The Animation Options Blog

The 12th Shanghai International Film Festival and market wrapped this week. It goes without saying that many great films were screened. But what I found most intriguing was the festival’s FORUM program, which provided lively discussions on a range of topics related to Chinese film production and international co-production - including story development, financing, and IP protection.

Sunday’s keynote address, “Made In China: What Kind of Films Does the Chinese Market Want?”, provoked a lively debate among the directors and producers on the panel. Director Ning Hao provocatively declared, “Movie makers in China lag behind the U.S. and lack certain fundamentals. The American filmmakers plan much more in advance before shooting.” Most concurred that the next 5 years will be pivotal for the Chinese film industry as the attention of the world turns to the mainland. Yu Dong, CEO of the Polybona Film Company, forecast that it is only a matter of time before a mainland Chinese film turns in a $100 million USD box office. To put this in perspective, there are currently only a handful of Chinese directors in China’s “Million Dollar Club”, and that’s 100 million RMB, not USD (the exchange rate being about 6.84 RMB to 1 USD). Nevertheless, Yu Dong soundly observed, “You cannot force distributors to support you. You need to attend to your presentation.” Certainly, a dramatic increase in China’s 4,000 movie screens will be required to realize this prediction (the U.S. has 10 times as many screens with less than 1/4 of China’s population). As this blog observed in “My Forbidden Kingdom For A Screen!”, the mainland Chinese audience continues to be remarkably untapped. Chen Guowei, Vice General Manager of the Wanda Cinema Line Corporation, remarked that films must be entertaining and resonant in order to do well in the market. In other words, they should not only be tasty, but also nourishing. Director Wei Te-Sheng noted ruefully that, “Everything beautiful is being measured.” He blamed “market rules” for overwhelming producers and “killing” the creation and distribution of independent films. “And if you successfully break these rules, ” he laughed, “they call it an exception!” In China, as in Hollywood, some things never change.

Monday morning’s roundtable discussion on “Asian Regional Cooperation” covered the ins and outs of Chinese co-productions, including the importance of matching story to partner, and the pros & cons of written vs. oral agreements. Many on the roundtable concurred that while a good contract is essential to a successful co-production, not every contingency can be adequately covered on paper - mutual respect and trust are paramount. To this point, producer Wang Zhonglei candidly admitted, “When China began to collaborate with other countries, we didn’t take many things seriously.” Corona Pictures’ Julian Alcantara brought his experiences with the Indian film industry to bear, noting how the Indian government moved from recognizing film as an industry only 10 years ago, to quickly adopting a more Western style of planning, production and distribution - with multiple international co-production treaties. The remarkable example of “Slumdog Millionaire” was raised, where an Indian story, cast and crew combined with an English director (Danny Boyle) and production leadership. Yet Mr. Alcantara cautioned how close “Slumdog” came to never even making the theaters. He mused how many other wonderful films audiences will never see due to the vagaries of international co-productions and independent filmmaking in general. Polybona’s Yu Dong repeated that China’s cinema lines must be more productively arranged in order to capitalize on market potential and stated: “I think Chinese filmmakers should collaborate with overseas distributors before movies are made, to ensure a better product.” Julian Alcantara seconded this notion, which this blog has long advocated: “Distributors often complain that producers don’t come to talk to them sooner. The earlier producers and distributors correspond ensures the success of both sides.”

Monday afternoon featured a high-octane keynote entitled, “Soft Power: Financial Innovation & Cinema Expansion”, helmed by none other than MPAA Chairman and former Clinton cabinet member Dan Glickman. Mr. Glickman’s amusingly direct speech went straight after the issues of piracy and market access restrictions on the Chinese mainland - not only linking the two, but noting the negative impact to domestic Chinese filmmakers as well as foreign filmmakers. Said Glickman, “If you don’t give audiences the front door, they’ll take the back door.” IDG’s Patrick McGovern, the “father of venture capital in China”, revealed that almost all of his company’s VC is vested in Asia. Touting the focus and benefits of IDG’s China Media Fund, McGovern remarked, “This is an opportunity for us to work with young directors and producers in China.” IDG is a founding investor in China’s Sohu.com, among other “community-based” media enterprises that target shared experience. Wellington Fung of the Hong Kong Film Council commented on the advantages of Hong Kong’s status as a “free port city for creation and investment”, but cautioned, “Small and mid-sized movies with lesser actors and new directors are higher risk - they attract fewer investors and need more support.” Lawyer Stephen Saltzman of Loeb & Loeb (who will open a Beijing office soon), followed up on this point with the observation that film financing and insurance sources are drying up for independents in the face of the global economic crisis (tell me about it). In a nutshell for Hollywood, foreign money was replaced by Wall Street money, which then fell out. And while Chinese banks and distributors are beginning to get on board with their domestic films, U.S. banks and distributors are conversely pulling back. Said Saltzman, “You might get 20-40% of your funding without a presale, but how do you get the rest?” Responded Patrick McGovern, “Private equity.” IDG typically looks for an average annual rate of return of 30-40% on their investments (to the amusement of some Chinese executives on the panel), but McGovern confided his faith in the principle that “20% of your investments will make 80% of your returns” - hence the importance of a diversified portfolio of media investments. The necessity of completion bonds as a reassurance to investors was discussed, but this concept seemed foreign to most of the Chinese filmmakers, who typically create their domestic movies without them. On the topic of intellectual property protection Stephen Saltzman remarked, “If children grow up thinking that content is free, content providers will have to make their revenue through other streams”. (We’re already seeing this scenario come to pass.) One audience member raised the ominous question for filmmakers of what will happen when these self-entitled children grow up to be the next generation of lawmakers. In closing, the most encouraging observation with respect to co-productions is that the “passive” nature of these relationships has become an increasingly “active” partnership - to the creative and financial benefit of both sides.

The co-pro mojo continued on Tuesday with the “Chinese-Foreign Film Co-Production Forum” keynote panel. Director Han Sanping noted China’s 30 major-market cities and bravely predicted that box office on the mainland will be 30 billion RMB in 10 years time. Julian Alcantara continued his poignant mantra: “We need to appreciate how easy it is for a film the world knows to be a film the world has never seen.” Alcantara declared that co-productions must not only encompass the financial, but also the organizational, artistic and technical. Noting that many non-U.S. filmmakers must go outside of their country to achieve success, he asked provocatively, “Are you Chinese filmmakers… or are you filmmakers who happen to be Chinese?” Zhang Zhao, president of Enlight Pictures, commented that regional distribution systems are required to achieve the box office numbers hoped for in China. On the subject of the global appeal of Chinese film he remarked, “Animated characters may have an international appeal that exceeds that of live-action actors.” This led to the question of whether Chinese audiences themselves like to watch Chinese films. Legendary director John Woo declared (to the appreciative laughter of the room), “We used to have good films, but no audience. Now we have a huge audience, but no good films.” Woo continued: “Most Asian audiences are not interested in Chinese-made epic films. They are considered too heavy. Hollywood is considered ‘The Best’. People will watch Hollywood films in the theaters, and watch their own country’s films on DVD. So, how do we make films that bring audiences to the theaters?”

That’s the $100 million USD question.

In the spring of 2008, I blogged on the important considerations of independent film distribution in “Disregarding Distribution”. Following are further observations on the subject.

STRATEGIES

The global animation industry is highly competitive, with much of a project’s success being directly related to the skills of the distributor’s marketing strategy, and the filmmaker’s solicitation of early feedback from potential distribution partners.

In the area of broadcast animation, the United States remains the largest and potentially most lucrative television market in the world. The traditional method of selling animation content to U.S. broadcast and cable networks is to license 13 to 26 episodes (a half-year’s or a year’s worth of shows) for a flat fee per episode, which gives the customer the right to air each show twice. Around the world, license fees paid to content creators have shrunk dramatically over the last decade, with networks sometimes demanding that producers cut their budgets as a precondition of acquisition. These fees, ranging from a few hundred USD to a few hundred thousand USD per half-hour episode, vary dramatically by budget, country, population, economic conditions and many other factors. The important point is that a considerable amount of most broadcast animation production budgets remains in deficit, and must be covered through international presales, co-production partnerships, ancillary sales or other means. Partly because of this, networks in the U.S. and around the world commonly become co-producers and co-financers in the productions they air, purchasing part or full ownership of the property, rather than simply licensing the rights to broadcast the show. As stake holders, they also receive revenues from international broadcast sales, home video & DVD, merchandising and other ancillaries. The total number of broadcast networks around the world is on the rise, and the growth in channels provides more points of entry for animated programming.

Of course, the best possible initial release for an animated feature film is release in theaters. In addition to its own potential revenue, theatrical release can generate demand for other media release platforms such as broadcast television and DVD, as well as consumer interest in ancillary products. For a film in initial release, the exhibitor will pay a percentage of the revenues from ticket purchases to the distributor (referred to as the “film rentals”). Film rentals customarily diminish over the length of a film’s theatrical run. Depending on the distribution agreement, the producers and investors are entitled to a percentage of film rentals, after the distributor recovers its distribution fee, marketing expenses and distribution expenses.

Other media releases for the film are calculated in a similar fashion. For instance, in the U.S., a home video company pays an amount to the distributor for the right to stock its video stores with the title. From these fees, the distributor will deduct its distribution fee, advertising costs and other distribution expenses in order to recover costs. The producers and investors then receive their agreed-upon revenues as set out in the distribution agreement. The same goes for television and ancillary rights. The total of the money received by the distributor from the exercise of all rights that it is entitled to is called the “distributor’s gross”. Every distribution agreement is different; however, there are similarities common to all. The distributor receives a distribution fee, which is the percentage of the profits that the distributor will receive from the gross. The distributor is then entitled to recover its marketing costs and distribution expenses. The remaining sum is payable to the producers and investors, and is generally called the “producer’s gross” or the net sum.

Independent animation producers have several ways of distributing feature films. For the widest distribution, they must partner with a major studio, although this means giving up significant rights. Typically, when major studios get involved early in the production, they finance most or all of the animated film’s development and production budget and also handle distribution. In return, they receive all rights (including the copyright) and control all creative, marketing and distribution decisions. While filmmakers can benefit financially from the guaranteed exhibition and broad audience reach provided by such deals, final compensation may be far less than expected once significant studio fees and expenses are deducted.

Fortunately, there are alternatives to this strategy for the independent animation producer to consider. Major studios and independent distributors (such as The Weinstein Company) can simply distribute an animated film, controlling marketing and distribution but not production. The distributor usually gets involved only after it sees the completed film, and production funding comes from elsewhere. In this scenario, the distributor takes approximately 35% of gross distribution revenues returned from the theaters, and then deducts expenses before remitting the remainder to the producer. While the relatively lower distribution take and the retention of creative control and copyright are attractive incentives to the producer, there is the very real risk of creating an animated film that is considered “unmarketable”. Distributors routinely reject films that they suspect will be under-performers at the box office due to lack of audience appeal or a clear market position.

A “middle way” is to negotiate with a major international distributor to distribute the animation production prior to completion. While the distribution cut is higher in this case (at least 50%), the distributor’s early involvement brings valuable market insight to the development and production process, includes an advance against revenues upon delivery of the completed negative, and provides the benefit of helping the producer to gain additional financing. Signed distribution agreements can be used as collateral for bank loans, and as incentives for other investors to join the enterprise. This type of deal is known as a “negative pickup”, in which the distributor receives distribution rights, usually in all media, for a specified length of time. When possible, it is in the producer’s best interest to negotiate options based upon performance milestones, which allow the distribution rights to return to the producer if the distributor fails to actively market the film.

Some studios and distributors may also choose to come on board as co-producers, which creates a level of involvement somewhere between owning all rights and simply distributing the film. The studio provides a degree of production financing, has creative input, oversees marketing and distribution, and shares back-end revenues, but does not take full control. The financial details of such arrangements vary greatly.

As these examples demonstrate, studios and distributors can license animated films at various points during the production process: while the film is being financed, during production, or after completion. The more that existing elements seem to point to box office success, the more likely a distributor is to pick up the film early in the process. However, distributors are generally reluctant to get involved early in the production process of independent animated films. The independent producer usually must finance and produce the film without any distribution presale money, and then try to find distribution through success on the international film festival circuit in venues such as Sundance and Cannes, or at markets where films are sold such as the American Film Market. The hard reality is that only a small percentage of companies pitching their films at festivals succeed in securing distribution deals.

Those independent animation productions that are fortunate enough to find distribution will often sign one deal for their domestic territory, and another for international territories. However, deals with major studios and distributors can encompass the entire world, with the major studios subcontracting to local distributors in countries where they may not have operations. Due to the fact that most animation properties do not turn a profit from theatrical release alone, distributors typically want rights to all media including home video & DVD, soundtracks and merchandising. In response, independent producers will usually license home video & DVD to the distributor, but retain rights to the revenue streams for soundtracks and other ancillaries.

Independent distributors have an advantage in releasing low-budget animated films, since they have the experience and patience necessary to handle the slower “platform” method of release. A platform release strategy involves opening a film in a select few cities, building on the film’s word-of-mouth, and gradually widening the release to add more cities and more screens to the release schedule. Positive buzz, festival success and strong reviews all add to a film’s platform.

RELEASE WINDOWS

The typical method of releasing animated feature films begins with domestic theatrical exhibition, which gives value to the various film “windows” (the period following a domestic release before a film can be released in other markets). Historically in the United States and Europe, the sequencing pattern for feature films has been to license international theatrical exhibition, home video & DVD, cable television distribution, broadcast television rights and other ancillary rights. As the rates of return shift among these different sources, changes are made to the sequencing strategy. It is important to note that the release windows for gaming and publishing ancillaries usually precede the initial theatrical release of a film by one to three months.

Distributors around the world plan their release windows with certain target audiences in mind. Given the high costs of film prints, even a relatively modest theatrical distribution of 1000 screens can exceed $2 million USD in initial expenses. For this reason, and as noted above, low-budget films will often receive platform release windows in selected major cities that feature substantial populations of cosmopolitan filmgoers. In this way, the film is given a build-up to a wider release that may occur several weeks later.

ANCILLARIES

Animated films and television properties generally turn a profit not on the initial theatrical or broadcast release, but through the exploitation of ancillary revenue streams. Animated films and television shows do very well on video and DVD, especially when the properties are well-known or appeal to a devoted niche market. For example, DreamWorks’s “Shrek” sold 2.5 million DVDs and 4.5 million VHS cassettes in its first three days on the market in 2001. Together the sales of these home video products totaled $420 million USD for 20 million units sold within two months. “Shrek’s” U.S. box office gross was almost $268 million USD, while its worldwide gross was over $480 million USD. Animated foreign films can experience similar success, although on a more modest scale. Japan’s Pioneer Entertainment released the anime hit “Akira” on DVD after restoring it at a cost of $1 million USD. The DVD release hit the number-one spot on U.S. home video bestseller lists. DVDs are subject to a high degree of piracy on the Chinese mainland, but as noted previously, this can serve as an ironic form of underground advertising for the animation property and its associated ancillary products.

Interactive gaming software is an increasingly important revenue stream for animation properties. This category can easily amount to 50% or more of all ancillary activity, and can rival the revenue of the core theatrical or broadcast distribution for animated films and television shows. Gaming software is also a good way to increase awareness for an animated property, especially when released prior to the screening or airing of the production. On 3D CGI productions, digital assets can be shared between the producers of the animation and the producers of the games. This is often done simultaneously, and can enhance the development of story and characters for both. Games often introduce new story lines and sometimes new characters that expand the world established in the original entertainment property. Platforms include PC, console, mobile and Internet formats.

While book and comic book publishing is usually not the top ancillary category in the United States, books and comics are still an important revenue stream in the West, and an extremely popular and profitable one in the East. Book and comic ancillaries generate awareness with the target audience, provide a means to extend story lines, backstory and character development beyond the original animation property, and enhance the brand image. Typical formats, depending on the age of the consumer and the nature of the content, include board books, story books, magazines, comic books and graphic novels, film novelizations (adaptations of the animation script) and derivative novels (“prequel” and “sequel” stories).

Many animation producers and executives take soundtrack sales into account when they plan the music for a film. By including musical acts that are popular with children and pre-teens (the primary purchasers of animation sound tracks), the producer can enhance sales of the album even among those consumers who have not seen the film. This marketing synergy can also work in the other direction: having a popular singer or band play an important role in the soundtrack can bring people into the theaters who might not otherwise see the film. Music videos are naturally an important part of this equation, and are often planned in conjunction with animation production to create tie-ins between the live action performers and the animated characters.

Toys are the main ancillary product category for most children’s animation projects, with dolls, action figures and board games among the most popular items. There is also an expanding market for collectible “urban vinyl” toys and cast resin figurines among teenaged and adult animation fans. Toys are often one of the first licenses granted for an animation property due to the long lead times required for product development and manufacturing. Some animation-based toy lines are narrowly focused. A licensor of a new, relatively unknown animation property might choose to self-distribute toys, or to license the sale of a small range of toys over the Internet. This approach allows the producer to test the market and gauge demand. For example, in 2001 the United States’ Cartoon Network chose to test a dozen products based on its “Samurai Jack” series, with sales initially limited to their website.

While home video, interactive games, publishing and toys are the primary ancillary categories for animation properties, the number of possible products is unlimited, depending on the nature of the content and its audience. Clothing, stationery, food and beverages are among the available revenue streams. Tactical considerations for maximum profits include the timing of product introduction in each country where the property is released, the product categories chosen, whether to grant exclusive or non-exclusive rights, and the choice of retail outlets. While under-stocking can reduce revenues, over-stocking can shorten the life of the product licensing program, and even have an adverse impact on the animation property itself by creating a negative consumer reaction.

Product placement within a film, common to American live-action properties, is generally not encouraged within animation properties, as it tends to reduce the “classic” status of the animated film. Threshold Animation Studios’ animated feature “Food Fight” launched a direct assault on this principle by setting a story in an American supermarket filled from top to bottom with name-brand household products, and using the fees charged to fund production. The ultimate results of this approach remain to be seen, but the negative online buzz from animation fans prior to release is noteworthy, as is the film’s difficulty in finding theatrical distribution. A commercial ancillary phenomenon common in mainland China is the inclusion of corporate logos in the end credits of feature films – in many cases from companies having nothing whatsoever to do with the production itself.

As you can see, the world of film distribution is “wild & woolly”, so it pays to familiarize yourself with it BEFORE you start production.

Begin with the end in mind.