EXCLUSIVE: Along with everything else about the 2001 Toronto Film Festival, the launch of Magnolia Pictures was quickly forgotten on September 11, as co-founder Eamonn Bowles and other indie film execs scrambled to find ways to get home. Magnolia marked its 10th anniversary at 2011 Toronto. While the company still doesn’t carry the profile of some other indie distributors, Bowles and co-owner Todd Wagner said their model — mixing traditional indie theatrical distribution with emerging digital technology — has made them distinctive and profitable. VOD revenues now often outpace theatrical for Magnolia films, and they return profit to filmmakers because of low P&A spends. Bowles and Wagner have been honing the VOD model since they were branded charlatans by theater chains in 2005 when Steven Soderbergh’s micro-budget film Bubble was released simultaneously on movie screens, VOD and DVD. Wagner and partner Mark Cuban put Magnolia and other film assets under the 2929 Entertainment banner on the selling block earlier this year, but pulled them back when they didn’t get a high price. Wagner said he’s staying.

Magnolia releases 35-40 films each year now, with upcoming releases that include the 2011 Toronto title Melancholia (which got Lars von Trier banned by Cannes for making dumb pro-Nazi comments). Some Magnolia efforts follow a theatrical release cycle, others go direct to DVD. But VOD has increasingly become the distributor’s calling card and Wagner said proof of its viability came when Harvey Weinstein poached Magnolia execs Tom Quinn and Jason Janego to start a VOD venture for The Weinstein Company.

“Harvey’s been in the industry forever, and he thought it was a good enough model to hire some of our folks away,” Wagner told me. “I’m flattered. There are other people doing this now, from IFC to John Sloss. To me, it’s validation that we’ve hit on something. But we’ve got an advantage, a unique collection of assets in the Landmark Theater chain, a home video division, and HDNet. The big theater chains still absolutely won’t play Ultra VOD titles, so having a theater chain is helpful. As is having the television network for the relationships it has made us with all the MSO’s. These synergies allow us to be freewheeling in how we license content. And producers are coming back to us with films because we are cutting them checks. That rarely happens elsewhere because of all the P&A that stands in front of them.”

Beyond Weinstein’s launch, VOD has been an emerging and un-sexy 2011 Toronto storyline. The perception of VOD as a bottom-feeding business is slowly changing in the indie sector to an increasingly viable option for movies that don’t quite make the cut for the big P&A spends necessary for wide theatrical releases. When high-profile acquisition titles premiered at Toronto last weekend, buyers didn’t jump. A late festival acquisition rally has included titles that will see a few theaters, but are designed to thrive on VOD. Magnolia has so far bought two of those: the Seann William Scott hockey comedy Goon and the Bobcat Goldthwait-directed satire God Bless America. Both will be released through its Magnet label, premiering on Ultra VOD, hitting theaters a month later and the following month on DVD.

Magnolia prices its Ultra VOD titles at $10 or $11, drops that to $8 when the movie hits theaters, and down to $5 when DVDs are released. Film backers get it, but actors still want TV commercials and newspaper ads and they remain as allergic to VOD as theater chains. That happened on the Casey Affleck-directed Joaquin Phoenix docu I’m Still Here, which Magnolia released theatrically. Widely panned, its US gross was a paltry $438,983. The docu would have fared better in an Ultra VOD strategy, based on how well even obscure films are doing for Magnolia.

“We’ve had seven films since December that grossed more than $1 million on VOD,” Bowles said. All Good Things, the Ryan Gosling-Kirsten Dunst-starrer, grossed just $582,000 on 35 theaters, but grossed $5 million in VOD revenue. The James Gray-directed Phoenix-starrer Two Lovers, which grossed $3.2 million theatrically, did and another $2 million in VOD. Even obscure titles are scoring: The Oxford Murders, which starred Elijah Wood, grossed only $4,803 on two theaters; it did $2.5 million on VOD and moved 80,000 DVD units. The Japanese-language film 13 Assassins only grossed $802,778 in 31 theaters, but it grossed $5 million on VOD. Bowles and Wagner say these quiet victories happen regularly and have proven the mettle of a model that took years to hone.

“When I first came out to Hollywood, Mark and I had been on the cover of Forbes for selling Broadcast.com to Yahoo for $5.7 billion, and I got any meeting I wanted because they said, ‘here’s the new sucker with the checkbook, ” Wagner recalled. “I got to listen to everybody about what does and doesn’t work and it became clear they were all afraid of technology. I said, great, that’s our opportunity. They’ll do everything they can to stop it, but because of where I came from, I know that technology is like a freight train going down a mountain. You might slow it down and temporarily derail it through litigation and lobbying, but you cannot stop it. Mark and I thought mixing movies with evolving technology could be fun. And so we put all those pieces, including exhibition, distribution and production and a TV network, because we knew no exhibitor was going to let us do what we wanted. We now have all the functionality of a studio with low overhead, and the relationships with the Targets and Best Buys, and allowed us to derive significant amounts of revenues  early by licensing product to places like Amazon and others that these people were afraid of back then.”

Wagner and Cuban put seed money into Magnolia’s launch and bought it outright in 2003. It was a key piece of the puzzle designed to avoid repeated big P&A gambles on theatrical releases that ruined many companies and led studios like Warner Bros and Paramount to flee the indie business in 2008.

“Maybe this is flip, but we’re one of the few guys here at Toronto using our own money,” Wagner told me. “Everybody else is working off other people’s money. Mark and I pay for this, and nobody else does. Not Sony Pictures Classics, not Harvey and not IFC. Writing the checks forces you to think about things a little differently. They answer to investors, but this is our money and we want profitability. We tried early to buy movies at festivals and distribute them but it all becomes about the P&A. We all know that unless you can spend $20 million or $30 million, why bother? Do the math on 500 or 1000 screens. Let’s say you gross $40 million, which is just huge. How many movie tickets did you sell? About 500,000. How many people are in this country? You start to realize, my god, we aren’t reaching anybody. Through technology, what if you create an impulse buy opportunity? You’re laying on your couch, flipping with your Comcast remote, and you see this new movie and say, I’d like to see that. One click and thank you very much, we just made $9.99. You reach the entire country, cable companies promote your product through running their own spots, there is a frictionless collections process, and most importantly, I don’t have to run a TV commercial trying to get you off your couch, into the car and into the theater. It’s terribly inefficient and ignores 99.9% of the population. You get to a certain age and just don’t go to the theater as much because of kids and other responsibilities. But you will spend a little extra to see something new that interests you. I believe there is a huge mass of movies this model makes sense for. And we’re only talking today, because things are going to change dramatically over the next 10 years.”

That decade, he predicts, will bring a continuing shrinking of theatrical windows. A theater owner himself, Wagner thinks chains will evolve and be viable, but their compensation models will have to change. He and Cuban own the Dallas Mavericks, and Wagner said as long as owners don’t overspend on player salaries, the hoops business works because they make money whether fans come to the arena, watch on TV or listen on radio. “It’s the multi-platform release strategy at its best,” he said. “Lots of us still want to go to the games for the communal excitement of being there and I think that holds true for the movie business as well.” The VOD alternative will cost theater chains the occasional moviegoer, which is 10% of that business, Wagner said. That can be remedied by paying exhibitors higher rental percentages on films that go the Ultra VOD route, or paying the chains 1% of each film’s ancillary revenue streams, which theater chains have long argued they helped create. Exhibitors don’t even want to talk about this right now, Wagner said, but that could change, particularly if  big studios continue to press for shorter windows in an effort to make their huge P&A costs more efficient by adopting a multi-platform strategy for their films.

If it’s such a great business, I asked, why did Wagner and Cuban put their film assets on the selling block? Wagner said people misunderstand why entrepreneurs put assets up for sale: “You always look at selling businesses when they are doing well. We’ve owned these for 10 years and hit on a model that works. Magnolia is highly profitable, Landmark, too. That’s precisely the time to say, anybody out there want to pay what we believe they’re worth? Mark and I can own these businesses another 10 or 20 years, and when we didn’t get the right price we quickly stopped it and said, we’re done. It’s off the block. We love these businesses.”