A Venture Capital Model for the Entertainment Industry

If you're like me, you wonder a) what dummies actually pay to see movies anymore and b) what dummies actually buy CDs. Simultaneously I realize it's not sustainable if I want to keep seeing movies and listening to new music. This is why I find the upcoming Nazis-on-the-moon Finnish film project Iron Sky to be so interesting: it's being made piecemeal based on donations it gets from people that want to see the final product.

When you think about art, you have to think about the economic aspects of its creation. People can write short stories or books as one-person essentially zero-cost projects, whereas a visual artist needs special materials and is more likely to require training in specialized motor skills. Musicians need a special room and lots of special equipment (including their instruments) to create recordings. In film, even a low-budget independent movie is a large time-consuming affair requiring multiple administrative individuals including people just to coordinate the time and resources. (When was the last time you needed a set manager to write a novel?) Consequently you expect that capital intensive forms of art must be more sensitive to sales to be sustainable, so the more a medium costs, the more financiers will exert more influence over the final product. But profits from non-live art result from making copies. Consequently if capital-intensive art is to survive the information age, it must find ways to innovate.

This is in fact what we're seeing. Erosion of profits happened first in the music industry, because of hardware requirements - in 2001 it was much harder to watch and copy movies digitally than music. One interesting idea was Radiohead's pay-what-you-think-it's-worth approach. For them, this was successful. Whether this will work sustainably for them or anyone else is an open question though the consensus is no. Now, the technology gap that pressured the music before the film industry is closing quickly, and in Iron Sky we're seeing the first example of an end user-financed model in film. (I'm sure this has happened before but this might be the most widely-reported instance so far.)

My prediction is that in the near future this model will go one step further. By that I mean, donations are inferior to investments because with donations you have no input into the characteristics of the final product, and you don't benefit from its success. (If I gave $100 to help Iron Sky I would be happy to see the final product, but very pissed off if it ends up being the top-grossing film of the year.) A venture capital (as opposed to donation) model is good news for the film-going public, because it tightens the loop between the film-consumer's taste and the type of movie that gets made, not only because the public votes with their dollars, but because fewer decisions are polluted by insider politics; there are reasons less noble than artistic value or even profit that affect decisions in this and every other industry (e.g., projects not going forward because so-and-so didn't like like such-and-such in college or slept with someone's ex-wife, etc.) But I don't think consumers will be satisfied with donating money to a pre-formed idea. Imagine the film-financing model of the future: a team of scriptwriter, director, producer etc. forms with a rough idea and announces they're taking donations. Buzz goes up among appropriate sector of the public (science fiction fans, human rights activists, whatever demographic the idea will appeal to.) People can donate $1, $10, $100, whatever they want, but factions can form: faction X will only give their money if you get Steve Buscemi to play a certain character, faction Y will only give theirs if you set it in colonial Mexico. If the production team is smart they'll lay out rules in advance to quantify script-impact per dollar, some modest revenue sharing, and (importantly) refund guarantees of X cents on the dollar if the project never gets made. Terry Gilliam might be in trouble in this future.

There's no reason this wouldn't work with music either. Not that Metallica needs seed money to make new albums, but if they did, how many fans do you think will say "here's a hundred bucks, do whatever you want" versus "We want something that sounds like the second Justice album"?

The intermingling of arts and commerce has always produced an uneasy tension, again particularly in those arts with capital-intensive production processes. But before anyone gets too nervous about the financial despoiling of the film and music-production process through the mechanism I just proposed, keep in mind that painting in Europe seemed to get on just fine with this model for the first three or four centuries of its independence from centralized religious and political rule. It was called the patron system. No doubt there are paintings from Michelangelo we don't have because of this; no doubt we enjoy the ones that we do have.

Added later: if there is a medium whose revenue models will likely remain more conservative, it's video games. As of 2009 major commercial video games are funded to a maximum of about $5M (figure from Wikipedia, attributed to McGuire and Jenkins), and the top 10 MMORPGs of 2008 were globally grossing anywhere from $50 to $500M each - and, relevant to the film industry, this wasn't the release year for any of the games. Name me one film that's ever grossed $50M in any year but its release year. These are ongoing revenues for a product that cost $5M max to develop. Video games are also more capable of controlling their own distribution. Copy protection technology is better, sometimes there is specialized hardware required, and MMORPG require interaction across the web which makes piracy more difficult. Video games will likely keep the old profit models, because they can.

Compare to the American film industry in the same period. The top ten 2008 MMORPGs total to $2.5B in global profits, exactly what the top 10 films of 2008 added up to in the U.S. I also believe the film grosses are just 2008, i.e. don't include DVDs etc., but I'm not sure. (That might temper enthusiasm for the ascendance of video games, but it ends up being less important than you think.) Interestingly, the global market for video games and movies is also estimated to be about the same, ranging from $7 to $30B, again according to the McGuire and Jenkins report. Again: the top ten video games were already-released games with minimal ongoing costs. The top 2008 U.S. earners were all 2008 releases.

To make the point more clearly I looked up budgets for each of these movies. I'm assuming that marketing costs are already included in the budget figures. We can start to see the obvious difference here:

Movie	Gross	Budget	Abs ROI	% ROI
Dark Knight	533	185	348	188
Iron Man	318	140	178	127
Indy Jones IV	317	185	132	71
Hancock	228	150	78	52
Wall-E	224	180	44	24
Kung Fu Panda	215	130	85	65
Twilight	191	37	154	416
Madagascar 2	180	150	30	20
Quant Solace	168	200	-32	-16
Horton Who	155	85	70	82

Now compare that to MMORPGs. Figures for specific development costs for the top 10 2008 MMORPGs weren't available, but let's say that they were all at the top end of development costs ($5M ea.) The film figures above show us that the top 10 films netted an average of $108.7M each, an average %ROI of 75% (again, that's in their release year, after which there's a steep drop-off.) Compare to the top MMORPGs, which net an average of $245M each, and an average % ROI of 4,900% - and that's during consistent follow-up years. Add to that the nature of the media which allows video games to control piracy and distribution better than movies, and I'm amazed that movies still dominate public attention relative to video games as much as they do.