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The Institutional Risk Analyst

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The Economics of Content: Michael Whalen

Over the past decade we have periodically talked to our brother Michael Whalen (MW), Emmy award winning composer, film editor, and now agent to a growing list of performers, about the rapidly changing state of the world of content. With theater admissions and revenues flat, the final break in the Old World of Hollywood came several weeks ago with the major studios announcing a new model for releasing content online almost immediately after the theatrical release. Will we even be watching the Academy Awards in 20 years?

The IRA: So Michael, the change in the relationship between the movie studios and theaters that you have long predicted has come to pass. The studios have announced that they will be releasing films to online distribution only weeks after the release to the theaters. Talk a little about the economics of making movies today and how the investors/creators are able to cover costs much less make money.

MW: The situation facing the movie industry is a classic case of supply and demand. It is so much easier to produce a movie now than 20 years ago. Technology has knocked-down a lot barriers and walls. Also, another factor is state issued tax credits. Localities are tripping over themselves to have even low-end filmmakers use their states. It might sound like a joke but there are people making quality videos and shorts with their iPhones.

The IRA: Hey, we’ve been experimenting with new platforms like Collide. Our friend Stacy Herbert shot a TV segment in Central Park with me and Max for The Kaiser Report last year on an iPhone. Looked great. But it sounds like the traditional distribution channels for films are the victims of innovation.

MW: Precisely. Trapped inside this rapidly changing economic environment are theatre owners. They charge $12 - $25 a ticket to watch films that I can rent at home for $4. We live in a time where people under the age of 30 have no real need to go to the theatre to see anything. They watch YouTube on their phones. The theatre chains have done little to make the basic experience of going to the theatre compelling for a young audience. It’s a value conversation: you’ll probably get dinner (for 2), gas for the car, tickets and theatre food. It’s $100+ evening. This better be the best movie ever. Seriously, many people today don’t have the disposal income to go to theaters, much less sports events or other types of live entertainment.

The IRA: OK, but how about the films themselves? Brent Lang put out a great piece in Variety recently talking about the whole movie business being in trouble. Do you agree?

MW: Yes, the finances around film have never been for the faint of heart. These days, beyond the theaters to the world of content the upside is so much less than it used to be even a few years ago. There are hundreds of new platforms and outlets around the world for quality content - however, no one wants to pay for it. Well, to be fair - - they don’t have the upfront dollars to pay for it. Therefore, most licensing deals are some kind of revenue sharing scheme.

The IRA: So you need to find investors for a film and the studios bare no risk for the project? How many films actually make money? Is this like people supporting Broadway shows out of passionate devotion or charity? Does not sound like a business any more.

MW: The truth is that investors in these schemes often cannot cover their investments. These are breakeven scenarios at best. In the old days, you could release a decent film - breakeven in the theaters and then the foreign licensing and home video would give you a nice multiple. Now, if you’re lucky, you hope your revenue share deal with NetFlix gives you a little income.

The IRA: So is the theater channel now a significant contributor to revenue or are we talking about online as the biggest contributor?

MW: Being nominated for an Oscar can translate to a VERY big payday for the movie, its stars and those associated with making the film. That said, Best Picture winners typically earn an additional $14 to $15 million in box office revenue. Movies like, The King’s Speech, garnered $138 million in domestic box office – over $100 million more than was expected before it won. That is very unusual. Moonlight (this year’s Best Picture Winner) had only made $22 million before the award.

The IRA: Wow, so a critically acclaimed film may not ever break double digits at the box office?

MW: Nope. To date, Moonlight has made $55 million. It is also the lowest grossing Best Picture winner in history. In Hollywood, talent agents and managers estimate that their clients will get a 20% boost in pay for their next film if they win the award for Best Actor or Actress. According to Reuters, an Academy Award nomination can boost ticket sales by one-third and cause a jump in the home video sales and streaming of movies no longer in theaters. When you add-up downloads, streaming and cable TV revenues, the monetary rewards from receiving a nomination can be substantial.

The IRA: Ok, so is this something that is attractive to investors or just a passionate crapshoot?

MW: Most of the movies that made money in the last 2 years are HUGE “tentpole” franchise movies. This is important because these films typically have the movie itself as one platform of 4 or 5 marketing platforms for an entire project. For example, Disney released “Rogue One” the Star Wars standalone movie. According to Box Office Mojo, it has brought-in $1 billion in worldwide theatrical ticket sales against a production budget of at least $200 million and a marketing budget of at least that much. So, despite HUGE numbers being brought-in, the net profit is relatively small. But Disney has ancillary merchandise, video games, toys, TV licensing and a host of streaming options for this material that will add to the bottom line of the movie - - probably in the $400 - $500 million dollar range after all the costs are deducted.

The IRA: Sounds like the big names and titles are the only sure bet. Correct?

MW: Yes. For investors, the best course in dealing with film or video content is to finance as big a slate as possible (to increase the statistical probability of having a movie that makes money). Or, to look at creating stand-alone outlets for content. For example, comedian Louis CK directed and produced a video of his stand-up from his show at the Beacon Theatre in NYC. He posted the video on his website in 2011. In a month, 800,000 people had spent $5 to download the concert. To date, he has made millions from a production that cost him $220,000. He has given bonuses to the people who helped him make it, contributed to charity and he shattered how such videos are distributed by doing it himself. Then, the video won a Primetime Emmy® for best live comedy performance. This is the paradigm: great content. Low cost. A simple distribution method that can be driven by social media. Link here to the video:

The IRA: So is Louis CK the new role model for content?

MW: The key to investing in film is to lower your risk through diversifying – which is obvious. What is not obvious is to lower your expectation on possible returns as well. Unless you have a sophisticated multi-platform release where multiple income streams can help recoup your “hard dollars,” you will probably fail. The percentage of movies that break even in 2017 is at its lowest level in history. Even with multiple streams of possible income, we know that film finance is risky at best. However, streaming models work when the actual cost of production is low. So, look for intense downward pressure on costs, more and more supply of content and fewer reliable financial outlets for this content in the United States and in other territories as “winners” and “losers” begin to emerge in the video streaming market. Said another way, do your homework and make sure you understand the distribution deals that you are getting involved with BEFORE you sign. Some investors “roll the dice” with such deals without fully understanding the dynamics. Frankly, there’s not enough financial headroom to mess around like that on a typical deal.

The IRA: Sounds like investing in blockchain startups…..

MW: Finally, the premium that is paid for “known” talent is ending. In its place we see increased emphasis on content that is compelling and well made. Yes, “A” list actors will continue to command fees for the foreseeable future – however, more and more, those fees will be replaced by rev share models that put that actor’s ability to attract to the test every time out. Don’t be afraid to put those types of deals in place and be ready to reward actors and other “top-line” personnel who bring the most allusive currency of them all: attention.

The IRA: Thanks Michael.


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