By Marissa Román Griffith and Christopher M. Maddox
Posted: 18th May 2017 08:14
Due to the changing market of traditional film financing methods, producers have started relying more heavily on international co-production arrangements to fund their projects. This trend has created a necessity for filmmakers to create content that can appeal to a global audience. However, any formula for developing films and other content that will find success internationally and across various cultures remains elusive. This article will provide an overview of the importance of creating content that can be successful across geographic and cultural boundaries.
I. The Decline of Pre-Sales
Traditionally, the business model utilized by the independent film industry to finance a film involved pre-selling the exploitation rights to that film in foreign territories to secure up to 70% of the production’s costs. To finance a film using pre-sales, the producer (either directly or acting through a sales agent) sells rights to a film prior to its completion (and, optimally, prior to commencing principal photography) to distribution companies that will exploit the film in their respective territories (e.g., Latin America, Scandinavia, German-speaking territories, etc.) once the film is completed. As consideration for the grant of exploitation rights from the producer, the distributor agrees to pay a “minimum guarantee,” or advance, on the income the distributor expects to earn from exploiting the film in its territory. The producer uses the value of the contracted minimum guarantees that it has secured as collateral to obtain a loan from a bank or other financier to finance the film’s production costs.
The pre-sale model is currently less effective than it was during the peak of the home video market. As a result, fewer films are being sold at the major film markets. The managing director of the American Film Market, Jonathan Wolf, noted that although the number of companies attending the market in 2016 remained level, there were 25% fewer films screened at the market compared to 2015. Additionally, economic difficulties in certain foreign countries have impacted the number of pre-sales (and the amount of the up-front minimum guarantees) that buyers from those impacted countries are willing to acquire. With the pre-sale market declining, independent producers have had to secure financing for a film’s production costs from other sources. A recent trend has seen more producers using international co-production arrangements to make up the required funding.
II. International Co-Production Arrangements
Generally speaking, a co-production involves two or more companies working together to finance and produce a film. International co-production arrangements, the focus of this article, involve producers from different countries and funding coming from each such country. In connection with that funding, there is often an expectation that production of the film will take place, in part, in each country and key creative positions will be held by citizens of each country. Other requirements for obtaining co-production status and the financing related thereto differ depending on whether the co-production arrangement is considered “official” or “unofficial.”
A. Official Co-Productions
Official co-productions arise under international treaties. Like unofficial co-productions, these arrangements involve multiple producers from different countries. However, the producers of an official co-production must strictly comply with the requirements set forth in the relevant co-production treaty in order to receive funding and obtain the benefits of official co-production status in each country. These requirements vary depending on which countries or regions are party to the treaty. A separate application must be filed with each country to seek approval for official co-production status. When a project is approved as an official co-production it is deemed a national production in each co-producer’s country. Obtaining this status allows the production to qualify for any benefits, incentives, subsidies or assistance programs available in those countries to local productions. Additionally, when an official co-production gains national status in a country it has better access to that territory’s local distribution systems. Funding from one nation’s benefits programs can provide up to 40% of an average film budget. With access to multiple countries’ programs, projects that qualify as official co-productions in more than one country can acquire much of their needed financing without having to rely as heavily on pre-sales as traditionally required.
B. Unofficial Co-Productions
Alternatively, producers from different nations may combine their experience and financial resources to produce a film that does not satisfy any treaty’s requirements and, thus, does not qualify as an official co-production. Under these arrangements the production will not have access to benefits and incentives as if it were a local production in each producer’s country, but the production may still qualify for benefits in the country(ies) where such film’s production and/or post-production activity takes place. The co-producers also are not forced to adhere to a treaty’s strict requirements, such as ensuring that the key creatives from each country are proportional to the financing split from each country. Unofficial co-productions offer producers a way to access talent, shooting locations and financing from multiple territories without being confined to or limited by a treaty’s prescribed formula.
The film Lion is a recent example of a successful unofficial co-production. It was filmed in both Australia and India, and the producers of the film, an Australian-based company and an Australian- and U.K.-based company, utilized an Indian production services company while shooting in that country. Although many of the key creative roles were held by Australians, they collaborated closely with an Indian production team while on location. If the producers had structured the film as an official co-production, they may have received additional financing from India, but the film also would have been co-owned by an Indian producer. Instead, the producers qualified the film as an Australian production, which provided them with access to Australian tax credits and equity from Screen Australia, and utilized international resources in their discretion to produce a film that went on to be nominated for six Academy Awards and four Golden Globes.
III. Issues with Co-Productions
Although co-production arrangements offer a partial solution to the declining pre-sales market, they do not come without a price. Several issues can arise under these arrangements. As discussed above, co-producers have to understand and comply with complicated rules and statutes to obtain official co-production status. The co-producers also have to share creative and business controls, and navigate different legal systems and battle language barriers. Thierry Potok, an international producer and former head of Berlin’s Studio Babelsberg warns, “If you have two or more different co-producers, the problems are compounded and you’d better foresee a comfortable budget for the lawyers and the tax advisors.” Many of these and other problems arise during the making of the project. However, possibly the biggest issue facing a co-production is ensuring its content can appeal to the global market.
The Great Wall, a recent China-U.S. co-production, is a prime example of the issues that can arise when a film’s content does not have international appeal. Legendary, a U.S. company owned by the Chinese conglomerate, Wanda Group, and Universal partnered with a variety of Chinese companies, including China Film Group and Le Vision Pictures, to produce the film. Helmed by the award winning Chinese director, Zhang Yimou, and starring Matt Damon, The Great Wall is the story of humanity’s defense of the historic landmark from legendary monsters.
While The Great Wall grossed over $170 million at the box office in China, which has helped the film earn almost $287 million across all foreign territories, it made less than $50 million in the U.S. Despite the impressive (albeit somewhat surprising) performance in China, the film is expected to lose at least $70 million. The issues The Great Wall faced are not new. “In recent years, international co-productions have comprised 10%-20% of the films made in China and 50%-80%” of its box office. However, subject to a few outliers, those films have not been successful in the global market.
As one film executive explains, “The problem that keeps happening and is probably going to continue to keep happening is when you try to make a movie for both markets, you end up making a movie for neither market.” The Great Wall is inherently a Chinese story, but its hero is from the West. The result leaves Chinese audiences pondering why Matt Damon was necessary, and American audiences feeling disconnected from the main story.
Unfortunately for Hollywood, there is not a secret recipe to creating an international co-production with global appeal. The process of creating content for “world consumption” is an ongoing experiment. With the increasing draw of structuring films as international co-productions to obtain needed financing, producers will continue the hunt for the key to ensuring a project will find global success.
Today, the “tried-and-true” model of using pre-sales as the key source of film financing is less consistent and reliable than it once was. This riskier market has led financiers and producers to develop new trends in international film financing, such as relying more heavily on international co-production arrangements—whether official or unofficial. Miguel Palos, the CFO at IM Global urges producers to be open to these changes and to create content that appeals to the expanding global audience. Casting a Hollywood A-lister in an otherwise foreign story may not be the answer to creating a film with international appeal, and it is likely that there is no one formula to achieving that goal. Instead, co-producers must be cognizant of their partners’ creative expertise and the cultural nuances of the varying locales. Despite their issues, international co-production arrangements offer producers a strategy to obtain necessary funding, access creative talent from across the world and create opportunities to produce great films.
Marissa Román Griffithis a partner of Akin Gump Strauss Hauer & Feld LLP specializing in entertainment transactional matters. She represents financiers, as well as borrowers, distributors and studios, involved in various aspects of the production, financing and distribution of film, television and digital content, including lines of credit, slate facilities, distribution agreements, production incentives, and domestic and international co-production arrangements. She has received numerous recognitions for her practice, including being named to The Hollywood Reporter’s list of “Power Lawyers 2017: Hollywood’s Top 100 Attorneys” and its list of “Hollywood’s Top 20 Dealmakers of 2016”, and Variety’s 2016 “Dealmakers Impact Report” and 2017 “Legal Impact Report”.
Christopher M. Maddoxis an associate of Akin Gump Strauss Hauer & Feld LLP where his practice focuses on entertainment and media transactional matters. He represents a variety of clients in the entertainment industry, including financial institutions, independent production companies, high-net-worth individuals and private equity firms in various aspects of the production, financing and distribution of film and television projects. He was a Michael T. Masin Scholar at the UCLA School of Law and was elected to the Order of the Coif upon graduation.
Scott Roxborough & Alex Ritman, AFM Dealmaking Sags as Market Shifts, Hollywood Rep. (Nov. 6, 2016, 7:00 AM), http://www.hollywoodreporter.com/news/afm-2016-dealmaking-sags-as-market-shifts-944487.
Colin Brown, Key Considerations in Film Finance (White Paper 3 of 4), Filmonomnics @ Slated, 1, 10 (Apr. 2015), https://drive.google.com/file/d/0B1J3HfvberWCSThDZXlUMzhWZ1E/view.
See Roxborough, supra note 1 (stating the demise of DVD sales has led international distributors to purchase fewer films).
See Alex Ben Block, AP, Film Buyers Rethinking Presales, Hollywood Rep. (Mar. 18, 2010, 5:47 PM) http://www.hollywoodreporter.com/news/film-buyers-rethinking-presales-21784.
See Brown, supra note 2, at 13 (discussing the use of co-production “soft” money to make up the difference as budget shortfalls from pre-sales began to widen).
Hot Docs Guide to Co-Production, HotDocs, http://assets.hotdocs.ca/doc/HD16_CO-PRO_GUIDE_v1.pdf (last visited May 11, 2017).
See-Saw Films & Aquarius Films, Directors Without Borders: The Producers of Lion give the Lowdown on International Co-Production, MovieMaker (Jan. 31, 2017) https://www.moviemaker.com/archives/winter-2017/international-co-production-lion-directors-without-borders/
See Id. (discussing the differences between official and unofficial co-productions).
Hot Docs Guide to Co-Production, supra note 10.
Co-Productions, Nat’l Film and Video Found. http://nfvf.co.za/home/index.php?ipkContentID=42 (last visited May 11, 2017).
Patrick Frater, Toronto Festival: Canada Strikes Co-Production Treaty with Booming New Zealand, Variety (Sept. 11, 2016, 3:00 PM) http://variety.com/2016/film/asia/canada-strikes-treaty-with-booming-new-zealand-1201857553/.
Production Funding for International Co-Productions, Finnish Film Found., http://ses.fi/en/funding/co-production-funding/ (last visited May 11, 2017).
See-Saw Films, supra note 11.
Id. However, in some circumstances a film can qualify as a local production in two nations without satisfying the requirements of an international co-production treaty. See Id. (describing the rare circumstances around the film Top of the Lake qualifying as a New Zealand production and an Australian production without complying with the constraints of being an official co-production).
Lion (The Weinstein Company 2016).
See-Saw Films, supra note 11.
Id.; Lion Awards, IMDB, http://www.imdb.com/title/tt3741834/awards?ref_=tt_awd (last visited May 11, 2017).
Brown, supra note 2, at 14.
The Great Wall (Legendary Entertainment 2016).
Nancy Tartaglione, The Great Wall’s Yin & Yang: Cautionary Tale or Building Block, Deadline Hollywood (Mar. 2, 2017, 10:32 AM) http://deadline.com/2017/03/the-great-wall-box-office-china-hollywood-analysis-future-coproduction-xxx-1201938044/.
The Great Wall, Box Off. Mojo, http://www.boxofficemojo.com/movies/?page=main&id=greatwall.htm (last visited May 11, 2017).
See Tartaglione, supra note 34 (stating whenever a film earns more than $100 million in China there is cause for celebration).
Giuseppe Richeri, Global Film Market, Regional Problems, Global Media and China 312, 323, (Dec. 16, 2016)http://journals.sagepub.com/doi/pdf/10.1177/2059436416681576
Id.; see Tartaglione, supra note 34 (describing other films that fit that description, including Warcraft, which grossed $221 million in China, but only $47 million in North America).
Tartaglione, supra note 34.
Gregg Goldstein, AFM Independent Financing Evolves, Adapts to New Market Realities, Variety(Nov. 2, 2016, 10:00 AM) http://variety.com/2016/film/spotlight/afm-independent-financing-evolves-adapts-to-new-market-realities-1201906564/.
See Hot Docs Guide to Co-Production, supra note 10 (discussing projects that will most benefit from co-production status).
See-Saw Films, supra note 11.