The Hollywood Economist

The Indie Game

The secret to success is a Hollywood star.

The genius of the indie film business lies in its use of Hollywood stars. The same actors and actresses who quote Hollywood studios $20 million per movie will work on indie films for a small fraction of that fee. Often they accept “scale,” as the Screen Actors Guild’s minimum wage of $788 a day is called, or “near scale” of about $10,000 a week plus overtime. Instead of requiring private jets, luxury suites, and multimillion-dollar perk packages as they do in studio films, the stars will fly on commercial flights, stay in inexpensive condos, and get the same per diem as the rest of the cast. Instead of receiving a sizable chunk of the gross receipts as they do on studio films, for indie films stars will accept “net points” (even though they—or their agents—are no doubt familiar with David Mamet’s famous observation that in Hollywood, “There is no net.”). “The total cost of a star can be less than that of running the office Xerox,” explained one knowledgeable producer. The willingness of top stars—including Keanu Reeves, Mel Gibson, Jim Carrey, Will Ferrell, Drew Barrymore, Al Pacino, Angelina Jolie, Pierce Brosnan, Leonardo DiCaprio, Charlize Theron, Tobey Maguire, Demi Moore, Sean Penn, and Julia Roberts—to work for near scale in the parallel universe of indie films allows indie producers to take advantage of a star’s cachet to finance the movies.

Ironically, in the era of the moguls, the Hollywood studios gained a similar advantage over stars by locking all their actors and actresses into long-term contracts in which they were paid a specified weekly salary regardless of the success of their movies. Since the stars could not work for any other studio, the studios who employed them could create PR images and reap all the benefits of a star’s cachet for themselves. After the studio system collapsed in the late 1940s, the stars, represented by powerful talent agencies, quickly turned the tables on the studios. Now, no longer under studio contract, the stars auctioned off their services to the highest bidder from film to film. The studios still paid for their films’ publicity, but the stars now reaped the benefits of their cachet via product endorsement, licensing their images for games and toys, and a raft of other celebritized enterprises. So, for example, while Warner Bros., Sony, Fox, and Universal collectively invested more than a half-billion dollars to hammer the superhero image of Arnold Schwarzenegger into the public’s mind in a dozen different action movies, Schwarzenegger himself got the rewards of his cachet, which included a record-breaking $29.25 million fee for Terminator 3, a personal-licensing empire, and the governorship of California.

Despite the lure of enormous compensation from studios—which now includes perk packages and cuts of the gross receipts that can easily exceed $30 million a film—stars find occasional satisfaction in working for coolie wages in indie productions, making a distinction between, as one top CAA agent put it, “commerce and art.” Some stars may find that roles in studio amusement-park movies (that they share with live stuntmen and digital doubles) do not provide the acting opportunities, award possibilities, prestige, camaraderie, or even aura of coolness of indie productions. Others may want to work with a particular director, such as Woody Allen, Robert Altman, or David Mamet, or burnish their fading image as an actor. They might also need to fill a hole in their schedule—since, PR hype aside, there is not an endless cornucopia of $20 million parts in Hollywood. Also, when stars do “artistic” films practically pro bono, they do not lower their $20 million quote.

Whatever the star’s motives, the indie producers get, if not a free ride, a means of financing their movies through a three-step process called “presales.” Here is how it works:

Step 1: Since indie producers, unlike studio producers, typically cannot get a distribution deal in America before they finish the movie, they raise money by making “presales” abroad. In such an arrangement, the indie producer turns over all rights to exhibit the movie—as well as sell it on DVD and to television—in a particular country in return for a minimum guarantee of money once the film is completed and delivered. The Catch-22 here is that a foreign distributor often will not commit to a presale contract if there is no American distributor or unless the film has a recognizable star (with a star he has at least a chance of selling the DVD and TV rights). So, indie producers must persuade or seduce a star into joining the movie—and here is where the genius comes in—for practically no money. With a star in tow, he can often make enough presales to cover most, if not all, of the budget.

Step 2: Since presales are no more than promissory notes, the indie producer must borrow against them from banks to pay for the movie. Before he can do that, he needs to guarantee the banks that the movie, once begun, will get finished and delivered to foreign distributors. So, he needs a completion bond, which guarantees the banks that it will pay all cost overruns necessary to finish the movie, and if the production is abandoned it will pay all the money lost on the venture, which means that one way or another the bank will get back its money. Two companies, Film Finances Inc. and International Film Guarantors, provide almost all the completion bonds for independent productions. (Studios that finance their own movies internally do not need completion bonds.) Before either company will sell a producer a completion bond, he has to meet its requisites, which include buying full insurance for the star (so if she is injured or quits, the completion bond coverer gets all the money back from the insurer) and turning over to the completion bond company the ultimate control of the budget (including the right, if anything goes wrong, to take over the production and bring in its own director to complete it). The producer also has to pay the company about 2 percent of the budget.

Step 3. With the completion bond in hand, and the presales contracts as collateral, the producer then borrows the money from a bank or other financier. Since the completion-bond companies are themselves backed by giant insurers, such as Lloyd’s of London and Fireman’s Fund, the banks take only a very limited risk in making such loans. John W. Miller, the head of JPMorgan Securities’ movie financing unit, which last year had $7.5 billion in movie loans outstanding, told me that he does not even “read the scripts” of the indie films he finances. “My bet is on the solvency of the distributors.” When these presales contracts are with established international distributors, such as Sony Pictures, United International Pictures, Canal Plus, Tojo Films, or Buena Vista International, that risk is, he said, “negligible.”

Even after scaling all these hurdles, securing the money, and making the movie, the indie producer faces one further challenge: getting the movie into American multiplexes. Unlike the studios, which have their own distribution arms and often set a tentative opening date even before filming is complete, indie producers typically cannot arrange American distribution until after they have shot and edited the movie. For many indie producers, finding a distributor requires going from film festival to film festival, an odyssey that often proves unfruitful. More than 2,000 indie films were submitted to the Sundance Film Festival last year, for example, of which about 1 percent were accepted. But if an indie movie has a Hollywood star it can improve its chances, especially in those festivals, such as Cannes, Berlin, Venice, and Toronto, that depend on celebrity stars for publicity. The presence of a star not only often fast-tracks the film into these festivals, but even more important, as one highly successful indie producer explains, “It gives the acquisition executives there more of an incentive to give the film a chance with distribution, because they figure that even if the film is a hard sell, they can always promote the star. Selling the film ultimately is what it’s all about.” So, the Hollywood star as homo ludens, or at least seeking some kind of non-monetary gratification, winds up as the crucial element in a business model that now sustains a large part of independent films—and, for that, we can all be grateful.