Who Profits? Red carpet investments
By J.R. Kambak
Film making is an investment, not a basic commodity traded on box office revenues.
Star Wars Film legend George Lucas spoke up at the recent D conference on the latest trend of equity investing in film production, "We call them the sucker of the moment," citing that at best, it's a great way to meet girls.
If you haven't heard, Morgan Stanley is selling bonds backed by revenues from movies. Specifically, these are movies made by Paramount Vantage banking on powerhouse "A" list actors Brad Pitt and Angelina Jolie.
According to David Joyce, a media analyst at Miller Tabak & Company, "There's lots of hedge fund and private-equity interest because of the glitz and glamour, but there are economic benefits if the deals are done well. Joyce claims that films can generate "fairly predictable cash flows over time" with merchandising, pay-TV contracts, and other revenues from film distribution.
Co-chair of law firm Kaye Scholer LLP, Henry Morriello's structured finance practice in New York, said "The availability of the financing is great because it's not in the traditional vein of how these films have been funded." I wonder what the traditional vein was?
Taking an online look at Paramount Vantage – a subsidy of Viacom Inc.'s Paramount Pictures Corp – indicates mega-budget sophistication "with a strong art-house sensibility," having received a Golden Globe Award for Babel as its first release. Next up is A Mighty Heart, starring Angeline Jolie, based on the infamous murder of Wall Street Journal reporter Daniel Pearl at the hands of terrorists. Investors are bullish.
Wedbush Morgan Securities in Los Angeles entertainment analyst William Kidd claims, "It's less risky and more profitable, so you're seeing interest from outside investors to get involved in these deals." Moody's Investor Service reports that five films will be made this year with combinations of equity, loans, and asset-backed bonds. According to Salter Group LLC, in 2003, hedge fund and private-equity firms' financing totalled $8.7 billion and included, Sony Corp., News Corp.'s 20th Century Fox, and Walt Disney Co. However, no profit returns have been publicly reported. Dresdner Kleinwort, Deutsche Bank, and Soros Strategic Partners are also getting into the shareholder production pacts. They should change the nick name for Hollywood from Tinsel Town to Hedge Fund Blvd.
Sure the money isn't small potatoes. Private equity investment means, putting up some of the cash as collateral for a letter of credit with added points on the end. Much in the same way financial managers take a lacklustre company stock with a steady cash flow, studios add star power leverage to amplify box office returns, thus pushing the box office receipt value up to cash out. Finally, transactions fees, carried interest fees, and of course expense accounts are tacked on for good measure.
The Motion Picture Association released a report forecasting that international movie markets will hit $25 billion at the box office by 2010. From 1991 to 2000, box office revenue went from $4.8 billion to $7.6 billion – a 59% increase. With new technologies' potential, Price Waterhouse Cooper reports ancillary markets to have grown over 200%, achieving a global market sales of $118.9 billion by 2009 – a 7.1% compound annual growth rate (CAGR). Whose forecasting model are they using?
In the mean time financial engineering means squeezing the production efficiencies by cutting spending on above/below line budgets, labour, administration overhead, and writers' salaries, all orchestrated to hit a short-term lucrative result for Hollywood's investment elite. Rather than interest payments, the investors receive bonds, like the ones sold during WWII – debt investments designed to keep cash flowing, sold as hedge funds that book the profits, which go into the executive producer's back pocket.
Lucas pointed out that only 10% of movies made in today's film industry, break even financially. A critic of YouTube, MySpace et. al., Lucas recently made available Star War's clips to be re-edited in an editor-swarm-type, online format for individual interactive editing of his blockbuster film, thus waving the copyrights for private use on a public domain. He's moving toward TV and artificial intelligence generated animation as the next cash cow of entertainment.
Granted, film making is an investment of monetary means, but I can't accept it as a commodity that is traded based on box office projected revenues. That's Wall Street's manipulative intervention on the creative aspect of the art itself, and left unchecked we'll be seeing exchanged-traded-funds (ETFs) in the near future based on movie star meter charts combined like mutual funds with indexes, moving average indicators, and oscillator overlays.
Setting up exclusive private investment funds establishes film making as a mahogany club cultural elite's pass time, just as certain DVD releases are given more shelf space at Blockbuster because of inside production deals. A Wal-martizing of film production prevails. Distribution management will make or break a higher investment yield, which more often than not is meant to be at a debt load rather than profits, compounded by the interest rates that carries over to the biggest beneficiaries – the deal makers.
Lucas calls the likes of YouTube similar to "throwing puppies on the freeway" (film lingo) that is voyeuristic, not art. Presentation is random, just like the speculation of film production, where there are no market indexes unless you count Internet Movie Data base's star meters as technical analysis. Such presentation fails to bring substance and consequently, credibility of creative imagination. Lucas says he never started out making movies to make money. He just liked making movies.
Consequently, the story about Lucas' falling out with Warner Brothers is classic when he showed them American Graffiti, a film they bankrolled. The executive producers didn't like it, so Francis Ford Coppola, a colleague of Lucas, offered to write him a check then and there for the rights to distribute. Lucas declined, resentfully allowing Warner Brothers to chop off five minutes of the film as a compromise for release. After the success of Star Wars, Lucas made them restore the coming-of-age blockbuster to its original cut. Ultimately, the creator must profit.
J.R. Kambak is a regular IN contributor and award-nominated screen-playwright, award-winning videographer, and former corporate communications/media relations executive. Contact J.R. Kambak for more information and resources:email@example.com