News Column

Turning the Silver Screen Gold

March 2004, HISPANIC BUSINESS Magazine

Joel Russell

Antonio Banderas
Antonio Banderas

A man in search of money is an old story in Hollywood. But in an industry overflowing with producers peddling their projects to studios, Santiago Pozo isn't looking for money just to finance a dream movie.
Mr. Pozo, in fact, likens that type of narrow focus to pure gambling. "My business is not to play roulette," he says. "My business is to build a casino."

That broader vision has fueled Mr. Pozo's hopes of transforming his Los Angeles-based Arenas Entertainment into a miniature movie studio with a Hispanic focus that can tap into the growing demographic market. His efforts, which include a global search for financing and strategic partners, highlight growing global interest in the U.S. Hispanic media market and offer universal appeal for entrepreneurs in every industry. In just two years, Mr. Pozo and his company have attracted the attention of a top international venture capital fund and landed the first half of a $24-million mezzanine financing strategy.

For 15 years, Arenas has functioned as a specialized advertising shop that sells major studio movies to the U.S. Hispanic market. The company has handled campaigns for such studio fare as Shrek, How the Grinch Stole Christmas, The Fast and the Furious, and the Mummy. Last year, the marketing division of Arenas worked on almost 30 feature films as well as video releases, theme park attractions, pay TV, and music projects, according to David Acosta, the company's president of marketing. Selling studio movies gives Arenas a steady income; Mr. Pozo calls it "a healthy business unit" for the company.

Two years ago, however, Mr. Pozo made a strategic decision to shift "from a service company to a supplier without abandoning the service part of the business." In addition to selling studio fare to U.S. Hispanics, he wanted to produce and distribute films specifically tailored to the market. "The capital needs for production and distribution are quite different from a PR [public relations] and advertising firm," he explains. "I went to different sources of money in Mexico, the U.S., and Spain."

But the timing didn't help. "The big thing at that time was the Internet. Investors told us they couldn't support us because there was no Web component," recalls Mr. Acosta. "Hispanic Internet stuff was out there, with StarMedia the most high-profile. So we were competing against Hispanic and general-market Internet companies."

With perseverance, Mr. Pozo eventually found a receptive ear at Marco Polo, a venture capital fund in Spain that concentrated on technology, media, and telecom. "We thought Arenas was a unique opportunity for the time because it was a chance to build a platform at the top of the entertainment industry that targets the biggest growing market, that is, the U.S. Hispanic market," says Marco Polo President Jorge Galera. "We think media in the U.S. that targets Latinos will be a growing segment. But we also think the knowledge of Arenas, especially Santiago Pozo, is a major competitive advantage. We think that competitive advantage can be coupled with [projects] we can develop in Spain and Latin America."

Mr. Galera describes Arenas as a potential two-way marketing channel: Entertainment products created by other Marco Polo-funded ventures will gain access to the U.S. Hispanic market by taking advantage of Arenas' well-established marketing. In the other direction, Arenas will produce Hispanic-oriented content that travels well to foreign markets.

Marco Polo, for example, sees potential with its strong contacts at Grupo Prisa, the largest television broadcaster in Spain. "We see synergy between the two companies not only in production but also in distribution and marketing," says Mr. Galera. "When you try to place Spanish-language products in the U.S., [they] encounter barriers. But if you have a vehicle to get into that market - not dominate the market, just to be there - it opens a lot of opportunities."

For Arenas, Marco Polo's interest led it to its place among investors in the first round of growth financing that yielded $12.5 million two years ago. At the time, the company was billing $6 million in marketing campaigns; today, the total comes to $20 million. The first round of funding "was a promise of what we could do," Mr. Pozo says. "Today we have proved it."

Aside from building the company's core advertising business, first-round money also financed early experiments in distribution and production. In December 2002, Arenas released Empire, a crime drama starring John Leguizamo. According to the company, Empire's purchase price was $1.75 million, but it returned $17.5 million at the box office and $22 million in video sales. Arenas also co-produced Imagining Argentina, a political drama with Antonio Banderas and Emma Thompson that is scheduled to open in theaters this April.

But to become a mini-studio, Arenas still needed more capital. Late last year, the company began the second round of mezzanine financing for $12 million. This time, Marco Polo also is interested and plans to tap private investors with an interest in global Hispanic media. "We are always open to new investment opportunities to create synergies with Arenas," says Mr. Galera. "We are truly committed to the Arenas opportunity right now."

Although the fund is not actively hunting for further investments in the United States, Marco Polo remains open to strategic opportunities, according to Mr. Galera. Like many venture capitalists, he is looking for established companies with strong management teams and detailed business plans in a growing niche. The fund seeks a minority equity stake in firms for a minimum investment of $6 million.

But while Arenas, for now, is the centerpiece of Marco Polo's U.S. strategy, the fund's involvement reflects a growing trend of global investment in the U.S. Hispanic media market. Plural Entertainment, a subsidiary of Grupo Prisa, has invested in Miami-based Estefan Enterprises. Prisa also has teamed with Universal Music Group to form Muxxic Latina, a "multinational record label" based in Miami, according to Variety. Venezuela-based Cisneros Group has invested in Claxson International, a broadcast and Internet provider that owns the portal El Sitio. And Hispania Capital, a U.S.-based venture capital fund, has announced its first investment in Chicago's daily newspaper LaRaza.

That trend of investor interest and Mr. Pozo's willingness to look to unconventional sources of capital highlight potential opportunities available to enterprising and determined entrepreneurs. "It was a good decision to tap into an alternative capital source," says Patrick Russo, principal in the Salter Group, a media industry consulting firm. "[Mr. Pozo] had a relationship there, coming from Spain himself. His background and track record gave them a comfort level, and they [Marco Polo] are strong supporters of his company."
And, says Russo: "First and foremost, [Arenas] identified a unique niche. Large corporations or conglomerates in media, retailing, or consumer goods typically don't have that sensitivity to the Hispanic marketplace. They simply don't."

Arenas also made strategic use of outside advisors during its financing search. In the first round of funding, Arenas went out with its business plan and one consultant - in Spain, the country that eventually yielded an investment. For round two, the company had help from the Salter Group and Hollywood powerhouse Creative Artists Agency. Mr. Pozo says the second round was "much easier," but he warns against over-reliance on experts. "In the end, the one who has to raise the money, the one who has to sell, the one the investors must trust or not trust, is you," he says.

Just as film directors and producers often pitch their projects by comparing them to blockbuster movies, Arenas pointed to the success of "mini-majors" like New Line and Miramax during its pitch. Both companies were started by entrepreneurs who identified a niche market in independent film, and both eventually outgrew their niche and were acquired by major studios. "Once you're successful, you're not 'independent' anymore - you're a success," says director Gregory Nava, who worked with Arenas to promote his films Selena and Mi Familia. "Now Arenas wants to try to do this. If they succeed, they'll become a major [studio]."

And what separates Arenas from the horde of small independent production houses is the company's Hispanic focus. Here the comparisons to Miramax and New Line end. "That's the Arenas dream - to reach the general Latino marketplace," says Larry Gleason, the company's president of distribution. "So far, no one has come up with a marketing campaign to reach the Latino audience."

But statistics indicate a growing market. According to Arenas, the average Hispanic goes to the movies 10 times per year compared to less than nine times for the overall U.S. market. Also, Hispanics tend to be "avid" moviegoers, meaning they see a movie when it first opens. More than 40 percent of Hispanic moviegoers attend during opening weekend. For movies that Arenas has marketed for major studios, 21 percent to 30 percent of the opening weekend attendance was Hispanic, while for Empire it was 51 percent, Mr. Gleason says.

Historically, Hollywood has addressed Hispanic culture through Spanish-language films or English-language crossover films. Neither genre addresses the English-dominant U.S. Hispanic. "The films that have done business - El Crimen de Padre Amaro, Como Agua Para Chocolate - reach the Anglo art-house market. They really didn't do business in the Latin market," says Mr. Gleason.

For Marco Polo, it is that potential opportunity that added to its investment interest. "The world of global entertainment is pretty fancy so you need to be careful to position your investment in terms of size and risks," says Mr. Galera. "Yes, Antonio Banderas is there [in the Arenas mix], but in the end the goal is to build a business. And we think that opportunity is better understood from the perspective of Latino culture."

Arenas plans to produce three films per year and acquire up to three more from foreign producers. Each project will carry a maximum budget of $5 million. Arenas also will produce up to four direct-to-video projects with a budget in the $1-million range. "Don't be surprised if five or seven years from now, Arenas becomes what New Line and Miramax are today," Mr. Pozo says.

Some of these films will ship overseas, trying to combine Hispanic subject matter with the style of filming in the U.S., the only country that consistently produces movies for the global market, according to Mr. Gleason. Other projects will aim for domestic distribution for English-dominant U.S. Hispanics. "The growth market is second- and third-generation Latinos, and they are a big chunk of the movie-going audience," says Mr. Acosta. "A lot of mainstream Hispanic agencies don't understand that market. They concentrate on the older, Spanish-dominant audience because that's where they [the agency people] came from."

But even in its niche, Arenas faces stiff competition. Besides the debut of Imagining Argentina, early 2004 will see the launch of SiTV, a cable network for English-dominant Hispanics; the start of VOY Network, a TV, print, and Internet initiative from StarMedia founder Fernando Espuelas; and the continuation of the TV shows George Lopez (ABC), American Family (PBS), and Urban Latino (syndicated). "Latino Hollywood will continue to grow," Mr. Acosta says. "Studios will put more projects in the pipeline. The trick is to pick the right projects."

And that's where the Arenas record, as well as Mr. Pozo's previous experience as an independent producer and director of special markets at Universal, comes to the fore. "We made money when the Latino market wasn't hot," Mr. Pozo says. "Why would we lose money now that it's the key demographic in the country?"



Source: HISPANIC BUSINESS Magazine


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