Thursday, January 21, 2010

What Crisis?

We’re always reading that some crisis or other is about to engulf the movie business. Whether it’s the withdrawal of the latest round of easy money from hedge funds, banks or German tax funds, the decline in DVD sales or piracy in developing markets, something’s always just about ready to eat the studios’ lunch. However with the movie business posting the biggest year ever in international revenue for 2009 and the prospects going forward looking very strong, we believe that there’s never been a better time to be making money in the movie business.

Not all investors do make money or get the right access to movie assets. The structure of your deal, or investment into the business, has to be right. There’s no point sitting on a “profit” participation deal on a one-picture slate when we all know movies rarely make what the real world of business calls “profit”. Investors need to be sure that they’re invested across a slate of movies over time with reputable producers, on which they’ll be sharing all revenues (a different beast from profits) on an equal basis with the producers. In this way everybody benefits from the capital that gets the movies made in the first place.

However, people always want to be a part of the movie business, and when one source of money dries up Hollywood always finds another. The wave of hedge fund slate finance deals with the studios has receded lately but we’re now seeing new deals from motivated investors using sophisticated structures, and cleverer equity investments ensuring that that participation by a principal financier actually means something. Movie investors haven’t always made smart investment decisions, and even the best and brightest had the wool pulled over their eyes by the studios as the majority of their slam-dunk blockbuster movies such as Spider-Man and Harry Potter were held back from third-party financier deals.

There’s always a smart way to make an investment and with a little less money on the table now there’s surely even better opportunity for investors to strike advantageous deals. Film-makers just want to get their movies made and they’re generally amenable to working with financiers to get the job done. Studios have a little more luxury since they have much deeper corporate pockets and some have walked away from what they felt were less than favourable investment and banking deals recently. But the experience of the recent wave of slate deals was that it helps the studios a lot to have co-financing partners, not only to lay off the basic risks of making big movies, but to help them focus their businesses on the part they actually make the most money from, distribution. So we’re going to continue to see different co-financing arrangements with some or all of the studios maintaining slate deals with financing groups.

In today’s Los Angeles Times, James Cameron commented that Hollywood exec’s will always claim some crisis or another, but historically that’s always been the way. In the 1950’s the scare was that TV would replace movies, in the 1980’s it was VCR’s, but now there are more movie theatres around the world than ever. So some sources of money dry up like the German funds, and others will take their place. In the last week alone we’ve seen a new $100 million film fund set up in Europe, and the announcement of a couple of $1 billion funds in the US. The opportunities for smart movie investors are too good to be ignored.

The Out Of Obscurity team.

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