Due Diligence for New Trends

There are also times when one can be a trendsetter. I have done this several times during my international sales and film production career. I have done due diligence, refused to take “no” for an answer, and created and established a market desire of which international buyers were not yet aware. Years ago, as a seller in the international market, I was able to sell in certain territories on a pre-sale basis, meaning that buyers would contract with me to purchase a movie before it was even made, due to the trust they had in me as a filmmaker. But Japan—an extremely lucrative market—was very mercurial, and Japanese buyers often wouldn’t buy a film at all. The films that they did buy were very specific and appealed particularly to Japanese consumers.

A turning point occurred in a meeting with a Japanese buyer, a gentleman named Hanada, who worked for a big Japanese corporation. He was a very smart, shrewd businessman but his English was not yet the best. I told him that I would like to pre-sell a movie to him for the Japanese market and explained that such a presell would greatly help with financing the picture.

“Oh, Japanese market very difficult,” he said.

I said that I understood that. I had been trying to sell and pre-sell to Japan for many years. I asked him what I could possibly do to entice him to pre-buy my movies.

“Ahhhh, pre-sale impossible! Japanese people very specific,” said Hanada.

I asked if Japanese consumers liked family films.

“Family film no good,” he retorted.

“Oh, so there are no children in Japan?” I asked.

“Ahhhh, you crazy,” said Hanada.

I joked, “Okay, how about donkeys with the laser beams coming out of their eyes? Do the Japanese people like donkeys?”

Once again, he replied, “Ahhhh, crazy, Andrew, you crazy donkey.”

As I sat mulling over this conundrum, I picked up a pen someone had left in the office. Lost in thought, I picked it up and began twiddling it between my fingers. Inside the barrel of the pen, in a liquid window, was a little submarine that went up and down as you tilted the pen to and fro. Absently, I said, “How about submarines? Do you like submarines?”

Hanada instantly perked up. “Submarine? You have submarine?”

I hesitated for a nanosecond. “Um, sure, I have submarine. Of course I have a submarine!”

He said, “You have submarine, we buy!”

I had cracked the code. By making “no” the beginning of the conversation, instead of the end, I established that submarines were a trend. So, if I had a submarine, I could pre-sell to the Japanese market. I made a deal with Hanada on the spot for an action submarine movie for $350,000 as a pre-buy, something I had never done before.

I soon came to realize that it wasn’t just submarines. The Japanese market, although its buyers didn’t know how to articulate it, keyed off of what I call “the second level of sell”—in this case a tangible piece of military hardware that was eye candy for Japanese consumers. I subsequently made seven submarine movies. I made aircraft-carrier movies, tank movies, movies with Stealth fighters, F-14 Tomcats, Bullet trains—anything that had actual military or technological hardware that I could put on a piece of key art and a poster, I could pre-sell to Japan.

I now had a component of my financing for a new trend of movie, so I went to the next-largest territory, Germany, and asked what they were buying. The answer was action films, but nothing that was gratuitously violent, bloody, or gory, because it wouldn’t pass the censors to play on prime-time television in Germany. Now, paradoxically, there are people running around stark naked on prime-time television in Germany, but the censors couldn’t care less about nudity. They do care about graphic, gory, or bloody depictions of violence. At the prices I was pre-selling for, the buyers insisted on no gratuitous violence, blood, or gore, because the revenues for late-night television sales are a fraction of what they are for prime time. I pitched to my German buyer that I had a submarine movie in pre-production that was a human drama with lots of action (but no violence, if you can figure that one out), about a man who leaves his young son to do his duty to stop a nuclear threat against the United States. I pre-sold to Germany for $450,000.

I then went to Korea and did my due diligence. The local buyers wanted action films with hand-to-hand martial arts. I pitched them an action film in pre-production about a man who infiltrates a submarine that has been captured by terrorists. Our hero uses hand-to-hand martial arts skills to fight his way from stem to stern to save the submarine and the world from a nuclear disaster. I pre-sold to Korea for $350,000.

Finally, I went to my domestic home video buyer and pitched the movie that I was formulating based on my due diligence with three major foreign territories. The buyer’s main interest was in a star who could be featured on the company’s video box, and the consensus was that it should be Michael Dudikoff, who had starred in the first two of the American Ninja series of films. I immediately called Dudikoff’s agent and secured the actor’s services. When the agent asked me the title of the film, I came up with Crash Dive on the spot.

So, I had pre-sold Michael Dudikoff in Crash Dive doing hand-to-hand martial arts in a submarine, without gratuitous violence, blood, or gore and saving the world. I now had to quickly develop a script based on these criteria. The one-liner I pitched to the writer was “Die Hard on a submarine.”

I made the movie based on the pre-sales to those four territories, so any sales to the rest of the world would be profit. I sold every territory worldwide. Crash Dive is a great example of how to do your due diligence, listen to the marketplace, and tap into it by doing a creative and financial analysis of it in order to make a profit. It was a home run for a smaller, independent film, and an example of creating a hybrid film that appealed to all of the key, most lucrative territories. It didn’t simply identify and follow a current, saleable trend, but instead created a new trend. And it was produced for far less than the analyzed market value.

I met with my staff and I told them that we had to come up with a great poster for Crash Dive. I took a page out of my own philosophical playbook and looked at the poster for The Hunt for Red October, then created a distinctly reminiscent image. Instead of Sean Connery’s face, we had Michael Dudikoff’s face, juxtaposed with a submarine against a red-washed background, with the bold-lettered title, Crash Dive. The buyers loved it.

I then had to come up with a great promotional trailer before the film was even shot! I needed a submarine for the promo (not to mention for the movie itself) and I didn’t know where I was going to get one. But I had promised the film to my buyers and now I had to deliver. Based on the storyline I had sold, there was no way the U.S. Department of Defense would approve the material and allow us to shoot on a naval base. I contemplated sending a camera crew to Seattle, where they might circle near the naval base in a helicopter to try to get some footage of submarines as they left or entered the port. Maybe we would get lucky and film some shots of a submarine diving and surfacing, but even if so, the shots wouldn’t be dynamic or plentiful enough for the entire movie. This was also before CGI was prevalent, so I called a motion control company, built a submarine miniature, and started shooting some motion control shots in a smoke element to replicate water. Finally, though, I had a brainstorm. While watching Crimson Tide and studying the multi-tiered set with my set designer, I called the stock footage department at Disney Studios. I asked if they would consider selling any outtakes from the movie, specifically submarine shots. The answer was “yes,” so I bought ninety or so amazing submarine shots from Disney’s library. They were infinitely better than anything I could have created on my shoestring budget, and I now had the submarine that I had promised to my buyers. I intercut these stock shots with footage of Michael Dudikoff from some of his earlier action movies, added some driving music, a voice-over, and titles to create a powerful promo before our movie had even commenced principal photography. This helped us to pre-sell the film in every territory worldwide. Remember, it’s called “show business” not “show art.”

Sales Agents

In years past, in the independent film market, particularly with genre films, the criteria upon which an international buyer might purchase your film were based almost solely on the quality of the key art and the trailer. Unfortunately, though, many buyers got burned because the finished film wasn’t nearly as good as the trailer or the key art. Consequently, these days, almost all buyers in all territories want to see the finished picture before they buy it.

We have discussed that films are sold at trade shows, that international buyers attend those trade shows to purchase film rights to meet their distribution slates in their respective territories, and that sellers sell movies to those international buyers. But who are those sellers, and how does an independent producer or filmmaker get his or her movie into a salesperson’s hands, and into one of those booths, in order to TAP into the lucrative foreign market?

The simple answer is that you need a sales agent. Sales agents were once also known as foreign distributors, but they didn’t really distribute in foreign territories; instead, they sold films to territorial distributors. They were generally independent companies whose business it was to acquire films from independent filmmakers and producers and sell them in the international marketplace. Sales agents made their money by charging off-market expenses to other people’s films that they acquired, as well as by earning a commission for every sale made in every territory world-wide. In later years, many sales agents also became producers—since who better than they knew what the hot trends were in the marketplace?—and they would sell or pre-sell their own product in the foreign marketplace as well as acquire other people’s product to cover their overheads and provide cash flow to their companies. The sales agent’s game was to use other people’s money, earned from acquired films, to cover his or her market expenses and overheads.

What’s the right deal to make with the sales agent in today’s market? What are the traps and pitfalls to avoid?

In the past, when the market was much stronger than it is today, sales agents might charge a premium sales commission of 25–30 cents for every dollar that they sold and received from all territories in the foreign market. They might charge market expenses of as much as $100,000 for an independent film, which comes off the top before commissions and any disbursement to the producer or filmmaker.

Let’s look at that model. For example, say your total foreign projections are $500,000, and you are being charged a 30 percent sales agency fee and $100,000 in market expenses, and at the first film market in which your film is exhibited the sales agent sells it for $200,000. As that money is collected, the first $100,000 goes to the sales agent for their market expenses, then another $60,000 goes to them in sales commission retroactive from first dollar, leaving just $40,000 for the producer. For every $100,000 collected thereafter, the producer gets $70,000 and the sales agent gets $30,000 (their 30 percent commission). So, at $300,000 of collected sales, the sales agent gets $190,000 and the producer gets $110,000, and so on. It is only at $500,000 in monies collected that the producer finally achieves parity with the sales agent.

Furthermore, in this scenario, if the budget of the film was $500,000, and $500,000 was collected from the foreign market, the producer would receive $250,000 from total first cycle foreign sales, and only the domestic market remains for the producer to try to recoup the film’s budget. If the 65/35 percentages that we discussed earlier hold, North America would be worth $175,000. If this amount were actually sold and collected, and only $50,000 were incurred in domestic sales fees and expenses, under this model the producer would collect $125,000 domestically, for a worldwide gross collection of $375,000, thus losing $125,000 of the financiers’ investment. Had the film been produced for $300,000 rather than $500,000, the producer and financiers would have made a first cycle profit of $75,000, thus implementing foolproof filmmaking.

In today’s more discerning market, you should negotiate and stand firm on the following foreign sales deal terms: a 15 percent sales agency fee and a flat $25,000 fee for market expenses. Now, let’s do the math under this more favorable scenario. Say you have the same $500,000 in projections and $200,000 is collected after the first market. The sales agent will get $25,000 off the top, plus 15 percent of $200,000 (i.e., another $30,000). So the sales agent gets a total of $55,000, whereas you—the producer—get $145,000. At $500,000 in monies collected from the foreign market, the producer would receive $400,000 while the sales agent would receive $100,000. If you factor in the same hypothetical domestic scenario as above, the producer would receive a worldwide total of $550,000 for the same motion picture. (A basic form sample sales agency agreement can be found in Appendix B. A sample sales agency agreement with an advance for a completed picture can be found in Appendix C.)

So, how do you choose or attract a sales agent? First of all, ask questions. Talk to other filmmakers who have done business with the sales agents you are considering. Were they honest? Were they fair? Did they pay on time? What relationships do they have with buyers in the international market? What is a particular sales agent’s relationship with key buyers for your particular film in foreign territories? Do they have any output deals? (By this, I mean that a sales agent may have a deal with a particular buyer in a particular territory for a volume of films per year. In an output deal, the buyer has contractually agreed to take every film that meets specific, contractually defined criteria that the sales agent represents on a predetermined price basis.) When there is a guaranteed sale, that’s a big value for any producer.

Sales Agent Alternatives

We have discussed sales agents and the preferred terms to negotiate with them. Let’s now discuss the alternatives. If you have a finished film or a film that is in post-production, an alternative to hiring a sales agent (which I don’t necessarily recommend) is to sell your film yourself. The easiest way to do this is to save the expense of traveling internationally and attend the American Film Market (AFM) in November every year in Santa Monica, California. The costs of attending a film market as a seller may be deceptive, however. For a non-IFTA member, the cost of a hotel room at the Loews Santa Monica Beach Hotel (which will serve as your sales booth) will be greater than it is for IFTA members, who receive discounts. Next, you would have to create your key art and posters, flyers, and trailers, as discussed earlier. Then you must rent panels on which to affix your posters, since you may not tape posters to the walls of the hotel. You might have to rent furniture. You have to make sure you have an audiovisual system that works and is sufficient to display your trailer or screen your finished film. You might incur the expense of traveling to Los Angeles and paying for your meals, lodging, and likely a rental car, as well as entertainment and other expenses. Once you add up all of these real, hard costs, you can accurately determine whether it would be more financially advantageous for you to try to sell the movie yourself or hire a sales agent.

Bear in mind that if you negotiate the right contract with the sales agent, your costs are finite and also cover every other international film market the agent might attend throughout the year, as well as for the term of the contract, as opposed to the single market that you might attend (i.e., the AFM). Factor in, also, that your sales agent likely has existing relationships with buyers, with whom they can make scheduled appointments, and that most sales companies attract traffic into their offices based on their current slates of films. A good sales agent should also have proprietary relationships with key buyers’ reps who are going to bring their leading international clients into the sales agent’s office.

Another possibility for an independent producer or filmmaker to explore is to hire a producer’s representative. A producer’s rep’s business is to sign producers and their films to a representation agreement to navigate the foreign and domestic marketplaces on behalf of the producer, and try to place the film with the most appropriate sales agent or distributor for each individual picture. Producer’s reps, however, work for a percentage of sales, just as a sales agent does, so the producer or filmmaker, in this scenario, will pay double commissions.

If you, as a filmmaker or producer, are able to attend a film market prior to making your film, visit the booths or hotel offices of sales agents and see what types of films they are currently selling, and which particular sales agent(s) appear to be appropriate for the film you envision making. Collect business cards and try to make connections with lower-level employees at the company, as they might help you arrange an appointment with a decision-maker. Ask what sales agents might consider representing your film once you have secured financing. Ask what type of films sales agents are looking for and what their buyers are requesting from them. Ask questions, listen, and heed their advice.

When determining which way you want to go to sell and distribute your film in the international marketplace, add up the costs of a sales agent, as discussed above, versus the costs of selling your film yourself. It is very expensive to attend any film market on your own, particularly an international one, and there is no guarantee, without established relationships, that you will be able to arrange appointments with international buyers, much less make sales. However, if you do decide to attend the AFM—whether to explore the foreign marketplace and do your due diligence or to try to sell your film yourself—IFTA has published some some tips that may make the experience a little easier (see below).