Films earn their living in many ways other than the cinema. These days, even DVD sales are broken down into traditional and Blu-ray disks, with 3D DVDs on the way. Television is now a wide spectrum covering pay per view (e.g. Sky Box Office), subscription (e.g. Sky Premiere) and free TV (e.g. ITV). The emerging video-on-demand market is also set to grow strongly with the launch of new “connected” TV boxes.
In 2009 worldwide revenues from filmed entertainment through theatrical release, video/DVD/Blu-ray and online were estimated to be $85.1 billion. Compound annual growth forecasts of 4.8% estimate this will amount to $107.5 billion by 2014, according to PwC’s Global Entertainment and Media Outlook 2010-2014. These figures exclude revenues earned from television, and video-on-demand.
Global box office revenues in 2009 were $30.7 billion, representing an increase of 8.5% over 2008 and revenues in 2010 are expected to show a further annual increase. Overall global box office is forecast to grow to $41.7 billion by 2014 at a compound annual growth rate of 6.3%.
In 2009, combined VHS, DVD and Blu-ray software revenues were worth an estimated $54.5 billion. The PwC: Global Entertainment and Media Outlook 2010-2014 report states this is expected to grow to $65.9 billion by 2014, driven by further growth in Blu-ray sales and a recovering economy.
The global adoption of digital television has seen phenomenal growth in the number
of multi-channel homes and a range of new subscriptions, with a proliferation
of channels and increased demand for filmed entertainment on television. This
has created greater demand not just for first-run films but also older titles, extending
a film’s revenue generating lifespan. In addition, the video-on-demand market is
expected to show significant growth, with global revenues that exceeded $4.1 billion
in 2009 growing to $8.3 billion by 2014.
Film production
There are 2 types of English language films:
studio and independent films. The former are those made and distributed by the major
Hollywood studios such as 20th Century Fox, Warner Brothers, Universal, Paramount,
Disney and Sony. These are subsidiaries of multinational corporations that own
their own worldwide distribution networks through which they exploit their films.
Independent films are financed outside the Hollywood studio system and distributed
through sales agents who license the film to distributors in different countries and
negotiate up front payments, paid on delivery of the film. These upfront payments entitle
the distributors to exploit a film in their particular country for a fixed term in cinemas,
and on DVD and TV, after which the right to exploit the film reverts to the producer. Often
the major studios “pick up” independent films to feed their massive distribution systems,
which require many more films than they themselves can possibly produce. When
a film performs exceptionally well, further payments will be received from distributors.
The complexity and involvement of many parties in film financing necessitates the
engagement of a collections agent to collect all monies from distributors and distribute
them in accordance with the contracts.
Financing Independent Films
A finance package may include:
• Banks,
• Pre-sales to distributors before a film
commences shooting
• Subsidies from local government and
state entities,
• Tax credits, e.g. the UK film tax credit
• Equity
Before the credit crunch, a number of banks actively provided senior loans to
finance independent films. In common with other business areas, the credit
crunch has led to the majority of banks withdrawing from the market, leaving a
vacuum to be filled by other financiers.
To evaluate how much to lend to a film, banks would examine a sales agent’s
estimates (provided before a film begins production) that forecast the upfront
payments they expect to achieve from sales to distributors in each territory.
While box office figures are generally available, data showing how much
distributors have paid for independent films has hitherto never been made available,
even though it is precisely this data that can show investors in independent films the
income stream that is being invested in.
Ingenious Media has collected such data, showing film budgets, sales agents’
estimates, and actual sales achieved for all films administered by one major collection
agent from 2006 – 2009. This data set of almost 300 films represents 40 – 50% of all
English language independent films released in that period. Analysis of the data shows
that for films costing more than $10 million the following relationship between sales
performance and sales agent estimates that for the 96 films with budgets above
$10 million there is an extraordinarily strong correlation between agents’
estimates and performance (correlation = 97.2%, standard Deviation = 1.9).
This makes perfect sense:
1\. Higher film budget films tend to have more bankable stars and/or established film
directors, elements that can be compared to previous films in a sales agent’s analysis
2\. Higher budgets are more likely to require pre-sales to complete the
finance. Pre-sales in turn provide reliable indications of the value of the film
3\. Banks traditionally used sales agents’ estimates to determine how much to
lend on a film, and if these subsequently proved inaccurate, they would then
refuse to provide finance towards the sales agent’s other films. As a
consequence, the films would not get made, and the sales agent would have
nothing to sell and go out of business
The data also yielded a further important piece of information - not a single one of the films had sales income below 50% of sales agent estimates.
Based on this statistical analysis of actual film performance, Ingenious Media has devised a strategy for a fund investing in English language films with budgets of more than
$10 million. The intention of Ingenious Media Senior Film Fund is to achieve a low risk of capital loss while delivering high returns.
The fund will:
1\. Invest up to 50% of sales agents’ estimates – representing on
average 35% of a film’s budget
2\. Recover the investment from 90% of all film sales income: this senior position gives the fund significant capital security.
To enable funds to be reinvested quickly any sales contracted prior to completion of the film will be discounted by a bank to a maximum of 30%.
The indicative investment period will be four years during which time a 7% coupon will be
paid. Funds will then be returned to investors as collected over an expected period of two
years. Monte Carlo analysis shows an IRR of around 23% is achieved for an optimum fund size between $25 million and $60 million, with a portfolio of over 20 films, without leaving funds in cash awaiting deployment.
Note the above returns assume there are no hit films in the portfolio and that, indeed, all the films will lose money. A hit film would result in higher returns.
Statistical analysis of actual film performance shows the correct strategy, implemented by
a knowledgeable manager, represents an excellent opportunity for uncorrelated high
performance and a low risk of capital loss.
The following graph shows the illustrative cashflow for an investor making a $1 million investment.
The returns shown in the graph, and mentioned elsewhere in this article, are illustrative only. No representation is made or warranty given as to the accuracy, completeness, achievability or reasonableness of any such returns or projections. Actual results could differ materially from those illustrated.
