FILM INVESTING – PART 2

In Film Investing-Part 1 we talked about film as a potentially attractive asset class for investors. There are, however, some aspects of a “typical” film investment that make it unattractive to some investors, many that can be avoided by diversifying in a fund, just as you would invest in a venture capital, or VC, fund that invests seed money in multiple tech companies.

To further that argument, lets clear up some common misconceptions that an investor may have heard about how films make money:

Myth #1: It’s All About Getting Into Theaters

Quotes are from a Slated.com white paper:

Because cinema releases involve hefty advertising expenses, it sometimes pays to aim for a more captive outlet: pay-television premieres can often eclipse theatrical premieres in terms of audience reach; video-on-demand can also out-gross cinema releases.

Independent films have much less overhead than the big hollywood studios, and spend a lot less to market their films because they don’t have to make as much money to recoup their investment. There are a number of companies that are “disrupting” — to borrow a tech term — the marketing and distribution industry right now, such as Tugg.com, VHX.com, Yekra.com, and Slated.com.

If you can pull any foresight out of trends, it’s showing that the future will have many different ways to successfully market and distribute your film directly to your audience, avoiding large marketing budgets and multiple tiers of middle men.

Myth #2: It’s All About Casting Stars

Independent films certainly benefit from having stars; their names help drive industry sales and attract other cast members to sign on. But it is also possible to have a breakout hit with unknowns who then go on to achieve stardom: none of the respective leads in Bend It Like Beckham (Keira Knightley), Beasts Of The Southern Wild (Quvenshané Wallis), and Winter’s Bone (Jennifer Lawrence) were known at the time. They are now.

Yeah, they’re known…

And how fun is that? To discover a great new talent, who then goes on to draw in millions, even billions of dollars in box office sales?

Which leads us to myth #3:

Myth #3: It’s All About U.S. Box Office Grosses

While theatrical success is certainly a harbinger of audience appeal and an indicator of demand, most profits actually derive from DVD and other ancillary revenue streams, not the weekend numbers the press focuses on.

Let’s look at some recent numbers, US vs Worldwide:

Screenshot 2015-02-05 16.32.39
budgets are estimates provided by IMDB.com

Not only are foreign sales making up a large chunk of independent movies, but the total worldwide box office typically makes up only 30–50% of a film’s total revenues. The rest is made up of other ancillary “windows” like VOD, Cable, Streaming, and DVD sales.

Myth #4: Revenues Are What Drive Profits

The real determinant of profitability is the film’s cost and payout structure. A film really does not need to be a box office success in order for an investor to make money — sound financial structuring can also make a significant difference, and in certain instances can guarantee 100% or more of invested capital is returned before the film even hits theaters.

The only way this works is on films where equity investment only represents a 30–60% portion of the film’s budget. When an equity investor puts up 100% of the financing for a film’s production budget, the burden is placed on the filmmakers to make back 100% of the film’s budget to break even, let alone realize a return for the investor.

Even then, returning $1.2 M on a $1M feature isn’t a very sustainable business.

Like I’ve said before, most investors I’ve spoken with are looking to realize a “3–5X return in 3–5 years” or “an 8–10X return in 8–10 years”.

So, investors need to look for films with a much more strategic and responsible budget, one that includes foreign presales, tax rebates, and soft money, and for opportunities that present asymmetric risk/reward — risk $1 to make $3.

Myth #5: Audience Opinion Impacts Profitability

The real determinant of profitability is the film’s cost and payout structure.

A film really does not need to be a box office success in order for an investor to make money — sound financial structuring can also make a significant difference, and in certain instances can guarantee 100% or more of invested capital is returned before the film even hits theaters.

Myth #6: Big Stars Bring Big Profits…

because audience opinion of a film and a film’s box office performance don’t drive a films profitability. Big names are important at the beginning of a film’s production & sales stage for securing a good sales agent and facilitating pre sales, but beyond that, in the low budget independent arena, they aren’t the main determining factor.

Myth #7: All Film Accounting Is Shady

I’m often miffed when I see such insane budgets on studio movies. Take John Carter, a 2012 production by Disney studios. Somehow, the estimated budget is $275 MILLION…more than all but Avatar, Pirates of the Carribean 3, and The Dark Knight Rises.

Screenshot 2015-02-05 17.38.55

While “shady accounting” does exist at the studio level, and even some large independent features, the reality is that when you invest in an independent feature you have much more access to the accounting of the film, and a clearer picture of where the money is being spent.

There also are much fewer layers of bureaucracy and management with an independent film, so you’re not spending money to “pad the pockets” of studio personnel that aren’t directly working on your film.

Myth #8: Studio Films Are More Profitable Than Indies

Well, thanks to the numbers, we have actual hard data, which I’ll leave without any further comment:

Screenshot 2015-02-05 18.02.44

Which brings us to…

The Bottom Line: Bet On Packagers & Powerbrokers

I’m not confident that I can put it better than Colin Brown, the man quoted above, so here he is again, driving it home:

Many hundreds of movies are completed each year and never distributed. For early-stage investors looking to lower their exposure to such bad investments, the best option is to identify and invest alongside similarly incentivized companies that have a proven development process strong enough to screen out all but the best ideas. Investors should invest in production companies that have a track record of working with “packaging” and sales agents who validate these projects’ potential in the marketplace before even a dollar is spent. These agents — each taking a commission on the sale of a film — are financially aligned with the investor and have a long reputation of successful film sales to protect. They have clout, are informed about market demands and know how to play the industry field to their best advantage.

In this regard, film investment can be compared to angel investors looking to invest in start-ups. Since each film project is analogous to a new venture that has no history from which to forecast potential performance, the best the angel can do is harness their considerable industry experience and insight to assess the track record of those behind those ideas. The packaging and sales agents, like super angels, are therefore the ones to bet alongside in the independent film world: the industry’s true insiders. An estimated 90% [I think it’s more like 95 or even as high as 98%] of startups don’t make their money back for investors. The same is true of independent films, although the stigma seems so much greater.

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