Understanding The Film Value Chain
If you have ever been involved in the production of a film, you will probably have heard the expression “the film value chain”. But what is it exactly?
In this series of articles, we are going to look at the film value chain in order to understand the processes involved in the production of a film and where these intersect with its funding.
A good starting point is to understand the concept of a value chain. A simple example can be seen by looking at a manufacturing company. A manufacturing company creates value by converting raw materials (cloth, for example) into something people want to buy (say, designer clothes). Its profit is the difference between the value it creates and captures (i.e. money it receives for its goods) less the cost of creating that value.
So far, so simple. But producing and distributing an independent film is infinitely more complex. The main reason for this is that these films are made by several unconnected freelancers and businesses. Each is involved in a different part of the chain at a different time. (In contrast, a film produced entirely by a studio is a simple corporate value chain).
Everyone who contributes to the film gives some kind of value, be it financial or artistic. It is important to understand that the value chain doesn’t show how income from a film flows. Rather, it shows how value is added at various stages of a film’s production.
Credit for defining the film value chain goes to Peter Bloore, who introduced the idea in his groundbreaking paper Re-defining the Independent Film Value Chain in 2009.
The diagram sets out the steps involved in the production of a film. The intersecting lines show where there are opportunities for financial transactions.
We can break the film value chain down broadly as follows:
In this first blog, we are going to look at development and pre-production.
This is the starting point for making a film. It is shown separately from production as it is often funded by a different party than the production itself. This development stage includes:
- Creating or buying the idea for the film
- Drafting a screenplay
- Securing development funding (to include payment to the writer of the screenplay)
- Starting the production financing process
- Contracting the talent: director, actors
Films often spend a long time in development, which is why it is a high-risk part of the project. In his paper, Bloore refers to research that says only 18% of films developed in the UK reach production. Funders of the development stage are often repaid out of the production budget rather than wait for a share of the proceeds of the finished film.
Pre-production (also referred to as financing and pre-sales)
This is the stage at which the involvement of a film financing company such as Iron Box capital is so crucial. It is now that the financing of the film is arranged. This involves signing up investors, applying for government subsidies and tax breaks, and arranging pre-sales.
Often, the producer or financier will pre-sell the rights to a distributor in a particular territory for a minimum guarantee and overages determined by the success of the film. This is usually done via sales agents who have relationships with distributors in territories around the world. Other potential pre-buyers will be pay-per-view channels such as Amazon or Netflix.
When financing a film, an accurate assessment of the value of pre-sales gives a more realistic basis for calculating the return on investment than projected box office figures.
In the next part of this blog, we will look at production and post-production.
To find out more about how Iron Box works with film producers to finance films, please call Raimund Berens on 020 7628 7587 or go to www.ironboxcapital.com.