Indie films have become the lost children of Hollywood in recent years. Author Edward Jay Epstein explains why Hollywood is abandoning the indie movie business in favor of merchandisable CGI spectacles like Avatar.

If you are a producer of indie movies, the great sucking sound you may be hearing is Avatar draining money from your future projects. While this brilliant Pocahantas-meets-Jurassic Park mashup may be a bonanza for Rupert Murdoch's 20th Century Fox studio, which gets a distribution fee on every dollar it brings in from theaters, video stores, and TV, and its producer-director James Cameron, who gets a cut of the gross after it reached its Hollywood-defined $500 million cash break even point, it will further convince the heads of the major studios that their salvation lies in putting their money in "high value" movies laden with mesmerizing visual effects that can be simultaneously opened on more than 5,000 screens around the world and lend themselves to sequels, merchandise tie-ins, toy licensing, and theme parks rides.

To be sure, even before the phenomenal success of Avatar, the Big Six studios were shying away from smaller movies despite their potential profits. Consider, for example. the sad story told to me by one of the most successful indie producers in New York. In 2009, he brought a major studio a $20 million project packaged with a hot director and two stars. After running the numbers, the studio estimated that its potential box-office in America at $100 million, which would yield it, just from its 30% distribution fee and a locked-in output deal with HBO, a 100% profit on its investment. But it turned down the project. One of the studio's top executives told the producer, "We don't do films that do not have a projected box-office of at least $150 million."

The reason for this rule is that a studio has only a limited number of slots for its releases at multiplexes and it has to fill them with projects, whether profitable or not, that generate maximum revenue, since the slice it takes off the top in the form of distribution fee pays the studio's overhead (which includes the executive's six-figure paycheck). This means worldwide grosses — almost 75 percent of Avatar ticket sales is from foreign audience — and indie films even if they are profitable, cannot be counted on to do that job.

Unlike a studio producer, an indie producer rarely, if ever, has a U.S. distribution deal in advance of shooting. To raise the money to shoot a film, he or she must either find an outside investor, an equity partner, or get a bank loan. What made loans possible, at least up until recently, were the availability of pre-sales agreements. These odd devices, which had been the backbone of indie financing since Dino de Laurentiis invented them in the 1970s, worked as follows: an indie produced would sell the distribution rights in foreign territories and then use the contracts as collateral to borrow from banks. Foreign buyers were willing to sign pre-sales deals because they assumed the film would get U.S. distribution since up until 2008 there was no shortage of smaller distributors specializing in indie films, including Miramax, Fox Searchlight, Fox Atomic Films, Paramount Vantage, Warner Independent Pictures, Picturehouse, New Line, Fine Line Features, Focus Features, Sony Pictures Classics, Lionsgate, the Weinstein Company, and Summit Entertainment.

Since the cash flows from indie films tends to be erratic, these smaller distributors had come to rely on advance output deals with three pay TV channels — HBO, Showtime, and Starz — to pay their overhead. In return, the pay channels got the exclusive rights to show their new movies. In 2008, for example, the $80 million that New Line Cinema received from HBO paid its annual overhead and development costs. Bob Weinstein, the co-chairman of the Weinstein Company, not only described output deals as "the bedrock of thebusiness," but said in 2008 "not one company in this business could survive and succeed without one."

His words soon proved prophetic. When the pay-channels found they needed fewer movie titles to retain subscribers, and began cutting back on their output deals in 2008, the "bedrock" crumbled within a matter of months. By 2010, most of these indie distributors and mini-majors were effectively out of business including New Line Cinema, Fine Line Features, Picturehouse, Warner Independent, Fox Atomic, and Paramount Vantage. Miramax, the linchpin of indie distribution for nearly two decades, closed down its main office in New York, and its owner, Walt Disney, is currently trying to sell its name and library Harvey and Bob Weinstein, who founded Miramax and named it after their parents Miriam and Max reportedly want to buy back the name but, under pressure from their banks, no longer have the money to do so. Almost all remaining players have drastically changed their acquisition strategy. Sony Pictures Classics does not buy any film that costs over $2 million, Focus Features is putting its resources mainly in co-production deals in Asia, and Lionsgate is investing in horror sequels like Saw VII. With the prospect of American distribution rapidly fading, indie producers are now finding pre-sale financing almost impossible. "It's a dead business model," a former Miramax executive said.

If so how can Indie producers continue to make movies? They might be able to find wealthy individuals entranced enough with a movie fantasy to put up the money, but they still need to devise a new way in this digital age to distribute them to an audience willing to see something more than the movie versions of amusement park rides.

Edward Jay Epstein is the author of 14 books, including two examining the movie business: The Hollywood Economist: The Reality Behind The Movie Business will be published by Melville House later this month, which follows his 2005 book The Big Picture: Money and Power in Hollywood.

Image via Michael Kesler's Flickr