The Benefits of
Film Investing
Written and researched by
Colin Brown
Revised April 2015
part two in a four part series
Chasing Unicorns, Thunder Lizards & Black
Swans
It has been business as unusual for the film world ever since this White Paper series was originally published in
late 2012. One assumption after another about what is commercially possible in film entertainment has been
turned on its head in those intervening thirty months. Performance ceilings have been smashed through often
enough to ask questions of the film industry’s existing predictive capabilities and institutional knowledge. Consider
just these examples from this recent period:
Female Action Rocks
A female-led action film, the French-made "Lucy", grossed $458.9m worldwide and did so on a
budget that was $12 million less than the reputed earnings of Dwayne Johnson (whose own bigbiceped epic “Hercules” was easily outmuscled by Scarlett Johansson’s psychokinetic
drug mule).
The Mexican Wave
The last two directors to win the Oscar for best director have both hailed from Mexico, a country that
also rewrote the script for what a Spanish-language film can supposedly gross at the North
American box office when “Instructions Not Included” took $44.5m north of its border – and
another $55m from countries elsewhere.
Paranormal Activities
Just when low-budget horror was being given up for dead as a theatrical attraction, along came
“The Purge”, "Oculus" and now “It Follows” to inject new blood into this old genre. "Annabelle",
made for $6.5 million, broke box office records for horror across Colombia, Chile, Malaysia, the
Philippines, Singapore, Taiwan and Mexico (where it grossed almost three times its budget).
Hollywood's New Building Bricks
The overwhelming popularity of “Guardians of the Galaxy” and “The Lego Movie” proved that
everything could be awesome too for unexpected, offbeat new franchises, not just bombastic
sequels and household-variety superheroes.
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Black Em owerment
The international returns from both “The Butler” and “12 Years A Slave” have shot down the
notion that African American subjects are anathema to the foreign marketplace.
China's New Blueprint
In China, the $200 million-grossing success of the $5 million screwball comedy “Lost In Thailand”
opened local eyes to the ROI potential of demographically targeted low-cost films. Other local
blockbusters have quickly followed including “Tiny Times”, “The Continent” and “Dad, Where
Are We Going?” that have relied on a new blueprint of online marketing and young stars from TV
and new media.
License To Thrill Globally
And just recently the quintessential British spy movie, “Kingsman: The Secret Service”, become
a massive culture-busting hit in South Korea with a gross $42 million and counting. That’s nearly
$20 million more than the film achieved at UK theatres. Even the film’s China numbers are rivaling
the home of James Bond.
Maybe it’s time we stopped being surprised by such global outliers. We are living, after all, in a boundless world of
entertainment in which still the planet’s most watched video on YouTube is a South Korean pop song that came
out of nowhere in 2012. The unexpected has become commonplace – but that still doesn’t mean that every film
pitch should be predicated on the likelihood of breakout potential. That’s delusional at best. A more rational
response is to keep a constant watch on actual performance data to ensure that median expectations are
adjusted to reflect the most current reality. The more granular that information becomes, the more a project’s
business plan can then be tailored to take advantage of territorial and demographic variations.
The film world has only to look as far as Northern California to see how a mature investment infrastructure
manages to accommodate freak occurrences in its own business planning. There, venture capitalists use terms
such as ‘unicorns’ to describe startups that grow to millions of users, billions in sales and enormous valuations.
Others have adopted the phrase ‘thunder lizards’ to describe those hugely disruptive ideas that eat up their
competitors in true Godzilla fashion. But just because investors use such colorful metaphors doesn’t mean they
believe their average startup will end up in such rarified company. Quite the contrary. Knowing that the most
probable outcome is a succession of failures, Silicon Valley’s angels like to spread their stardust across huge
portfolios of statistically gauged bets and mix that with inside referrals from trusted sources. Play that table long
enough and an extreme outlier may come. In the meantime, trust that a regular rotation of modest successes will
help offset the financial exposure.
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While such a level-headed approach to risk management is
reminiscent of how Hollywood studios feed their annual supply
lines, it stands in contrast to the world of independent film
investing. There the default mode comes closest to the “Black
Swan” theory as popularized by Nassim Nicholas Taleb to
describe events that are beyond the realm of normal
expectations. Such occurrences have three defining
characteristics. They come as complete surprises. They have
an inordinate impact on overall thinking. And they are often
inappropriately rationalized after the fact. With the benefit of
film history shows
just how reliably
unpredictable
cinema can be as a
business. You can
bank on anomalies
hindsight, people contend that they not only expected the
event to take place but also that they understand the reasons it happened. Ironically enough, there are few better
examples of this collective blindness than the Natalie Portman film of the very same name, “Black Swan”.
Executives at Fox Searchlight, which released the film, freely admit that they were as surprised as anyone by its
$329 million worldwide gross. It was a singular phenomenon that still defies easy explanation. And yet that still
doesn’t stop indie producers from frequently citing “Black Swan” as a “comparable” illustration of how their
own completely unrelated film project might behave in the marketplace. Boasting superficial similarities is hardly
an indicator that lightning will strike twice.
Rather than predict the next Black Swan film event, the film industry is better off building its investment case
around persistent aggregate growth. This is clearly a business of anomalies; we might not know with any
computational certainty exactly when or why they will happen, but history tells us that anomalies will keep
occurring through good times and bad. Indeed, this White Paper will show just how reliably unpredictable cinema
can be as a business. The desire to be transported to unexpected places by stories and characters seems to be
hard-wired into the human psyche. We like nothing more than to be surprised.
Part II - Resilience & Stability
The film business has an impressive history of stability. Even at the height of the last financial crisis, as stocks
whipsawed, banks imploded, and real estate holdings cratered, demand for film remained stable. As is the case
with any given year, many of the films released during those dark days would have lost money, but across a
diversified portfolio there have historically been a sufficient number of moneymakers to ensure that the film
business as a whole remains consistently in the black.
Such resilience is magnified during downturns as film ends up outperforming other investment options. Some of
the most profitable films of all time based (see both charts) - “Paranormal Activity”, “Once”, “Friday The
13th”, “Mad Max”, “Jaws”, “Young Frankenstein”, “American Graffiti”, “Peter Pan”, “It’s A Wonderful
Life”, “Gone With The Wind”, “The Big Parade”, “The Birth Of A Nation” – coincided with either major
recessions or world wars.
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Indeed, "Avatar", the highest grossing film of all time, broke records in 2009 as the world economy struggled to
recover from the credit crisis. But this resilience in downturns tells only part of the story. Just as many other films
on those all-time lists of films with the greatest returns on investment– as defined by the crude metrics of the
both the worldwide gross-to-budget ratio and the estimated profits-to-budget ratio – were released during
economic booms. This history of non-correlation makes film an ideal alternative asset to hold against seesawing
fortunes from other sectors.
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Year
Movie
1980
ad
2004
uper i e
a
e
Budget
Worldwide Gross
% Return*
$200,000
$99,750,000
24,837
$65,000
$29,529,368
22,614
2009
Paranormal Activity
$450,000
$196,681,656
21,854
1999
The Blair With Project
$600,000
$248,300,000
20,591
1993
El Mariachi
$7,000
$2,041,928
14,485
1968
Night of the Living Dead
$114,000
$30,000,000
13,058
1976
Rocky
$1,000,000
$225,000,000
11,150
1978
Halloween
$325,000
$70,000,000
10,669
1973
American Graffiti
$777,000
$140,000,000
8,909
1994
Clerks
$27,000
$3,894,240
7,111
2007
Once
$150,000
$18,997,174
6,232
1969
The Stewardesses
$200,000
$25,000,000
6,150
2004
Napoleon Dynamite
$400,000
$46,140,956
5,667
2004
Open Water
$500,000
$52,116,982
5,411
1980
Friday the 13th
$550,000
$59,754,601
5,332
1939
Gone with the Wind
$3,900,000
$390,525,192
4,906
1915
The Birth of a Nation
$110,000
$11,000,000
4,900
1925
The Big Parade
$245,000
$22,000,000
4,389
2004
Saw
$1,200,000
$103,096,345
4,195
2004
Primer
$7,000
$565,846
3,941
6
5
Year
Movie
Budget
Approx. Profit
Return on Investment*
2009
Paranormal Activity
$450,000
$89,347,044
19,755%
2012
The Devil Inside
$1,000,000
$37,350,397
3,635%
1953
Peter Pan
$4,000,000
$39,799,743
3,395%
1978
Grease
$6,000,000
$184,125,978
2,969%
2010
Paranormal Activity 2
$3,000,000
$77,209,483
2,474%
2011
Insidious
$1,500,000
$34,210,170
2,181%
1974
Young Frankenstein
$2,800,000
$57,468,108
1,952%
1946
It's a Wonderful Life
$3,180,000
$60,305,658
1,796%
1992
Reservoir Dogs
$1,200,000
$22,605,251
1,784%
1975
Jaws
$12,000,000
$221,250,638
1,744%
2014
Annabelle
$6,500,000
$97,529,180
1,400%
1991
Beauty and the Beast
$20,000,000
$284,279,692
1,321%
$2,000,000
$28,195,931
1,310%
2014
od s
ot
ead
2010
The King's Speech
$15,000,000
$196,319,594
1,209%
2012
Magic Mike
$7,000,000
$88,586,945
1,166%
2014
The Fault in Our
Stars
$12,000,000
$145,103,986
1,109%
2013
The Purge
$3,000,000
$35,869,963
1,096%
2008
Slumdog Millionaire
$14,000,000
$163,105,371
1,065%
2010
Black Swan
$13,000,000
$148,267,614
1,041%
2009
The Hangover
$35,000,000
$380,383,238
987%
* The percentage returns figures are estimates. They are based on the assumption that 50% of the box office receipts were returned to
the distributors by the theaters. These figures are based on theater ticket sales only. They do not include earnings from other revenue
sources such as DVDs, video, VOD, TV licensing stc.
Source: www.the-numbers.com
Any profitability chart highlights the film industry’s potential for eye-popping returns on investment - particularly
when it comes to independent films, which account for the vast majority of titles in those top twenties. It also
plays to the frequent characterization of film as an exclusively hits-driven enterprise. This is a misleading
perception. With production costs dropping and cheaper distribution channels opening up, “home runs” are no
longer a prerequisite for covering the sunk costs of content development. Moreover, since so much hinges on
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how much is spent actually releasing and marketing a film – a line item known as print and advertising or “P&A”
– cost control over distribution can have a greater bearing on profitability than the actual grosses generated by
box office “hits”.
the history of noncorrelation with the
general economy
makes film an
ideal alternative
asset
In many ways, this is the secret story of film investment. For every
spectacular box office success that is trumpeted in the media,
there are dozens of films that make their money back in far more
discrete ways. Some entirely bypass theaters in favor of cable,
video-on-demand, and various emerging platforms that generate
lower cost returns from niche consumers. Others have a sizeable
portion of their production budgets already offset before even
being seen by an audience. The use of presold foreign distribution
contracts, sales estimates based on commercially tested actors,
and various government production incentives (“tax credits” and
“soft money”), can all minimize risk to investors by reducing the
equity investment and thereby accelerating recoupment. By the time they are sold for distribution, intelligently
budgeted films that take full advantage of these financing strategies can mitigate a portion of their performance
risk while still preserving some upside exposure to performance and a long library life.
New Money, New Sophistication
Many high-net-worth individuals are sold on such benefits, judging by the continuing flow of new money into
film. So too are some of the intriguing new media and publishing companies to have entered the theatrical film
production arena of late: BuzzFeed Media, Vice Media, CNN, Condé Nast and Newsweek, among others.
These news-orientated organizations have all recognized cinema’s unparalleled ability to stir up cultural
conversations and to hold viewers’ attention for longer than their own insta-headlines and video shorts. They
want to create a supply of branded films that will resonate with the public before they arrive on their own online
and TV networks. But unlike so many new film investment waves equally hooked on cinema’s cachet, they are
doing their financial homework first. The debut film for Condé Nast Entertainment, a Nicolas Cage comedy
called “Army of One”, is being bankrolled through Endgame Entertainment with the help of pre-sales to
foreign distributors through FilmNation and an advance US distribution deal with TWC-Dimension. As riskmitigation strategies go, that’s pretty much by the book.
Even the money flowing in from the world’s emerging economies, where film demand is growing in lockstep
with a growing middle class, can no longer be characterized as “dumb”. There is no question that the four
Chinese companies most heavily involved in film right now – Dalian Wanda, Baidu, Alibaba and Tencent – have
the resources to buy a Hollywood studio conglomerate or two in order to expand their content ambitions
globally. To do so would be to follow in the footsteps of foreign buyers such as News Corp, Sony, Matsushita,
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Seagram and Vivendi. However, other than Wanda’s $2.6 billion deal to buy the AMC chain of movie theaters,
these four giants have resisted the urge to be one giant ATM for Hollywood assets. Along with Hunan TV, Huayi
Brothers and Fosun International, these Chinese superpowers have limited themselves to what are essentially
co-financing slate deals with Hollywood producing entities. When it comes to their own Chinese-language
productions they are also gravitating away from expensive martial arts extravaganzas to focus on much
cheaper social satires and romantic comedies. In his eye-opening survey for Variety, “China Rising: How Four
Giants are Revolutionizing the Film Industry”, Patrick Frater notes that many of the local box office smashes of
2013 and 2014 were made on budgets of less than $3 million and marketed using data analysis and social
media targeting for a fraction of what it takes to release a blockbuster in North America. “Tiny Times” grossed
$79 million without a single movie poster appearing on the streets.
As a living laboratory for exploring how films will be using technology platforms to mobilize audiences and
maximize their investment returns in the near future, there is no better place than China right now. Film
investors are clearly engaged in a learning curve there that is already shifting both the industry’s center of
gravity and also its business practices. But also evolving are the opportunistic U.S. equity financiers that came
into film over the past several years after sensing a financing gap in the market that been vacated by the
Hollywood studios and their institutional backers. Now that they have had a few years to understand the risk/
reward sweet spots for feature films, they have become noticeably more aggressive in the period since this
White Paper was originally written. Where possible, they are looking to fully own their projects that they finance
– even to the point of muscling out the debt financiers.
Market Reset
This 100% equity strategy might seem like the reckless film financing equivalent of betting the farm but it is not
more than a natural outgrowth of the educated discipline with which these investors entered film production.
With an eye fixed firmly on bottom-line driven analysis and market validation, they have seen the risks that have
come from being last in line when it comes to sharing a film’s spoils. They also don’t want to pay expensive
debt costs.
What drew them to film investing in the first place was a surprisingly stable yet high yielding asset class
particularly when organized around a diversified and relatively low-cost film portfolio. Where others may have
seen peril before, they saw a greater degree of certainty, an attractive risk/reward profile, a low correlation with
the equity/bond markets and a recession resilient history of film returns. Theirs was a calculated risk, in other
words, rather than a starry-eyed gamble.
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Back in 2012, the reasons for investing in independent film were becoming much clearer:
• Hollywood’s six majors had ratcheted back on mid-budget projects to focus primarily on producing
mega-budget franchises targeted to a 12 to 29 year-old demographic.
• Dozens of new North American theatrical distribution companies were emerging to take up that
slack and creating buying competition for independent films.
• There were real savings in talent costs, a recalibration accelerated after 2008 by the financial
meltdown.
• Film markets such as Cannes, Berlin and the American Film Market were being flooded with new
distributors. They came not only from the emergent BRIC countries but also from more mature
markets experiencing their own content growth.
In light of such enticing macro conditions, wealthy individuals and funds salivated over both the prospective
rates of return and also the speed of that return. An infusion of new film titles hit the market all hoping to match
the success of indie-financed titles such as "The Hunger Games", "Beasts of the Southern Wild",
"Looper" and "The Best Exotic Marigold Hotel".
The buying market, however, was not quite so ready to play along with this production boom. From the
evidence of recent rights-trading events such as the AFM, deal-making has become that much more measured,
forensic and risk-averse. Distributors refuse to pounce unless film packages tick off multiple boxes at once.
From an investor’s point-of-view, this wariness enhances the sector’s long term appeal since it means both
buyers and sellers are likely to remain in the game, offsetting a liquidity-driven boom/bust that has defined
lower-budget movies in the past. The precious rights-trading ecosystem, around which so much of the
independent film financing world hinges, is that much more sustainable.
But excessive caution can also create paralyzing bottlenecks in the indie sales and production chain. Fast
forward to today and you see that misalignment between supply and demand has led to a drop in the number
of pre-sold films actually hitting the marketplace. At least at mid-budget levels. That wealth of equity and debt
money is chasing fewer and fewer viable projects. “There’s a lot of liquidity in the market,” confirmed Union
Bank’s Bryan LaCour to Variety ahead of the most recent AFM last November. “But not that many investment
opportunities.”
The reason for this paradoxical state of affairs can be summed up in one word: talent. With film projects all
angling for the same few star names to commit and stay committed, pre-sales are becoming that much harder
to pull off. Which is another reason why the 100% equity paradigm makes greater sense. If you are prepared to
fully finance a film then your decision-making is less predicated on second-guessing what the marketplace is
willing to pay for upfront and then trying to shoehorn those expensive choices into your artistic vision. You can
afford to take creative risks. Unusual film propositions such as “Whiplash”, a $3.3 million project featuring a
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first time feature director and two leads who had never carried
a movie before, are only possible if equity funders and sales
outfits are willing to take the plunge without waiting for presales to kick in – and, in this case, even tax credits. “We did an
analysis of what the sales numbers would look like based on
the packageable elements which led us to conclude that we
were scorching two-thirds of our investment,” chuckled Bold
Films CEO Gary Michael Walters earlier this year. The reason
he can laugh about that now are the film’s three resulting
like venture capital
exponential
returns can
seemingly come
out of nowhere
Oscar statuettes and a worldwide gross that was only a few thousand dollars shy of $14 million at the time of
writing.
High Return Potential
One of cinema’s enduring appeals is that, like in venture capital, exponential returns can seemingly come out of
nowhere. You don’t need a celebrated cast for that to happen, you don’t even need good reviews and you most
certainly don’t need big budgets. In the case of “The Devil Inside”, a micro-budget ‘found footage’ exorcism,
all it took was a clever marketing campaign. The advertising included a graphic online trailer and taped reactions
of moviegoers at an advance screening that appeared to take place in an old church. By the time the audience
had wised up, it was too late: the universally panned film had opened to $34.5 million at the US box office and
usurped the $145 million-budgeted “Mission: Impossible – Ghost Protocol” as the number one film across
North America at that time. Inevitably, the film quickly disappeared from the box office top ten - but it still was a
huge commercial success, grossing $101 million worldwide in 2012.
Set against the $1 million minimum guarantee that Paramount paid to distribute the film through its fledgling
Insurge label, that $101 million figure amounts to a putative 4,950% return on investment even after theaters
have taken their slice. Paramount’s marketing and distribution expenses, which are all charged to the studio
anyway, are not included in that figure. But neither are all the subsequent DVD, video-on-demand, television,
airline or Internet-derived revenues that will accrue later. While undoubtedly profitable, pinning down the exact
ROI is at best a product of educated guesswork. There are so many tranches of debt and equity involved in film
production, each of them claiming a position in the recoupment stream, that determining ROI is a matter of
perspective and requires information that is seldom made public. What can be a loss for a studio-financed film
may even be a gain for an institutional investor. There are simply no set averages for ROI. Every film is a
standalone business that is subject to distribution agreements and profit participation shares whose only clues
are the reported box office numbers.
Occasionally, that accounting veil is lifted enough to see how the real numbers stack up. In the case of the
Oscar-winning independent drama “Crash,” court records showed that this was a $7.3 million budgeted
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What can be a
loss for a studiofinanced film may
be a gain for an
investor
production that yielded gross receipts of $33.8 million after a
worldwide box office release that generated $98.4 million. Once all
residuals, expenses, deferments and interest were deducted, that
left $23.5 million in the “pot” for producers and investors. Assuming
the film was funded entirely through equity, and those investors
enjoyed a 50:50 split with the production company after first being
paid their original investment, their ROI was 158% over a period of
up to six years.
Impressive as that figure may be, the “all equity” assumption ensures that it does not fully represent the potential
returns that investors stand to gain from a film like “Crash”. If that film were shot today on location in Los
Angeles, it would qualify for generous California film tax credits of 25% and more that have since been
introduced to encourage local shoots. Combine that, for argument’s sake, with the federal income tax break for
film known as Section 181 (Jobs Creation Act) that was enacted in 2004 and has been subject to periodic
renewals since then, and those investors would have seen an initial immediate return of between 40%-60% on
that initial $7.3 million spend. Under such a scenario, an even more compelling ROI picture emerges. Looking at
it from an IRR perspective, the front-loaded nature of profits on a theatrically released hit like “Crash” should not
be overlooked. A film’s effective revenue-generating shelf life may be up to ten years, but much of that money
comes during the first two or three.
Tax incentives and other forms of ‘soft money’ including foreign subsidies and crowdfunding are an important
part of the investment calculus. Since a film’s commercial performance is subject to so many different factors,
many of them beyond anyone’s real control, projecting ROI based simply on box office and other distribution
revenues becomes an exercise in wishful thinking. As much as your film might exhibit many of the same
characteristics as a previous hit – a so-called “comparable” - you still have no way of telling what the prevailing
market conditions will be when it comes to release time. Even leaving timing aside, this methodology can be
difficult to apply: what would the comparable have been for “My Big Fat Greek Wedding” or “Beasts of the
Southern Wild”, for example? For this reason, a more robust approach is to focus on maximizing returns that
are available before any performance revenues accrue. You might think of this as a film’s “salvage value”. An ROI
based on global distribution advances and/or tax incentives may not offer the elastic upside of a box office
breakout, but at least that number is far more quantifiable, more immediate and serves as a benchmark for
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establishing a viable budget. Look at “The Devil Inside.” The filmmaking team responsible could hardly have
predicted its theatrical performance since so much revolved around Paramount’s marketing inspiration. But what
they could control was the decision to shoot the film documentary-style on a shoestring in Bucharest and Rome,
cities that come with their own advantages in terms of production costs and local film funds, and then build a
case for why a film might be sold for a multiple of cost to a studio on the prowl for the next “Paranormal
Activity”. Experienced producers will look to tight budgets and fully avail themselves of financing alternatives in
order to maximize the equity investment recouped through a distribution rights sale. The devil is in these early
details.
Non-Correlated Returns
When money’s too tight to mention, there is nothing quite like a darkened movie-house to provide a cheap
diversionary fix in the shared comfort of strangers. For producers and investors, the only suspense is in
determining exactly which films will end up resonating with their paying public.
A big part of what drove hedge funds and investment banks into
pouring billions of dollars into Hollywood movie slates starting
around 2004 was the long-held assumption that movies are
both “non-market directional” and “non-correlating”. No matter
how much the equity markets and the economy as a whole
fluctuated, investors could still count on getting a piece of
Hollywood’s 15% internal rate of return, with a possible kicker in
the event of a blockbuster hit. Such a belief is well founded. Box
office grosses rose during five of the last seven economic
downturns, including the 70’s oil crisis and the burst of the dot-
box office gross
rose during five of
the last seven
economic
downturns including
the dot-com bubble
com bubble. And look at the Great Depression. The 30’s
occasioned both America’s rock bottom low in terms of general living standards but also Hollywood’s high-point
in terms of box office admissions as millions sought escape in Marx Brothers comedies, musicals and monster
flicks even with their jobs on the line and the threat of global hostilities hanging over their heads.
Back then a movie ticket bought you a cartoon, a newsreel and a supporting feature – four hours of
entertainment for the price of a gallon of gas. The average U.S. film ticket today costs twice that amount and
there are myriad other ways to watch both at home and on mobile devices that were simply unimaginable during
Hollywood’s heyday. Theatrical admissions come nowhere close to matching the days of “Gone With The
Wind”, whose global box office would equate to an astonishing $3.2 billion at today’s prices. Nonetheless, total
revenue keeps expanding, even when adjusted for inflation. Last year, studio-released movies not only made a
record $31.6 billion at the global box office, but they grossed another $53 billion from a combination of pay-perview TV, cable and satellite channels, video rentals, DVD sales, online subscriptions, and digital downloads
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– the very technologies that were supposed to supplant cinema watching. This paradoxical growth is evident
around the world. In the UK, for example, the box office broke the £1 billion ($1.4 billion) barrier for the first time
last year as cinema admissions returned to their second highest level since 1971. So much for austerity.
Not every year can be considered a boom year for film. There are periods when profits are shared more widely
than others. But the point is that those economic cycles bear no relation to other investments such as real
estate, industrial commodities, precious metals, fixed income, equities, international currencies, fine wine and art.
For investors looking to balance their portfolio with an asset class that does not correlate with the ebb and flow
of Wall Street, this holds obvious appeal. But they can go even further in their non-correlation quest.
Until now, the focus has been spreading bets across individual Hollywood film slates. Such a strategy certainly
helps investors achieve a similar diversification to that which has historically benefited Hollywood studios.
However, these studios rely on just a few key decision-makers to greenlight films. This leads to limited variation in
the kinds of films being financed, a problem exacerbated by the studio’s retraction to $75+ million blockbusters
targeted to the 12 to 29 year-old demographic. To avoid this concentration risk and achieve fuller diversification,
investors would do well to seek out slates of films that come from the widest range of tastemakers. A portfolio of
independent films, particularly one that combines boundary-pushing titles with more generic ones that are
custom-designed for particular audience niches, would fulfill that non-correlating mandate.
Benefiting from Capital’s Ebbs and Flows
The 2008 financial collapse may not have dented ticket sales, but it did scare off many of the Wall Street players
that had trickled back into film financing. Institutional investors retreated from the billion-dollar slate financing
deals just as quickly as they came in. Deutsche Bank, for example, promptly shut down its film-funding unit after
failing to corral other investors willing to shoulder the senior debt component on a $450m fund for Paramount
Pictures that would have shared the cost of making 30 films including “Tropic Thunder” and a proposed sequel
to “Transformers”.
In the wake of that retreat, even the biggest Hollywood players turned over every rock in search of equity. With
their parent conglomerates suffering from the same credit crunch, finding financing partners that can take up
some of the capital burdens associated with blockbuster-focused Hollywood moviemaking took on greater
urgency. Indian moghuls, Russian oligarchs, Middle Eastern potentates and Silicon Valley luminaries and scions
have all joined various sovereign funds on Hollywood’s speed-dial list.
DreamWorks’ deal with India’s Reliance, which covers 50% of the production costs for Steven Spielberg’s next
two directorial efforts, “Bridge of Spies” and “The BFG”, exemplifies this shift. So does Paramount’s massive
co-financing deal with Skydance, the production company run by David Ellison, the son of Oracle founder Larry
Ellison and the brother of film financier Megan Ellison, the patron saint of auteur-driven prestige pictures.
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Kickstarted with his own equity funds and a revolving credit facility from JP Morgan Chase, Skydance has
become a veritable franchise factory for Paramount, co-funding a slate that includes a trilogy of rebooted
“Terminator” films, a fifth “Mission: Impossible”, another “Star Trek” and even a “Top Gun” sequel.
For a while, the independent film industry also found itself capital-deprived, creating a new financing landscape
that tilted towards those with cash. While the studios tapped into institutional sources, indie producers resorted
to creative combinations of equity, debt finance and critical contributions from tax shelter funds and public
subsidies in order to cover their budgets. Frequently, they have found themselves having to defer their fees for
producing the movie in order to bridge any shortfalls. They turned to banks and specialist lenders to secure such
“gap financing”, essentially borrowing money at a steep premium against the promise of distribution revenues and
tax credits. Assuming they were even able to find one willing to discount pre-sales and tax credits.
How different things are today. Not only are the Reliances and Ellisons of this world no longer the exception in
Hollywood, where studios have their pick again of co-financiers, but there is now an abundance of equity capital
for independent filmmaking. The debt financiers who have returned to the scene find themselves having to
compete against these deep pockets. Evidence of how far this pendulum has shifted can be seen in the way that
lenders are now willing to bridge bigger gaps and embark on riskier tranches known as “mezzanine” or
“supergap” financing. Banks are desperate to put their low interest money to work.
With each financing wind change comes a different set of challenges – and also a different set of beneficial
opportunities. During times of contraction, there are Darwinian upsides. Starved of capital, producers are prone
to giving away most of their potential upside from the success of a film simply to get them financed. Their
investors benefit accordingly. Moreover, only the fittest film producers are able to stay the course. With this
thinning of the herd comes a corresponding reduction in the number of dubious “vanity” projects. In an effort to
find equity partners and foreign companies willing to share risks, producers are forced to cut overheads and be
far more proactive about what movies to make. Again, investors benefit.
The flipside to this commercial mindset is that the range of movies that get the greenlight becomes limited. Only
the most obvious projects make the cut, creating potential problems downstream with audiences who tend to get
turned off by too much formulaic filmmaking. This is where all those emboldened new equity players come to the
industry’s rescue. Their willingness to play the long game allows them to gamble on riskier projects without big
names and to hold out for better distribution deals that allow them to think in terms of growing their enterprise
value, instead of surviving project-to-project.
There are several telltale signs that this optimistic, future-facing paradigm is really starting to take hold. Knowing
that equity-backed film projects can afford to wait for the best deals, agents are only too happy to hold back so
as not give away too much upside. This year’s Sundance Film Festival was remarkable for the number of hot films
– including the big prize-winner “Me And Earl And The Dying Girl” – that turned down record advances in
favor of agreements that offered their financiers a bigger chunk of the profits should those films become broad
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The film industry is
starting to play
the long game
rather than give
away their upside
too cheaply
commercial hits. Such waiting games have already paid off twice for
equity financier Teddy Schwartzman: after enjoying success with
“The Imitation Game”, he has since secured a $15 million
minimum distribution advance and a P&A guarantee north of $20
million from the Weinstein Company for his next project he agreed to
fully finance, the Stephen Gaghan-directed “Gold” that will star
Matthew McConaughey and Edgar Ramirez when shooting starts
this Summer. That is one of the biggest commitments of its kind for a
film package.
There are currently at least two $30 million hot-selling projects in the marketplace that don’t have even the luxury
of either a big-name cast or director. Stephen Hopkins’ “Race” stars Canadian actor Stephan James as Jesse
Owens, the athlete who won four gold medals at the 1936 Berlin Olympic Games. Scott Hicks’ “Fallen” is a love
triangle revolving around fallen angels that is based on a young adult book series that has sold over 10 million
copies. Both projects have enjoyed pre-sales, as well as European co-financing subsidies – proof that history and
even novelists can be stars too. And should either be successful, they will help introduce a new generation of
actors that distributors might add to their wish-list of bankable talents, increasing diversity. And so the virtuous
cycle continues until the next capital contraction.
Next: Part III: Key Considerations in Film Finance
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