AN INSIGHT INTO

INVESTING IN THE
MOVIE INDUSTRY
Aug 2019

This paper aims to provide a broad understanding of the

strategies and risks associated with investing in the movie
industry.

Contributed by: CoAssets Research Team

Publication Date: Aug 2019

2019 © CoAssets International Pte Ltd

 CONTENTS
Introduction 3

Film investments’ low correlation with 4

equity markets

Trend in the film & online video industry: 6

A closer look into China

Value chain of the film industry 7

Types of film financing 8

Risk mitigation and considerations 9

Conclusion 10

Annex A: Linear regression of variables 11

Annex B: Film project value chain 12

Bibliography 13

2 | An insight into investing in the movie industry 2019 © CoAssets International Pte Ltd
 Introduction

AN INSIGHT INTO INVESTING IN THE MOVIE INDUSTRY

By CoAssets Research Team

A. INTRODUCTION

1. Investing in movies can be considered an alternative investment. Like most alternative

investments, the return on investments in this sector have a low correlation with equity
markets. Alternative investments generally have lower liquidity, lower regulation, and
lower transparency. While potentially lucrative, this means that it is critical to perform due
diligence to assess the risks associated with the various investments. The risks and returns
for film investments vary based on the nature and structure of the specific investment.

2. To understand investments in the movie industry, we need to understand the industry’s value
chain. This describes the whole process of movie production from development to consumer
consumption. In general, investments in the later part of the value chain have a more accurate
valuation due to a lower level of uncertainty once costs are finalized and distribution contracts
have been signed. For this reason, investments in the early part of the value chain generally have
higher returns and greater risk, while investments in the later part of the value chain have lower
returns and risk. The risk-reward ratio is project dependent.

3. The main factors determining the success of a film include public taste, aesthetic merit, compe-
tition from other films released at the same time, quality of the script, quality of the cast, and the
quality of the director and other parties.

B. SCOPE OF PAPER

I. Film investments’ low correlation with equity markets

II. Trends in the film & online video industry: A closer look into China

III. Value chain of the film industry

IV. Types of film financing

V. Risk mitigation and considerations

2019 © CoAssets International Pte Ltd An insight into investing in the movie industry | 3
I. FILM INVESTMENTS’ LOW CORRELATION WITH
EQUITY MARKETS

All investments inherently carry risk. Conventionally, Figure 2: S&P 500 index from 2005-2018
there are 2 broad categories of risk in the equity market –
Unsystematic risk, and systematic risk.

Unsystematic risk refers to firm specific threats in

each investment. These include risks from the firm’s
management, operational risks, business risks etc.
Unsystematic risk in an investment portfolio will decrease
with diversification.
Source: S&P 500 index | Yahoo Finance, 2019
Systematic risks, or market risk, exists even in a
diversified portfolio. This refers to risks that come from
macroeconomic or geopolitical risks, and even acts of Figure 3: Global box office revenue from 2005 to 2018
nature. In general, such events or shocks affect all stocks,
and can be considered to be risk that cannot be reduced
through diversification. Indices like the S&P 500, are good
representations of market risks.

Figure 1: Historical correlation of various asset class-

es vs S&P500 (2009-2018)

Source: Global box office revenue 2018 | Statista, 2019

By plotting box office revenue growth and growth in the

S&P 500, Dow Jones Industrial Average, as well as World
Source: Asset Class Correlation Map | Guggenheim Investments, 2019
GDP (Annex A), we can see that the correlation between
these variables are extremely low.
Figure 1 represents how different asset classes have been
performing with respect to the market. As shown, most tra-
The correlation coefficient of global box office revenue
ditional forms of investments have had a high correlation
growth measured against the S&P 500 performance growth
to the S&P 500, signifying exposure to market risk.
from 2005 to 2018 is 0.07. The correlation coefficient of
global box office revenue growth versus the Dow Jones
Alternative investments have grown rapidly since the
Industrial Average performance growth in the same period
1990s (CFA institute, 2019). Alternative investments that
is 0.15. However, it is important to note that this study is
have low correlation to the markets enhances the risk/re-
limited by 13 years of data which only covers one econom-
turn profile of a portfolio that might only contain traditional
ic cycle.
investments correlated to systematic risk.
In measuring the global box office revenue growth against
Based on the following figures, we can see that trends in
the world GDP growth, from 2006 to 2017, the correlation
the film industry have a different trend from the S&P 500.
coefficient is even lower, at 0.05.
Figure 3 shows that global box office revenue has been
steadily increasing from 2005 – 2018. In contrast, the S&P
These numbers are in stark contrast to the correlation in
500 index can be seen in figure 2 to have dipped between
the various assets classes from Figure 1.
2008-2009 before steadily increasing again.

4 | An insight into investing in the movie industry 2019 © CoAssets International Pte Ltd
Due to the industry’s low correlation with equity markets,
investments in the movie industry can be considered ab-
solute return investments (as compared to relative return
investments).

This means that profits and returns from this industry are
largely dependent on specific film risks (e.g. script, produc-
tion costs etc.), and the ability of the producer or portfolio
manager to manage these risks, rather than market risks.
Such risks, and the areas that should be considered for
due diligence, will be covered in the later segments of this
paper.

2019 © CoAssets International Pte Ltd

II. TRENDS IN THE FILM & ONLINE VIDEO INDUS-
TRY: A CLOSER LOOK INTO CHINA

As shown in Figure 4, U.S./Canada has the largest box Figure 6: Revenue of China’s online video market from
office market in the world, raking in a total of 11.9 billion 2009 to 2017 (billion yuan)
U.S dollars in 2018.

Figure 4: Leading box office markets worldwide in

2018, by revenue (in billion U.S. dollars)

Source: Film industry in China | Statista, 2019

These data points support Deloitte China’s observation that

‘revenue generated from non-box office has grown rapidly,
providing important support for the continuous expansion of
China’s film consumption.’

Having said that, investment in new theatres are expected

to stabilize against a backdrop of theatre overflow and high
costs in first tier cities. As such, Deloitte expects expansion
into second, third, and fourth-tier cities to be rewarded with
better returns.
Source: Film industry in China | Statista, 2019
The growth within the Chinese market has also been felt
While North America remains a clear leader in this space, by Hollywood producers. Hollywood movies are being re-
China has the fastest growing film market in the world worked in order to appeal to Chinese viewers (Joanna
(Deloitte, 2017), and is ranked number 2 in the world, Robinson, 2016). These include filming scenes in China to
with a box office revenue of 9 billion U.S. dollars in 2018. make the film more culturally relatable, and including more
Chinese actors. Some movies have also had a dual release
As shown in Figure 5, ticket sales in China has grown – An international version and a Chinese version to be re-
from 284 million to 1.716 billion in a span of 8 years. Fig- leased in China.
ure 6 shows that revenue in China’s online video market
has also experienced explosive growth from $2b yuan in All in all, at a macro level, we need to understand the trends
2009 to $96.23b yuan in 2017. and growth areas within the industry before identifying and
evaluating specific investments and the risks associated
Figure 5: Number of movie tickets sold in China from with them.
2010 to 2018 (in millions)

Source: Film industry in China | Statista, 2019

6 | An insight into investing in the movie industry 2019 © CoAssets International Pte Ltd
III. VALUE CHAIN OF THE FILM INDUSTRY

To understand specific investments made in the film indus- Development: This is the process of creating and de-
try, we look at the value chain of film entertainment (Figure veloping an idea for a film. This includes screenplay, as
7). well as securing funding for the writer. Films often spend
a long time in the development stage. This makes the
Figure 7: Summary of the film entertainment value chain investment at this stage particularly risky. One research
cites that only 18% of films developed in the UK reach
actual production. Funders of the development stage are
often separate from funders of the production and are
generally repaid out of the production budget rather than
from a share of proceeds of the completed film.

The investment sequence, as suggested by Vickery and

Hawkins (2008), is illustrated in Figure 8. Generally, the
higher up you are in the chain (closer to development),
the higher the potential risk for investors, due to the dis-
tance in recoupment from the money paid by consum-
ers. Investment is first made in the process of converting
the intellectual property into the film. Investments at this
stage are typically funded in-house or via bootstrapping.
There may, however, be investment opportunities with
small and new scriptwriters or filmmakers. You would
need expertise or flair to assess the potential of a film at
the developmental stage.

Financing and pre-sales: This is the stage where the

film’s financing is arranged. This is the most complex
stage of the value chain. The different types of financing
can be found in section IV.

Pre-sales refers to the process where a film is sold, be-

fore being made, on the strength of the perceived value
attached to the director and cast. This is usually done
via sales agents who have relationships with distributors
in territories (a group of countries) over the world. Other
Source: Bloore, 2019 potential pre-buyers include pay-per-view channels such
as Amazon or Netflix.
Figure 8: Basic motion picture investment model
Valuations at this stage can be nebular and risky. Com-
panies often use social media following, and past film
successes as a proxy for the director and casts’ popu-
larity. It is also possible for smaller films to not be able to
secure any pre-sales.

Production/post-production: In this segment, the film

is shot and edited. It includes the addition of music, color
correction and complete editing. During the process of
the shoot, the director holds the most power. This au-
thority can be reduced during the post-production pro-
cess, as investors increase their involvement in creative
decisions at this stage. Generally, the director, financiers
and producers get involved in approving the final edit.
Funding at this stage is used to cover the cost of the film,
which is the net expense to produce and shoot the film.
This excludes distribution and promotional cost.

International sales and licensing: The film is complet-

ed at this stage and licensed internationally to distributors
Source: Organisation For Economic Co-Operation Development. (2008) in each country or territory. The distributors will purchase
2019 © CoAssets International Pte Ltd An insight into investing in the movie industry | 7
the rights of the film and exploit it over an agreed period. For example, a distributor could pay the producer $100,000
The distributors can agree to return a portion of profits upfront in the form of a minimum guarantee and incur $15,000
from the film back to investors. The distributor, instead of in the form of marketing expenses (total cost $115,000). He
the producer, pays to market it to the consumers. is then entitled to take 20% of revenue from the film as a
distribution fee. If receipts from the film total $50,000, the
At this stage, early investors may start to get returns from distribution fee due to him would be $10,000. Given an ini-
the rights purchase from distributors. The purchase price tial spending of $115,000 and the fee of $10,000, a total of
or minimum guarantee that producers get depends on $125,000 is owed to the distributor. The distributor will then
their negotiating power and market circumstances. Dis- be entitled to the full $50,000 from the film since it is insuffi-
tributors may also push to delay royalties and payment cient to cover the amount due to him. The distributor would
of profits, and have first right to the revenue, until they have a negative return of $65,000, and the producer would
recoup their printing, marketing and advertising costs, as not receive anything.
well as costs from the rights purchase (see example in
negative pick up). As shown from the above example, the details of the dis-
tribution contract would affect the risk and payouts for both
International distribution/exhibition and exploita- the producer and the distributor.
tion: This is the process where the distributor’s inter-
mediary prepares and executes the ‘Exhibition and These contracts can be executed before or after production
Exploitation’ in each group of countries. The different is completed. If the contract is signed before production is
types of exploitation include Cinema (a.k.a. the Exhib- completed, the distributor will only pay the minimum guar-
itor), Video-on-demand (VOD), Pay TV (satellite and antee after the movie has been produced. In such situa-
cable), or online download. Exploitation at this stage or tions, the independent producer takes the risk of incurring a
merchandising (like toys, soundtrack CD) is sometimes substantial loss if the film cannot be completed.
carried out at the distribution stage and might not involve
the film producer or financiers. However, some profits In such cases, a producer can also have a lender lend
may be returned according to the deal structure. against the value of the contract (the minimum guarantee/
licensing fees from the distributor) to support the financing
Once the film exists, the investments go into convert- package of the film and ensure that the film is completed.
ing the film into a broader commercial platform. The These contracts may be collateralized/ factored by the lend-
capital will go to exhibition facilities and media as well er at up to 100% of the contract value, and the lender may
as auxiliary product development. As indicated by the just take a setup fee. (Lotz, 2014)
rightmost arrow in Figure 9, downstream stages require
lower amounts of risk capital vis a vis those at produc- Gap financing: This is a form of mezzanine debt, where the
tion stages. Many of the markets are exploited within security is structured as a pledge of the equity interest in the
infrastructures that are already established (like cinema borrower (Dogen, n.d.). A gap loan refers to the difference
theatres). between the borrower’s primary loan and his available cash
on hand.
IV. TYPES OF FILM FINANCING
It can be used to complete the producer’s film finance pack-
There are a myriad of funding sources for the film, in- age by securing a loan against the film’s unsold territories
cluding public sources like government grants, private and rights. The value is based on the quality of the script,
sources like debt financing and other alternative meth- cast, genre, director, producer as well as the territories (a
ods like crowdfunding. We will explore some private and group of countries) it is distributed and whether it is handled
alternative sources of investment in this next section. by a major film studio (Bramme, 2016). Valuation is also
based on market trends of each territory. It is recouped after
There is no ‘best’ type of financing. Different financing the first production loan is repaid, thus recognized in the
types serve different purposes and should be evaluated second place of the loan hierarchy.
on a case by case basis.
The gap loan will normally be recouped before an equity
Negative pick up: Negative pick up is a contract where financier’s investment but are subordinate to bank produc-
the production company agrees to sell the license for tion loans. Thus, the deal is high risk, high rewards. This is
distribution rights to a film studio (a.k.a. distributor) in ex- similar to buying properties where buyers usually pay only
change for reimbursement of production costs and some 20% in cash (or equity in the film) and borrow the rest.
form of profit sharing.
This type of financing has been popular with indie films with
Typically, the studio pays for all distribution, advertising a budget of $10million - $30million (Adam Dawtrey, 2008).
and marketing costs. The distributor and producer will
split profits after recoupment of distribution fees and Bridge financing: This loan type serves to “bridge” the bor-
marketing expenses (see below example). rower to a conditional or future outcome. The loan serves as
a primary financing vehicle for the borrower (Dutton, n.d.).
8 | An insight into investing in the movie industry 2019 © CoAssets International Pte Ltd
This is useful for films that need funds to get actors, but Litman also noted that it is important for the producer to
do not have good enough actors to attract funds. engage a major distributor as they have better negotiat-
ing rights, bigger financial capital, and a wide network for
This happens when the investor gives the filmmaker a distributing the film. Litman stated that the audience traffic
letter of intent to finance the film if the filmmaker can tends to peak around major holiday like Christmas. This is
attach an approved actor. A short-term lender can pro- especially evident in the Indian film market. (Litman, 1983)
vide a bridge loan to secure the actor, using the note
as collateral. When the actor’s payment is in an escrow A note here is that despite these indicators, there is no per-
account, the equity investment can be triggered, and fectly accurate method to determine the revenue of the film.
the bridge loan will be paid back with interest (Bramme, Other factors to analyse would be the supporting exploita-
2016). This is a great way for smaller sum movie invest- tion markets such as on-demand videos or pay TV. Risks
ments for a short period as the investor knows how the could also be managed with public subsidies and grants
investment will be used. and pre-sales from foreign distributors (Lotz, 2014).

Slate financing: Hedge funds use slate financing to Factors to consider for due diligence before getting involved
manage risk and generate returns. This type of invest- in film financing include (but is not limited to):
ment is in a portfolio of films as opposed to a single pro-
duction. This reduces exposure to project risks (unsys- a) Investment structure
tematic risk) from a single film. As it is more diversified b) Return of principal (Escrow)
than the latter, the overall risk and return are more bal- c) Collateral
anced. The films included in the portfolio may depend on d) Cost of production
the fund’s co-financing efforts with the production and e) Ensuring a fair arrangement of the investment
distribution company. Portfolios are usually constructed
using a model or a few fixed criteria. The challenge faced Investment structure: Investors should consider the type
here is in conducting due diligence on tangled, opaque of financing (discussed in section IV) and the value chain
financial accounts to achieve greater transparency (Se- (discussed in III) in which he invests in, as this affects his
gal, 2018). projected nominal return and exit strategy. For investors
who invest early in the value chain, the time value of mon-
Crowdfunding: Partial funding via crowdfunding sets a ey is also important to monitor. Although many commercial
more realistic level of the funding target as it is easier films will continue to generate revenue for decades, the
to finance a specific production phase (e.g. pre-sales, present value of the revenue is diminished by time. Ancillary
post-production, distribution) rather than the whole (Mar- revenues (i.e. video-on-demand, pay TV, etc.) usually ac-
tin, 2016). Crowdfunding makes the film industry more crue to the studio that purchased these residuals (royalties
accessible to smaller investors who can now contribute paid to the actors/directors during DVD or online streaming
to projects which otherwise might have been shelved release) (HDTVNEWS, 2012).
(First, 2016). This also provides more security should an
investor pull out unexpectedly because the proportion of It is also important to consider how the investment will be
overall funds lost will be small, having a minimal impact repaid. For example, early-stage financiers would want to
on the continuation of film production and distribution. be repaid using the production budget, while late-stage fi-
nanciers would want to be repaid from actual profits. When
Because of the various ways crowdfunding can be used, different financiers are involved, there are also different re-
the risks for investments through crowdfunding are en- payment priorities. In such situations, it is also important to
tirely dependent on what the underlying financing struc- find out if existing financing has already been ranked pari
ture is, and where the investment lies on the value chain. passu, or if there is seniority tied to such debt. Senior debt
is normally considered to be lower risk than ’junior’ or subor-
V. RISK MITIGATION & CONSIDERATIONS dinated debt. In situations where debt is not directly present,
there are also structures that effectively mirror senior and
The creative factors which contributes to a film’s com- junior debt (see negative pick up example).
mercial success are (Litman, 1983):
Return of principal (Escrow): Investors should consider
a) Public taste in films especially in the territories of if there is an escrow account in the chain of financial trans-
distribution actions between the financing company and the production/
b) The artistic merit of the film distribution company.
c) Competition of other films released at the same
time in the target countries of distribution In an article by J.P. Morgan, it states that an escrow is a risk
d) Quality of the script and cast mitigation tool which allows two parties to set aside funds, to
e) Quality and accolades of director, producer and enable them to resolve various risk issues that might unfold
other parties during the transaction (Week, 2012). In film investments,
f) Production budget this addresses potential challenges like if the film distributor
g) Rating pays minimum guarantee for distribution rights, but the film
2019 © CoAssets International Pte Ltd An insight into investing in the movie industry | 9
delivery does not take place on time, or the materials a box office revenue of $500 million. In both examples, the
are not in line with conditions in the distribution agree- return on investment is 10 times. However, the movie with
ment (Zannoni, n.d.). the higher absolute cost of production and distribution runs a
larger risk of incompletion. This would also mean concentra-
An example of how an escrow account mitigates risk in tion risks for investments.
film financing is of a distributor who wants to buy distri-
bution rights of a film and the producer seeking to sell As such, judging the investment based on the ‘quality’ of the
such rights. Both parties run a financial risk of trans- movie produced may be misleading (see figure below); a
acting directly, as the distributor may not pay upon re- lower budget movie may make the same returns to the in-
ceiving the materials or the producer may default upon vestor as a blockbuster, depending on the investment struc-
receiving the money. With an escrow account, the pro- ture. This is also an added benefit to diversification via slate
ducer and distributor will enter into an escrow agree- financing (see section IV) when funding multiple movies with
ment with the account manager. The distributor will low production costs.
then pay for the royalties into the account, maintained
by a neutral third-party manager. After which, it is up to Figure 9: ROI for Hollywood movies in 2013
the producer to deliver the materials by a cut-off date,
meeting pre-agreed conditions. Once the conditions of Movie Studio Gross Cost ROI
the escrow agreement are met, the money will be re- Insidious:
FilmDistrict $160.4M $5M 31.1
Chapter 2
leased from the account (Zannoni, n.d.).
The Purge Universal $89.3M $3M 28.8
Collateral: According to Gallagher, Callahan & Gar- Warner Bros./
The Conjuring $316.7M $20M 14.8
trell, to serve as proof of value and collateral of the New Line
loan, the film package must demonstrate to the lender Despicable Me 2 Universal $918.6M $76M 11.1
the value of the project. If filming has not begun, the
Jackass Presents:
collateral can include the screenplay and story rights; Bad Grandpa
Paramount $142.2M $15M 8.5
legally binding commitments by the key personnel to Warner Bros./
We’re the Millers $269M $37M 6.3
participate in the film; the production budget – includ- New Line
ing a draw-down schedule for the use of the proceeds Gravity Warner Bros. $652M $100M 5.5
as they are paid to the filmmaker throughout produc-
Disney/
tion; and most importantly, legally binding guarantees Iron Man 3
Marvel
$1.2B $200M 5.1
for the territory sales, negative pick-up, or other financ- The Hunger Games:
ing arrangement. These contracts must specify the Lionsgate $774M $130M 5
Catching Fire
guaranteed minimum the filmmaker will be paid, and
Source: The Wrap (2013)
that amount can be used as collateral to be pledged
against the value of the loan (Ravgiala, 2009).
Other considerations: When assessing a film investment
Cost of production vis a vis returns: Investors opportunity, investors should confirm that the investment is
should consider the absolute cost of production and its a fair arrangement and structured in a way that ensures the
projected revenue. For example, an independent film agent and principal’s interests are aligned. Investors should
may cost $1 million to produce and distribute with a ensure that the parties are incentivised to execute their du-
box office revenue of $10 million. In contrast, a block- ties properly (Bloomenthal, 2019).
buster film may cost $50 million to make, and earn

VI. CONCLUSION
value chain is exposed to lower risks as compared to
This paper can conclude the following points. Firstly, investments early in the value chain. The risks associated
film investments as an asset class have a low with the various types of investments in this industry must
correlation to the equity market. This attribute could be factored into the investment decision making process.
be attractive for some investors due to the potential of
diversification when added to a portfolio of traditional Fourthly, there are different types of investments
investments. available within the film industry, including gap financing
and negative pick up financing. In this niche asset class,
Secondly, the global film industry has been steadily due diligence is crucial. Depending on the investment
growing for more than a decade. China is leading structure and the production stage at which the investor
the market in terms of growth, and is expected to finances, the investor should consider how he is repaid
eventually overtake the U.S. as the largest market in and how realistic the assumptions in revenue and cost
the world. projections are. For loans, lenders/investors should
consider how their financing is ranked, evaluating their
Thirdly, capital investment in the later part of the returns given the risk they are undertaking.

10 | An insight into investing in the movie industry 2019 © CoAssets International Pte Ltd
ANNEX A: LINEAR REGRESSION OF VARIABLES

Correlation

S&P 500 growth v. Box Office growth 0.07245102

DJIA growth v. Box Office growth 0.04290892

World GDP growth v. Box Office growth 0.04909852

2019 © CoAssets International Pte Ltd An insight into investing in the movie industry | 11
 ANNEX B: FILM PROJECT VALUE CHAIN

12 | An insight into investing in the movie industry 2019 © CoAssets International Pte Ltd
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debutfilme-171970

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