I noticed an article this morning in the Hollywood Reporter about the purchase of HSN by QVC.  This brings me back to my thoughts that it is perhaps easier to make money selling things through programming than it is to sell advertising for things through programming. 

The reason QVC works is because they've brought the programming closer in space and time to the purchasing decision.  And what gets even closer than QVC?  Digital media, where one click starts the object of your desire on its journey to your mailbox (or front doorstep assuming you desire something that won't fit into your mailbox).

This is why I think Amazon is the big dog - quality original programming and selling lots of stuff.  That's the winning combination.  Entertain people and make money selling them stuff - not just motivating them to go buy stuff somewhere else.

There are other companies who have had this vision for a long time as well.  Overstock.com talked about aggressively pursuing original programming over 2 years ago (not sure what happened there).  And Joyus.com is a well-funded venture combining programs and commerce (although it feels like a lot of short infomercials to me).  I even heard that Etsy wants to be in the programming game.

In truth, I think the real players in this space have yet to emerge.  They probably have some little web series on YouTube that will suddenly (after years of trying) break out and start driving sales.  The key is to make money off of the commerce that they're driving because people will continue to buy stuff, but they won't continue to pay much for programming.

And of course, the platform to focus on is mobile.  That's where the Internet is moving and that's increasingly where digital programming and commerce will continue to grow.

Once you have determined that you have been presented with material and a team in which you'd consider investing, it is time to get down to the brass tacks - what is the deal that is being offered? Does it make sense? Does the potential upside justify the risk you are being asked to take? How can the deal be improved?

It is important to remember that your primary goal in film investing is to manage risk. We certainly want deals that give us the opportunity to make a lot of money, but do not be tricked into focusing on the potential returns. The producers will likely present you with a list of films that they claim are just like their movie and which made a lot of money. They will present that as the reason you should invest, but for the most part this argument is completely irrelevant. The success of those films offers no real indication that this film will have the same success.

Instead, you should look at the deal and ask what happens if things go badly. In a sense, you are asking not only about their plan for the film but also their Plan B - the back-up plan. What steps are they taking to mitigate the negative impact of the unexpected? Obviously they will have production insurance to cover casualties and calamities (if they don't, you should run away as quickly as possible), but you also have to look at whether there is a completion bond, whether they have any traction for potential distribution of the film once it is completed, whether they will have the cooperation of the stars in promoting the film. What is the distribution plan for the film and is it realistic, and perhaps more important, what could cause that plan to fail and what will they do if it does?

The other extremely important part of looking at Plan B is to consider the actual form of investment that is being offered to you. Are you getting a security interest in the film to protect your investment? Where do you sit in the priority of payouts - the so-called "waterfall?" Who is in front of you in the waterfall and how much are they getting back before you get your money? If you are being asked to assume a higher degree of risk, does your ultimate return in the event of success exceed that of lower-risk financiers, and by how much? Is it fair? More important, is it a risk-reward profile that you are willing to accept, or would you rather lower your risk in exchange for giving up some of your potential returns?

The only way this can be answered is with a realistic projection of how funds will be distributed under various scenarios ranging from worst case to likely case to best case. Frankly, most producers are not competent at creating these projections, and they have a built-in motivation to be more optimistic than what may be warranted. In order to prepare a projection of various scenarios with any degree of accuracy, there must be a fairly detailed understanding of the distribution process, collection accounts, residuals, and contracts. This requires a lot of experience and most of the people in the independent film space simply do not have that level of knowledge (although certainly many of them do).

So, if you are investing any amount of money that is a serious investment for you, you need to talk to other people with industry experience and get their take on the project. You should also get professional help from someone who has real experience with these types of investments and knowledge of the current market. As with any investment, knowledge is your friend and independent analysis of the claims being made is critical.

I'll continue with a discussion of various specific deal structures in the next installment.

​Roger Goff

I noticed an article in the Hollywood Reporter this afternoon about layoffs at New Form Digital - the digital media partnership between Discovery Networks and Imagine Entertainment. This followed another article about cutbacks at Heat Street, a digital media business owned by News Corp.

There are various reasons that businesses fail, but this got me thinking about the digital media industry in particular. While most participants still express enthusiasm for the potential of so-called "new media" (really not so "new" anymore - people have been trying to make money on the Internet for over 30 years already), it obviously is taking much longer than anticipated to become a fruitful industry. The obvious question is "Why?" The likely answer is that, as with so many pursuits, its biggest strength is also its biggest weakness.

Digital media would appear to have tremendous profit potential because digital distribution is so inexpensive, but therein lies the problem. Because it is so easy to publish digital media (through YouTube or any other of thousands of outlets), there is no barrier to entry. That creates an essentially infinite amount of content. Basic economic theory tells us that if there is an infinite amount of something, then it has no value.

This means that only the tiny fraction of content which attracts a very large audience has even the slightest chance of making money. And that means the real value is in making superior content and then marketing it in a way that causes it to rise above the endless sea of other programming. First-rate content producers and superior marketing are not inexpensive. So digital media is really a business where you need to spend the same kind of money as in traditional media, but then fight your way out of a limitless crowd of inferior competition. That's actually less attractive than traditional media where there are at least natural barriers to entry that keep most of the inferior competition off of the playing field.

The other problem is that in this endless barrage of messages and images that all of us confront every day, advertising becomes mostly ineffective. We simply see and hear too many things to pay any attention to most of it. We are tuned out most of the time. So ad-based models become less attractive as potential advertisers realize that they are not seeing a return on their investment most of the time because no one is really paying attention.

Personally, I think one possible solution is to tie media more closely to purchases that people are already inclined to make. This is at the heart of the Amazon vision and business. They make their money from selling things, not just from media and advertising. That's why Jeff Bezos is about to be the richest man in the world and that's where the media business should be looking for its inspiration. Media needs to be integrated into the normal chains of commerce. Attracting eyeballs to try to sell your ability to influence them in some way is becoming an increasingly difficult business, and that is not likely to change.

Comments? I'd love to hear your thoughts.

Roger Goff