Richard Obank comments on recent experience in handling the collapse of UK arthouse and indie film distributor Metrodome Group and the challenges facing film distributors generally.

We acted on the pre-pack administration sale of Metrodome Group to 101 Films, which completed in August following a lengthy unsuccessful attempt by management to find a buyer.

Metrodome, an indie and arthouse specialist, launched 12 years ago, and was the UK distributor behind numerous films, among them the Oscar winning titles The Secret In Their Eyes (2010), The Counterfeiters (2007) and Monster (2004) . It seemed that, until recently, Metrodome was on a roll.

The pre-pack deal hopefully secured a number of imminent high-profile film releases in the UK which were in Metrodome’s pipeline, among them Childhood of a Leader, given a five star rating by Guardian critic Peter Bradshaw, and Kristen Stewartstarring Personal Shopper.

The deal is noteworthy in that it highlights recent challenges faced by UK film distributors. The collapse of Metrodome swiftly followed the voluntary bankruptcy of arthouse pioneer Fortissimo Films, the Hong Kong and Amsterdam-based international sales agent that helped bring Asian arthouse films to the rest of the World. Indeed, given the seismic changes we are seeing in the film sector, it is likely that in the coming months we will see more film distributors struggle as they seek to adapt.

Changes in the independent film distribution sector

• The additional windfalls brought by DVD revenue sales/ rentals from the late 1990s are mostly gone. The DVD boom, while it was under way, changed the economics of the industry, boosting production, increasing supply, and forcing up marketing costs for films in order for them to distinguish themselves from the competition. With DVD revenue mostly dried up, the industry has been left with a legacy business model that retains the architecture built in the initial boom.
• As DVD has wound down, digital in-home exploitation has ramped up. In theory, this should be good news for distributors. However, in practice, digital revenues have been slow to rise. Part of this is because of public consumption patterns, as consumers have shown an initial reluctance to pay for content when so much free content is available. Another part of the challenge for new digital revenues for film distribution companies is their revenue structure. Many pay-per-view (PPV) companies account to film distributors on a per-use basis, which means the revenues are paid out over long periods of time, in contrast to other licenses where the majority of the payment is made up front. These new long-tail rolling PPV payments can impact the cash flows of film distributors.
• Viewing patterns of cinema-goers across the world has been a contributing factor in the squeeze on independent film distribution. The major Hollywood studios have increasingly responded to perceived audience appetite for expensive “event” films, and this means fewer films with higher budgets. These blockbuster films have increasingly come out all year round (rather than just clustered around holiday weekends) and are distributed through the larger cinema chains, many of which are well funded and private equity owned. This means there are fewer star-driven independent films for the specialist distributor to acquire, and, given the knock-on effect in the intense competition to acquire them, higher costs.
• The explosion in TV content has been another key factor. In the last five years, the number of scripted TV shows has doubled. Many of the companies that used to be licensees for the films acquired by independent film distributors are now creating their own original content, and this means fewer slots given and less money paid to distribution companies for their independent films.
• From a general perspective, the revenue model for a film distributor required the majority of the investment to be made up front, because film distributors must pay acquisition fees for films and then pay the marketing and publicity costs. Revenues take time to flow, and due to the strict observance of exploitation windows (cinema first, then PPV, then pay TV), it may take more than five years for meaningful revenues to come in.
• Forecasting can be difficult for independent distributors as well: each new film is more like a prototype than an existing product, so there is no way of knowing for sure how the launch will go. With fixed, identified costs and uncertain revenues, it becomes clear why film distribution is described as a hits business. For those independent companies that have hits early on in their history, there is more of a cushion for risk taking.

Strategies and opportunities

• Consolidation is one way forward for distributors considering their options. A merger or acquisition could be an efficient way to buy a solution that otherwise would take too long to build. Low interest rates and relative availability of debt help owners considering this path. For example, a distributor uncertain about the performance of its upcoming annual slate of film releases could consider looking at companies that have stable cash flow from large existing film libraries but few upcoming releases. These target companies could benefit from the new releases, as they can refresh the existing library, helping sustain value as they license it to third parties.
• Equity infusion can be another option for the right film distributor. The UK remains one of the most lucrative entertainment consumer markets in the world. By way of example, the recent Absolutely Fabulous movie made over $20 million at the UK box office, impressive for a film reported to have cost $11 million, and a film that is still early in its exploitation cycle. It follows a trend of UK TV comedy spinoffs which have done well at the box office (such as Kevin and Perry Go Large and Alpha Papa). Successes like these make film distribution companies with commercial appetites attractive to investors. What also makes them attractive is the history of such companies being acquired by larger media companies, which gives the investors their exit.
• Diversification can be another fruitful route for a film distributor and many have branched out into TV production, operating cinemas, sales agencies or post-production facilities. The opportunity needs to be the right fit and offer synergies with the existing business, as well as providing the possibility of a more stable cash flow compared to the risks of film distribution.
• US cultural benefits could be replicated more closely in the UK by adopting the trade practice and custom of film and media entrepreneurs working more closely with strategic advisors, like lawyers, accountants and investment bankers. Among the benefits: the ability to tap into deep experience and network in the sector which can help a struggling distributor to devise solvent turnaround strategies before passing the point of no return.

How we can help

The media and entertainment sector is going through a period of rapid change and growth, driven by new business models and technological innovation. Our deeply experienced global Media, Sport and Entertainment group acts for rights holders as well as governing bodies and event organisers on media rights, sponsorship and other corporate and commercial matters. We advise Hollywood studios, distributors, producers, government agencies, banks, investors and financiers in the financing, development, production, distribution and exploitation of feature films. To learn more, visit our Media, Sport, Gaming and Entertainment page.

We have also formed Noble Street Limited, a strategic advisory firm which assists companies in this sector to raise capital and identify acquisition or merger targets or strategic partnerships. With specific experience in film and financing, Noble Street can help companies devise a strategy tailored to their business goals. Find out on the Noble Street website.

For more information, please contact the authors.