The Next Area of Disruption in Hollywood: Film Finance
The past several years in Hollywood have showcased a massive phase of technological disruption, from emerging distribution methods, such as new streaming services and virtual-reality content, to advancements in production techniques, like CGI and autonomous drone cameras. There have even been a few attempts at AI-written scripts. However, amid all of this evolution, one area that has been slow to progress is how premium content is financed. Fortunately, with recent developments in capital markets technology and digital securities, a new era is around the corner.
Investor Pain Points
When investing in an alternative asset class like film, an investor runs into two major problems — access and liquidity. Currently, it is nearly impossible to directly invest in any of the big blockbusters or movie franchises. There is presently no platform or financial product today that offers this type of investment. Even the wealthiest investors in the world cannot call their stockbroker and buy shares in the new Tom Cruise movie.
There are a few publicly traded stocks that investors can buy to gain exposure to the content market. Netflix has been one of the best-performing stocks from 2010 to 2019. However, investors are still not able to directly own a piece of individual films and are wholly reliant on the subscription-based business model, meaning Netflix investors are missing out on the many other areas where movies make money, such as theaters, pay-per-view, and licensing fees from other streaming services. Moreover, many analysts are starting to believe the stock is overvalued. In a Yahoo Finance interview, one Morningstar analyst anticipates the stock declining over 60% due to significant cash spending and an increasingly competitive landscape as new streaming services launch.
Lionsgate is another publicly traded “content play” for investors. Shareholders saw significant gains following the announcement of its acquisition of Summit Entertainment in 2012, which brought the highly lucrative “Twilight” and “The Hunger Games” franchises under one roof. Since the exploitation of that intellectual property has largely been exhausted, shares in the company have declined over 75% during the past two years, highlighting the need for a diverse portfolio of intellectual property for any film investment.
There are several other publicly traded media companies that an investor can easily access, such as Disney, Sony, Comcast, and Viacom. However, other facets of their business besides content creation and distribution impact these entertainment conglomerates. These companies have many revenue streams, which affect their overall financial returns. How good or bad a new film franchise does at the global box office could be completely offset by theme parks, music divisions, or consumer product sales. In turn, there is no significant correlation between film performance and stock price for these types of entities, leaving investors locked out of the upside from some of the most successful movies.
Outside of investing in your neighbor’s kid’s indie film, it is very difficult to find an opportunity to invest in a real film. Moreover, it is a virtual dream for investors to directly own part of the next “Spider-Man”, “Fast & Furious”, or an upcoming Oscar contender. Only a handful of well-connected and extremely wealthy people are able to gain access to these opportunities.
The other key issue investors face is liquidity. Once an investor makes their investment in a film and production begins, they are locked up for an extended period of time. For a single film, it typically takes three to five years before they ever see any returns. For a slate of films, it can be longer — usually six to eight years. As of now, there is no liquid secondary market for film assets. This creates huge headaches for investors, making film investing less efficient and riskier since they cannot access their capital for many years. As a natural consequence, this prohibits more investment from flowing into the industry as a whole. This cycle leaves many filmmakers and their projects unfunded, and investors looking to other sectors to allocate their capital.
Investors have long hoped for a true Hollywood stock market to make investing more efficient, transparent, and accessible. There have been some attempts at solving the pain points of access and liquidity over the years. The two most notable of which have been the Hollywood Stock Exchange (HSX) in the 2000s and Silver Screen Partners in the late 1980s and early 1990s.
The Hollywood Stock Exchange
The HSX started as an internet game that allowed users to try to predict how well new movies would perform at the box office. Using fake money, users could buy and sell “shares” in individual films. It was a bit like fantasy football — where real-world events translated into a fun game of skill and luck. However, after the financial services firm Cantor Fitzgerald purchased HSX, it attempted to convert the platform into a regulated futures market for Hollywood in 2008, seeking official approval from the United States Commodities Futures Trading Commission (CFTC).
Unfortunately, in 2010, after significant lobbying efforts from studios, Congress passed a law targeting HSX that prohibited futures trading in the film industry. While studios based their argument on protecting consumers, a more reasonable interpretation would be that studios wanted to avoid greater government oversight of their finances. HSX still exists today in its game-format, but, more interestingly, it represents a fruitless attempt to bring a new era of capital markets into Hollywood.
Silver Screen Partners
Silver Screen Partners, a more successful endeavor, was a series of four different film investment funds that collectively had over 100,000 individual investors. Shares were priced as low as $500/unit, and they raised about $975 million at the time. The funds were used to finance films with both Disney and HBO, owning a portion of many successful hits, including “The Little Mermaid”, “Beauty and the Beast”, “Footloose”, and “Who Framed Roger Rabbit”. This was the first time retail investors had the opportunity to access these types of blockbuster films, and Disney was able to access a significant amount of capital, leading to one of its most prolific movie-making eras in the history of the company.
Silver Screen Partners eventually was replaced by other funds, namely Touchwood Pacific Partners, that had a much more limited investor base. However, the lasting success of these investment funds demonstrates the possibility of bringing capital from retail investors directly to studios specifically for film production and ultimately enabling the creation of many more impactful and profitable movies.
Capital Markets Technology
With the advent of digital securities as a new capital markets technology, and global exchanges launching worldwide, it is now possible to democratize film finance and bring a liquid market to fruition. Investors could soon have the opportunity to participate in financing films on a new scale, which would be produced and distributed by a top studio partner, providing both never-before-seen access and liquidity. Through a robust and secure online platform, investors could have the ability to log in, check their shares in a film portfolio, and make trades through global exchange partners.
This new capital markets technology allows investors to take traditionally illiquid paper securities and digitize them into tradable shares. So, rather than waiting years to see returns, investors can buy and sell shares in real time as movies are released. Many legacy financial giants are integrating digital security technology and launching their own new platforms. This includes Nasdaq, Hong Kong Stock Exchange, SIX Exchange, and Deutsche Börse Group. Through the evolution of global trading markets, Hollywood will finally be able to tap into the increased demand for content ownership and offer investors direct film ownership without the impacts of other business models or revenue streams.
Overall, the state of disruption the entertainment industry is experiencing in production and distribution is about to be matched with innovations in film finance. As these financial innovations continue to develop, companies like MCT will operate at the forefront of this evolution. With digital security technology developments, investors will finally achieve both the access and liquidity that HSX and Silver Screen Partners previously tried to bring to the industry. As premium content becomes more watched and valuable than ever and technology continues to disrupt the status quo, there has never been a more exciting time to be an investor in Hollywood.
