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
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.