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Giving Credit Where It's Due

Giving Credit Where It's Due

December 18, 2008
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" There has never been any appreciable presence of outside capital in this industry, which is a big part of the reason it is the way it is, for good or ill. "

The gloom is thick in this land today. If it keeps going like this, they’re going to have to make the front pages of newspapers longer to track the downward spiral of the Dow.

Have I ever said we’d be immune to the vast tsunami of red ink engulfing the world’s markets? No way. When people have less to spend, they may still hang onto their most treasured and least expensive vices as long as they can, but they will spend less on everything sooner or later, including porn.

However, we will miss some of the worst of the financial catastrophe demolishing other whole industries overnight for one very good reason. We have more or less been forced to live within our means. The terrible havoc wrought by the sudden disappearance of short-term business credit afflicting other sectors of the economy just isn’t a factor here. We don’t owe much to anyone and nobody owes much to us. Debt isn’t a major drag on our freedom to maneuver because we have never had the ability to run any up.

Just try walking into a bank on the best day they’ve had in 10 years and ask for a couple of million bucks to start a porn company. You’ll still hear them laughing as you’re driving out of the parking structure. No matter what our financial histories might be or how good a risk our applications might or might not be, no bank executive is going to put his or her career at risk by loaning depositors’ money to any of us — nothing new about that. There has never been any appreciable presence of outside capital in this industry, which is a big part of the reason it is the way it is, for good or ill.

Unlike some other, larger and less efficient trades, most of what we make has to sell, or we just can’t keep making it. There are no taxpayer bailouts if we fail. And there is nobody except someone else we know personally, and to whom we will be personally responsible, to whom to turn when cash gets tight.

Some of our vendors — duplicators, printers, shippers, etc. — may give us 30 days net, but after that, they’ll cut us off and we won’t have a whole lot other places to get our jobs placed, since not that many vendors deal in our kind of material. Thus, what little credit we do have we tend to protect zealously. We pay our jobbers the way we pay our lawyers — religiously.

Beyond that, everything we do has to pay for itself or be paid for by something else we do. If one of our lines lags, another must pick up the slack or rather shortly we’ll have no lines at all. We have to be much more ruthless than most businesses when it comes to cutting losses. Even if we sink a fair amount of our investment stash in a project or a series of projects, believing them to be good bets that might ultimately pay off, we can’t wait very long to see the returns. They’re needed to produce whatever we’re going to do next and if they don’t come in, we could find ourselves out of the game in a couple of hands.

Similarly, we can’t indulge in the profligate costs for which mainstream Hollywood is justly legendary. Unlike mainstream producers, we can’t go back to our investors and tell them that we ... um … will be needing another few million — but it’s going to be a really great movie, honest! If we run an hour overtime on a location, that hour will have to be paid for out of our own checking accounts. With necessary production costs as high as they are and margins as slender as they’ve gotten to be, those little nicks and dings add up pretty quick.

This kind of Darwinian fiscal discipline imposed by the inability to get short-term financing tends to weed out weak companies very quickly and compels even strong ones to be very careful how they place their bets. No one else is there to cover if those bets go wrong.

We’re seeing the downside of this at work in the shakeout happening right now. Some companies are closing up shop. Some are consolidating, or entering partnerships with others to lay off some of the risk in return for durable equity in co-produced projects. This remains a handshake business where the only kind of paper that matters comes in green. That reality isn’t always easy to live with, but it beats unreality. It’s unreality that haunts virtually every other industry out there right now.

The good news is that strong companies with good products and the know-how to market them properly enjoy solid liquidity and carry no interest-bearing debt. They may have to tighten their belts in terms of volume of new releases or the sizes of production budgets to keep their pants up during lean times, but at least they own the pants they wear. Right now, there are a lot of stockholders, CEOs and newly unemployed workers who probably wish they’d treated other people’s money as if it were there own, which we do automatically because ours is our own.

If there’s one area in which we’ve been less prudent, it’s as creditors ourselves, rather than as borrowers. Video production companies, ever eager to show good out-the-door numbers on new titles, have let retailers string them along far too frequently for far too long.

Giving reasonable terms to good customers with reliable payment histories is not unreasonable, but madly shipping cases to anyone who asks and allowing them half a year to make good on sixty-day invoices is dangerous nonsense. When the guy who places the orders is always in the office and the guy who cuts checks only shows up every third Tuesday (unless he had a flat tire or a court date or a dentist’s appointment that particular day), something is not right.

Money on the street is not an asset. It’s a liability. It costs us money to produce videos, money to advertise, duplicate and ship them and money to pay the phone company for all those calls back east trying to get through on that third Tuesday. We can boast all we like about how many pieces we put out the door, but we can also go broke waiting for that door to swing back the other way. Out-the-door numbers no longer mean what they used to before the advent of multiple marketing platforms anyway, and bragging rights to them isn’t worth piling up expenses to secure. Now more than ever, when a slow economy will provide our buyers with fresh, new excuses for slowing up the pipeline, we have to insist that they live by the same rules we do.

“Neither a borrower nor a lender be,” says Shakespeare. As usual, we get it about half right.


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