Can Movies Be Financed Like Tech Startups?

from the venture-capital dept

I wrote last week about the perversity of having a one-size-fits-all contract in an industry that's becoming more diverse and dynamic by the month. Netscape co-founder (and now Ning co-founder) Marc Andreessen made some similar comments last week, but today he's gone further and pointed out an interesting alternative model for organizing the movie industry. He points out that a fundamental weakness of Hollywood's traditional model is that everybody works for a small number of big, bureaucratic studios that hire all the necessary talent and oversee production, distribution and marketing. He points out that this leads to talent getting paid (and behaving) like hired guns. Because they don't share much in the profits, they have little reason to go above and beyond to make the production a success. And if they feel they're getting a raw deal, they don't have a lot of options since there aren't very many studios to choose from. So they go on strike seeking a bigger share of a shrinking pie, instead of looking for ways to make the whole pie bigger.

The technology industry is different. If a talented employee at Microsoft or Yahoo doesn't feel he's getting compensated fairly, he doesn't go on strike. Instead, he proves his point by starting his own company. Employees at small Silicon Valley firms are often given significant equity in lieu of other compensation. The ones who get in early at a really successful startup get filthy rich. As a result, they're part owners of the companies they're working for and they act like it. There's much less friction between management and labor in Silicon Valley because almost anyone who wants to can become part of management by starting a new company or joining a company already in the early startup phase. "Labor" and "management" aren't two separate categories, they're often the same people at different stages in their careers. Andreessen persuasively argues that a similar model can work for Hollywood. Two of the traditional functions of the studios, distribution and marketing, are rapidly being displaced by Internet-based distribution and viral marketing. The equipment required for producing high-quality video is falling quickly in price. The main thing that's still expensive is labor, and that can be had the same way it's obtained in Silicon Valley: by raising venture capital and paying talent partly with equity. A lot of talent will likely be willing to accept a smaller paycheck in exchange for a significant share of the profits from a successful film. And a lot of investors will jump at the chance to be business partners with talented (and maybe famous) actors, writers, and directors. It certainly sounds like a more productive model than the protracted strike we're facing now.

Filed Under: hollywood, movies, ownership, silicon valley

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  1. identicon
    SofaKing Stoned, 13 Nov 2007 @ 11:03am

    Doesn't Understand Hollywood

    "...a small number of big, bureaucratic studios that hire all the necessary talent and oversee production, distribution and marketing."
    This is not true. Well over half of the movies nowadays are in fact independently produced. Funds for these projects are raised much like venture capital. Important parts of the labor chain (stars, directors, writers) already do take less on the front-end in order to participate in the back-end profits. The old studio model is long dead. Very few films are made completely within the studio. The most important part of the studios now is their marketing and distribution facilities, which are needed to make a big hit. But still, independent films (being cheaper) have an easier time recovering costs via web and niche marketing, and are viable commodities even without studio participation. For the most part these productions work outside of the guilds, but still pay guild minimums.

    The guilds function as protection for aspiring Hollywood types. Since a lot of people would give their left nut (or right ovary) to be in the glamorous movie business, some floor needs to be set and maintained, lest these aspiring stars be taken advantage of (more so than they already are). Even on non-WGA/SAG/DGA productions, everybody uses the minimums as scale.

    Problem with equity distribution in the movie business is that films are really small potatoes as a business. Even the most profitable film (Titantic, one of the Star Wars pictures ??) makes only about a billion dollars (after two or three years). There's just not enough value to go around compared to Microsoft or Yahoo -- who are making billions of dollars a year, year after year.

    A Valley startup might raise ten or twenty million in first round financing -- just to develop a possibly new technology to the point of marketability. Then go public and instantly be valued in the hundreds of millions of dollars. That same 10 or 20 million would be the whole budget on most (non-SFX) films. No film equity has either the value nor the liquid market to make such a thing possible or attractive. Would you want to buy shares in Leprechaun 4? How about Jaws 3 in 3-D? Nope. No value, no market.

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