Sometimes, financiers from outside the entertainment industry seem to think: “I’ve succeeded in [real estate, tech, oil, fill-in-the-blank]. So I can make money in movies.” Then, too often, they invest and fail.
Their mistakes typically involve both their business plans and (yes) their metaphysics. Common mistakes include: (1) departing from the business plan without good reason, (2) not departing from the business plan when there is good reason, and (3) not having a plan or, anyway, not having a good one. As to metaphysics, new-to-movies investors often misjudge the balance between inspiration and analysis that precedes action; they lean too much toward either passion or data.
Of course, specific mistakes can be more complicated, and informative, but cataloguing them is beyond the scope of this post. Rather, the focus here is on understanding fundamentals of this asset class.
1. Motion Pictures as an Asset Class
“Motion picture” means more than “movie” or “film”. “Filmed entertainment” is even broader; it includes not only movies, but also television shows, videogames, made-for-internet videos, really any kind of recorded audiovisual entertainment. You can even think in terms of “content” (a term which I personally avoid, but which may still be the best term for the asset class).
2. Investing in Production
“Passion investors” frequently focus on production of small, slice-of-life, independent films, “independent” in this case meaning non-studio. Film investing opportunities for individual investors tend to be with independents, but independent films don’t have to be small, and “slice of life” can be a tough sell in the marketplace. If you’re looking to invest in a single film, don’t rule out the horror, zombie or thriller genres, or animation, if you find an original take. (I was a legal adviser to the financier of Beasts of the Southern Wild; when it comes to investing in films that are this original, well, the brave can be
proud . . .)
3. Slate Investments
A “slate investment” is an across-the-board bet on the output of a major studio or other film company, or of a particular filmmaker. If the pool exceeds a certain number of films, it’s supposed to behave with the predictability of a portfolio. In any case, a pool offers more “bites at the apple” and, hence, more chances for a hit movie.
Slate investors have typically been large investment funds leveraged with bank debt. For individual investors, a challenge is to build slate characteristics, such as neutral selection criteria and spreading of risk, into other types of film investments.
4. American Films
Both passion investors and slate investors tend to invest in American films, meaning, in this case, films for which the overall center of gravity is the U.S. But there are other English-language films out there – films originating in the UK, Canada, Australia, New Zealand, and South Africa. Plus films made in English for the international market, but by companies in non-Anglophone countries. In addition, there’s a whole world of non-English-language films. Films from anywhere can present investment opportunities.
5. Production vs. Distribution vs. Exhibition
Of course, production is just one part of the filmed entertainment ecosystem, and one of the riskiest. The most risky is the financing of development, which is the writing (and rewriting) of screenplays, teleplays, etc. and, sometimes, acquisition of production rights in underlying intellectual properties such as novels, stage productions, and even prior movies and TV shows. Since development has the highest risk, it should have the highest reward.
As to investment in production, risk varies based on your place in the capital stack and the timing of your investment. A loan against pre-sales (that is, distribution deals conditioned only on delivery) reflects ordinary commercial risk. A loan against projected but not completed sales bears a much higher level of risk. A loan against incentives (governmental financial support conditioned on compliance with production parameters) requires specialized diligence and knowledge. And an equity investment – often first in and always last out – is the riskiest position in a production finance package. The counterbalance is that it offers the biggest potential returns.
6. Exhibition
Exhibition is the sector that transacts directly with the consumer. A movie theater is an exhibitor, but so is HBO, and so is NBC. HBO, like your local movie theater, sells you a ticket. Unlike a theater, however, HBO (née Home Box Office) doesn’t have its own box office; rather, it uses the ticketing system of the cable systems that carry it. In contrast to HBO, a network like NBC traditionally doesn’t charge the public for admissions. Instead, sponsors pay, and your ticket is free.
Of course, streaming Netflix is also an exhibitor. And iTunes, as an internet retailer, is in a position analogous to that of an exhibitor, since it deals directly with consumers.
7. Investing in Exhibition
The film investment that gets closest to consumer dollars is investment in exhibition. So, if you’re looking to invest in filmed entertainment, don’t overlook exhibition, in whatever form it may take.
Last year, Wanda Group, a Chinese company, bought AMC Entertainment, the second largest U.S. movie theater chain, for $2.6 billion. Carl Icahn has made a pass at Netflix; as of this writing, the value of his Netflix shares has more than tripled, and Netflix’s market cap now exceeds $10 billion. Both Wanda and Icahn know where the money is.
It will be interesting to see how the battle of the digital “majors” (Netflix, Amazon, Redbox, iTunes, Google/YouTube, Hulu, etc.) plays out. Also, if smaller over-the-top (that is, internet delivered) streaming services that are independent of broadcast and retail can establish a sustainable model. Look for investment opportunities in that area.
8. Distribution
Distribution is the bridge between production, on the one hand, and exhibition and retail, on the other. Or, to use another transportation metaphor, distribution is the truck that takes the product to market.
The biggest problem for independent productions is failure to get distribution or, in any event, distribution with sufficient funding for advertising and publicity to raise consumer awareness of the film. In the classic, independent model, distributors benefit from entering the game late: by the time they commit, they’ve seen the movie, and they’re able to judge the potential yield from incremental spend. Moreover, their money is usually last in, first out, with a rate of return often higher than that of the equity, but with significantly less risk.
9. Investing in Distribution
There’s a scarcity of capital in both production and distribution, but distributors are in a much better position than producers to capitalize on the marketplace. Distribution isn’t a one-off, it’s an ongoing business with its own portfolio. If you have a choice between investing in production and distribution . . . well, let’s talk about it.
10. Other Filmed Entertainment Productions
Television shows and productions for the internet (YouTube, etc.) inhabit the same universe as movies, with differences as to detail. But opportunities for well-crafted deals are there.
11. Mixing, Matching, Disintermediating
Early in my career, I worked on a joint venture that financed both an Imax movie –Grand Canyon: The Hidden Secrets – and an Imax theater at the South Rim of the Grand Canyon. By building their own site-specific theater, the venturers were able to bypass and (to use a word that may not have existed then) disintermediate distribution as a risk factor. That is essentially what Netflix is doing with its production of House of Cards, and Amazon and Google/YouTube are similarly doing with their many investments in content.
12. Final Words of Advice
If you are a passion investor who isn’t overly concerned how your investment turns out, you don’t need an entertainment lawyer. But if you do care about your investment, consult an experienced entertainment lawyer – early!
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Ezra Doner is an entertainment and copyright lawyer who has represented clients in the filmed entertainment sector, both as an in-house business and legal executive and as a lawyer in private practice, for more than 25 years. He did not represent any of the parties in this case.
donerlaw.com 