The movie business fears a future of declining ticket sales and revenues, but these entrepreneurs are determined to flip that script.
By: Graham Winfrey
Shaking up the U.S. movie business with an innovative startup is like trying to make it as an actor. Your odds are so low that it can seem foolish to even try.
While startups like Kickstarter and Indiegogo have helped celebrities fund some low-budget projects, such as Zach Braff’s Wish I Was Here and Spike Lee’s Da Sweet Blood of Jesus, crowdfunding has yet to have a significant impact on the industry.
Why? Hollywood’s long-running assembly line, which churns out movies by attaching cast and crew to film scripts, continues to serve the industry well. Changing the way this business manufactures its products is–at least for the time being–close to impossible.
After production wraps, however, the opportunities for innovation begin to present themselves. In the same way that digital video has replaced celluloid in the cameras used to shoot movies, digital technology is transforming the way films are distributed.
“There is no question that the theatrical distribution model is about as inefficient as any [business model] that exists,” says film producer John Sloss, “both in terms of knowing who the audience is and filling seats.” An entertainment industry multi-hyphenate with experience in virtually every aspect of the business, Sloss has worked in movies as a lawyer, producer, distributor, and financier, on films ranging from Boyhood to Exit Through the Gift Shop to The Fog of War. After starting New York-based film advisory firm Cinetic Media in 2001, Sloss has gone on to found digital distribution companies FilmBuff in 2007 and Producers Distribution Agency in 2010.
One problem with the theatrical distribution model is that movie studios spend hundreds of millions of dollars every year promoting films–the largest fixed cost that comes with releasing a movie–without having any real way to target their marketing efforts. Until studios can gain better insights into specific consumers’ film preferences, the “spray and pray” advertising model seems to be the prevailing strategy.
One startup trying to solve this problem is San Francisco-based MovieLaLa, which operates as both a social network for film fans and a marketing platform for movie studios.
Founded in 2013, the company sends text messages and emails with movie trailers and other promotional content directly to users based on their specific film tastes. Part of the lure for consumers is getting a first look at movie previews and other early clips of unreleased films. For studios, MovieLaLa’s data and analytics help with things like seeing which video ads users are watching and which they’re closing out of early.
“The studios need to know about their customer and their customer behavior, and as the younger generation moves into the iPad and mobile space, that really should become more of their focus,” says MovieLaLa co-founder Dana Loberg.
Armed with data on which ads generate a better response from viewers, studios can custom tailor their marketing and social media campaigns, according to Loberg.
“Based on how the first teaser trailer does and how people are engaging with it, they can modify or change other trailers,” she says. “Amazon and eBay are masters of recommending products for you to buy, but when it comes to film, you don’t know, because so much of it is traditional, like a random commercial or a banner ad on Yahoo.”
MovieLaLa has raised more than $1 million in funding from investors including Salesforce CEO Marc Benioff and Machinima co-founder Allen DeBevoise. The eight-person company has more than 1.4 million users and is generating revenue from partnerships with four major studios: Paramount, Universal, Legendary, and Skydance, a production company founded in 2010 that co-produces and co-finances movies with Paramount Pictures.
“At Skydance, we can’t build a premiere, next-generation studio if we do not remain constantly open to exploring new platforms that help us create better experiences for our audiences,” says Jesse Sisgold, COO of Skydance Media.
While it’s too early to know how much studios will actually benefit in the long term from partnering with MovieLaLa, the fact that their marketing departments are using the service is a form of validation, argues Loberg. “It shows that there is change that’s happening,” she says.
A new revenue stream
One of the greatest new opportunities in the movie business has nothing to do with the marketing, distribution, or theatrical exhibition of films.
Since 2009, Los Angeles-based startup Zefr has been generating revenue off of film clips posted on YouTube by fans who don’t own the rights to the content.
Instead of forcing these individuals to take down “pirated” videos posted online, Zefr arranges for advertisements to play before the clips, creating a revenue stream it splits with the studios and media companies that own the rights to the content.
Founded as Movie Clips in 2009, Zefr rebranded in 2012. The company had recently expanded into music, sports, and television content, and needed a name that wouldn’t associate the startup just with movies. In addition to handling rights management for studios such as Universal and Warner Brothers, Zefr generates revenue from videos posted online for brands including Adidas, Nike, and American Express. The company has 270 total employees across its four offices in Los Angeles, New York, Chicago and Provo, Utah.
In order to find film clips posted online, Zefr built proprietary technology that works within YouTube’s content ID systems to track down movie footage.
“We knew we were onto something when the anti-piracy guys at the studios said they we’re getting exhausted by all of the whack-a-mole activity,” says Zefr co-founder Zach James, who previously worked as an investment banker at Credit Suisse.
Zefr has raised roughly $60 million in funding, half of which came via a Series D round last year led by Institutional Venture Partners, an investor in Dropbox, Snapchat, and Twitter. The investment reportedly valued the company at between $250 million and $500 million. Other investors include U.S. Venture Partners, Shasta Ventures, and First Round Capital.
Today, Zefr manages roughly 275 million online videos and tracks more than 31 billion videos per month. In addition to selling advertisements against video clips, Zefr also analyzes its data to build intelligence about its clients’ fans. In September of 2014, the company acquired social-media advertising startup Engodo, which helps brands partner with the people posting videos and other content on Vine, Instagram, Pinterest, Snapchat, YouTube, Facebook, and Twitter.
A Priceline for movie tickets
Even if movie studios can generate new revenue streams from video ads, they still struggle with declining ticket revenues. U.S. ticket sales have fallen 20 percent since 2002, from $1.58 billion to $1.26 billion last year, according to movie-industry data site The-Numbers.com.
One startup trying to reverse this trend is Los Angeles-based Dealflicks, which describes itself as “Priceline for movie tickets.” Founded in 2012, the company partners with theater chains to offer discounts on tickets and concessions. The discounts can run as high as 60 percent, and Dealflicks charges theaters between 10 percent and 20 percent of ticket sales. That may seem like a tough sell, but consider that 88 percent of movie theater seats are left empty every day, and the proposition for theater owners becomes compelling.
Today, Dealflicks has partnerships with more than 500 theaters across the U.S., but getting those customers was not easy.
“It’s a very old-school industry, so you need to get in there and get some face time to execute a deal,” says Dealflicks co-founder Kevin Hong, who spent more than two years driving around the country in a van to meet face-to-face with theater owners. It took Hong almost a year to sign up Dealflicks’ first 100 theaters, but since then, the rate of new partnerships has been accelerating. The company’s revenue grew from $245,000 in 2013 to nearly $1.4 million last year.
Part of the inaugural class of the Warner Brothers startup incubator Media Camp (Disney runs a similar program called Disney Accelerator), Dealflicks has raised $2.9 million from groups including 500 Startups, Siemer Ventures, and Be Great Partners. The 10-person startup has a common investor with MovieLaLa in Larry Braitman, a founding investor in social movie site Flixster.
Dealflicks plans to use its data to help predict attendance and collaborate more closely with its theater partners to optimize discount offerings. It also intends to spread into Canada and other international markets. Though the company has yet to reach profitability, Hong expects the business to turn a profit before the end of 2015.
Appetite for curation
When it comes to the digital distribution of movies and TV shows, few companies have been as influential as Netflix. While the company’s massive library of titles has helped it dominate the streaming video market, smaller streaming companies are winning market share by offering movies and TV shows not available on Netflix.
One such company is Mubi, a video-on-demand subscription service founded in 2007. The company has dual headquarters in London and San Francisco, with offices in Munich, Mexico City, and Istanbul.
Mubi adds one new film per day to its library and offers each of its titles for 30 days, so at any given time there are 30 films to choose from. The monthly fee is $4.99 in the U.S., €4.99 in Europe, and £2.99 in the U.K.
Mubi operates on the premise that too much choice actually frustrates customers, many of whom prefer to have quality films chosen for them.
“There is so much content available nowadays that it can be overwhelming,” says Mubi founder Efe Cakarel. “The more you have, the harder it is to choose, so we curate.”
The company has raised $20 million in funding, almost entirely from individual investors, including former Goldman Sachs co-president Jon Winkelried, tech investment firm Silver Lake’s Simon Patterson, and film producer Eric Fellner, co-chair of Working Title Films.
Mubi is available in 200 countries online and for iOS, Android, PlayStation, Samsung Smart TVs, and Amazon Fire. As of January, the streaming service had been downloaded more than 5.5 million times.
One of the keys to Mubi’s business model is its ability to keep acquisition costs low.
“We only need to license 365 films a year per territory and negotiate in 30-day windows,” Cakarel says. (The “windows” refer to the 30-day periods during which Mubi is allowed to stream each movie.) “For the rights holder, it means they can still exploit other revenue streams and not fear cannibalization.”
With so many constituencies of film fans hungry for a wide variety of films across subject matter and geography, the opportunity for new curated streaming companies seems significant.
While Mubi is not yet profitable, Cakarel says he sinks every dollar of revenue back into the business, a strategy he says he’s borrowing from Amazon founder Jeff Bezos.
“I think it’s more important to be able to prove that a model is working, that you can see revenue, and that you created something that people find valuable,” he says.
Back to the future
Though Silicon Valley-based startups like MovieLaLa and Mubi seem poised to help change the way films are marketed and distributed, it’s still early days in terms of the digital revolution’s impact on Hollywood. Why? The bulk of marketing and distribution revenue continues to come from traditional channels, according to Marc Schiller, founder and CEO of New York-based marketing and distribution company Bond Strategy and Influence.
“The future might be in a lot of the innovation that’s coming out of Silicon Valley,” Schiller says, “but that doesn’t mean that the current revenue is there.”
While Hollywood executives may be waiting for the money to catch up with the technology, the major change that has already reached every corner of the movie business is the transition to digital consumption.
“The theatrical experience is still an important part of the mix, but it’s viable for fewer and fewer films,” Schiller says. “Audiences know that through their mobile device they can access anything they want, and I think we have to shift towards that being the reality.”
So do more opportunities exist for startups to save Hollywood from the outdated studio system? Producers Distribution Agency’s Sloss says the answer is yes, so long as entrepreneurs can partner directly with artists.
“If the 20th century was about the studios, which controlled the physical plant and the financing and the distribution, to me, the 21st century is going to be about the talent,” he says. “That’s what the future is about.”