Last Wednesday was the inaugural meeting of the Pacific Northwest chapter of the Institute for International Film Financing, an organization bringing together filmmaking and finance.

About 13,000 independent films are made every year. Of those, from eight to ten thousand are sent to the Sundance film festival for consideration. Only 240 are screened at the festival, and perhaps two to four films land themselves a major distribution deal, according to Scilla Andreen, co-founder and CEO of IndieFlix.com.

This year, “Humpday,” from Seattle-area director Lynn Shelton, numbered among those lucky few, getting a mid-six-figure deal with Magnolia Pictures, a media company co-owned by Mark Cuban.

The plaintive cry at the IIFF meeting: “Let’s not waste this opportunity.”

Jane Charles, an independent producer, pointed out the need for a sustainable investor base in Seattle. Every time a local filmmaker convinces a local doctor or dentist with dreams of Hollywood starlets and L.A. lunches to finance a “home movie” vanity project, the subsequent and inevitable losses cause that once-burned investor to assiduously avoid future film projects. On the other hand, if a local filmmaker can return any part of that investor’s money, the success has the potential to attract new and repeat investors, which in turn leads to new projects, new jobs, and the possibility of putting the Seattle filmmaking business on the map.

“There’s a lot of money up here,” said Conrad W. Denke, CEO of Victory Studios, a post-production shop in Seattle that hosted the IIFF event. “We have to convince [investors] they’re going to get their money back.”

Charles’ advice to would-be filmmakers:

• Write a great script and subject it to professional criticism rather than the automatic accolades of your closest friends.
• Hire an experienced crew, especially if it’s your first time in the director’s chair.
• Get some real actors to participate. You’d be surprised who’s available on a reasonable budget.
• Come up with a solid investor presentation, with a realistic schedule and business plan, including marketing and distribution.
• Include profit projections based on comparables, using services such as FilmProfit.
• “Be responsible.”

Google: The Studio System That Doesn’t Pay for Content

Wes Chan is an investment partner at Google Ventures, a venture capital fund that receives $100 million annually by Google to invest in 15 startups per year.

Citing the “title risk” involved with any specific film property, Chan expressly ruled out the possibility that Google Ventures would invest in a specific film, or even a group of films, making him a curious participant on a panel dedicated to film financing.

Instead, Google Ventures seeks “change-the-world” ideas from entrepreneurs showing “passion, ability, judgment and wisdom,” where Google can provide a “value-add” such as engineering, design, or Chan’s own passion, photography. Knowing that eight of 10 startups will likely meet with failure, Google Ventures looks for a return of up to 20 times the initial investment for each project. Filmmakers need not apply.

Despite its separation from the content business, there is a kinship between Google and the early film industry in the way that Chan, who helped to helped to launch Google Analytics and Google Voice, described Google’s internal staffing process for new ventures as being “like a movie studio.”

“We look at projects as a production,” said Chan. “You have to convince people to work on your project.”

In other words, you can’t simply convince a bunch of suits to order you up a roomful of Ph.D.-carrying scientists to build your personal vision. You have to woo those scientists with the promise of intellectual glory and financial riches beyond measure, or something to that effect. And if it turns out that your idea stinks to high Mountain View, your talent will defect to other projects. “People vote with their feet,” Chan said.

This description of the internal workings of Google helps explain the company’s recent success. It’s not just a movie studio, but a “Golden Age” vertically-integrated studio system of the 1920s thru 1950s, of the kind that survived until an antitrust consent decree put an end to its vertical integration practices.

In Google’s case, the company is concerned entirely with channel rather than content. So, if you’ve come up with a way to push contextual advertising-supported content into some new configuration of LED pixels that can deliver billions of ad impressions every month, they’re interested. If you want to share your artistic vision with like-minded souls, then you’re duly invited to try your luck on YouTube or whatever distribution channel the company builds or buys next.

Chan’s advice for filmmakers is to pursue commercial viability, or if I may translate, content that will drive maximum traffic through Google-powered portals. “Create things your audience likes,” advised Chan. “Most people create what they like.”

How to Make Money as a Filmmaker

Here are some of the ways to make gun-shy investors happy in a Google-channeled world.

1. Make that one film out of thousands that lands a distribution deal and a mid-six-figure payoff.
2. Create a viral content on the web that drives traffic to ad-supported websites. According to Denke from Victory Studios, the base CPM (cost per thousand impressions) is about $5, which means that every time someone watches your video, you can earn a half-cent, with one million views yielding about $5,000. About 100 million views (on the magnitude of “Evolution of Dance” with its 146 million views) yields about as much revenue as a movie distribution deal but with far lower upfront costs, which is probably why YouTube has more videos starring non-unionized house pets than brand-name actors. Speaking of pets, the Seattle-based “I Can Has Cheezburger” earns millions in advertising, licensing and merchandising, and is said to have a movie deal in the works.
3. As with any online media, advertisers are willing to pay a higher CPM for you can deliver a highly-targeted audience. Alex Garcia, founder and CEO of Banyan Branch, a new-media marketing consulting group, cited the example of “The Guild,” a World-of-Warcraft-themed sitcom which started as a YouTube video and then received sponsorship from Microsoft.
4. If you intend to release your film independently, use a partner for digital channel management. Seattle-based IndieFlix offers a non-exclusive sales channel for DVDs, streaming rentals, subscriptions and third-party distribution. Filmmakers receive 70 percent of net revenue after any costs are paid out. If the major studios don’t want you, “it’s not a bad thing,” says IndieFlix CEO Scilla Andreen. In addition to direct sales through IndieFlix.com, the company also arranges sales through third-party distributors iTunes, Netflix, Amazon and Hulu. And of these, only Hulu has demonstrated ability to get people paid. “We’re writing checks for $5,000 to $6,000,” said Andreen. That’s a relatively big take compared to what Andreen characterized as low payouts from Amazon, lackluster movie sales on the app- and music-focused iTunes, and high fulfillment costs through Netflix.
5. Get government subsidies, such as Washington Filmworks, which provides 30 percent cash back for in-state qualified expenditures purchased from WA-based businesses and compensation to state residents.

That Thing

I figured that a couple of hours listening to people in the trenches of the entertainment industry would provide valuable perspectives. And so it did.

The main reason I attended the panel discussion was because of a forward-thinking client who invited me to pitch him with an out-of-the-box idea that people would talk about, within an industry that’s fairly set in its ways.

A “thing,” he said. “We want to do a ‘thing.’”

To successfully pitch this client, I’ll need to come up with an idea that will get the attention of a targeted, high-value audience (see #3 above) by showing them something they’ve never, ever seen before, and I have some ideas in that regard. But as Jane Charles wisely recommended, you should really partner with a crew that knows what it’s doing, especially if it’s your first time.

And so I’m looking to meet Seattle-area people who know how to build “things.” Is that you? Let me know.

Jack Dorsey, the 33-year-old who invented Twitter, and Jim McKelvey, a former glassblower turned CEO, are about to put the fragile payments industry inside of a very hot furnace.

But before I talk about their plans for world domination, I want to talk about Gossip Girl. For those of you who do not live with a teenage girl or with someone who acts like a teenage girl, or if you do not share the tastes of a teenage girl, you are, like, OMG sooooo missing out with GG!!! Like seriously?? Dorsey totally reminds me of Gossip Girl heartthrob Chuck Bass, ROTFLMAO!

Separated at Birth?

Jack Dorsey, the creator, co-founder and chairman of Twitter, and CEO of Square (left); Gossip Girl bad boy billionaire Chuck Bass (right)

And when on Monday at the NACHA Payments conference in Seattle, Jack Dorsey described Square, his new payments venture [Note: The session replay is available on the NACHA site], he did to the bankers in attendance what Chuck Bass does week after week to the squirming, helpless targets of his plotting machinations – first, he says exactly what he’s going to do; then, he explains why you’re completely powerless to stop him; and finally, he makes an offhand suggestion of a possible friendship contingent on you being able to do something for him.

What’s Jack doing?

Square will allow anyone with a mobile device to accept payments of any type. Just download the free application from the App Store or Android Marketplace, sign up for the service, and wait for the free credit-card swiper that connects into your mobile phone’s audio jack, and you’ll have a merchant terminal that would usually cost you hundreds of dollars to acquire through a complicated provisioning procedure. For a face-to-face, “card-present” transaction, the seller pays 2.75% of the total, plus $0.15 per transaction.

One scenario for using Square would be selling a couch on Craigslist. If the seller has Square, you’ll be able to pay with a credit card. For security purposes, Square will send you an SMS text message to confirm the transaction. They’ll also send a picture of your choosing to the seller’s phone, which the seller can then show to you to convince you of his or her authenticity. And if requested by the buyer, Square can even tap into the location-awareness data on the mobile devices of both buyer and seller to detect if either party is outside of your usual range of movement, and if necessary take additional steps to confirm identity.

Another scenario would be a coffee shop taking orders on an iPad running the Square application. In this example, Square isn’t just a merchant terminal for accepting card payments; it’s also a point-of-sale device to record cash sales.  And if the customer provides some means of identification – a Twitter handle, perhaps? – the coffee shop could keep track of repeat purchases, run promotions, and send rich-media receipts to the buyer’s e-mail address.

Or how about selling someone a pair of jeans while they’re still in the dressing room? Or paying the babysitter, the dog walker or the cleaning service?

In a square-shaped nutshell, Square will have the ability to capture detailed, line-item information about sales data of sellers along with specific, personal preferences of buyers, and they’ll have dozens of ideas for compelling reasons for you to opt-in to allow Square to collect this information. Now remember that the Square application has opt-in features for location awareness, and then this shapes up to be a service that knows where you go, where you buy, what you buy, how much you spend, how much you tip, whether you eat alone or whether you eat in a pack, many calories you eat in a single sitting, whether you want fries with that, and whether your new pair of jeans is bigger than your last pair of jeans. Might there be some cash-rich company in the Bay Area able to sell a few contextual ads based on that information?

Oh yeah, they’ll also make good money on the transactions themselves.

Why you’re completely powerless to stop this.

The kids, they love the Twitter and hate the banks.

Check out this Jack Dorsey quote: “Payments are inherently social. It’s a form of communication. It’s never been done in a human way. We want people to love it.”

Is your bank ready to compete against that? Good luck.

But that’s not all.

Square is a textbook disruptive innovation, according to Clayton Christiansen’s definition: “An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.”

If you’re an artist selling sculptural glass, you may be disenchanted with the payment industry’s hard-to-understand billing structures, hidden fees and monthly minimums. Or if you’re a seller of used household furniture, you may not be happy about having to take checks that may bounce or accepting big wads of cash that put you at risk of robbery or theft. For these people, Square fills a clear need that was not being served by existing providers. And if it delights these people formerly thought unprofitable by the incumbents, it also works well for the higher-value small-business owners who run coffee shops, clothing stores, and the like.

The existing processors will eventually recognize the threat, but what are they going to do, lower rates? You can’t get into a price war with a competitor who gives away hardware and who has opt-in access to extremely valuable information about consumer preferences that’s being used to subsidize hardware, interchange rates, PDF statements to e-mail, integration with Twitter and who-knows-what-else.

Once it gets going, Square has the potential to really hit the incumbents where they live.

There are many things that you can’t buy with Square, including a long list of mostly legal activities that are nevertheless prohibited from being transacted over the Square network. These industries are characterized by high potential for fraud and high chargeback rates.

One example would be that time that you, um, lost your wallet and discovered to your shock and horror that somehow, a computer virus stole your credit card number and signed up for a perfectly legal adult website, and it must have been that same virus that put those cookies on your computer for your wife to find. Yeah, that was it.

But other high-risk areas are not necessarily in the red-light district: Airlines, bankruptcy lawyers, cell phones, flea markets, and mail-order/telephone-order tobacco products. These are historically riskier businesses to manage through the payments network, with higher-than-average incidence of people claiming, “I didn’t order that.”

If more and more coffee sales, babysitter money and other transactions considered “safe” move to Square, the traditional processors will be left with higher concentrations of “unsafe” transactions. Square would be able to lower its rates, while the incumbents would be pressured to raise theirs.

Can’t we be friends?

I chatted with several people about Square after the keynote session, and the main criticism was, “They don’t know the payments business.” Jack and Jim would probably agree, which may explain why they’ve already partnered with a merchant processor from the outset.

For financial institutions, the best opportunity is probably outside of the U.S., where the rules and payment mechanisms are much different. While Square intends to start here at home, any domestic success will likely be replicated abroad. That will require market-by-market analysis, design and rollout.

If you’re a solely-domestic bank, perhaps you can enter into a marketing agreement to promote Square to your business customers instead of maintaining that unwieldy, declining business that you called merchant banking.

Is it really over for the incumbents in the payments business?

Here’s where watching GG really pays off. Although you may not like yourself in the morning, there’s usually a way to beat Chuck Bass at his own game.

In this case, I can think of only a few things that might potentially throw cold water on the Square plan.

One: An unintended security breach in the system leading to loss of credit card numbers, financial data or personal information not meant for public consumption.

Two: A major backlash against the intended uses of opt-in location data, leading to specific, targeted regulation.

Three: If people end up using the service to misrepresent items and services being bought and sold, Square may earn the unwelcome attention of law enforcement agencies. Or worse, if it turns out that the heavy users of Square are those conducting illicit transactions under an innocent-seeming guise (e.g., “she’s the babysitter”), it could end up being perceived as dingy and unsavory rather than squeaky-clean and cutting-edge.

This last point leads to my one big question: How can Square reliably and repeatedly tell the difference between high-risk and low-risk transactions, especially when those transactions are happening behind closed doors?

Dorsey remarked about Square, “We can’t wait to see how the world uses it.”

I couldn’t agree more.