Friday, September 10, 2010

Making a Business Plan part 5

OK, so what if we handled our own distribution?

The abstract of this is going to be
  • It'll cost us a whole bunch of cash up-front
  • Our overhead will skyrocket and we'll become too big too fast and inplode

At least, at the beginning of this post that's what I think the abstract will be. We'll find out once we get to the end.

I'm not even going to use real number in this post because I'm too lazy to look them up the fake numbers I make up out of my head will be just as accurate. You don't believe me? Oh, you should believe me. Because the real costs of things are always higher and involve a whole bunch of things you wouldn't have ever thought of.

How much does distribution cost to do? Well, if we were able to magically distribute thorough the Internet like we're supposed to be able to do then it would be zero dollars! But it ain't. So we're not.

We can divide distribution up into two parts:
  • North American and 
  • Worldwide (not North American).
For North American we'd be the ones selling DVD's directly to Blockbuster (that's a lie -- we'd have to go through someone like Koch/E1 or the like to get into Blockbuster and BestBuy, Koch/E1 would take a bite of the money IF we were able to get them to "sub"-distribute us.)

For Worldwide we'd sell to distributors around the world. 'Cause let's face reality, we're not going to be selling directly to stores in the Thai or Japanese markets ever. And that means that realistically we're going to be going to the Marche du Cannes and the American Film Markets each year. I figure that each one of those markets cannot cost less than $20,000 to attend when you include the cost of the booth/hotel suite you'll be set up in, flying at least two people out there, and putting them up and feeding them. Have you ever worked at a market? It's really one of the most miserable jobs there is.

And the reality is that you have to have signs made up, and your trailers running on TV screens, and there's no way you're getting away with only spending $20K on each market once you've bought a round of drinks and cleaned the stains off your suit.

So let's say that at best you're only spending $60K including trailers for the pictures you're selling, the artwork, and the raw cost of showing up in the South of France during Cannes.

You have to be making that amount of money back even before you get started thinking about paying yourself and maybe making enough money to actually have a slate of movies made for next year. And realistically, you're probably not going to sell any movies the first year. So you're $120K in the hole by the time you start selling some movies plus the cost of making movies plus the costs your landlord has the audacity of charging you every month.

How many movies do you need to sell to make that trip to Cannes worthwhile? 3 "major" sales? And then what are you doing at AFM? So that's three more "major" (I'm talking $20K gross sales). So you have to be putting out 6 pictures a year just to make your costs on showing up at the major markets. In order to be even remotely in the black you better be putting out somewhere close to 10 pictures a year.

Now there's always the North American market to make up the difference, right? The advantage to the N. American market is that you don't have to go to a "market" in order to join it. You just need to make some phone calls and put some screeners in the mail. But here's the thing: how many units are realistically going to be ordered and sold by all the Blockbusters, Best Buys, and by Netflix. Lets say that you're totally awesome and you unload 2000 DVD's. These days that's a huge win.

As the distributor you get to pocket upwards of 100% of the seven dollars or so for those DVD's (I say "upwards of" because there's no way a tiny independent will not have to go through someone like E1, who will take their own cut). But let's pretend you actually bring in $14,000. Now all you have to do is create the artwork (although you may be able to amortize some of your costs out of the Worldwide costs of creating art) and author and produce DVDs. If you're some kind of genius you manage to do that for what, $4K or $5K?

That means that for each picture you make you're lucky and making $10,000 "profit" for North America. Because you manage to sell your pictures consistently like crazy. So lets say you make 10 pictures a year -- you're grossing almost $250K a year with North American and Worldwide sales.

That's almost enough money to stay in business.

But it's also not very likely. You're going to take a bath on at least (and I think I'm being generous) half of your North American pictures. Your Worldwide gross sales could, if you're lucky again, be something like $24,000 for each picture. So heck, maybe you're going to be rocking an average of (being liberal and generous) $30,000 for each movie over a four-year timespan.

Make 10 pictures and that's $300K/year that your company can gross.

Business plans for movie companies are like an android wrapped in plastic.
Your costs for distributing those pictures (showing up at Cannes and AFM at $30,000/market = $60,000, making 10 different DVD's for North America is $50,000) is $110K. That's a little more than 1/3 of your total revenue. And in addition you have to be ready to take a bath for at least your first two markets while you're continuing to produce a movie (almost) every month. More than that, I think you're going to end up having to hire someone full-time for sales. They get paid whatever you can pay them plus they get a desk and a telephone.

Right now we pay the equivalent of... er... let me figure this out. Well, it varies really widely because we typically make 100% of whatever North American sale we can weasel out of the market, but we use Halcyon for Worldwide sales. So the apples-to-apples comparison (let's pretend we pay 40% of our gross for Worldwide -- when you calculate the dumb costs of making DigiBeta masters that's about right, and not at all unfair) we pay about the equivalent of 20% to 30% of our total revenue (Worldwide and North American to distribute our pictures.

Hmm... that's at best about the same as if we were doing it ourselves. Oops.

So here's the actual conclusion:
  • We'd have to come up with a lot of cash up-front and we'd be spending the same amount of money.  
  • Plus we'd have to hire someone full-time to be our sales agent anyway.
OK, well that's that then. Next up I'm going to try to figure out how we're going to make more money in North America and how on earth we're going to make 10 pictures a year.

Plus, of course, I'll figure out if I did any of my thumbnail calculations wrong and correct as necessary.

ADDENDUM ONE: Man, at a budget of $200K a year (including your salary and overhead) and doing 10 pictures a year that's only $20K a picture. If you're paying minimum wage and you have 200 man-days on the picture THAT's gonna cost you $20K. 


Kangas said...

Been through this before. I think there are ways to cut your costs a bit, but for the most part I think your conclusion is probably correct.

And I think you mean you'd like to figure out how to make 10 GOOD movies a year. 'Cause I can make 10 BAD movies a year no problem!

(some people might even say without trying!)

Andrew Bellware said...

Right. 10 good movies a year. Well, technically this is a business plan so it's 10 SELLABLE movies a year.

A few years ago I noticed that both The Asylum an Roger Corman were doing approximately 10 movies a year. I think at one time Corman was doing 20 but he pulled back.

How to make them good? Man, at a budget of $200K a year (including your salary and overhead) that's only $20K a picture. If you're paying minimum wage and you have 200 man-days on the picture THAT's gonna cost you $20K.

So uh. Hmm... I'm going to put that as an addendum into the post.

joe said...

you'll have to trust your cash to other producers/directors in order to complete 10 movies a year - gulp!

joe said...

or purchase completed movies for resale at roughly what your budget would be to produce them in house.

Andrew Bellware said...

@joe Interestingly The Asylum has experience with both of those things.

Trusting other directors: back in the olden days they used to try to give new directors a chance. That, as it turns out, was a nightmare. So they started using a relatively small stable of their sort-of "in-house" directors.

Buying material: they also found that independents would make thousands of un-releasable films and that ultimately it was easier to make 10 pictures a year which they knew could sell (having talked to the buyers) than trying to cull out of hundreds of submissions per year the few films they could release.

Yeah, right, I know.

joe said...

in order to produce 10 movies a year, it appears that Pandora Machine needs to expand just enough to have a small stable of in-house directors. preferably ones who would not have to rely upon "The Machine" as their source of income while making movies. everyone then would be doing as much as possible to hopefully gain something at the back end.