Up until 2008, it was not easy to finance an independent film but, with the right script, stars, and director, the entire budget could be borrowed from banks on the strength of pre-sale agreements.
What had made this business model work then was the likelihood the film had of getting meaningful distribution in the U.S. domestic market (which includes Canada). Most of the better financed indie distributors, such as Miramax, New Line and Paramount Vantage, were owned by the major studios that had bought these companies for, among other reasons, to expand their DVD shelf spaces at WalMart and other retailers.
Their willingness to make commitments to distribute movies domestically had a great advantage overseas: it greatly increased the value of pre-sales, since foreign distributors benefitted from the buzz and publicity from an American opening. Indie producers also could rely on domestic market to get a substantial part of their financing.
Prior to 1990, they could get over 50 percent of their movie financed based on the value of the domestic market. Even though the value fell as distributors’ cut their commitments in the 1990s, the domestic market could provide a producer with 20-30 percent of his budget as late as 2007. And with that keystone in place, a producer could get the balance from foreign pre-sales and government subsidies.
This formula was not perfect, but it allowed indie producers to make such award winning films as "The English Patient," "Traffic" or "Babel." In 2008, however, the value of the American market virtually disappeared for the purpose of financing a movie. As one top producer told me in late 2010, ”It is now zero.”
What caused this sudden decline was the closing of most of the studio-backed specialty distributors. Within the space of a few months, New Line Cinema, Miramax, Fine Line Features, Picturehouse, Warner Independent Films, Fox Atomic and Paramount Vantage shut down. Most of the remaining ones sharply cutback on making advance commitments. The causes of this cratering ranged from faltering DVD sales in large retail chains to the ending of output deals by HBO and other Pay-TV channels.
The result was that indie producers had to base their ability to borrow money almost entirely on the foreign market. Yet foreign distributors then greatly reduced the amount they were willing to commit because they could no longer be confident that indie films would have the publicity and hype that goes with an American release.
Making matters worse, three of the top seven markets, Japan, Spain and Italy, sharply cut back on making pre-sales deals. So it was nearly impossible for a producer to assemble enough pre-sales in the remaining major foreign territories -- Germany, Britain, France and Australia -- to finance the film.
Even so, in theory, it was possible to raise the additional funds through government subsidies and tax shelter (which can provide 30 percent of the budget.) In reality, however, both pre-sales and subsidy agreement are just pieces of paper.
