A Shift in Power: Apple’s Oscar Winning Purchase Could Put Independent Film in the Driver’s Seat

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In late March, “CODA” won Best Picture at the 94th Academy Awards, becoming the first film distributed by a streaming service to win the prestigious award. While it was a historic night for Apple TV+ and the streaming industry, the significance this win had for the independent film market must not go overlooked either. Around 14 months prior to winning Best Picture, “CODA” premiered at the 2021 Sundance Film Festival, where Apple acquired the distribution rights for a festival record $25 million. The purchase caused ripples in the independent film community, both because of the expensive purchase price and the invasive nature of the worldwide distribution deal imposed by Apple.

To the dismay of independent distributors, streaming services have become prominent buyers in the independent film market, raising the demand for and prices of premium content. Demand at film festivals has quantifiably increased in the past few years. From 2019 to 2021, the record for the most expensive acquisition has been broken each year. In 2007, which is regarded as a pre-Great Recession peak for independent film, no movie was acquired for more than $10 million despite a thriving independent box office. However, from 2019 to 2021, there were eight films sold for more than $10 million at Sundance, as well as two sold for more than $20 million (“Palm Springs” and “CODA”). Additionally, seven of the eight acquisitions were made by streaming services, with Amazon and Apple being the most prominent buyers. In 2022, two more films have sold for more than $20 million already, both to streaming services (“Goodbye Yellow Brick Road” and “Nightbitch”). At the moment, there is no better time to be an independent film financier and no worse time to be an independent film distributor.

Independent Film Sales and the Importance of Pre-Sale Agreements

The modern independent film market took form in 1978, when Sterling Van Wagenen, Charles Gary Allison, and Robert Redford founded Utah/U.S. Film Festival, which later became the Sundance Film Festival. The festival was founded with the goal of showcasing the potential for independent film. Between Sundance and the Toronto International Film Festival (TIFF), which also formed in the late 70’s, independent film slowly grew as access to the market increased. Since then, film festivals have transformed from collections of independent filmmakers showing off their work to fully functioning marketplaces that oversee millions of dollars’ worth of sales.

Independent films have historically found funding through equity financing and a patchwork of pre-sale agreements, tax incentives, and bank loans. Traditionally, pre-sales would happen at major film festivals like the Berlin International Film Festival, the Cannes Film Festival, and TIFF, and at events like the American Film Market. A pre-sale would involve selling territorial distribution rights of an unfinished independent film to a foreign distributor committing a fixed dollar amount (an advance or a minimum guarantee) once the film is finished. Typically, upon signing the pre-sale agreement, the distributor would pay 20% of the agreed amount upfront, but a producer can then leverage the agreement with a bank to secure additional financing against the remaining unpaid portion of the contract. Pre-sales have functioned like this for decades, with distributors taking on the risk of a film while reaping the rewards that might come from a financially successful movie.

Apple’s Unconventional Acquisition

Around the same time as Apple’s acquisition of “CODA” in early 2021, Netflix paid $18 million for the Liam Neeson thriller “The Ice Road”. Because the film had been pre-sold internationally, Netflix could only acquire domestic distribution rights. Similarly, Netflix acquired the North American and Latin American distribution rights to “Operation Mincemeat” but could not purchase other territories. With both acquisitions, Netflix worked around pre-existing distribution agreements and came out with distribution deals for high-demand content without stepping on any toes and disrupting the international distributors who helped fund the films. Because of the disruption from streaming services, it has become difficult for independent distributors to compete with Netflix or Amazon in an open market for a finished film. Independent distributors are more often getting involved in a film’s life cycle at earlier stages in hopes of maintaining a competitive edge over streaming services.

However, unlike Netflix, Apple struck a $25 million deal meant to cover more than 100 countries, including countries where the film had already been pre-sold. Apple then planned to execute a “kill fee” for each pre-existing distribution contract, buying back the territorial rights from the distributors who bought the film during the earlier pre-sale stage. Apple was banking on distributors cooperating with them in its attempt at worldwide distribution, but some held out. Companies like Nordisk Film, who acquired the distribution rights nearly two years prior to the premiere, refused to accept the kill fee and continued to release the movie in their territory. According to a domestic theatrical acquisitions executive, Apple’s biggest blunder was that “nobody ever called these distributors before the Apple deal was announced”, which led to animosity from foreign distributors.

Despite major distributors refusing to cooperate, Apple has still significantly benefited from its acquisition of “CODA”. Apple TV+’s subscription numbers grew 25% in the week following its Best Picture win at the Academy Awards. This was a big deal for a streaming service that had been struggling to grow at the same rate as its competitors. The benefits of the $25 million investment outweigh the complications with foreign distributors that followed the acquisition. Apple has now set the standard for how much a streaming service can benefit from ambitious and expensive acquisitions in the independent film market, which will only work to further increase the demand for and value of independently produced premium content.

Apple’s acquisition of “CODA” at Sundance changed how the profitability of independent films are viewed and disrupted the international distribution business. Following Apple’s aggressive kill fee strategy, discussions have started about adding in a potential buyback clause in distribution agreements where pre-sales are executed. The theoretical buybacks would involve independent distributors being forced to accept a kill fee if worldwide distribution rights are purchased once the film is completed. International distributors are angry and concerned by this idea, and rightfully so. While being entirely hypothetical, a mandatory buyback clause would leave international distributors with all the risks and less opportunity to capitalize on the success of a movie, creating less incentive to pre-buy a film.

Streaming Services Have Opened a Door for Independent Films

Former Disney senior executive Kevin Mayer recently spoke on a panel at South by Southwest, discussing his partnership with The Blackstone Group for his new venture, Candle Media. Since August 2021, as the Co-Founder and Co-CEO of Candle Media, Mayer has directed the company to acquire independently produced premium content, stockpiling IP from atypical places. Its first acquisition valued Reese Witherspoon’s Hello Sunshine at around $900 million, followed by the acquisition of Cocomelon IP holder Moonbug, which valued the company at a staggering $3 billion.

Mayer explains that The Blackstone Group-backed Candle Media has made these expensive acquisitions because the inter-studio dynamic has changed since the introduction of in-house streaming services. Before nearly every studio had a streaming service, studios would sell content to each other. Today, most studios have an in-house streaming service, providing a post-theatrical life to a movie without selling the distribution rights, and providing an alternate distribution platform for content. Companies like Netflix are now deprived of this previously available content and are aggressively looking to purchase premium content from new sources. With most studios now keeping the majority of their content in-house, independent producers are the only available option for original content. This shift has skyrocketed the demand for independently produced premium content, displayed by the record-breaking purchases seen at film festivals.

Mayer has discussed that despite the collection of premium content and IP Candle Media owns, they have no interest in creating a streaming service. Candle Media will instead continue to invest in and create content designed to sell rather than attempt to build a platform to compete with the major streaming services. Candle Media’s thesis is dependent on the lucrative distribution deals that major studios and streaming services are willing to offer. A company with a similar ideology is Sony, which is now the only studio without a major streaming service. In April 2021, Sony announced a deal with Netflix for an undisclosed amount. After the home entertainment window closes, which could take up to 18 months, Netflix has an exclusive streaming window for all of Sony’s theatrical releases. While Sony is far from an independent producer, this deal shows that streaming services are willing to go to great lengths for premium content and that Candle Media’s thesis comes with merit. Netflix is willing to spend exorbitant amounts to acquire premium content for its platform despite the wait because they know the value of content ownership in the long run.

Two years ago, many thought the independent film business was on its way out. However, recent trends have forced major studios and streaming services to pursue independently produced premium content aggressively. Streaming services and independent distributors are getting involved in financing films at an earlier stage and are willing to pay more to acquire distribution rights. With studios spending so much money on content, investors like MCT are now needed more than ever to capitalize on this unique industry inflection point.