In times of trouble, the big beasts always herd together. 'Consolidate or die' has been the frequent mantra when the independent film business is under threat. It was very much the message given by Ben Waisbren, president and chief executive of Continental Entertainment Capital, during his keynote speech at the Screen International European Film Summit in Berlin last week. 'Don't hesitate - consolidate!' he told the audience of financiers and producers assembled at the Embassy of Canada.

In his speech, Waisbren managed the delicate task of striking a fitfully optimistic tone about the prospects for film financiers while being brutally frank about the problems the film industry faces as a result of the worldwide economic meltdown. Amid a flurry of graphs showing the plummeting profit lines of banks and film companies, Waisbren chronicled what Stewart Till, CEO of Stadium International, has called 'a perfect storm of financial distress'. What gave Waisbren's remarks credibility was his prescience early last year in predicting the impending calamity in US slate financing (see March 2008 article Storm Warning).

Not so long ago, the financial markets were enjoying what Waisbren called 'a liquidity bath'. Debt was 'abundant and cheap'. The film industry benefited alongside everyone else from the flow of easy money during the credit boom. Of course, it did not last.

'Why should anyone be surprised when you have absolutely no regulatory oversight over markets. You're going to have a situation where, if people are given an uncontrolled opportunity to take risks to satisfy their greed, the result is like giving a 15-year-old boy a Ferrari,' Waisbren said.

Diagnosing the problems facing the independent film business is not difficult. There is a glut of specialty films. This has led to ferocious competition which has driven up production spending as companies desperately try to sell their movies. Not only have budgets shot up;so has P&A spending. Meanwhile, cash-strapped buyers are losing confidence.

Fractious mood

Waisbren listed current woes. 'The American distributors are clearly holding back. Getting domestic deals done in the US is harder and harder. That is affecting the European buyers. There is a reduction of active buyers and there is lower bidding on product. Hedge fund support and gap lending is all falling away.'

The DVD market is in freefall, he continued. Companies looking for VoD and internet distribution to step into the breach will have to remain patient. It will 'take years', Waisbren predicted, for new exhibition windows and technology to 'replace the lost revenue from DVD'.

The mood in Berlin last week was fractious. A group of leading US sales companies is banding together to take measures to prevent buyers from reneging on contracts. Distributors, meanwhile, are holding back on pre-buys. 'The pre-sales market is near dead and the distributors are waiting and seeing,' Waisbren said. 'The notion of waiting and seeing means that the value of a film declines as the distributors know there is blood in the water as (bank) interest grows on that unsold film.'

Nor can the independent film business in Europe and the US blithely look to Asia and the Middle East in expectation of new sources of financing. 'There is clearly investment opportunity in India and the Middle East but they can't be looked at as 'the money',' he said. 'The good news about sovereign wealth is that some of these investors do take the long-term view,' he said, citing India's Reliance as a company likely soon to become a global player.

Not that there is much point in blaming producers and financiers for wastrel behaviour. In the boom years, the industry was simply behaving in accordance with its own nature. 'Film is by its nature a rabid consumer of capital. You can't blame the film industry for its nature any more than you can the scorpion (in the) scorpion and frog story,' Waisbren stated.

He predicted the independent film business will now go through a prolonged period of contraction and restructuring. There will be increased vertical integration. Fewer films will be made. In short, this is a period of market correction.

The way that the industry will grow, he added, will be through consolidation - the acquisition of libraries and operating businesses. 'There is some good news because the film industry really does have the ability to correct itself ... growth opportunities for leading independent distributors are certainly there.'

Waisbren illustrated what he called the 'normalised film finance paradigm' - the source material and who is attached creates 'a demand pull by the distributor and that creates the capital to make the movie. During the recent boom years, this model changed. Finance became available even for films that 'didn't have a distribution solution locked up'. The result was a glut of specialty movies. Now, that glut is bound to end.

'It doesn't mean that speciality films won't be made but the gatekeeper is going to be the distributor and his economic projections (will matter) much more than the hedge fund saying 'I want to be in the movie business'.'

For all the present challenges, Waisbren argued the industry is potentially in a better position than it was in late 2007. 'Dark as it is out there, it is a much better time to be an investor than it was 18 months ago. We all might have felt better 18 months ago but it is simply a better time to be a buyer. Equity valuations have come way down and long-term investors can see a recovery as there always is.'

He asserted that 'growth opportunities for leading independent distributors are certainly there'.

Small outfits are prospering

Some at the European Film Market last week questioned whether the rush towards consolidation really is the panacea that Waisbren suggests. For example, recent examples of consolidation in the UK sales sector have not all had happy results. Outsiders have come in and bought what seem to be thriving independent sales and production outfits and then seen them quickly wither away. Witness the disappearances of J&M and Capitol.

Nor is it entirely clear how consolidation will be financed. As Waisbren himself acknowledged, 'the dealers and banks' have exited the film business. He cited the failure of JP Morgan to syndicate the DreamWorks/Reliance deal as an example of how tough it has become to prise open the banks' purse strings.

The theory seems to be that prices will now come down and there will be good buying opportunities. 'When you have a lack of liquidity, you have a lack of demand. That means the price goes down.'

Anecdotal evidence suggests the companies coping best with the economic crisis are not necessarily the big, vertically integrated outfits with pan-European ambitions. On their own micro-scale, tiny outfits with minimal overheads often seem to be faring just as well.

In times of economic crisis, the tendency is to cling to the familiar. The urge is to make star-driven projects that repeat tested formulae. However, look at the international box-office chart and the success of Danny Boyle's Slumdog Millionaire leaps out. A lowish-budget ($15m), Mumbai-set film about an Indian street kid, made with largely unknown actors, is an Oscar front-runner that has done huge business.

Distributors have similarly high expectations for Sundance hit Push: Based On The Novel By Sapphire. With the support of Tyler Perry and Oprah Winfrey, some believe it could turn into a huge hit.

With such examples to bolster them, some independent distributors are striking a surprisingly bullish note. For his part, Waisbren told Berlin the problems facing the industry are 'all so manageable ... It's not like having to make an electric car.'

What the business needs at a time of huge uncertainty and market stress is to keep its nerve, he suggests. 'It (the film business) will adapt over time. Even though 'nobody knows anything', over the long-term, it is an industry that offers great rewards for patience.'