Where will NFTs fit into movie budgets?

It’s somewhat challenging to nail down exactly what is spent on movies worldwide. Even box-office and streaming revenues are kind of vague, but if we assume global revenues of $150 billion USD — and hope some people are making some profits along the line — then let’s say $100 billion of costs? A nice round number, anyway.

At the moment, this money comes from the big studios and their financiers (professional movie investors), from private investors, government subsidies and movie industry specialist lenders. I differentiate between the sectors’ financiers and lenders as it’s a distinction between debt and equity — though that can be a vague line. Most equity investment is likely founded on a repayable debt basis, though the straight up lending is unlikely to have an equity element.

A further important contributor to movie funding is deferrals. Any member of the production or a vendor to a production could well defer their fees against later revenues. This could be a writer, director or producer, but it could just as easily be the VFX house or the backlot. For the creatives in the team, this may be a necessity so they can pursue their passion. But for vendors, it can be a means for winning business. If a vendor is willing to take a deferral, then that can make a huge difference to a movie production budget, and may influence the vendor selection.

Of that $100 billion or so, it’s hard to work out exactly how it all is divided between the various funders. But for the sake of argument, we could just divide it equally; $20 billion each from professional movie investors, ad-hoc private investors (actually, probably smaller), subsidies, lenders and deferrals. These numbers are likely out by a few billion, but you have to start somewhere.

So taking the professional investors first, they are in an advantageous position in leveraging crypto funds for two reasons. Firstly, they have scale and track record. They’re funding the biggest blockbusters with the most transparency on revenues and their key people are well known. Secondly, they have the ability to pool crypto funds with their other funding sources, meaning a sharing of risk. It doesn’t have to be an on/off switch for them. They can raise $1m, $5m, $20m as they see fit, and just slot it in to their budgets.

But they do have challenges. People investing through this kind of vehicle aren’t doing it for merch and party invitations. They are investors interested in making a return, and if they are crypto investors, then they want to make a return in excess of their expected crypto returns. It simply isn’t feasible for the majors to leverage this kind of crypto funding without being regulated as a security, which then starts to become a costly exercise — and you turn away all the potential crypto investors who are not keen on subjecting their wallets to KYC protocols. The second challenge is accounting practices. Accounting for crypto transactions to auditable standards is a pain in the neck, and accountants willing to take it on are expensive. And there’s always going to be a risk manager in the equation piping up that it’s an environment in regulatory flux.

These challenges are real, and will inhibit the majors from entering the space, but not forever. They will be overcome, particularly as crypto holdings become more normalised in a population comfortable with KYC norms. My expectation is that these vehicles will be outsourced through third parties where securities regulation and crypto accounting are daily activities, with financial transfers to the pro-investor happening in fiat, rather than crypto.

Private investors, on the other hand, are more naturally aligned with the crypto community. They may be more motivated by the “benefits” than the financial returns. They may be more motivated by their belief in and passion for the production and its team, rather than a hard-nosed calculation of opportunities and counter-opportunities.

But private investors are notoriously fickle and demanding — and someone contributing a mere $10,000 is going to need a contract, which itself may take weeks to execute. Even when contracts are signed, smaller productions in particular don’t breathe until the money is in the bank, because suing rich people is rarely an option.

Crypto-fundraising is a significant opportunity in this space. A production should be able to raise sums far faster and in smaller denominations than ever before, and with significantly less hassle. This is what we’re working on at www.filmicnft.com (excuse the plug).

In fact, our aim is to snowball a fund (or funds) that can not just replace deferrals, but also eat into the traditional lenders space.

But this model also has challenges. The crypto community has not yet seen this model produce results. So not only is it conceptually “a risk” but it’s also impossible to judge the track records of various fund management teams to assess their relative track records.

But this is a temporary issue. Not only are we, at FilmicNFT, backing our first project, the Raven’s Hollow team, but we have competitors racing with us to build investment funds or fund individual IPs (like Calladita, Let Me Out, Arabian Camels, the absolutely delightful Flinch, Barracuda, Triangularity and so many more).

I call them competitors but, as the space is in its infancy, all projects that promote the crypto/movie crossover increase the total sum of crypto sector interest in the crypto/movie crossover space. This symbiosis makes for an enthusiastic and collaborative space, which has benefited from the leadership of people like Jordan Bayne, Alan March and several others.

And I haven’t yet got to movie revenues yet…

Firstly, I have to mention the bleeding edge of #film3/#nftmovies. There are concepts out there, where the goal is direct distribution of movies (and series) via Web3 streaming. To one degree or another, these include the Anthony Hopkins-backed Vuele and Cineverse.

But this model also has challenges. Looking at the roughly $150 billion movie revenues worldwide, these are being delivered through existing SVOD, Cinema, Broadcast and even airline sales. The innovators in NFT streaming are laudable, but the way distribution sales are chopped up, it’s just another channel to a potential buyer. Netflix, Apple+ and Prime won’t differentiate between the rights you are trying to sell them and the rights you have “sold” to NFT streaming services. Modest NFT streaming revenues at this time would cannibalise potentially more lucrative traditional distribution sales. There is a path for success in the NFT streaming space, but it’s a long one. However, it will, in the long run, have the opportunity to cut out some of the middlemen in the sector who are making the most money from film production. Or it might just create a different set of middlemen, who in turn may get bought by the existing middlemen.

But that’s not to say there isn’t a more immediate opportunity for NFT-backed movie distribution.

Rights are generally chopped up on a market by market basis. And this is a matter of contracts. Typically, the sales process is quite manual, with individual negotiations — though there are content “clearing houses” who may take a more structured or automated approach. However, contracts are negotiated, defined and signed. If you buy the screening rights in Albania for 5 years, they’re yours for five years in Albania, regardless of whether you screen the movie.

However, there is no reason why these rights shouldn’t be transferrable. And if you are prepared to offer screening rights to your movie on a transferrable basis, then you have an increased opportunity for future revenue.

This is because a transferrable right allows a more fluid reflection of the popularity of the product. If you presale your movie a year before it’s made for distribution in Germany, then that distributor gets a discount price for the next five years (or for however long the rights last). But if it turns out to be a hit, unless you have negotiated a revenue share, which for indie movies is unlikely, then the production, investors and equity holders get none of that benefit.

Transferrable rights — certified and traded as NFTs — incentivise rights holders to sell those rights at any profitable level. And selling means trading royalties to the production company. And it doesn’t even have to be a hit. Just one cast member can break through and suddenly there is increased demand for anything they have ever made before.

The existence of such a rights trading platform would also benefit production companies, as it removes their need to re-contract sales agents, which may be 15 years or more after a movie has been made.

There are barriers to this. It’s one of those “build it and they will come” projects that are great, but only when they have adoption. But kind of useless when they don’t have adoption by productions or distributors. That said… having had the idea, I am tempted to build it…

But the easiest revenue generator for movie franchises is NFTs as merchandise. For blockbusters, this is just free money — and this is the space where you do see activity from the majors — but for indie movies it can be the catalyst for a community of people enthusiastic to see the film. In both cases, I see third-party providers delivering the NFT services, if only to buffer the production companies from the crypto accounting headache. But this is by far the lowest hanging fruit in movie revenues.

So in summing this all up, there’s one piece of context worth adding. Compared to an estimated $100 billion USD of movie costs globally, the current quantum of crypto assets held worldwide is around $2 trillion USD, 20 times the liquidity required for the whole movie industry.,

So my predictions…

Within two years, nearly every movie in the world will have an NFT element in their fundraising or revenue model. Within 5 years, I believe NFTs will account for 25% of all movie production costs.

The 2022 crypto crash is a maturing process for the crypto community, the same process that benefited the dot.com sector twenty years ago and early derivatives traders nearly 400 years ago.

Though I accept it hurts now, the maturing of crypto speculators will increase enthusiasm for crypto projects based on real world value. It will also make the cryptoverse seem less a “wild west” den of bandits and gamblers, meaning it will become a more comfortable place for late adopters.

The movie industry is perfectly placed to ride the next crypto bear and deliver that $25 billion a year within five years, because it straddles the Venn diagram between crypto enthusiasts and the real world. Because, hey… who doesn’t like movies?!