Entertainment finance has had its ups and downs, but with the industry going through a major change, how will financing methods and models evolve? Key players in the entertainment industry identify the best forms of investment, and suggest ways to create the most successful media and leverage the fast-growing range of media outlets.
Bennett Pozil, executive vice president and head of corporate banking at East West Bank says, “There’s a huge change that’s going on from our traditional models to non-traditional models of entertainment finance.”
The changes in media consumption, coupled with the accessibility of creating low-cost productions, has increased the need for companies and investors to conduct robust market research and risk analyses. Traditional methods of procuring money, such as equity-based financing, bridge loans and tax credits, remain popular tools for filmmakers. The introduction of foreign investment and crowdfunding, however, contributes as factors that make it much easier for low-budget films, new filmmakers, and independent productions to enter the mainstream.
Take the film production completion bond, for example. This bond is a form of insurance that is backed by a completion guarantor company. Mostly used for independently financed films, this bond assures banks and financiers that films are produced according to a fixed schedule and budget. Why, then, do most films still fail or run out of money? “What oftentimes holds films back in terms of financing is not that they’re using their budget incorrectly,” says Susan Williams, partner at law firm Loeb & Loeb, “it’s that many of them are unaware of the bond fee or contingency that comes with a completion guarantee.”
Media outlets such as Netflix, Hulu, and Amazon Prime have opened the floodgates for streaming services across multiple platforms. Other companies such as Sony PlayStation and YouTube Red have followed suit to grab a piece of the consumer pie. With many of these outlets now creating their own original content, pressure in the entertainment industry to consistently produce creative, cheap and compelling narratives has grown exponentially.
“You’ve got streaming shows like ‘Orange is the New Black’ gaining a lot of popularity,” says Pozil. “I’ve also seen two other things come out of the Netflix streaming model. One is that much lower-budget television series—think going from $100 million, to $5 or $10 million—are exploding onto the scene and creating a lot of opportunities for production. The second thing is the aggregation of international distribution rights. Content is no longer limited to theatrical releases. The industry is now exploring other options by obtaining international licenses and streaming materials with companies like Netflix to secure better long-term value.
"What you have to do is to stand out and make an argument as to why your deal makes the most sense."
Digital streaming platforms are becoming increasingly saturated, with giant cable companies no longer dominating the consumer market. The spike in original content coming from nontraditional outlets emerges from the realization that, in order to gain long-term subscribers, outlets need to create their own material. Even companies that have long hosted user-generated content such as YouTube have embraced the idea of large-scale original productions in the form of YouTube Red.
“Compared to the doldrums of 2007 through 2012, there are a lot of new players in the market and there are digital native-content creators for obscure distributors like Verizon that are putting out content at the level of feature films,” says Jeff Geoffray, managing partner of VX119 Media Capital, LLC, a heavy lender in the film and television industry. “These companies realize that if they’re going to be successful, they have to create their own content.”
Much of film financing takes into account the basic understanding of supply and demand. Factors such as contracted receivables, cost overruns and future cash-flows are all calculated into the risk, and the emergence of new streaming outlets can oftentimes complicate the formula. Today, financers must take into account profit margins based on forecasts of future cash-flows through third-party distribution outlets and residuals. This also involves the international market, which is a driving factor behind Chinese investment into Hollywood. “Look at the successful deal between Hunan TV and Lionsgate,” says Pozil. “There’s a well-developed China strategy here that involves teaming up with entrepreneurial partners to expand global operations.” The partnership that promotes co-development and co-production has helped create movies such as “Sicario,” “Age of Adaline,” and “Gods of Egypt.”
Changing consumer behavior has also shaken up the industry. The on-demand generation is driving the experience of movie-going to near extinction. Box office ticket sales are flat, streaming networks are on the rise, and studios are looking for other ways to boost their bottom line. Companies like the Screening Room have leveraged this change in behavior to offer newly released movies straight to the homes of audiences for a mere $50 for 48 hours. While it’s still too early to determine whether or not this becomes the new way to consume entertainment, change in consumers’ expectations and behavior is undeniably on the horizon and will change how the industry becomes financed.
Despite the growing number of investments being poured into Hollywood from China, this trend is also prone to change. To show the scale in which Chinese companies are investing into the entertainment industry, Viacom Inc.’s Paramount Pictures recently received a $1 billion cash investment from Shanghai Film Group (SFG) and Huahua Media. The investment is contingent upon a three-year deal where SFG and Huahua Media will finance up to 25 percent of all Paramount films, with an option to extend for a fourth year. External factors involving political environment and financial regulations are not predicted to have a drastic impact.
“The good deals that make sense will always be approved,” says Pozil in response to the growing uncertainty for China’s capital outflow into U.S. companies. “Capital controls today are real, and I don’t know if they will be short-term or long-term. I’m sure there were many misguided investments in addition to the macro concept of currency control, and entertainment just happens to be a highlighted industry.” Following the recent meeting between President Trump and President Xi, a number of positive outcomes has emerged. “I bet we’ll see a loosening of capital controls either this year or the next,” predicts Pozil. “And as that loosens, we’ll see more money and more strategic discipline from Chinese investment groups.”
Paramount Pictures is not the first U.S. studio to work and/or partner with Chinese companies for lucrative cash flow. Studios like STX Entertainment, Warner Bros, Walt Disney Co, Dreamworks and Lionsgate have all worked produced work with Chinese investment. “We’re getting more Chinese equity, either as the full source or as part of the financing, and it’s growing more prevalent every day,” says Geoffray. Other recent ventures include China’s CMC Capital Partners joining with the Creative Artists Agency (CAA) to expand into China.
“Box offices in China have grown from $140 million 12 years ago, to more than $6 billion today,” says Rong Chen, chief executive officer of Perfect World Pictures. “It only makes sense that we’re all teaming up to capture the widest audience margin.”
Appealing to Chinese audiences has grown in priority for moviemakers and, while still scarce, Asian faces and themes are becoming more noticeable across recent entertainment lineups. Take China’s most popular actress, Fan Bingbing; she has recently appeared in movies such as “Iron Man 3” and “X-Men: Days of Future Past,” and anticipates acquiring larger roles. She told TIME magazine in January that, “In 10 years’ time, I’m sure I will be the heroine of ‘X-Men.’”
“What you have to do is stand out and make an argument as to why your deal makes the most sense to them,” says Pozil. “There has to be good strategic play that will help the Chinese agencies grow better relationships in Hollywood.”