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THE MOVIE FUND BLOG
Film finance and Film Financing is a subset of project finance, meaning the film project’s generated cash flows rather than external sources are used to repay investors. The main factors determining the commercial success of a film include public taste, artistic merit, competition from other films released at the same time, the quality of the script, the quality of the cast, the quality of the director and other parties, etc. Even if a film looks like it will be a commercial success “on paper”, there is still no accurate method of determining the levels of revenue the film will generate. In the past, risk mitigation was based on pre-sales, box office projections and ownership of negative rights. Along with strong ancillary markets in DVD, CATV, and other electronic media (like streaming video on demand -SVOD), investors were shown that picture subsidies (tax incentives and credits), and pre-sales (discountable-contract finance) from foreign distributors, could help to mitigate potential losses. As production costs have risen, however, potential financiers have become increasingly insistent upon higher degrees of certainty as to whether they will actually have their investment repaid, and assurances regarding what return they will earn.
Past film slate’s poor performance records are showing up in public court documents. Property and casualty companies (P&C) like AIG had offered insurance against film slates and the bonds issued to fund them, but now fully refuse to cover film slates. This ended in many lawsuits, starting in early 1999 (with Steve Stabler’s Destination Films $100M bond fund failure and subsequent lawsuit), and continue to this day with Aramid’s lawsuit on Relativity’s Beverly-1-Sony film slate and the Melrose-2-Paramount slate. Citigroup attempted to wrap the Beverly-1-Sony slate with a property and casualty insurance wrapper (from the formerly bankrupt Ambac Assurance, Corp.). After these “uninsured” slate financing arrangements (SFA) failed to return even the original principal to investors, the market has sought solutions. Traditionally, banks like JP Morgan have an entertainment division that uses proprietary risk mitigation regression analysis to see if future film revenues can meet an exceedance probability (where in the ultimate revenues allow the loan to break even), but this is calculated guesswork, and has caused all of the major national banks to lose millions in bad loans. An alternative to such loss protection was developed by Geneva Media Holdings, LLC (originally as risk mitigation for affluent individuals and “direct investors” under US tax incentive IRC 181). Fully insured media funds are now being carefully reviewed by risk analysts at major hedge funds, banks and institutional pension plans specializing in investor risk mitigation.
Many outside of Hollywood fail to realize the longevity of film and television after-market income streams. Many commercial films and network television shows will make money for decades. For the investor who pays for part of the negative costs, the time value of money is important. For many movie investors the required rate of return for this “risky” investment may be 25% or more. This means that while there may be TV revenues for an additional 10 years after the movie is released, the PV (present value) of those revenues is diminished by the required rate of return and the time it takes for these revenues to accrue. Ancillary revenues (VOD, DVD, Blu-ray, PPV, CATV, etc.), tend to accrue to the studio that purchased these residuals as part of their overall distribution deal. For many movie investors in the past, the theatrical box office was the primary place to gain a PV return on their investment.
VaultML has developed technologies usually seen in high frequency trading to predict box office success and investor risk using artificial intelligence. They claim to analyze over 300,000 elements from screenplay to form a basis for prediction. Based on their published future predictions for 2015 they out yielded the market on a return on investment basis.
Ryan Kavanaugh of the recently bankrupted Relativity Media offered participation in profits to actors, rather than up-front fees, to lower production costs and keep profits protected. Kavanaugh has attempted to use data from major studios like Sony and NBC/Universal to build a complex Monte Carlo system to determine movie failure rates prior to production. His projects and business models have failed miserably, causing a half-a-billion dollars in losses. The box office results of his movies have been mixed, as there is no set ratios, blends, mixtures, method or secret crystal ball that can project movie revenues, investor risk or rejection parameters.
Slated is the first dedicated online film finance marketplace for professional equity investing. Combined with Slated’s team, script and financial analysis, investors can have ownership in films with real profit potential.
Epagogix has developed a system using neural networks to assess factors that contribute to box office success. They assess a wide variety of movies of different box office returns. Another film finance analyst, Steve Jasmine, claims to have developed a system for predicting a film’s box office success. This system claims to quantify 800 creative elements of billion dollar grossing movies to determine what audiences are most interested in. Worldwide Motion Picture Group offers a service termed “script evaluation” where a team of analysts compare draft scripts to those of previously released movies in an effort to estimate the box office potential of the proposed script. They also conduct surveys and use results of previous focus groups to assist this analysis.
A final consideration is securing title. Since the collateral for film financing arrangements can be based on the ownership of intellectual property rights, film finance transactions generally commence with a title analysis.
FROM THE MOVIE FUND BLOG:
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