1 the business and art of producing feature films philip lee taipei, 30 th june 2004

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The business and art of producing feature films

Philip Lee

Taipei, 30th June 2004

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What does a producer do?

• To identify good projects – creative sensitivities• To put the project together – financial knowledge• To put the team together and execute the logistics

– managerial and control abilities• To market the project – Salesmanship

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The system and experience from the US

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Types of producers and their jobs

• Producer – to initiate projects, hiring key members hoping that they would help to visualize his/her visions, financing and putting the projects together

• Executive Producer – to help financing the projects or putting the projects together

• Co-producer/Line Producer/Production Manager – Producer on hire, to ensure the logistics works and the completion of the projects

• Associate Producer - could be anything

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Mindset for Creative Producer

• Initiative• Creative sensitivities• Passion• Ideas and materials• Development funding and resources

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Ideas and materials

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Mishima’sThe Sea of Fertility

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Crouching Tiger, Hidden Dragon

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Bound feet & western dress

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Hero

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The foreign version of “Rouge”

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Dream of a dream

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When we were orphans

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M. Butterfly

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Dragon: The Bruce Lee Story

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Windstruck

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One summer with you

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還劍奇情錄［梁羽生］

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Remakes

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Creativity

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Various stages in a film project

• Development• Financing• Pre-production• Production• Post Production• Distribution• Marketing

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Development

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Optioning materials

• Option a literary property (a novel, a play or a script)

- Securing the exclusive rights “to purchase the movie rights in the future”

- An option to purchase the movie rights- EXERCISE the option: buying the movie

rights - Normally 10% to 20% of the full purchase

price, but negotiable- A useful way for parties to share risk

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Optioning materials (cont.)

- “Free” option or an option with nominal sum (e.g., “for ten dollars”)

- A best seller may insist on an outright sale rather than an options

- The option period – initial option period is often a year with right of renewal for another one year or more…

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Optioning materials (cont.)

- Generally, producers don’t want to purchase the movie rights until the first day of principal photography

- Payments can be Applicable or Non-Applicable- Must negotiate the terms of the purchase

agreement simultaneously- Usually with a literary purchase agreement

attached as an exhibit. When the option is exercised, the literary purchase agreement automatically kicks in

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Optioning materials (cont.)

- Producers will want owners to warrant that they own all the rights they are selling, free and clear of any other obligations

- Writers will disclose their copyright registration number so that producers can check the copyright records and review the chain of title to ensure they obtain all the rights they desire

- Writers may want to retain publication rights, stage rights, radio rights and the right to use his characters in a new novel (a sequel book)

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Optioning materials (cont.)

- Producers typically will have the rights to adapt the work into a motion picture and release it in ancillary markets such as home video. They may also obtain sequel and remake rights, although an additional payment would involve

- Producers normally will have the unlimited right to make changes to the work when adapting it

- Producers have no obligation to produce

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Optioning materials (cont.)

- Producers always want writers to make certain warranties, like defaming or invading anyone’s privacy, or infringe on another’s copyright. The difference between “the absolute” and “the best of the writer’s knowledge and belief”

- Writers agree to reimburse the buyer for any litigation costs and judgment that may be rendered as a result of the writer’s beach of warranty

- E & O insurance (more later, very important)

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Optioning materials (cont.)

- Credit- Reversion clause for the script- Assignment- To register the script with WGA in the US

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Hiring a writer

• The idea may be proposed by the Writer in a pitch meeting, or it may be suggested by the Producer

• Risk for the Producer but guarantee payment for Writer’s labor

• “Work for hire” – the employer owns the copyright. They could shelve the project or hire someone else to rewrite it at any time

• “Step deal” – the employer has the right to end the writer’s services after each step

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Hiring a writer (cont.)

• Step deals are often used for unknown writers- The steps

- treatment/outline- first-draft screenplay- second draft- rewrite- polish

• Two weeks reading period• The WGA’s scale

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Hiring a writer (cont.)

• Normally, one to three months to complete the first draft

• Compensation and bonus compensation• Deferred compensation• Contingent compensation, or net profits – normally

1% to 5% of 100% of the net profits• “Additional compensation” when making sequel,

remake or television spin-off series based on the original work

• Credit issue

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Hiring a writer (cont.)

• Performance standards – follow suggestions and instructions from the employers, to devote all time exclusively to the project during the term of the agreement

• Force Majeure

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Packaging your project

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Package means to put together the various elements of a film which make a

film project marketable to potential financiers, producers and/or distributors

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What should be in a package?

• Script• Budget• Shooting schedule• Some sort of commitments from creative talents

- Director- Writer- Stars/Actors/Actresses- Executive Producer- Producer

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What should be in a package?

• Income projections, if there is any• Various agreements

- deferments from vendors and artists

- funding already raised or agreed upon

- product placements

- shooting permits, particularly in China

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Who would package a film project?

• Producers

• Talent agents

• Entertainment attorneys

• Packaging service

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Various issues

• Whether brings the most desirable combination of elements, which would create the best result to a motion picture?

• What if some elements may prove to be unacceptable to a financial source or studio?

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How to attract the talents?

• Good materials

- Marketability

- Creditability

- Profitability

• Relationships

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Business models for film financing

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Hong Kong’s models

• Fully financed by major local film companies: Shaw Brothers, Golden Harvest, China Stars, Emperor, Media Asia, Universe and etc. Sometimes partnerships with foreign partners.

• Pre-sale arrangements: Taiwan, Singapore, Malaysia, Korea, Japan, US, Europe and etc.

• Private investors• Video distribution arrangements• Fully financed by subsidiary of foreign film studio:

Columbia Asia and Warner Brothers – the US model: Studio financing

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Film financing in the US

The studio system• Big budgets and lower budgets

- own development - housekeeping deal: deals with various creative talents- subsidiaries for lower budget films: Disney and Miramax; Columbia Pictures and Sony Pictures Classics; Universal and Focus; New Lines and Fine Lines

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Film financing in the US

The studio system (cont.)• Normal process

- Package- Agents/Attorneys/Studio creative executive- Pitching- Development- Deal memo- Step deal- Production- Turnaround

• Production/Distribution deal (P/D deal)

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Film financing in the US

The studio system (cont.)• Production/Distribution deal (P/D deal)

- A deal between a studio/distributor (or other distributor) and a producer

- They (studio/distributor) provide production financing, assumes the role of the lender, to a film. In exchange, they ask for the rights to

distribute the film in some or all markets- They (studio/distributor) usually exercise certain controls and approvals over the production process

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Film financing in the US

The studio system (cont.)• Production/Distribution deal (P/D deal)

- Higher interest rates and longer interest-paying period

- Little chance of net profits- Studio overhead charges, other than

distribution fee, distribution expenses, interest and the negative cost- Copyright ownership

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Bank loans

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Major financing options relating to bank loans

• Bank loan – loan on assets only• Major assets: bankable contracts from

distributors or studios promise to pay a certain amount of money on a fix date

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Major financing options relating to bank loans

Three major options:

• Distribution guarantee/Negative pickup deals• Foreign presales• Gap financing

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Major financing options relating to bank loansDistribution guarantee/Negative pickup deals

• Distribution agreement to be negotiated prior to a film’s completion

• A distribution guarantee is a contractual agreement that a distributor is licensed by the producer to distribute a film over a specified time

• The main difference between a distribution guarantee and a negative pickup deal is that negative pickup deal is contracting to buy the original negative and the right to distribute the picture when the picture is completed

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Major financing options relating to bank loansDistribution guarantee/Negative pickup deals

• Contracts are the assets for bank loans• The loan is largely depending on the credit

standing of the distributors and studios• Banks’ legal fees for reviewing and preparing

documents will be paid by producers• Interests on the loans are high• Producer draws down loans from the bank based

on the cash flow schedule approved by the completion bond

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Major financing options relating to bank loansDistribution guarantee/Negative pickup deals

• Great deal of documentation and information would be required- A synopsis of the project- A copy of the script- Copies of agreements on distribution guarantee/negative pickup deals- Copies of any foreign sales contracts- Complete financial commitment, to reveal if any other investors are involved

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Major financing options relating to bank loansDistribution guarantee/Negative pickup deals

• Great deal of documentation and information would be required (cont.)- Resumes of the key persons attached to the project- Proof of the chain of title document- A copy of the completion guarantee agreement (Completion Bond)- A detailed budget- A cash flow schedule

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Major financing options relating to bank loansDistribution guarantee/Negative pickup deals

• Great deal of documentation and information would be required (cont.)- Security agreement to ensure that the bank

has the first legal claim to the film’s assets if there is any problem occurred- Agreement between the bank and distributors to ensure that all receipts for the producer would be paid directly to the bank until the loan plus interests are paid

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Major financing options relating to bank loansDistribution guarantee/Negative pickup deals

• Great deal of documentation and information would be required (cont.)- Letters from the laboratory and/or other

mutually agreed-upon third party would be issued to confirm its acceptable technical

quality and the script was substantially kept, the agreed cast members appeared in the

proper roles. Otherwise, distributors would release no monies to the producer or the banks

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Major financing options relating to bank loansForeign presales

• “Foreign presales” refers to the selling of the distribute rights of a film in one or more foreign territories prior to the commencement of principal photography

• Many independent film financing comes from international “Sales agents” nowadays

• Some Sales Agents take the package to film markets and raise production money through foreign presales contracts

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Major financing options relating to bank loansForeign presales

• The payment term for a typical foreign presale deal would be structured as below. However, they are negotiable and depending on the track records of the filmmakers.- 10% upon signing the contract- 10% upon commencement of principal photography- 10% upon completion of principal photography- The balance upon delivery of the items in the

contract

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Major financing options relating to bank loansForeign presales

• Some Sales Agents would only act as a middlemen, representing the producer’s finished film projects, trying to negotiate the sales with foreign buyers around the world

• Some Sales Agents give producers a contract that guarantees a portion of the budget, which is bankable. They normally would receive 20-30% of the foreign sales as commission, sometimes in a profits participation position

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Major financing options relating to bank loansForeign presales

• Very few banks would loan a percentage of the projected revenues estimation by a handful of powerful foreign Sales Agents, to the producers

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Major financing options relating to bank loansGap financing

• Only if there are some territories have not been sold or you don’t want to be sold

• Only a handful of banks and lending institutes would do this

• The terms are tough. They would ask for profit participation in the projects, higher interests rates and services fees

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Other financing options

• High risk capital• Foreign equity investment• Grants for independent feature production• Tax benefit• Creative financing and self-financing• Private domestic investment• The limited partnership• Cable TV companies and more….

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Completion Bond & Production

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Completion Bond

• Banks require Completion Bond to provide protection against their loans to the producers; to ensure that their loans will be repaid

• Completion Bond guarantees to cover over budget expenses, insuring that the film will not go unfinished

• Completion Bond guarantees that the film will be delivered to the distributors; to ensure that the distributors will pay as according to their contracts

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Completion Bond (cont.)

• To evaluate the reputation of the producers and the director, sometimes the cast

• To approve certain key crewmembers, production manager, production accountant, first assistant director, director of photography, production designer

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Completion Bond (cont.)

• Documentation and contracts: Production

- Script

- Shooting schedule

- Budget

- Post production schedule

- Day-out-of-days

- Union contracts, if any

- Principal cast contracts

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Completion Bond (cont.)

• Documentation and contracts: Production (cont.)

- Key crew deal memos/contracts

- Equipment contracts

- Lab contract

- Post sound contract

- CGI contracts with shot list and storyboards

- Government permits

- Local studio contracts

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Completion Bond (cont.)

• Documentation and contracts: Accounting

- Cash flow schedule

- Production Accounts information

- Update cost report/trail balance

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Completion Bond (cont.)

• Documentation and contracts: Insurance

- Production package certificate with Completion

Bond additional insured (with approval of

negative shipment/daily viewing schedule)

- Essential elements certificates and terms – the

whole loan needs to be covered

- E & O certificate with Completion Bond

additional insured

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Completion Bond (cont.)

• Documentation and contracts: Insurance (cont.)

- Cast log (which cast members have been

examined and are covered at the time)

- Extra insurance for some cast members

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Completion Bond (cont.)

• Documentation and contracts: Legal items

- Producers’ contracts

- Director’s contract

- Director’s inducement letter

- Contracts for all deferments

- Production account takeover letters (for all a/c)

- Distributors delivery requirements

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Completion Bond (cont.)

• Documentation and contracts: Legal items (cont.)

- Final script, schedule, budget, post production

schedule to be signed by the director, producers

and the production in charge/unit production

manager

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Completion Bond (cont.)

• Documentation and contracts: Legal items (cont.)

- Distribution agreement

- Sales Agent agreement

- Co-production agreement

- Laboratory pledgeholder agreement

- and more….

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Completion Bond (cont.)

• Very detailed evaluation before commitment• Reports, daily call sheets, daily production

reports, daily “hot costs”, weekly cost reports• Cost projection – their concerns – schedule, film

stocks, overtimes• Regular visits• Their possible interventions when the production

is having difficulties• Their rights in firing the crew

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Completion Bond (cont.)

• Their rights in taking over the picture• Artistic consideration is not the most important

for them; what matters are the completion of the film

• Producers may lose any entitlement to additional revenues, and will be held for any losses incurred by the studio as a result of the guarantor taking over if the picture over budget

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Completion Bond (cont.)

• On a Production/Distribution financed film, the guarantor recoups any over-budget expenses before everybody

• Completion Bond has no incentive to take over the project

• Some studio films still require Completion Bond• The fee – between 3 to 6% of the budget, with

possible rebate, the minimum charge would be between US$40,000 to 50,000

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Production

• The script• The team – producers, director, DOP, production

designer, script supervisor, 1st assistant director, production manager, production accountant, the editor, the music and etc….

• The cast• The money• The shooting• The post

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Distribution

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Distribution

• Nothing to do with filmmaking but is unavoidable for all filmmakers

• Pros and Cons of having a distribution deal prior to the beginning of the production – no rules

• Well considered before hand; the market and the audience

• Depending on your financing deal; working for studios, sales agents, equity financing, pre-sell distribution deal and etc.

• To create awareness of your film; press, festivals and markets; do it in early stages

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Distribution (cont.)

• Choosing right distributors in different territories; their tastes, their past record, their reputation, their commitments on P & A, distribution fee (Minimum Guarantee), profit sharing, delivery schedule and etc.

• Re-gaining control should something goes wrong

• Rights other than local theatrical distribution: Foreign markets, cable outlets, television sales, home video/DVD rights, non-theatrical distribution rights, ancillary rights and merchandising rights

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Distribution (cont.)

• Show the film to the distributors only when the film is completed

• Never give the unfinished videotapes to the distributors

• Releasing date and format; seasonal variables, competitors at the time, platform release, limited engagement and wide release

• Four-wall distribution – do it all by the producers

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Distribution (cont.)

• Rent-a-system – put up the print and advertising (P & A) by the producers but rent a distributor’s in-place distribution and collection system

• The availability of P & A fund investments but giving out share of equity

• No deals are the same• Good legal advice is extremely important,

consult your legal advisor

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Marketing

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Marketing

• Movie marketing pervades our everyday existence• Define the targeted audiences clearly• Positioning of your film• An event film, the planning of its marketing

campaign is as precise as if preparing an invasion• Distribution and Marketing Executives always

fight for the best release dates• Marketing mix – Product, price, place and

promotion

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Marketing (cont.)

• Promotional mix – Advertising, public relationships, sales promotion and personal selling- Advertising campaign - television, radio, newspapers, magazines, internet, billboards

and etc- Public relationships – free press coverage- Publicity during the production – celebrity

interviews- Promotion – games, contests, giveaways,

fast food, tee shirts, seminars and etc.

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Marketing (cont.)

• Trailer exposure, buzz, awards and reviews• Distribution of a soundtrack album• Publication of a novelization or book• Licensed merchandising• Words of mouth• The limitation of Producer’s involvement -

working with the distributor who understands the film and whom you trust to make good marketing decisions on your film

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Marketing (cont.)

• Marketing executives involve in the earliest stages of development. If a story sounds promising, but the marketing department opines that it will be a difficult sell, the project may be shelved

• In the US, most movies do not make back their production and marketing costs from their domestic theatrical release, the advertising and promotion dollars spent there also build public awareness of the film and enable the studio to make substantial sums from the home video and television markets.

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Marketing (cont.)

• In these co-called ancillary markets, studio marketing expenses are modest and revenues can be substantial.

• A brilliant marketing campaign cannot save an awful picture, a good picture can be lost in the shuffle if it is not marketed well.

• Filmmakers must understand how movies are sold to the public if they ever hope to market their projects to a distributor

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Conclusion