Industry Report: Financing
Building Business Plans
by Cartoon, the European Association of Animation Film
25/06/2010 - Paco Rodríguez founded PPM Multimedia in 1990 where he spent 10 years working in distribution, co-production, funding and as an executive producing several animated series for children. He has produced the following animated feature films as an Executive Producer for Filmax Animation: El Cid: The Legend, P3K Pinocchio 3000, Gisaku, Nocturna, Donkey.xote, and The Hairy Tooth Fairy 1 & 2. He acts as a consultant for the international theatrical and audiovisual sector.
How do you put together a business plan for a feature-length animated film?
I think the first question any producer needs to ask himself when taking on a project is «what type of film do I want to make, or what type of film could I make within the artistic, technical, and especially financial limitations I have». If it’s a case of several million euros, we’ll have to finance this through financial institutions with guarantees for some time… Do we have this or not, can we manage to get it or not…
Above all, you need to define the type of film you want to make. Is it a very experimental independent film with a very low budget, or is its aim to be commercial, or a film that’s going to be a blockbuster, i.e. American in style? There are several films in Europe that could fit in that definition: Planet 51, Arthur and the Invisibles and Valiant, which have managed to be quite similar to American blockbusters.
Once we have made the decision about the type of film, then this will set the framework for our project, the budget, and how to finance it. Afterwards, the project exploitation or business plan will also have an influence.
Another decision to weigh up when considering the possibility of making a feature-length film is what line or strategy I want to follow: Do I want to minimise the risk or create values or assets? Minimising the risk is «I am going to share this film with other co-producers, decrease my share so that it is not 100% of the film, so I may have 20%, 30% or 25%, but I minimise the risk». Or not, «I want to create value and assets for my company, and the more rights I have the better, and if I can have 100%, that’s even better, I don’t share it».
I could also opt for another avenue, which is either going for co-production or for presales. Both have their pros and their cons.
What are the pros and cons?
With co-production, I minimize the risk, my contribution will be smaller, but controlling my production will be far more complicated, because I’m going to have to share it with two or three structures with all their idiosyncrasies and different ways of doing things.
With presales, I might be able to finance all the film myself, supplement with presales and own it 100%. Presales involve credibility and risk. The risk of presales is that all the presale contracts I sign need to become effective when I deliver the film. In the meantime, they are paper I can discount at a bank, but they remain risky because a distributor who has bought the film from me might change his mind or not pay me, and I would lose part of the funding based on these presale contracts. It involves a risk which co-production minimizes in a different way.
You can also have more of a market film and go to the market with investors, or make a film backed more by subsidies and grants, offered in my country and other countries. If we get these grants, we can base a funding plan and a business model on them.
I can also try to get tax relief to complete my funding, or tax relief for R&D.
This is what I have to think about to define a strategy and the direction I want to go in, because this direction will define the scale of the project, and also the business model I am going to use, as well as the business plan, and whether this film will earn money or not after it has been produced.
What are the most important steps in funding a project?
The most important steps taken are in the scale of the project, especially the size of the budget and what budget level I want to be in. I could choose a national or regional film, or I could go to the national, European or world level.
It depends on ambition, the size of the company, and the type of market I want to access. There are people who make films solely for the DVD market…
But I could also make animated films for television, a TV movie, which I don’t release in the cinema, or I lean towards new technologies, and I can decide to make a film financed by Internet contributions or donations, I produce it, and whoever donated can see this film or can have some compensation. And it also depends on the audience I want to target.
It’s important to realize that any decision we make in the development is going to have a direct or indirect impact on the film. It will have an influence artistically and financially, and on its own exploitation, because this forms the basis for establishing processes, production costs, promotion (marketing), and advanced sales, i.e. presales, because my presales volume will depend on the budget I have.
I’ll have to deal with other matters in the development phase, such as its release in cinemas, marketing, international sales, and discussing my project with people with know-how, with people with experience in premiering, or with people who are selling internationally, or who are going to bring out a DVD. Does my project really accommodate all these aspects or not? It is very important for the development to give me feedback before the project advances any further.
How large are budgets for a European film?
In Europe our budgets are between 1 and 15M€. If my budget is between 1 and 2M€, it will be easy for me to finance it with the grant systems that we have in Europe, but the project won’t have much of a leg to stand on. It won’t be released outside my region. I won’t have much chance of a national release, hardly any or no chance of an international release, there won’t be any presales, and I’ll have fewer TV or DVD opportunities, because coming out on DVD is a result of box office success. It’s feasible, but difficult.
If we go up to between 3 and 6M€, the budget is more viable for a 2D production, feasible funding, possible presales, but I’ll have to co-produce with at least two European partners, and, therefore, I’ll have limited production resources to tackle this type of project.
If I have between 6 and 10M€, then 3D production is feasible, but I’ll need three European partners for this film. The more the budget increases, the more partners I’m going to need, especially from important countries, i.e. Italy, France, Germany, the UK and Spain. And that means that the more my budget increases and the more European partners I have for the co-production, the more, to a certain extent, I am mortgaging the exploitation of my film. I am lowering my income because I am giving it away in exchange for funding to produce the film. The more my budget increases, the more I am mortgaging the exploitation of my film in exchange for co-production.
Between 10 and 15M€ is difficult to finance in Europe alone. We are increasingly turning to Asia, India, and China, and looking for alternative means of funding. Of course, I’m going to have presales, and the presale prices will be high to match the high budget I have. But, in this case, I’m going to need more partners, and if they are not co-producer partners, they will be investors. But they are going to further decrease my share, and, furthermore, as far as my recovering the investment is concerned, I will be in a very weak position, because I will be the last one, especially if my partners are investors, to be in a first position.
First position means that the first euro that comes in from a cinema, or sale to TV, or a DVD, will be recouped by the investor who has made the money available. A scale of recovery is established, which will include everyone up to the last ones who joined. And sometimes we are in the queue, even though we are the ones who instigated the project.
This type of film of around 15M€ is difficult to amortize and turn a profit on. Not impossible, but very difficult, and we don’t have many examples of successful films with this kind of budget in Europe.
And if it is more than 15M€, the projects are not very viable or not very profitable. Or, in this case, there has to be the American equation, i.e. you need to have an American partner. And you can’t get American partners for 15M€ projects, because there simply isn’t enough credibility for a project from Europe for the US. You must have budgets of 50, 60 or 70M€ just for them to look at you, because if you have a 15M€ budget they don’t bother because they don’t believe you.
If I went to the US, I’d have to have a casting of American voices, which I would have to produce as soon as production started, because in animation we record the voices first and then we animate.
What kind of audiences are animated features for?
At the moment, we have a family or child audience between six and nine years old and between nine and twelve. For the business or exploitation plan of our film we also have to bear in mind how our film is going to fare at the box office, and, especially, what the exhibitor is going to do with it.
Here in Spain, and possibly in other countries, some films for the six to nine age group have half the daily screenings. If we target a family audience, we have a better chance of staying on screen until 10:00 at night.
The type of audience we target is also important. In recent years, we have noticed that animation films for adults are few and far between, and, save a few exceptions, they are not very profitable.
Our budget, which goes hand in hand with our business plan, is going to develop. First, I will budget on the basis of the script I have produced, but the script will change, especially with input from investor or financial partners, who will revise the script, make changes and this will affect my budget. So, if I involve financial partners in the coproduction or just in the investment, my budget will go up, and I will have to adjust my funding plan to this increase.
I have to take the following kind of percentages into account in the budget: overheads, contingencies… and above all completion bond costs. When I am playing in a league with a budget of 8, 10 or 15M€, I am bound to be asked for a completion bond, and the completion bond, depending on who it is, is going to cost me 3% or 4% of my production budget. A budget of 2M€, however, will not require a completion bond, but we mustn’t forget it if we get into a higher budget.
When do you produce the film’s marketing and exploitation plan?
During the development, I will have established a production budget, a funding plan, and I’ll be looking for partners. Using these as a basis, I really need to be thinking about the film’s marketing and exploitation plan as early as the development phase. I already have to speak with distributors for the initial marketing plan, which we will have a draft of, but we have to get together to find out whether my film is a 40-print film in Spain, or 80, 300 or 600 prints, which print range will apply. If it is a 2M€ and 80-print film, then I will spend 300,000€ on advertising, that could be my aim, or if it is a 15M€ film, I’ll have to spend a minimum of 2M€ on advertising from the start.
My business model is also going to progress depending on the packaging I give the film. I’ll have to detail all the elements to give my project a good pitch and to attract partners. The more attractive the packaging is, the more attractive it will be to them, and the more chances I’ll have of finding co-production or funding. The packaging is easy. It’s the scriptwriter, the director, the composer, the casting and the voices.
All this will have an influence on my business plan, and it will give me more cachet and more or less credibility. If I am working with a director who has already had three box office successes, and they are blockbusters, that gives me more cachet. If I am working with a new director, he simply gives me expectations, but not confidence. The same happens with scriptwriters, and, especially, the voice talent. If I limit myself to my national market, I will look for voice casting.
Our problem with voice casting is that when we hold a press conference for the release of the film, our animation figures are not going to attract the press. They want to see flesh and blood, so we are partly forced to use two or three well-known actors.
How do you gauge a film’s potential?
If I’m making an independent film, I’ll have to do some research to arrive at some box office forecasts. In other words, I’ll go to see other independent films which have been released over the past five years, and see how they have fared in the box office and in the DVD market, how many prints of them were released… to see the potential and adapt the plan that I have.
If I put in my exploitation plan that my film is going to sell 3 million tickets, in other words around 10M€, that wouldn’t be real, because right now no Spanish film has sold more than 700,000 tickets.
A larger budget, and, consequently, more expenditure on promotion and distribution does not mean more box office takings and success. That rule is not valid.
The profitability of European animation film does not lie in the cinema, which is where it should be. We have to find other alternative sources of income which are not cinemas.
What are the characteristics of European funding plans?
Most of the funding plan model of animation films is designed around the subsidies and income I have. In other words, I don’t plan a film around the story I want to tell, but around the grants I am going to raise.
When should a film be released?
One of the reactions of distributors that distribute European animation film is to run a mile from American releases, i.e. don’t compete with an American release. Actually there are more elements: I can’t control who is going to be competing with me, or I could control it by running a mile, but there could be football on that day, it might be raining, etc.
I think the best animation release date is the beginning of Christmas: whoever is around, I get takings everyday. In Spain we are limited to three dates in animation: Easter, the beginning of the summer and Christmas. At Filmax, Nocturna was released on 11 October 2007, and it was a total flop because releasing on 11 October is a suicide mission. There might not be any American competition, but you can’t make any money on that date, and if you could, they’d be there.
The type of film I am making will also dictate the type of release: saturation, massive with 400 or 600 prints, or a standard release of 60 or 80 prints, or 120 or 180 prints, which is quite large for a Spanish film. My business model lets me know how much I can spend on prints and on advertising, and also what will give me an income, where I am going to get takings, besides how to finance my film with subsidies, grants, investments…
Is the business model for film production well distributed?
No, after all the effort a producer makes developing a film, funding it, and taking it to the screen, the average amount that can be made from it is around 12%, 15%, or 20% from all the exploitation lines there may be.
How are windows of exploitation changing?
The issue of the windows of exploitation is changing mainly because of piracy. The idea is to make money in the majority of the windows of exploitation and as soon as possible. We can also see that the classic form of exploitation is changing too, and it is entering into a new business model where online distribution is starting to grow and make a timid appearance, above all due to piracy (because it is actually piracy which affects these exploitation models).
There are other platforms and other channels, and other market values, because new exploitation channels are always appearing, such as US-style video games. Which American film doesn’t have a video game? Another added value is stereoscopic cinema, which is another way of increasing box office takings.
When do you have to start looking for presales?
You mustn’t start the presales until you have at least 80% of the funding in the bag and have started pre-production. It’s not good for the company to pre-sell and then the film isn’t made, or it is made years later, as that’s bad credibility for the market.
Not everyone can make presales on a film. The company has to have a good track record to do that.
What is the production schedule for an animated film?
The first year is more a development phase, a marketing phase for financiers, and we are testing the market. After a year, you know if your film will be well received or not. Often producers end up making films out of stubbornness, or because they’re pushed into doing it, or because they’ve already spent 150,000€ and they can’t afford to say good bye to that money, so they have to keep going. Often it’s better to say goodbye to the 150,000€ and not make the film rather than keep on going and lose several millions later on.
Which films have merchandising potential?
There won’t be any merchandising until a release date has been established, a marketing budget has been finalised, or the number of copies to be released into the market has been decided upon. If it is a film with 20 prints, and it is being released in March, it doesn’t have any merchandising potential.