Aspiring filmmaker James Kerwin had an image in his mind — a 1940s-era Lauren Bacall wearing Humphrey Bogart’s trench coat and walking through city streets at night. That image was the genesis of his first feature film, Yesterday Was a Lie, a black-and-white noir-style science fiction mystery starring Kipleigh Brown, Chase Masterson (who also served as producer) and John Newton. The independently produced film draws on myriad arcane influences ranging from Jungian psychology to quantum physics.
To fund the film, Kerwin used an approach that is uncommon in motion picture production: He established a tax exempt non-profit organization to raise the roughly $200,000 he needed. He was also fortunate enough to be awarded a grant from Panavision, which supplied most of his equipment.
Yet, as Lance Weiler, another independent filmmaker, previously told Knowledge at Wharton, “the real struggle comes when it’s time to distribute” your movie. “Making the film is easy in comparison.” If you want your film to be exhibited in a theater or your DVD to be available through the major retail chains, you need to have your film picked up by a major distributor. And working with a well-known one doesn’t guarantee you’ll generate enough revenue to fund your next project.
The economics of filmmaking are not unlike the “Tarzan economics” described by music industry consultant Jim Griffin: Everyone wants to swing forward to grab the next vine of the digital future but is afraid to let go of the old vine first.
In the case of filmmaking, the current vine is already slipping through filmmakers’ fingers. The revenue streams from media sales — DVDs and Blu-ray discs — are eroding. The revenues from the new digital distribution methods that are replacing these media — online streaming and digital downloads — have not advanced sufficiently to fill the gap.
Knowledge at Wharton recently met with Kerwin in Los Angeles, Calif., to discuss the business of independent filmmaking, his film’s long journey from concept to distribution, and his views on the business models — and the perils — of movie distribution. Kerwin takes a dour view of the business model behind Netflix’s streaming business — believing it is not economically sustainable — and he sees Internet piracy as a growing threat to content producers.
An edited version of that conversation follows.
Knowledge at Wharton: After some student film projects and a period directing live theater, you wrote and directed your first full-length movie, Yesterday was a Lie. What was the impetus to do a feature film?
James Kerwin: I started feeling a little constricted directing theater. You have such a huge pallet when you’re directing film. It’s not just the performances and the blocking and the lighting. It’s the mise en scène, where you’re placing the camera, f-stops and exposure levels, sound design, and musical score. The way you cut scenes completely alters their feel. Many of these cinematic tools are not available to you as a theater director.
Theater is more of an actor’s medium than a director’s medium. Once the curtain goes up, you have turned your show over to the actors. You can’t re-take. You can’t alter a performance slightly by editing. That feels somewhat constricting if you have a background directing film.
So, I said, “I really need to get back into film.” I’d been developing some script ideas on the back burner for several years. But this script idea — to use science fiction/noir and the theme of the nature of time as a metaphor for people’s relationships — just came out of nowhere.
Knowledge at Wharton: Can you recall when you first had the idea for the film?
Kerwin: The very first image I had was of Lauren Bacall, dressed like Bogart, walking the streets at night. It just came to me out of the blue. I knew [the film would deal with] science fiction and the nature of the way our consciousness experiences reality. When that one shot appeared in my mind, I knew right then, “I’ve got to make this.”
Knowledge at Wharton: The movie deals with a number of unusual topics, such as quantum physics and Jungian psychology. Were you concerned about doing something so out of the mainstream for your first feature?
Kerwin: It was a calculated move. If you become more established, you’re going to be restricted from doing something that’s kind of out there. It’s your first film that you get to be a little experimental with. If you look at Darren Aronofsky, Richard Kelly, Shane Carruth — their first, low-budget films were [unconventional].
The independent film market has been flooded for 15 or 20 years — since Reservoir Dogs — with people all making the same film. When I was touring around film festivals with my short in the late 1990s, I remember thinking, “Every film in these festivals is the same independent film over and over and over and over again.”
It’s the ones that are totally unique that stand out. [Darren Aronofsky’s early feature film] Pi is a perfect example. It’s like, “Whoa. I’ve never seen an independent film like that before.” So, it was a calculated move to do something totally different than anything you’d ever seen before.
Obviously the concern is: Is that going to find an audience? We knew from the beginning that it wasn’t going to find a broad audience. The intent was for it to find a specific audience that would like it and be very loyal to it.
Knowledge at Wharton: Did you try to shop around the screenplay to find a distribution partner before going into production?
Kerwin: No. I knew that this screenplay would probably never sell. And if it did, it would be altered before it was made. I wanted to direct it. I don’t consider myself a writer. I’m a director. I didn’t want to sell the script to somebody else to make it.
Knowledge at Wharton: This approach meant you had to raise all the funding yourself. Was that a challenge?
Kerwin: Yes. It took a couple of years.
Knowledge at Wharton: How much did the film cost to produce?
Knowledge at Wharton: The film was produced under Helicon Arts Cooperative, which is a 501(c)(3) tax-exempt nonprofit arts organization. What is the advantage of that approach? Does it make the financing easier?
Kerwin: Financing any piece of art through a non-profit has pros and cons. Many theater companies, operas and visual artists operate that way. Not a lot of films are financed that way, but it can be done.
It’s not a traditional investment model. You’re not going to investors saying, “If you buy a share in my LP, or LLC, you hope to get this type of return on investment.” Instead, it’s patrons of the arts donating to an arts organization, a private operating foundation that is designed to create pieces of art. They’re not going to get their money back. It’s a tax write-off.
If you happen to know people — family, friends, relatives, your dentist, people you went to school with, friends of friends — who are looking for tax write-offs, and we happened to find ourselves in that particular situation at the time, then that might be a route to go for you. But I wouldn’t necessarily recommend it for everyone.
Knowledge at Wharton: As you said, this approach is fairly common for plays and musical productions, but is rare in cinema. Why is that?
Kerwin: I think there’s just an idea that live theater is more artistic than cinema. And, frankly, it often is. Motion pictures are a business, whereas live theater is primarily about the art. But that doesn’t mean that motion pictures can’t be about the art.
Also, plays generally cost less to make than a film. Even [the budget of] a film like Yesterday Was a Lie, [which] is considered in SAG’s [the Screen Actor Guild’s] ultra-low-budget category, seems like a fortune [when compared to the cost of] a play. But that’s pennies for a motion picture. People are much more hesitant to donate large sums of money. And you have to get more people in order to raise that much money. It becomes counterproductive at a certain point. People who are willing to shell out that kind of money usually are doing so because they’re looking at it as an investment and they want a return.
Knowledge at Wharton: What are the ramifications of this approach? If the film becomes a runaway hit and brings in millions of dollars, what happens to that money?
Kerwin: As a 501(c)(3), if Helicon Arts Cooperative were to make any type of, quote, “profit” from the film, that money could not be dispersed among individual people. It would have to go into Helicon’s mission statement, as a 501(c)(3) registered with the IRS, to produce more pieces of art.
Knowledge at Wharton: What are your real costs for a feature film like this? Where does the $200K go?
Kerwin: There’s one major cost: Talent, the actors. And your above-the-line crew gets paid a significant amount for their work — [although], on this film, [it was] not a significant amount. [Then there is] renting equipment, post-production expenses, renting time at editing suites and mixing studios, costumes and things like that.
The majority of it usually goes towards equipment rental. You need a 10-ton grip truck, a lot of lights, jib arms, and [so forth].
You also need a camera. For this particular film, we did not want to shoot with a consumer or “pro-sumer” camera, the way a lot of indie filmmakers think they can do.
Knowledge at Wharton: And now some established directors like David Lynch.
Kerwin: Some established directors — like [Steven] Soderbergh — will do it because they think it adds a charm or genuineness to their projects. But there’s a world of difference between a consumer high-def camera and a cinema high-def camera. You can’t buy a good high-def camera to shoot a movie that’s going to be released at a movie theater for a few thousand dollars. The type of high-def cameras that are used to shoot real feature films — the CineAlta or the Genesis — cost hundreds of thousands of dollars. They’re very expensive pieces of equipment.
We could not afford that. So, thank God, we got the Panavision New Filmmaker grant based on the strength of the script. Panavision reads hundreds of scripts a year that apply for this program, and they [award the grant] to only a few a year.
Panavision donated the use of a complete camera package: The [Sony] CineAlta, the sticks, the heads, the video feedback system, the lenses, everything. [The film] was shot with very high-end camera equipment that we never would have been able to afford.
Knowledge at Wharton: Did you have a plan B?
Kerwin: Plan B would have been to shoot it with a pro-sumer camera — buy a Sony-Z1U at Best Buy. The problem is that you’re never going to get a theatrical release. You’re even not particularly likely to get a home video release through a real studio, because the image quality just is not there. The CCD [imaging sensor] is [small], there’s one zoom lens that’s usually not that high quality, and there’s massive amounts of compression being applied.
We now have digital SLR cameras that shoot high-def video. You see those used on some television shows for some second unit [ancillary footage]. And those are good, although they have problems. They have overheating problems. You get shutter flicker problems, especially when you move the camera. And, even in the good ones, you’re recording compressed video. It looks okay for broadcast, because things coming over your cable line are already pretty compressed. But you can’t project that in a movie theater.
Knowledge at Wharton: After showing the film on the festival circuit for a year or so, you found a distributor with Entertainment One Distribution. Can you explain that process?
Kerwin: There’s no real trick to it. It’s just playing on the festival circuit. If your film is good, you’re going to win some awards. That gets distributors’ attention.
Distributors don’t tend to attend festivals. It’s a bit of a myth that if you play at a lot of festivals, a distributor will see it and then make an offer. It’s extremely rare for a distributor to make an offer because they saw something at a festival — even at Sundance. It can happen, but it’s rare these days.
More often than not, you’re cold-calling the distributor and saying, “Have you heard about this film? I’ll send you a press package. Let’s send you a screener copy and see what you think.” You do that for dozens and dozens and dozens of distributors. Some bite and some don’t. And we had some of them bite, and of those, we went with the one that made us the best offer.
Knowledge at Wharton: How do you determine what the best offer is? Is it the largest percentage of revenue share or access to theatrical or retail distribution channels or something else?
Kerwin: When I say, “makes you the best offer” it’s not necessarily what percentage of the sales they’re going to give you. It’s: What channels do they have? On what shelves are they going to get the DVD?
A smaller distributor might say, “We’re going to give you a huge chunk of our sales.” But if it’s a distributor that you’ve barely heard of, and you look at the other titles they’ve released and you’ve never heard of those, that’s a warning sign that people are never going to hear of your title.
If you go with a distributor like Entertainment One that releases a lot of films and television shows on DVD — and their DVDs are at Barnes & Noble, Best Buy and Wal-Mart — you know that your product’s going to get more visibility. Those things are more important than what percentage they’re going to give you.
Knowledge at Wharton: There are a number of songs in the movie. Initially you obtained musical clearances only for the festival circuit because it’s more economical at that stage — is that right?
Kerwin: Yes. That’s pretty typical, actually.
Knowledge at Wharton: But when you got the distributor, you had to go back and renegotiate for the broader rights. Because the film is already completed, doesn’t that put you in a bad bargaining position?
Kerwin: Horrific bargaining position. And you better know going into it that you’re going to be at a major disadvantage.
You have to weigh the pros versus the cons. In our case, we thought it was worth it, because the jazz in this film is so important to the storytelling. The songs aren’t just there as background. They further the story. When you have one of the two main characters who is a singer and she is singing these songs specifically to the other character in order to teach her lessons, we thought that if we had sound-alike songs, it would be pretty transparent to our audience.
So, we made the creative decision that it would be worth it to take the risk and include real jazz songs, negotiate for the festival rights and have clauses that say, “If this film sells to a distributor, both parties agree to negotiate in good faith for what those broad rights are.”
The problem is that “good faith” means different things to different people. When we finally got a distributor, one of the music licenses did not negotiate in good faith. And that song had to be cut and the film had to be re-edited for its commercial release.
Knowledge at Wharton: Why is music licensing such a morass for filmmakers?
Kerwin: The music industry is still stuck in the 1980s. The rights they sell are completely fragmented: theatrical, non-theatrical, digital, videogram — which means DVD — videotape, Blu-ray, laser disc. The videogram rights [are distinct from] the digital streaming rights or the digital download rights. If you want the right to screen your film in a hotel, that’s different than the right to screen the film in a movie theater. It’s an absolute accounting nightmare. Why are we defining these things as different when they’re really not?
Knowledge at Wharton: What’s the practical impact of all this for a filmmaker?
Kerwin: It makes it impossible to move quickly. The release of Yesterday Was a Lie was delayed not because E1 didn’t license the film from us, but because the song licensers took forever to agree to the cost and the release in all the various territories.
The rights are so fragmented. The people who own the rights to the song everywhere else in the world had no idea who owned the rights in certain Caribbean countries. It went on for, like, six months. And then finally, they said, “Oh, we found a piece of paper in a file cabinet in a closet that said we actually own them.” That’s how bad it is. It’s so fragmented. And it just takes forever.
The irony is that the companies are paying the lawyers to draft these contracts and sort through file cabinets to figure out who has the rights. In many cases, it’s costing them more to pay their lawyers to draft these complicated contracts than they’re making.
Knowledge at Wharton: Now that the film is available on DVD, what techniques did you use to promote it?
Kerwin: We didn’t have a marketing budget. E1 has their own marketing department that markets through their channels — magazine ads, online ads, catalogs to third-party DVD vendors, renting booths at Comic-Con and bringing in [actors from the film] like Chase [Masterson] and Peter [Mayhew] to sign at the booth and give out promotional fliers about the movie.
We also hired our own publicist to publicize the film before the DVD release. They sent out press releases, contacted the trades magazines and things like that.
Because we didn’t have much of a budget, you’ve got to work the social networking sites. I know that sounds clichéd, but you do. You have to do viral stuff. You have to use YouTube and Facebook and Twitter to your advantage. That’s how you generate interest.
Knowledge at Wharton: The film is now available through several channels — for download through iTunes, through streaming through Netflix, for purchase on DVD. What are the relative merits of each of these from a financial standpoint?
Kerwin: That’s difficult [to say]. Netflix streaming is a weird beast right now. It’s new and people aren’t quite sure how to deal with it yet. And studios definitely aren’t quite sure how to monetize it.
Netflix pays a flat license fee to the studio for the right to stream a film for one year. [The film] can be streamed an unlimited number of times by all Netflix subscribers. [Subscribers] don’t pay Netflix per stream and Netflix does not pay the studio per stream.
So it’s a weird gamble: If you didn’t sell the streaming rights to Netflix, would you sell more DVDs? Our entire fan base — tech-savvy people — is Netflix subscribers. They can now watch the movie for an unlimited number of times for free whenever they want to. Why would they buy the DVD?
You have to hope that you’re selling those streaming rights to Netflix for more than you would have made in DVD sales. Because — no doubt about it — it cannibalizes your DVD sales.
Paramount and several of the other studios just signed a deal with Netflix where Netflix has complete access to their entire library, but Netflix had to pay a fortune for it — and Netflix can’t release the films on streaming until three months after they’ve been on cable.
Knowledge at Wharton: The studios have forced Netflix to push back its release window in an attempt to protect DVD sales.
Kerwin: Everybody’s trying to figure out how that’s going to work monetarily. It’s not sustainable the way it is right now, frankly, because Netflix is giving away so much content effectively for free to their subscribers.
Netflix streaming now accounts for 20% of all landline Internet usage during peak hours in America. A massive amount of people are watching movies for free now. And that is why a lot of studios have been resistant to sell streaming rights to their new titles. They’re like, “Dude. We’re losing a fortune on it. Look at how many people are watching our stuff for free!”
This is not sustainable. It’s like a car dealership where you pay $10 a month and get an unlimited number of cars. That sounds great, but the roads are going to start collapsing pretty soon, because everybody’s going to keep taking more cars. And, after a while, the people who make the cars are going to say, “Wait. This isn’t worth it.”
Digital distribution is the wave of the future, but we’re not at the future yet. In order to get there, Netflix is going to have to jack up the rates that their customers pay and/or they’re going to have to limit the number of videos that a customer can stream per month — because the studios are going to start demanding higher rates. Otherwise, this is just going to implode.
The other problem is the streaming quality of Netflix videos. Netflix claims they stream in 1080p, which they do, but it’s so compressed. Buying an HD movie on iTunes, which is 720p, you’re going to see much higher quality than streaming it on Netflix in 1080p. Even a DVD, which is standard definition, is going to look just about as good or better than Netflix streaming. The other advantage of the DVD is you get all the special features like a commentary track. I’m very much an advocate of buying films on DVD rather than streaming them.
Knowledge at Wharton: In the case of Yesterday Was a Lie, who makes these distribution decisions? Is it E1, is it Helicon, is it you?
Kerwin: It’s all E1. This is an E1 film now.
Knowledge at Wharton: If it were under your control, would you not do the Netflix deal?
Kerwin: That’s a tough one. Netflix paid a nice sum for the rights, from what I’m told. But I don’t know if it is as much as E1 would have made in DVD sales. I have a sense that it’s not. We have run into a lot of people who say, “Oh, I’ll just watch it on Netflix streaming. I don’t need to buy the DVD.” That’s frustrating to hear.
Knowledge at Wharton: In a case like this, where you have a distribution deal with E1, do you get a percentage of the revenues from these channels — the DVD sales, the iTunes downloads, the amount Netflix pays — or do you get a lump sum from E1? How does that work?
Kerwin: Legally, I can’t get into the specifics of our deal. When a studio licenses a film from a production company, sometimes they pay an advance, sometimes they won’t. Sometimes they will cover costs to finish the film or the debts that were incurred on the film.
Theoretically, as far as percentage of DVD sales or streaming rights sales, the distributor’s not going to start giving the money back to the production company until they clear their expenses.
Knowledge at Wharton: In the world of Hollywood accounting, does that ever happen?
Kerwin: Yes, it does. There are distributors that are jerks. E1 is not. They have a reputation for being extremely transparent with their filmmakers. We know how much they spent on releasing the film, marketing it and manufacturing the DVDs. We know how much money they need to make back before they would give any money to us. In which case, that would go to our union percentages, residuals, and then deferred salaries and things like that.
There’s a whole other [issue] with royalty percentages that above-the-line talent often negotiates with production companies. You’ll hear cases where a writer will say, “In exchange for this screenplay, I want 10% or 20% of the production company’s net revenue from the project.” And then, inevitably, the writer will get nothing. He’ll sue them and people will say, “Oh, those jerks in Hollywood. They cook the books to make it look like they didn’t make any money.”
What people don’t understand is that the budget of a film is not the complete cost of making the film. There’s also P&A — which is prints and advertising. The cost of actually releasing the film is often double the budget.
Knowledge at Wharton: And in the case of your film, that is over and above the $200,000, which is just the production cost?
Kerwin: Right. The writer says, “That movie made $200 million at the box office, but they claim they never made any money.” Well, they didn’t make any money because they spent more than that on advertising and marketing the project.
Where they made their money was in DVD sales. So, if above-the-line talent were smart, in my opinion, they would stop negotiating for a percentage of theatrical box office net because there’s never hardly ever theatrical box office net. Even for big films, the theatrical box office is usually a loss leader for DVD sales. It’s an advertisement for your DVD. If writers who negotiated a percentage on the back end were smart, they would negotiate for a percentage of the gross DVD sales.
Knowledge at Wharton: Gareth Edwards, who directed the modestly-budgeted film Monsters, pointed out that there is a good business model for very inexpensive films like Paranormal Activity. If your film cost $10,000 or $20,000, you can easily make your money back. And if you’re a major studio and you’re spending tens — or hundreds — of millions of dollars, you can often make the money back through theatrical distribution and DVDs. It’s the in-between films — those in the low-hundreds of thousands of dollars — that are particularly challenging to monetize. But that’s exactly the space that you’re in.
Kerwin: You’re right, that’s the problem. If you’re making a $200 million blockbuster, the studio is going to put everything they can behind it, advertisements will be all over the place and you’re going to make money on DVD sales. With the theatrical box office, you’ll probably break even once the marketing costs are taken into account, even for huge films. But with DVD sales, you’re just making gold there.
[On the other hand,] Paranormal Activity will make lot of money because it only cost them $10,000 or whatever to make. But there’s no real business model for a $200,000, $500,000, or even a million-dollar film. It cost too much to make its money back from a small amount of DVD sales, but it didn’t cost enough for a distributor to put a huge marketing campaign behind it.
Knowledge at Wharton: Since DVD sales are decreasing and, as you’ve said, streaming models like Netflix don’t fill the gap monetarily, how will the industry sustain itself?
Kerwin: I don’t know. You have a two-pronged assault on the distribution model. One is the advent of streaming. The other is piracy. Those are eating up DVD sales. If the industry’s going to survive, the distribution model has to change.
[We need] a smarter way to monetize digital distribution. iTunes figured out a way to do it with music. Before the music industry collapsed under piracy, [Apple] said, “Make it easier to buy the song for $.99 than to search for it on BitTorrent.” They were successful, and the music industry — at least the artists — are recovering from that dip in the early part of the decade when everybody was afraid the music industry was going to collapse.
The film industry hasn’t had that happen yet. Yes, you can buy a movie on iTunes, but it is fairly expensive. And it’s competing with streaming on Netflix, which is effectively free if you have a Netflix subscription. Who’s going to buy a movie for $14 on iTunes if they can easily BitTorrent it or stream it for free on Netflix?
Knowledge at Wharton: Many of the early attempts of the recording and motion picture industry to stop piracy have not been successful. How should the movie industry respond to piracy?
Kerwin: The way to stop film piracy — and I know this is not a particularly popular idea with some people — is to allow ISPs to cut it off. We simply do not have the legal infrastructure to go after all those people, particularly when they’re in Eastern Europe or Sweden or wherever The Pirate Bay is.
You have privacy advocates saying, “That’s a violation of my First Amendment rights. Net neutrality, net neutrality, net neutrality.” A lot of people don’t like to hear this, but a lot of money is being pumped into the net neutrality lobby by companies like Google and Yahoo — companies that profit off piracy, to a certain extent.
And there’s no doubt about it, Google profits off piracy. They own YouTube. People put pirated content on YouTube and [the rights owner has] to find it and take it down. It takes them about 24 hours to take it down. In the meantime, thousands of people have watched your movie illegally and Google has sold ad space. Google has no vested interest in stopping piracy.
A lot of those companies have tricked people into thinking that net neutrality is about protecting your rights. But, to a certain extent, it’s also about letting pirates run free.
FedEx can scan your package to detect if there’s a nuclear weapon and stop it. You have to give your shipping service the right to detect if you’re shipping contraband. Otherwise, it’s going to become a huge black market. Piracy of movies is turning into a major problem. I don’t know how we’re going to get over it, unless we let ISPs block it.
Knowledge at Wharton: What are you working on next?
Kerwin: I don’t know what’s up next. I have a few scripts that I would like to explore. We’ve been so busy promoting Yesterday Was a Lie after the DVD release, that I haven’t really had time.
We are almost finished shooting a web series, a spin-off of Yesterday Was a Lie, where we spin off a couple of the supporting characters from the film into a seven-episode web series that’s going to drop [in the near future]. It’s been fun to explore those themes within the rules of physics that were established in the movie.
There’s a graphic novel that has been completed. Some pre-release copies were released at Comic-Con. It has not found a publisher yet, so we’re still looking for [one].
And then there’s also the CD soundtrack, which we’re hoping is going to come out [early in 2011].
We’re focused on all that right now.