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Part 3: Best financial performers

All the films are very different from each other in terms of story, style, budget, sales arrangements, how they attracted the revenue that got them into this hallowed list and more.

The Quick read

It was promised and here it is: the big reveal. Congratulations to the following 10 films for being the best financial performers in this commercial analysis of 94 recent independent Australian films:

1. Red Hill

2. The Babadook

3. Red Dog

4. The Sapphires

5. Predestination

6. The Rover

7. The Railway Man

8. The Dressmaker

9. Animal Kingdom

10. Tracks

The research very clearly shows the importance of international performance across the whole sample. In the case of this top 10, nine of the films principally recouped from outside Australia and New Zealand – the exception was Red Dog – and three of those nine got 100 per cent of their recoupment from abroad.

The measure used to judge which films are the best financial performers is the percentage of the film’s budget returned from revenues earned, net of commissions and distribution costs. While none of the films in the sample are in profit yet – some are very close – there are many companies and individuals that are receiving revenue and, in some cases, profits.

Red Dog

Red Hill comes up trumps

A film that went into production with the director’s friends, family and colleagues paying for the shoot and no sales agent or distributor attached is closest to returning its entire production, distribution and marketing costs and going into profit.

That film – drum roll – is Red Hill.

Very relevant here is the fact that Red Hill was made for comparatively little money so there is less to repay. The same applies to the second best financial performer, The Babadook. There are six films in the 94-film sample that cost less than Red Hill and 22 that cost less than The Babadook.

Ryan Kwanten in <em>Red Hill</em> Ryan Kwanten in Red Hill

The top 10 films that are closest to going into profit (as of 14 March 2017) – second drum roll – are, in descending order:

  1. Red Hill

  2. The Babadook

  3. Red Dog

  4. The Sapphires

  5. Predestination

  6. The Rover

  7. The Railway Man

  8. The Dressmaker

  9. Animal Kingdom

  10. Tracks

The whole point of this analysis was to hone in on the overall financial success of recent independent Australian films. Financial success goes to the heart of industry and individual sustainability and survival but it is an aspect of the business that’s very difficult to get reliable data on.

Along the way, to provide context and open up discussion, three key indicators were examined, being Australian cinema performance, international cinema performance and international post-financing-sales. Eight films excel on either two or three fronts when these three indicators are applied to the 10 best financial performers. The exceptions are Red Hill and Red Dog.

(Screen Australia is an investor in all the films in the 94-film sample. It provided completion funds to Red Hill at a level that would now, as a result of a change of policy, be regarded as a grant. This means Red Hill would be excluded from this research today because only films with investment from the government agency are being examined. Screen Australia provided 23 films with grants in the three years up to 30 June 2016. In 11 cases the funds were for completion. Funding of $500,000 or less is regarded as a grant. Grants for completion are now capped at $250,000.)

From a business standpoint, film production is a long game. This list reflects a moment in time and in the months and years to come all the films will continue to attract revenue and jostle for position. Some will go into the black. Some will be pushed out of the top 10 by newcomers.

Quality is not causal but ….

So what do the 10 films have in common?

Deciding if they’re all great films or films with enormous appeal, irrespective of how much money was thrown at their release, is very subjective but the At The Movies website shows that both Margaret Pomeranz and David Stratton gave eight of these films either four or four and a half stars. (Red Hill scored three and a half and four stars and At The Movies was off air by the time The Dressmaker was released.)

Matthew Goode in <em>Burning Man</em> Matthew Goode in Burning Man

Be very wary of jumping to the conclusion that good films will do well financially though: Burning Man, A Few Best Men, Not Suitable for Children, Oranges and Sunshine and Wish You Were Here also pleased both the king and queen of Australian film criticism just as much but have much less right to brag about financial performance.

What could be said though, is that a film probably has to win critical acclaim if it is to perform financially. In other words, quality is common but not causal.

While that may sound obvious, critical acclaim is very different to spin. Consider the case of a film in post-production that sells exceptionally well off a promo reel at an international market but then doesn’t live up to the promise of the sales or the resultant news coverage. The film may have left the impression that it is a great film but if it fails to excite critics and audiences and attract ancillary sales it may well struggle financially.

Getting overseas attention has more impact than local buzz

This analysis very clearly shows that a strong international performance is much more important to the bottom line than a strong local performance – the world is a big place after all. By way of example, of all the recoupment attracted by all 94 films in the sample so far, 27 per cent comes from Australia and New Zealand (ANZ) and 73 per cent from the rest of the world (ROW) – due more to the volume of international sales than sale prices.

Only one of the top 10 financial performers didn’t fit this rule of thumb. In three of the nine cases that did, 100 per cent of the recoupment flowed in from abroad, meaning that the revenue from ANZ has not yet been enough to cover ANZ distribution and marketing expenses.

Of the top 10 financial performers: The Sapphires, The Railway Man and The Dressmaker are in both the top 20 in Australian cinemas and the top 20 in international (including New Zealand) cinemas; and whereas only one other film, being Red Dog, is also in the Australian list, five others are in the international list.

Scoring a US distributor with grunt is good news

Anecdotally, overall commercial success rests on whether a film sells into North America because very high prices are sometimes paid for the rights in this territory.

A lot also rests on which company handles US distribution. It is probably no coincidence that three of the top 10 financial performers – The Sapphires, The Railway Man and Tracks – were distributed by The Weinstein Company and three by Sony companies or companies associated with Sony, namely Red Hill, Predestination and Animal Kingdom.

(Everyone serious about the feature film business is carefully watching the video on demand services Netflix and Amazon. They are likely to have a very big impact on financing, revenues, recoupment and profit potential over time. Amazon bought US rights to The Dressmaker.)

Talent escalation can be good for the bottom line

Four of the 10 films had first-time feature directors being Patrick Hughes (Red Hill), Jennifer Kent (The Babadook), Wayne Blair (The Sapphires) and David Michôd (Animal Kingdom). Every one of the films brought those directors a lot of attention from abroad.

Screen Australia takes talent escalation seriously but pinpointing the overall financial performance of films principally backed for this reason is tricky and not attempted here.

Here are the five runners up

Credit where credit’s due: the following five films only just missed out on a place in the top 10:

Sam Worthington and Ed Oxenbould in <em>Paper Planes</em> Sam Worthington and Ed Oxenbould in Paper Planes

  1. These Final Hours
  2. Paper Planes
  3. Oddball
  4. The Hunter
  5. Life

The films were financed from these sources

The Australian feature films in this analysis were financed using some or all of the following:

  • The federal producer offset (PO) which is worth up to 40 per cent of qualifying Australian production expenditure. The PO is generally cash flowed into the production budget via a loan. It is paid after the completion of the film.
  • Direct investment from federal and state film agencies. For info on what Screen Australia offers see here
  • Distribution guarantees (DGs) from the ANZ distributor and from the rest of world (ROW) sales agent. DGs are also called MGs or advances, are made against anticipated revenues and are cash flowed into the budget.
  • Presales which, again, are cash flowed into the budget.
  • Private investment, from both inside and outside the film industry.

Banks and other lenders can generally be found to cash flow presales and sales estimates but usually only when a couple of presales are in place to prove the validity of the estimates. Some sales agents are very good at preselling; others have different priorities. Sales made when a film is still in production or post are also called presales but do not contribute to the financing. Information on the film sales business can be found here

Here’s how financial performance was judged

The measure used in this analysis to judge which films are the best financial performers – at this stage – is the percentage of the film’s budget that has been returned from revenues earned, net of commissions and distribution costs.

Let’s spell this out with a simple example. A film is sold to the US for $2 million at a high-profile film festival. If the sales agent’s commission is 25 per cent ($500,000), the marketing costs and expenses and the CAM’s collection fees are $400,000, this leaves $1.1m from which to repay the various contributions to the budget. The sales agent is usually in first position to claim back any distribution guarantee (DG), say $600,000 (the average DG for the 55 films with ROW DGs is $665,000) which leaves $500,000 to share amongst the next in line in the recoupment waterfall. This is usually the banks/lenders and then on to the equity investors. So if the film cost $10 million then the recoupment to budget is 11 per cent.

Revenue flows to many players. These might include:

  • gap financiers and some other lenders
  • distributors
  • sales agents
  • equity investors including government film agencies
  • producers and other parties with an entitlement to the producers’ net profit.

Those not interested in financial detail could go to part four to read interviews with the producers of the top 10 financial performers.

The Sapphires

The numbers behind the top 10 financial performers

Every film is financed differently; it wouldn’t be inaccurate to say wildly differently. Read on for aggregated data on the performance of the top 10 films, on aspects of their financing – and on how those performances and deals stack up against the whole sample.

The average percentage recoupment of the top 10 financial performers was nearly 60 per cent as of 14 March 2017. The average across all 94 films in the sample was 16 per cent. Four of the 16 per cent came from ANZ; the rest from ROW.

It would not be sensible to read too much into that 16 per cent: while it is quite true that some films will have negligible returns over their lifetime, others have only been on the shelf for a few months. Also, from Screen Australia’s point of view, culture, practitioner development and industry sustainability drives investment decisions in addition to potential profit.

At this stage, post-financing sales revenue for the top 10 ranges from $1.2 million to $6.8 million, with the average being about $4 million. The average across all 89 films that have so far earned post-financing sales revenue is $1.5 million.

  • Budgets: Putting aside one outlier, the budget range of the whole sample – $580,000 to $21.6 million – is only slightly wider than the budget range of the top 10 financial performers. It is not possible to provide the budgets of the top 10 films because several of the producers would not agree to it. But three were budgeted below about $5 million, three cost between $8.5 million and $10 million, and four cost more than $12 million. Eighteen of the 94 films cost more than $12 million. The average budget of the 10 films is nearly $10 million and the average of all 94 films is $6.86 million.
  • ANZ DGs: On the top 10 financial performers the ANZ DGs range from nil (one film) to nearly a million dollars. Excluding the film without a DG, the DGs of the top 10 range from 2.8 to 8.2 per cent of the budget with the average being five percent – in dollar terms the average is $540,000. Across the whole sample the range is nil to $2 million and the average is lower: $320,000 across 83 films with DGs, with the median being $200,000. (Excluded are films that either didn’t have DGs or the DGs were part of multi-territory deals and the value of just the ANZ rights is unknown.)
  • ROW DGs: On the top 10 financial performers the ROW DGs range from nil (two films) to $3.4 million, one of the biggest DGs in the sample. Excluding the two films without DGs, the DGs range from 3.1 to 27.3 per cent of the budget with the average being 12 per cent – in dollar terms the average is $1.125 million. The two excluded films are among the most expensive that Screen Australia has invested in and the most successful at attracting presales. Across all 55 films with ROW DGs the average is $665,000 and the median is $300,000. (Again, films that are part of multi-territory deals are excluded.)
  • Presales: Presale revenue ranges from nil to $7 million for the 10 best financial performers – and this range applies across the whole sample too. Two of the top 10 financial performers didn’t have presales; the average for the remaining eight is $1.66 million. The average across all 32 films with presales is about $1 million.

Note that Screen Australia has access to all the distribution and marketing costs of all 94 films and to how much revenue is going towards commissions, but not in a form that is accessible and aggregated.

Just because a film is financially successful, doesn’t mean that all the equity investors share in that success equally. It depends on what type of finance was used to greenlight the film, the risk associated with that finance and the cost involved in sourcing it – because that’s what determines who sits where in the recoupment waterfall.

Equity investors in Australia are generally government agencies and private investors. Producers are also assigned equity – effectively an ownership position in the film – via the PO. In many situations the film returns that go to each investor are, quite simply, in proportion to the size of that investor’s equity. Screen Australia prefers producers to get a share of revenue in proportion to their equity but is comfortable if the producers use their equity to attract finance by offering genuine private equity investors an accelerated recoupment position. However, Screen Australia strongly advises producers not to give away all their equity.

About 58 films in the 94-film sample have private investors and on about 28 of those films there are investors not associated with the film industry. It would take more research to show how many of these investors are now earning profits.

To read interviews with the producers of the top 10 financial performers go here

To see exactly what films are in the sample go here