. However, Australian features do receive about 40 per cent of budget finance from
overseas in the form of pre-sales.

There seems to be a fundamental difference in approach to co-financing films between Europe

and the rest of the world. Foreign money is able to invest in a production nearly everywhere in the
world. However, Europe has chosen to institutionalize co-productions for political and
economic ends. This is a model that is being followed by some Latin American countries and
Spain that are setting up a Eurimages-style production fund. Recent criticism directed at
Eurimages, and the lack of such schemes elsewhere, suggest that the rest of the world prefers
not to be limited to certain countries for production partners and finds the bureaucratic
European model too restrictive.

We cannot be sure that the fall in European co-productions is a confirmed trend but it should
make some policymakers sit up and think. The Asian currency crisis is likely to have the
effect of making these countries more insular, as domestic production is the only way to feed
distribution markets although Asian producers may see co-production as a way of obtaining
distribution rights to films it could not afford to acquire. Latin America, generally in a
production boom, is likely to see more co- productions with each other and favoured trading
partners such as Spain.
Global film investment
A key measure for analyzing a national film economy is production investment, which rose in
France, Germany, Italy, Spain and UK. Unsurprisingly, highest average production budgets
are found in USA ($14.53m), followed by UK ($9.48m), Germany ($5.68m), France ($5.53m)
and Ireland ($5.08m). Three out of these five countries are English-speaking, showing the
impact of this language on a films potential revenues and thus its production costs. North
American production costs, in the case of the majors, are reaching titanic proportions,
standing at $52.4m in 1997. However, in the wake of James Camerons Titanic, studios have
taken steps to reduce budgets or have scrapped projects that were likely to run into silly
money and this should feed into 1998 figures that three world regions dominate overall film
investment: North America, Western Europe and to a lesser extent, the Far East. Indian
feature film production sector is known for producing the highest number of films world-wide
yet it does not invest much money. This highlights the nature of film budgets in India, where
films are churned out for low sums of money.
Overseas production sources
The expansion of overseas markets is forcing the majors review their production strategies in
order to include local product in their distribution release schedules. Despite talking a good
game for several years, negative pick-ups were for long the real extent of overseas involvement
for US majors. Now, however, moves are being made to establish production bases and deals
overseas. Obviously, in the case of Polygram, its European background reverses this situation,
in that it needs to set up sources of American product. Warner Bros and Disney have
particularly run with this strategy. Disney has first-look deals in UK, Germany Netherlands
and Italy and also co-produces films in Japan and Argentina. Warner is mainly active in
Germany, with two output deals and a link through Castle Rock Pictures (part of Time Warner
Entertainment), and Australia in a split rights deal with local group Village Road show.
Twentieth-Century Fox, through a niche subsidiary Fox Searchlight, financed the UK hit The
Full Monty which was produced by a British company. Locally produced features will be
crucial to sustain market shares of US distributors, especially faced with increasing
popularity of native films, particularly in Europe. Of the fully-established majors, only
Paramount and Universal currently have no production activities abroad although Universal is
in the process of setting up deals with filmmakers in all parts of the world and declares
overseas co-productions and acquisitions as a key part of its diversification strategy.
Organization structure of major Distribution Company

Movie ads (PR to media, advertising)

Sales (Distribution to Movie Theatres)

Management

Movie HQ
Overseas (distr. & sales of movie
works to overseas)

Movie shows (operations of movie

owned theaters)

Admin. HQ (acctg & admin.)

The blue color indicates department or a company in charge of overseas

transactions.
 Film finance
Film finance is an aspect of film production that occurs during the development stage prior
to pre-production, and is concerned with determining the potential value of a proposed film.
In the United States, the value is typically based on a forecast of revenues over a ten- to 15-
year period, beginning with theatrical release, and including DVD sales, and release to cable
broadcast television networks both domestic and international and in flight airline licensing.

Film finance is a subset of project finance, meaning the film project's generated cash flows
are used to repay investors, and generally not from external sources. This however has
been met with new ways to protect principal, and insure against loss of investor's assets.

Typical methods of Financing a film

There are four main methods of financing the production of a film:

1. government grants;
2. tax schemes;
3. private equity and hedge funds
4. debt finance; and
5. equity finance.

Government grants

A number of governments run programs to subsidies the cost of producing films. For instance,
in the United Kingdom the UK Film Council provides funding to producers provided certain
conditions are met. States such as Louisiana, Massachusetts, New York, Connecticut,
Oklahoma, Pennsylvania, Michigan, and New Mexico, will provide a subsidy or tax credit
provided all or part of a film is filmed in that state.

Governments are willing to provide these subsidies as they hope it will attract creative
individuals to their territory and stimulate employment. Also, a film shot in a particular
location can have the benefit of advertising that location to an international audience.

Government subsidies are often pure grants, where the government expects no financial
return.

Tax schemes

A number of countries have introduced legislation that has the effect of generating enhanced
tax deductions for producers or owners of films. Schemes are created which effectively sell the
enhanced tax deductions to wealthy individuals with large tax liabilities. The individuals pay
the producer a fee in order to obtain the tax deductions. The individual will often become the
legal owner of the film or certain rights relating to the film, but the producer will in substance
continue as the real owner of the economic rights to exploit the film.[ Governments are
beginning to recognize that enhanced tax deductions are an inefficient way of supporting the
film industry. Too much of the tax benefit is siphoned off by promoters of the tax scheme.
Also, films with little commercial or artistic merit are produced simply to generate tax
deductions. In 2007 the United Kingdom government introduced the Producer's Tax Credit
which results in a direct cash subsidy from the treasury to the film producer.

German tax shelters

A relatively new tactic for raising finance is through German tax shelters. The tax law of
Germany allows investors to take an instant tax deduction even on non-German productions
and even if the film has not yet gone into production. The film producers can sell the
copyright to one of these tax shelters for the cost of the film's budget, then have them lease it
back for a price around 90% of the original cost. On a $100 million film, a producer could
make $10 million, minus fees to lawyers and middlemen.

This tactic favors big-budget films as the profit on more modestly budgeted films would be
consumed by the legal and administrative costs.

That being said, the above schemes are all but gone and are being replaced by more
traditional production incentives

The main production incentive is the German Federal Film Fund (DFFF). The DFFF is a grant
given by the German Federal Commissioner for Culture and the Media. To receive the grant a
producer has to fulfill different requirements including a cultural eligibility test. The film
finance calculator on NRW.GermanFilmFinance.com checks online if the project passes the
test as well as it shows the individually calculated estimated grant.

British tax shelters

Now, the same copyright can be sold again to a British company and a further $10 million
could be raised, but UK law insists that part of the film is shot in Britain and that the
production employs a fair proportion of British actors and crew. This explains why many
American films like to shoot at Britain's major film studios like Pinewood and Shepperton and
why a film such as Basic Instinct 2 relocated its action from New York to London. These are
commonly referred to Sale & Leaseback deals; they were discontinued in March 2007, though
those initiated prior to Dec. 31, 2006 were grandfathered in.
Private Equity financing

Generally tax-advantaged theatrical film and television investment for affluent individuals
comes with little risk. Most often, the cost of production is recouped by a combination of
federal and state tax incentives, thereby eliminating most of the risk. Capital is still required
as a direct investment (partnerships can be used), but must also be "at risk", which allows
181 IRC write-offs. For example, if a private equity source is found (individuals with capital or
a private wealth management firm representing individuals personal funds), the investor pays
for the film or TV production, and receives back an equal amount of capital in tax-incentives,
pre-sales and state tax credits, thereby making the investment and recoup a wash. This is a
highly specialized tax play, and is often looked upon as risky by those who do not understand
the risk mitigation offered through state tax and federal tax incentives like 181 IRC.

Hedge-Fund financing

Also known as slate financing deals. Some hedge fund managers watch Oscar ceremonies
with great interest to see their funded films among the winners.

Several Oscar nominees, including hits such as The Pursuit of Happyness, Blood Diamond
and Borat, were partially financed by hedge funds, loosely regulated pools of capital that are
restricted to institutional investors and wealthy individuals.

Wall Streets fascination with film financing has grown in recent years, with several private
investment firms making agreements with major studios to co-finance slates of movies over a
period of years.

With names like Relativity Media and Virtual Studios, these firms do not have the cachet or
name recognition of the big studios. They certainly will not be sauntering up to the podium
and thanking their agent should their films get an award. Even so, a win at the Oscars could
be rewarding.

Relativity Media helped finance Happyness, whose lead actor, Will Smith, is up for Best
Actor. An affiliate of Dune Capital Management, a hedge-fund firm once controlled by
financier George Soros, kicked in money for Borat, the guerilla comedy starring Sacha Baron
Cohen that is a nominee for Best Adapted Screenplay. And Virtual Studios, which is backed
by the hedge fund Stark Investments, has invested in Blood Diamond, which is up for five
awards, as well as the disaster-film flop Poseidon, which garnered a nomination for best
visual effects.

This list reflects the growing ties between Hollywood and hedge funds and private equity
firms, which have invested billions in movies since 2005, Bloomberg News reported last
month. Two investors in MGM, the movie studio, are the buyout firms Providence Equity
Partners and Texas Pacific Group.

It can be a risky business. Legendary Pictures, another hedge fund vehicle, has caught flack
for its investments in box-office bombs Lady in the Water and The Ant Bully.

Yet some of these companies seem to have found gold in the Hollywood Hills. Borat cost an
estimated $18 million to produce. The tale of a fictional Kazakh reporters adventures in the
United States has earned about $128 million in domestic box office.

Private Investors

One of the hardest types of film financing pieces to obtain is private investor funds. These are
funds invested by an individual who is looking to possibly add more risk to his investment
portfolio, or a high net-worth individual with a keen interest in films. Boston Financial Trust,
Corp. has become a catalyst for many of those types of investors and has access to some of
the strongest film financiers in the Northeast.

Debt finance

Pre-sales

Pre-sales is, based on the script and cast, selling the right to distribute a film in different
territories before the film is completed. Once the deal is made, the distributor will insist the
producers deliver on certain elements of content and cast; if a material alteration is made,
financing may collapse In order to gain the marquee names essential for drawing in an
international audience, distributors and sale agents will often make casting suggestions.Pre-
sales contracts with big name actors or directors will often (at the insistence of the buyer)
have an "essential element" clause that (as per the example above) allows the buyer to get out
of the contract if the star or director falls out of the picture and a marquee equivalent cannot
be procured.

The reliance on pre-sales explains the film industry's dependence on movie stars, directors
and/or certain film genres (such as Horror).

Typically, upon signing a pre-sale contract, the buyer will pay a 20% deposit to the film's
collection account (or bank), with the balance (80%) due upon the film's delivery to the foreign
sales agent (along with all the necessary deliverable requirements.)

Usually a producer pre-sells foreign territories (in whole or part) and/or North American
windows/rights (i.e. theatrical, home video/DVD, pay TV, free TV, etc.) so that the producer
can use the value of those contracts as collateral for the production loan that a bank (senior
lender) is providing to finance the production.
Television pre-sales

Although it is more usual for a producer to sell the TV rights of this film after it has been
made, it is sometimes possible to sell the rights in advance and use the money to pay for the
production. In some cases the television station will be a subsidiary of the movie studio's
parent company.

Negative pickup deal

A negative pickup deal is a contract entered into by an independent producer and a movie
studio wherein the studio agrees to purchase the movie from the producer at a given date and
for a fixed sum. Until then, the financing is up to the producer, who must pay any additional
costs if the film goes over-budget. Superman and Never Say Never Again are examples of
negative pickups.

Generally, a producer will have a bank/lender lend against the value of the negative pickup
contract as a way to shore-up their financing package of the film. This is commonly referred to
as "factoring paper". Most major North American studio and network contracts (incl. basic
cable) are collateralized/factored by the bank at 100% of the contract value and the lender
just takes a basic origination/setup fee. This is not the case with foreign contracts, which the
bank will usually only lend 80%, 50%, or 0% of the value of the contract, depending on the
bank's history with the buyer, country/territory, and/or seller.

Splitting the roles of studios and networks necessitated a means for financing television series
appropriate to the varied risks and rewards inherent in the separation. A practice known as
"deficit financing" consequently developed - an arrangement in which the network pays the
studio that make a show a license fee in exchange for the right to air the show, but the studio
retains ownership. The license fee does not fully cover the costs of production - hence the
"deficit" of deficit financing.

Deficit Financing developed after the varied risks and rewards were determined and carried
out through film financing. Deficit financing occurs when the license fee for a show doesnt
fully cover production fees. A studio has ownership of the production, but as license fees are
handed out in exchange to air a show, the phrase deficit financing comes into play as costs
were not being met and paid.

From the late 1960s through the mid-1990s special regulations from financial regulation's
and syndication's rules created relations between television networks and independent
production companies. These rules stated that ownership of the rights to the programs
reverted to the producer/production company after a specified number of network runs
(syndication). Profits from any other sales, including syndication, generally benefited the
production community. Because of this, production companies produced original shows at a
loss, hoping that they would eventually be run by syndication and make their money back.[

Gap/Super Gap financing

In motion pictures, Gap/Supergap financing is a form of mezzanine debt financing where the
producer wishes to complete their film finance package by procuring a loan that is secured
against the film's unsold territories and rights. Most gap financiers will only lend against the
value of unsold foreign (non-North American) rights, as domestic (North American: USA &
Canadian) rights are seen as a "performance" risk, as opposed to more quantifiable risk that is
the foreign market. In short, this means that the foreign value of a film can be ascertained by
a Foreign Sales Company/Agent by evaluating the blended value of the quality of the script,
its genre, cast, director, producer, as well as whether it has theatrical distribution in the US
from a major film studio]; all of this is taken into consideration and applied against the
historical and current market tastes, trends, and needs of each foreign territory of country.
Surprisingly, this is fairly predictable to a certain degree of certainty. Domestic distribution,
on the other hand, is very unpredictable and far from ever a sure thing (e.g. just because a
film has a big budget and a commercial genre and cast, it could still be unwatchable and thus
never receive a theatrical or television release in the US, thus being relegated to being a big
budget, direct-to-video film.) So, in as much as there can ever be any certainty in the
entertainment business, lending against foreign value estimates is almost always going to be a
much better bet than banking on domestic success (comedies and urban films being two
notable exceptions: they are referred to as "domestic pieces" or "domestic plays".)

True to its mezzanine nature, in the pecking order of recoupment of investment, generally, gap
(or super gap) loans are subordinate to (recoup after) the senior/bank production loan, but in
turn, the gap/super gap loan will be senior to (recoup before) equity financiers.

A gap loan becomes a supergap loan when it extends beyond 10-15% of the production loan
required to shoot the film (or in other words, when the percentage of the gap required to
complete the film's financing package becomes greater than a bank is willing to bear, which is
traditionally 10-15%, but can sometime be a flat dollar threshold like US$1,000,000.)

Gap/Supergap lending is a very risky form of capital investment and accordingly the fees and
interest charged reflect that level of risk. But at the same time it is not unlike buying a house:
nobody pays 100% of the purchase price with cash; they pay about 20% in cash and borrow
the rest. Supergap financing works by the same principle: put down 20-30% cash/equity and
borrow the rest.

Over the years, because of the high risk nature, many supergap companies have come and
gone, but a few established players have survived the ups and downs of the markets with
Relativity Media, Screen Capital International, Grosvenor Park, Helios Productions, Endgame
Entertainment, Blue Rider, Newmarket Capital, Aramid Entertainment, MDG Entertainment
Holdings, Limelight and 120dB all active in the current debt financing space.

The internet portal www.NRW.GermanFilmFinance.com aims to support national and

international film makers in the acquisition of production financing. By combining national
and regional financing components including a Superap loan, it is possible to finance up to
50% - 65% of the entire film project budget.

Product Placement financing

Income from product placement can be used to supplement the budget of a film.

The Bond franchise is notable for its lucrative product placements deals, bringing in millions
of dollars. In the film Minority Report, Lexus, Bulgari and American Express reportedly paid a
combined $20 million for product placement, a record-high amount. Product placement may
also take the form of in-kind contributions to the film, such as free cars or computers (as
props or for the production's use). While no money changes hands, the films budget will be
lowered by the amount that would have otherwise been spent on such items.