An incredibly short (far from inclusive) overview of media finance, its opportunities, and pitfalls.
Please watch this 2 min cat video. Cats are essential. Probably the first time you heard that about cat videos
Last week I shared with you that this week would have a cat video. Ok, I know, so what do cats have to do with high or even low finance? Well, this weekend is a 100,000 ft overview of entertainment finance, and what is more entertaining than a 2 min cat video?
Entertainment is the classic monkey and pedestal problem. The pedestal creates the content. The monkey is getting the content to generate more money than the cost of the pedestal. It is a 100% valid assumption that the better the content, the more money you can make. This is where the monkey jumps in, and you must discern whether content can make more than its cost.
I have attended more than a few AFM American Film Market events. My role has been to separate the real financiers from the BS artist, to work with real financiers to button each project to keep costs under control, identify and catalog all of the intellectual property, and assist with finding as many profitable distribution channels as possible.
Here is a thought list:
• Before you spend, research the potential for impinging intellectual property (IP). You do not want to produce content that ends up legally barred from distribution because of copyright violations.
• Examine all of the IP and begin the process of protecting IP through contracts and IP filings. Both domestic and foreign.
• How is someone going to view this content? Movie Theatres, Television, Streaming, In Flights, and Live Performances.
• Ancillary revenue from Merchandising, Computer Games, Albums, sales of music online, clothing, and apparel.
• How is the project to be financed? What are the financing options: Investors only, Investors and a studio, Foreign Pre-sales, Ancillary Advances, Negative Pickups, Crowdsourcing, Presale of Distribution, or other rights?
• Making the hard calculations on what is promised to whom, how much that costs, and who is owned what and when. This is not an easy task. After all the wheeling and dealing, you, the investors, the rights purchasers, and the renters need to make a profit.
THE INVISIBLE RAKE
As this goes on, one must be aware of the invisible rake. The invisible rake is where someone is raking in more than they should or have disclosed. On a European licensed deal for a mini-series, the producer had a shell company that contracted with the foreign distributor. The foreign distributor had to pay the director's shell company 12.5% of all gross licensing revenue as a referral or co-brokerage fee. That 12.5% rake was not disclosed. When discovered, the investors recovered the $2.8 million through tough litigation.
Another invisible rake is the silent rake. A category of profit ignored by the team during the establishment of the project. After the project is completed, an insider, through a shell company, will offer peanuts to license an overlooked item of IP. Typically, these schemes work because the investors are delighted at the found money. The smiles turned to tears when the overlooked item of IP was worth 10 to 20 times what they collected in a fee. This is all perfectly legal.
Entertainment Finance has some attractive components. After you have created the entertainment project – you sell the same things repeatedly. Each entertainment project has its own business. It has its officers, directors, investors, and accounting and remains wholly apart from the other projects. Each needs its own business plans and contracts, and operations.
The world of entertainment and entertainment finance goes through near-continuous convulsions as technology continues to eat away at the cost of production and distribution. The studio needed to invest a lot of capital to make a movie 40 years ago. They need property, specialty buildings, lighting, cameras, sound equipment, and enormous post productions facilities to edit, add the sound strip and make copies. I remember physically editing High 8 and 16 mm films and matching the sound with scenes. Then came real to real video with similar but different editing problems, cassette tapes, DVD, and now all digital. The evolution of cameras has reduced size and cost; software has replaced the editing bays. Now many with only rudimentary skills can make videos and sell them.
So you say, who would buy a 2 min kitten video? No one, but did you see the advertisement before the kitten video? The creativity of content creators, technological evolutions, and some sharp business practices drive the evolution of entertainment finance.
I remember the chilling lines of one movie and TV financier, “Out of the room, Out of the deal.”
Weekender Music
The best movie on making plays
The Producers – “I Wanna Be A Producer”
This blew me away. You must listen to this.
L. Burke Files CACM, DDP
Senior Research and Advisor
Unucs Research, LLC
Brilliant, make a 2 min cat video and reap the rewards from the advertising that precedes the cat video for moths or years to come.