Investing directly in a movie could be a perilous endeavor. Scouting
the right talent, managing production costs and finding the right
distributor are but a few of the hurdles that investors share as the
production moves forward to fruition or perdition. The hardest to gauge
is the personal whim of the moviegoer. Taste is fickle. A story with a
broad appeal in one decade could fall flat in the next. If a movie does
well, it may open the possibilities of a franchise; if it flops, it
could claim numerous casualties, from studios to the careers of actors.
SEE: The Economics Of Summer Blockbuster MoviesConsiderations Before InvestingGood investors use
due diligence. So it is with investing in movies. The private equity/hedge fund vehicle appears to be the
most common means for direct investment.
Unsophisticated investors
need not apply. The risks of such an enterprise can be substantial and
are better suited for the family office or pension client.
Due diligence throughout is critical. Offering documents must accord
with applicable securities law. What is the producer's reputation?
Experience? Backing one with nary a track record is akin to investing in
a mutual fund with rookie portfolio managers. What is the film's
potential market? Blockbusters tend to have a broad appeal; foreign
films and documentaries, black and white and silent films have less
appeal. Notable exceptions would be Spike Lee's "She's Gotta Have It"
and the recently feted best picture, "The Artist."
Films with a
religious message or ones with a more intellectual humor could be a hard
sell to the distributor, as well, since their audience is typically
quite narrow. What if the film has no A-list talent? That could be a
problem, though sometimes the film itself is the talent. Think of "Slum
Dog Millionaire." Name recognition could vary, too, depending on where
the film is targeting its release. Learn about the director's vision. An
outsized ego can prove fatal, as was the case with
Michael Cimino's
"Heaven's Gate." Are the interests of the filmmaker properly aligned
with the distributor and investors, or does much of the revenue inure to
the benefit of the filmmaker? Is the
investment a fair arrangement?
Where the Money GoesTypically,
revenues are first used to repay investors all of their investment and debts incurred.
The process is akin to a return of basis or of the investment. Next
would be profit sharing, or the return on the investment. Often, the
split is even between the producer and investors. The film's stars,
writers and director are paid from the producer's profits. Any
investment proposals should be in writing and contain an arbitration
clause for a more cost effective dispute resolution. Filmmakers would do
well to have such a clause when dealing with financially stronger
distributors in order to protect the former's interests.
The
producer should have secured a completion bond which is a surety bond
that kicks in to pay for cost overruns rather than having the investors
shoulder the burden. Different fundraising options should be considered,
depending upon the script and budget.
Tax incentives properly pursued are another revenue generator, so long
as the incentive tail does not wag the movie dog. The filmmaker should
escrow funds during the fundraising stage of the film. This helps to
ensure transparency and accountability. If insufficient funds are
raised, then they should be returned to investors. All of these
considerations point to the need for any investor to work with a
professional with experience in the film industry.
The Way ForwardAs
an asset class, film would appear to be uncorrelated to the other types
of investments and somewhat recession resistant as people still go to
the movies or rent them. Slate financing is the hedge funds' approach to
risk management and return generation. This approach simply
entails investment in a portfolio of films,
rather than a single production. Through diversification comes a more
proper balance of risk and return. What films are included in the
portfolio may be a function of how the fund's co-financing efforts with
the production and distribution company work through the film studios.
Part of the challenge is untangling opaque financial accounts through
due diligence in the quest for greater transparency.
The movie industry plays in the form of common shares, and is available to
individual investors,
who need to understand where in the chain of production the companies
lie and to what risks those companies are subjected to. For example, is
the investment in a studio like Lionsgate (which nearly doubled its
share price since the beginning of 2012) or distribution like Netflix or
Coinstar?
The Bottom LineHave movies been
commoditized? Consider how easy it is to access a favorite movie. The
theater is but the first of several distribution channels which include
cable television,
Internet and rental outlets. Ready availability of content has stolen a
march on the movie theater experience and created more revenue streams
and greater profitability. Perhaps it is for this reason that the
Academy Awards this year focused on the lost grandeur of the Golden Age
of film.
The
fundamental dynamic of America’s job market is simple: we need
relatively few workers to provide the absolute essentials of life even
as the cost-basis of the economy inexorably rises. In other words, there
are fewer jobs even as the costs of maintaining a “middle class” life
rise.