Everywhere I go, every time I meet someone new who wants to learn about the AFG or COME WHAT MAY, every conversation begins with the same question: "What about distribution?"

It's a great question. And one that I had to answer for myself way back at the very beginning of AFG. In fact, no one should launch a film production company or make a movie without knowing the precise answer to that question.

Most people assume that movie distribution automatically begins with a theatrical release. For movies made by STUDIOS, that is definitely true. It is mandatory for Studio movies to have a theatrical run in order for it to succeed. For everyone else, it's an option.

How can that be? Doesn't every movie need to be shown at the local movie theater in order for it to be profitable? The simple answer is no. A theatrical release is actually a loss-leader for virtually EVERY movie, except the bona-fide, boffo-box-office franchise movies like "Pirates," "Shrek," "Star Wars" and the like. The studios actually know ahead of time that they will loose money at the theaters. Hence, the "loss-leader" moniker.

If that's the case, why release it at the theaters at all? Three reasons: 1) Raise awareness, 2) Get reviews, 3) Increase credibility for ancillary sales. Advent Film Group seeks to achieve these same goals but we have to do it a different way. We'll get to that in a moment, but first, some background information on costs and profitability.

Studio movies are mass-market entertainment projects. They have to appeal to a huge audience in order to get a return on their investment (ROI). The ROI is based on the cost of production and its resulting distribution revenue.

Here's a quick breakdown of production cost averages:

1. 1.The average major studio film in 2006 cost $65 million to make and another $35 million to market and distribute. (2007 studio figures are still pending.)
   

2. 2.Lots of movies are made in the $15-30 million mid-dollar range. These are made by mini-majors (like LionsGate or The Weinstein Company). "3:10 to Yuma" is a recent example.
   

3. 3.Still more are made for $3-10 million as low-budget indies. Movies like "Bella" and "The Ultimate Gift" are in this lower-end range.
   

4. 4.Lower still are movies made for $1 million to $3 million. The upcoming "Jack In the Beanstalk" movie from Avalon Family Films is in this category.
   

5. 5.Micro-budget movies are those made for $100K to $500K. "Facing the Giants" is the best example of a successful micro-budget movie.
   

6. 
   

Now that we know the production cost averages, let's look at how the BASIC theatrical distribution model affects profitability.

Let's say we have a $5 million dollar movie and it made $10 million at the box office in ticket sales. Great, you think! It made its money back, plus $5 million dollars in profit. The filmmaker should be doing cartwheels. Not so fast. The movie actually lost money. Here's how:

Profitability breakdown:

$10 million gross sales revenue (ticket sales from the theater audience)

- $5 million exhibitor fees (theater owners get 50% of ticket sales)

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$5 million net revenue balance

$5 million in profit - not a bad deal right? Hold on just a minute. We haven’t factored in the distribution costs.

Now the distributor deducts their fees and expenses against the $5 million

- $3 million in prints and advertising cost (just the material cost for 35mm print and ads)

- $3.5 distribution fee (theater owner gets from 35-40% distribution fee from gross sales)

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1. -$6.5 million in total distribution expenses
   

2. -Weighed against the $5 million net revenue balance that equals a $1.5 million LOSS.
   

The filmmaker or production company who spent $5 million in production cost still hasn't seen a nickel of profit for them. In fact, they haven’t even covered their original $5 million in production costs. So in actuality, the movie actually LOST at least $6.5 million during its theatrical run ($1.5M loss in distribution + $5M loss in production). Now you know why it's a loss-leader.

So how do people make money on movies? You guessed it, in DVD sales mostly. The standard model is that DVD sales will generate about 1.3 X of the theatrical distribution sales. So, DVD sales for our model should be about $13 million dollars.

Let's continue the profitability breakdown:

$13 million in DVD sales (from 650,000 units sold at $20 retail)

- 6.5 million in wholesale distribution costs and fees

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$6.5 million in Net profit

Now that’s a little better. . .

(More about AFG's distribution landscape in PART 2)