..Gary Dretzka
..Noah Forrest
..Leonard Klady
..R.J. Matson
..David Poland
..Douglas Pratt
..Ray Pride
..Michael Wilmington

November 24, 2003

COMPLAINT
Indies Vs. MPAA
page 4

THE MOTION PICTURE INDUSTRY AND THE IMPORTANCE OF SCREENERS
27. The major motion picture industry is excessively concentrated; the MPAA signatory members, their specialty divisions and distribution subsidiaries, New Line Cinema, and DreamWorks make up more than 95% of the box-office market in revenue annually.

28. Films are costly to make, difficult to finance and hard to distribute. The theatrical release market is characterized by large theater chains that most often exhibit only major releases heavily promoted by Major Studios.

29. Theatrical release motion pictures appeal to consumers in a unique way. In spite of numerous entertainment options, multi-channel cable and satellite systems, DVD and videotape rentals, and pay-per-view movie availability, consumers can view most movies only on the big screen. Although many feared that the DVD and videotape rental and sales industry would burgeon to the detriment of theatrical release motion pictures, the two industries have been complimentary. Motion Picture studios ensure this by carefully timing the stages of motion picture release, "first to cinemas, then to home video, then to other media." The theatrical release of a motion picture creates a marketing foundation for the exploitation of the motion picture in all other media.

30. Motion pictures are licensed to theaters by national distributors that sell the licenses nationwide. Dominant distributors have long-term relationships with many if not most of the dominant, national theater chains that make up the bulk of the market. Use of exclusive dealing provisions and multi-film contracts are common. Movies marketed and distributed by Major motion picture Studios most often play at national chains, with longer runs and appear on more screens at multiplex theaters.

31. The determined use of these so-called "distribution windows" for release of motion pictures in varied media is one of several reasons that theatrical and aftermarket release are separate relevant markets in the film production sequence. The middlemen in the production cycle between studios and distributors, on the one hand, and ultimate consumers, on the other, are very different industries--theaters and theater chains provide an entertainment experience, while retailers--some specialty, particular for rentals, but others merely general sales, such as Wal-Mart, provide consumers only with the opportunity to purchase the movie for home viewing. The theatrical release market and the DVD/videotape aftermarkets have distinct costs, profit margins, distribution channels, and production schedules. For similar reasons, major motion picture studios' theatrical releases do not compete directly with other entertainment such as television broadcast, sporting events, or videogames.

32. The Screener ban also has an adverse impact on the relevant market for post-release television broadcast of motion pictures, which includes pay-per-view markets, subscription cable television channels, and network television channels. The likely geographic parameters of this market are national, and will be proven at trial. There is substitutability for television broadcast entertainment, and there are many particular cable channels that broadcast nothing but movies. The selling of television broadcast rights to motion pictures is a specific "step" in the distribution of motion pictures by the industry.

33. Similarly, the aftermarket for sales and rental of DVDs and videotapes is also national in scope; large chain retailers and smaller retailers alike purchase from the film's licensed DVD/home video distributor.

34. As used herein, Independently- films are those that are not produced directly by or with Major Studio financing nor are they distributed directly by Major Studios.

35. Independent films are generally funded with one or more of the following:
(a) Equity: One or more individual or corporate investors finance the project, and thus obtain an ownership interest in the film and a share of the profit. This type of financing is generally unavailable for films with budgets over 2 to 3 million dollars.

(b) Foreign Sales Model: Foreign sales companies act as agents to sell the rights of motion pictures in various territories outside of the United States, essentially selling the distribution rights to a film territory by territory to raise money.

(c) Premium Cable: HBO (a sister company to Warner Bros.), Showtime (sister company to Paramount Pictures), have film companies that finance a limited number of films for theatrical release (average of 2 or 3 per year) with budgets ranging from approximately 2 to 12 million dollars, with the average being around 5 to 7 million dollars.

(d) Independent distributor financing: there are a few independent distributors in the theatrical release market, such as Lion's Gate Films, Newmarket Films, and IFC Films. These distributors are not subject to the Ban and are in fact utilizing Screeners for those films they think would benefit from such promotion, such as Whale Rider, and The Cooler. These companies produce relatively few feature films for domestic theatrical distribution, and they tend to pay relatively modest sums for
acquisitions of finished films and are thus significantly less desirable purchasers of domestic distribution rights.

(e) Mini-major financing: Each of the major studios has specialty divisions and/or subsidiaries that obtain for distribution small market, independent films. The growth of specialty divisions has been complementary to the increased visibility of independent films and their resonance with both audiences and awards season voters. Because specialty divisions finance films that are budgeted between approximately 7 and 20 million dollars, with the average being approximately 12 million dollars, they are the most desired financers for independent films. !For films which are produced without domestic distribution, Mini-Majors are the most desired rights purchasers of independently produced films because they consistently purchase distribution rights for sums that are equal to or greater than the actual cost of the motion picture, and they have the best funded and well organized distribution apparatuses. The so-called "mini-majors" are captive to the MPAA signatories and their co-conspirators and are thus subject to the Ban.

(f) Debt financing: Many films are financed through elaborate forms of bank debt financing, including but not limited to "negative pick up" agreements, where a contract with a distributor to acquire rights to a film is used as collateral to borrow all or part of a film's budget. Or, a film may be financed by overall debt or "gap" financing, where a bank agrees to loan the shortfall between the cost of the film and the existing contracts, in expectation that the licensing of the film in the remaining territories will yield more than enough funds to pay back the loan. Both sorts of financing are contingent on the bank's comfort that the film will both be completed and able to yield revenues equal to their revenue projections, which are predicated on a variety of economic factors, including expectation of awards and critical notice.

36. In many cases an independent film production is financed by a mix of the above-described options. Of those options, only financing by a captive specialtydivision and by independent distributors are mutually exclusive.

37. In order to induce any of the above-listed entities to finance an independent film project, the entity must be persuaded of the film's eventual ability to attract theatrical audiences, aftermarket audiences, and critical acclaim.

38. It is very difficult to obtain financing, even at the lowest possible budgets that can be utilized to obtain name actors. For example, Antidote Film's Thirteen stars Academy-Award winner Holly Hunter, and was made for only $1.8 million, and was still difficult to finance. Moreover, at budgets that size, "name" actors are often being paid far below their market rates; it is, of course, the potential for awards consideration and residuals that induces known stars to participate for little comparative up-front pay.

39. Similarly, the financiers are strongly attracted by the awards-season potential of a prospective film. Accolades and awards increase the prestige of the financier, particularly if it is a distribution company (independent or captive) or a cable channel film company. Films that obtain accolades, nominations and awards perform better economically. Mini-majors have been set up and continue to be funded (albeit sparingly) precisely because they can deliver awards and prestige to studios that are churning out big budget, uninspired mainstream fare.

40. Production, marketing and publicity budgets for independent films are a fraction of those for studio productions, and thus independent films start out at a great material disadvantage. This disadvantage is somewhat overcome by the quality of the films and by efficiently marketing films to awards committees and juries. Screeners have a vital role to play in calling awards-season attention to the independent films because they are a highly efficient method of communication. Screeners are low-cost and are direct--they are delivered right to the people who can best help in marketing and publicizing the quality of the film. Over the years, awards strategies for independent films have come to depend extensively on the use of Screeners.

41. The marketing strategies outlined above have been successful in allowing increased entry in the concentrated motion picture industry: the use of screeners and other efficient marketing tools or campaigns during the awards season has led to more independent films being made and more quality independent films being made, which, because of the competitive pressure those films place on Major Studios, results in more films and more quality films being made in the market as a whole.

42. Awards and accolades beget more awards and accolades, which culminate for the awards season with the Academy Awards. Academy voters are influenced by nomination s and receipt of earlier awards and critical acclaim, and every well-constructed awards-season campaign for an independent film begins with smaller awards and critics groups (which are more open to recognizing independent films) and parlays early success into greater and more significant awards.

43. Independent films are financed on the margins of the industry; therefore, small perturbations in the market can effectively eliminate the opportunity to make any particular film.

44. Similarly, independent films receive awards on the margin; therefore, small perturbations to the marketing and publicity of the films can greatly diminish its ability to win accolades and awards.

45. Distribution options for independent films and those outside of the mainstream, "blockbuster" major motion picture genre are limited. The vast majority of the distribution market is made up of MPAA signatory, major studios and their subsidiaries, all of which are subject to the Ban on the use of screeners as a marketing tool.

46. The large number of downstream mergers and the use of subsidiary distributors has resulted in a highly concentrated motion picture industry, in which the Major Studios, because of their market power, have been able to jointly attain a majority market share of both the production and the distribution markets. Because the Major Studios are producers and yet simultaneously control distribution, they are able to erect barriers and exclude new entrants in the film production market and thereby insulate themselves from competition.

47. Very few independent distribution companies, such as Lion's Gate films, exist as viable options for independent filmmakers. Filmmakers who in the future wish to sign distribution contracts with those companies that will utilize screeners as a marketing tool are essentially foreclosed by the Ban from over 80% of the nationwide distribution market.

48. Screeners have been instrumental in the recent increased-entry into the motion picture market of independent filmmakers and specialty-division films. The recent success of independently-made and specialty-division films put competitive pressure on the major studios and provide consumers with choices they would not otherwise have.

49. Screeners are important to independent and specialty division films because of the limited exposure these films usually obtain. Large, "blockbuster" films receive wide-spread release in large mega-plex movie theaters across the country, on multiple screens, in every town, and remain in first-run release for longer periods of time. The Major Studios have larger advertising budgets and huge marketing and publicity departments that can take advantage of unique economies-of-scale. By contrast, specialty divisions receive significantly less funding than the mainstream release divisions of Major Studios, and independent filmmakers are often undercapitalized and underfunded to begin with, and depend on a distributor (only 3-5 of which, enjoying only about 5% of the box-office market, are independent of the Major Studios) or a specialty division acquiring the distribution rights to their films in order to even make the film in the first instance. Often, it is only the prospect of critical success and the prestige of a successful awards season that enables that kind of transaction to take place.

50. The awards season is a pivotal marketing time for independent film producers and smaller, edgier specialty divisions and subsidiaries of major production studios. It is the prospect of a successful awards season that has enabled many recent successful movies to be financed and distributed. Over the past five years, many Academy Award nominees have been independents or specialty-division films.

51. The promise of a successful awards season fueled by screeners has opened up the motion picture industry to independent filmmakers and has increased the quality of movies released and the choices available to consumers in recent years. Major motion picture conglomerates are risk averse, and that leads to a tendency to only fund films that are like those that have been previously successful. The ability of new entrants to break into this market and be critically successful on a level playing field with major studios has resulted in a wider variety of films being made and recognized than ever before.

52. The burgeoning success of independent films over the past decade has resulted in the expansion of the Major Studios' specialty-divisions and the acquisition by Major Studios of formerly independent studios. Many specialty divisions enjoy great prestige because of their release of independent films, such as In the Bedroom, Gosford Park, and Far from Heaven.

53. The promise of critical success during the awards season, fueled by the use of Screeners as a marketing tool, has enabled independent filmmakers and specialty divisions to hire more qualified and better-known actors for their films. This has helped to "even the playing-field" somewhat and increase the ability of independent filmmakers to compete with the Major Studios, both critically and economically.

54. The partial Screener Ban has an adverse impact on the marketing of independent films distributed by companies subject to the Ban. These films, such as Thirteen, Lost in Translation, American Splendor, and Pieces of April, will not be as strongly marketed during the awards season this year, which has already begun. If the Ban is not lifted immediately, critical exposure, momentum and "buzz" opportunities will be irreparably missed. Awards shows have been cancelled, and some critics have suggested limiting influential "top-ten" lists to only five films as a protest against the Joint Screener Ban, stating that although independent and specialty films will certainly be harmed by that action, there is no way that the films can be sufficiently viewed without Screeners. Large-scale blockbuster films that have received large amounts of advertising dollars and publicity thus will have a significant competitive advantage during the awards season and in the aftermarket for DVD and videotape sales and rentals. Additionally, the few truly independent distributors affecting a small part of the market, which are not subject to the Ban and are utilizing Screeners to market their films, will have an advantage as well, at least for this year.

55. Because the MPAA and the Major Studios announced their agreement to prohibit the marketing of films with Screeners so late in the year, key release and marketing decisions had already been made by the independent filmmakers' and by their distributors who are subject to the Joint Screener Ban. These filmmakers and distributors had no opportunity to adjust their marketing efforts to deal with the sudden denial of their ability to market their films as they see fit.

56. Increasing the number of theatrical screenings of films subject to the Ban is not a viable substitute for the use of Screeners in marketing independent films. First, screenings are only scheduled in limited areas of the country, typically New York City and Los Angeles. Guild members voting for various awards ceremony nominees that live outside of those areas and/or are working on location or out of the country are typically unable to view those films. Very few voting members of any organization are able to attend the 2-3 movie screenings per day they would need to attend in order to see every movie.

57. The ability of Academy members to utilize Screeners does not relieve the discriminatory impact the now partial Ban has on independent filmmakers. Only a portion of Academy members have so far acceded to the conditions imposed for the use of Screeners, due to distaste for the actions of the Major Studios and the unnecessary conditions placed upon them. Moreover, Academy members who do receive Screeners will receive many. They will be most likely to watch those that have attained some level of notoriety and critical acclaim--in short, those most highly publicized. The adverse effect the lack of thorough consideration for earlier awards ceremonies will have on the independent films will thus adversely impact both nomination and award chances for independent films with the Academy Awards.

58. In future years, the clear effect of the Ban will be to disadvantage independents by inhibiting financing, both private (because of the lowered chance of awards season success and critical acclaim) and via distribution contracts (because of the limited resources available to the few truly independent distributors), by raising costs of promotion and advertising in attempts to market films during awards seasons and throughout the year, and by making it less likely that films will be able to attract topnotch talent because of the decreased chances for success during the awards season. And, if the films cannot top-notch talent as they have in recent years, the financial risk is even greater, thus further hampering the films from getting financed.

59. The Ban, in raising barriers to entry, raising marketing costs, and adversely impacting opportunities for success in independent filmmaking will inhibit the capital markets for financing independent films. Competition will thus be further chilled as fewer filmmakers are able to obtain financing and distribution contracts because of those barriers and costs.

60. Independent films that receive less publicity will be less able to compete for rental and purchase dollars in aftermarkets for DVD and video sales and rentals. Prospects of lesser returns will chill aftermarket distributors from entering into contracts for distribution.

61. The Joint Screener Ban is having and will have a disproportionate negative impact on marketing and exposure for independent films, which depend upon the momentum and exposure throughout the entire awards season for recognition and widespread publicity. The Ban raises marketing costs for independents and their distributors, whose films generally receive less publicity throughout the year and are released on a far smaller scale nationwide.

62. Additionally, the selective repeal of the Ban for Academy members disadvantages competing awards ceremonies and will result in higher costs and barriers to competition in the market for awards shows. Disadvantaging and even eliminating competing awards shows will further disadvantage independent filmmakers as avenues for exposure are eliminated from the marketplace.

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