Investing in Movies: Strategies for Investors and Producers
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INVESTING IN MOVIES Investing in Movies: Strategies for Investors and Producers is a useful guide for inves- tors and producers looking for an analytical framework to assess the opportuni- ties and pitfalls of film investments. The book traces macroeconomic trends and the globalization of the business, as well as the impact these have on potential returns. It offers a broad range of guidelines on how to source interesting projects and advice on what kinds of projects to avoid, as well as numerous ways to maxi- mize risk-adjusted returns. While focusing primarily on investments in inde- pendent films, industry veteran and author Joseph Cohen also provides valuable insights into the studio and independent slate deals that have been marketed to the institutional investment community. A graduate of Yale and Oxford, Joseph Cohen held senior positions at Salomon and Lehman Brothers before he became president of Largo Entertainment, a joint venture between JVC and producer Lawrence Gordon, in 1989. During Cohen’s tenure, Largo produced such hits as Point Break and Malcolm X . Cohen founded American Entertainment Investors (AEI) in 1996, which is best known for advising independent production companies, including Alcon, River Road and Black Label. AEI advised Goldman Sachs and Assured Guaranty in restruc- turing The Weinstein Company in 2010. Cohen is a member of the Motion Pic- ture Academy and has taught film finance at the Peter Stark Producing Program at the University of Southern California. INVESTING IN MOVIES Strategies for Investors and Producers Joseph N. Cohen FORMER ADJUNCT PROFESSOR OF FILM FINANCE IN THE PETER STARK PRODUCING PROGRAM AT THE USC GRADUATE SCHOOL OF CINEMATIC ARTS First published 2017 by Routledge 711 Third Avenue, New York, NY 10017 and by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2017 Taylor & Francis The right of Joseph Cohen to be identified as the author of this Work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice : Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data Names: Cohen, Joseph N. author. Title: Investing in movies : strategies for investors and producers / Joseph N. Cohen. Description: New York, NY : Routledge, 2017. | Includes bibliographical references and index. Identifiers: LCCN 2016048952 (print) | LCCN 2017005916 (ebook) | ISBN 9780415791908 (hardback) | ISBN 9780415791915 (pbk.) | ISBN 9781315212159 (e-book) Subjects: LCSH: Motion pictures—Production and direction. | Motion picture industry—Finance. Classification: LCC PN1995.9.P7 C57 2017 (print) | LCC PN1995.9.P7 (ebook) | DDC 791.4302/32—dc23 LC record available at https://lccn.loc.gov/2016048952 ISBN: 978-0-415-79190-8 (hbk) ISBN: 978-0-415-79191-5 (pbk) ISBN: 978-1-315-21215-9 (ebk) Typeset in Bembo by Apex CoVantage, LLC To my late mother, Matilde, and the sweetest dog, Daisy, anyone could ever have, who together never let me get discouraged in the early years of American Entertainment Investors’ existence when I was struggling to turn the corner financially. And to my daugh- ter Catriela, whom I can always rely on for some well-thought-out advice on new film projects. CONTENTS Acknowledgments ix Introduction 1 1 Pros and Cons of Motion Picture Investment 13 2 Macroeconomic Trends and Studio Co-Financing 33 3 Tax and Other “Soft Money” Benefits and Limited Partnerships 40 4 Welcome to the World of Independents 50 5 The Evolution of Revenue Streams 59 6 Cast of Characters 67 7 Globalization of the Business 89 8 How to Have Fun and Not Lose Your Shirt 113 9 Managing Risk 130 10 Working the Banks 145 viii Contents 11 How to Beat the Odds: Niche Strategies 165 12 Evaluating Projects 176 13 Where You Should Be in the Food Chain: Distribution Versus Production 189 14 The Sinkhole of Development 204 15 Exit Strategies: The Value of Film Libraries 210 16 New Directions: The Digital World 216 17 Art Versus Commerce 223 Index 233 ACKNOWLEDGMENTS I want to thank all my colleagues at American Entertainment Investors (AEI)— my brother Charles, Andra Gordon, Christopher Howland, Myriam Bocobza, Luiz Tassi and David Chasmar for their strong support and willingness to search for data I directed them to. In particular, I want to thank my colleague, John Smith, for his many valuable comments on the text and his invaluable collabora- tion in preparing the charts and graphs interspersed throughout the book. I also want to thank my editor at Taylor & Francis, Emily McCloskey, and her editorial assistant John Makowski, for their much-appreciated guidance in making the book more accessible to the broadest possible readership and for persuading me not to go with a “sexier” but less-Googleable title So You Want to Walk the Red Carpet? I want to especially acknowledge my peer reviewer, Milena Grozeva- Levy, who clearly spent many hours reading my draft and greatly contributed to reducing its opacity and reliance on technical jargon. Since the book was inspired by the course on film finance I taught for 16 years in the Peter Stark Producing Program at the USC Graduate School of Cinematic Arts, I would be remiss if I did not thank the longtime program director, Larry Turman, for his strong support of my teaching efforts during my tenure there. Finally, I want to thank all of AEI’s clients who kindly allowed me to comment on their business strategies in such a public forum. INTRODUCTION Summary— The introduction traces the career arc of the author from Wall Street to Hollywood via the UK and Canada. The author describes his seminal experience as president and chief operating officer of Largo Entertainment, one of the first of the well- capitalized independent production companies, and how he segued back into the financial advisory business, focusing on advising wealthy individuals who want to invest in the media space and incubating the companies they finance. There are lots of books about the job of the motion picture producer. Many of them focus on creative packaging and production issues, but some offer a broader insight into the financing process as well. What the market is lacking, in my opinion, is a book that is directed at prospective investors in the film industry—both institutional and individual. I have attempted to address that shortcoming with this book. While the structure of the book does not exactly mirror the lecture sequence of my course on film finance, which I taught (and modified to accommodate changes in the marketplace) for 16 years in the Peter Stark Producing Program at the USC Graduate Film School (I retired in 2010), most of the concepts, analysis, issues and, to a lesser extent, financial models that I have introduced to my students can be found herein. One warning: I write like I lecture—circuitously. That is, I tend to return to subjects I brought up previously for further clarification and amplification. Hopefully, I will not be too repetitious. While this book is directed at the broadest possible audience, I recognize that the universe of prospective investors in the film industry is relatively small. This is not surprising given the enormous capital requirements of most films. Yes, you can make movies utilizing your credit cards, but the likelihood of anyone ever 2 Introduction viewing such films outside of film schools or obscure film festivals is minuscule, to say the least. I must admit that I am conflicted in writing this book. Given that I advise high-net-worth individuals in their investment adventures in motion pictures, it is obviously not in my interest to overemphasize the perils of investing in films. But the fact remains that most investors, particularly those who dabble in the space and don’t take it seriously, fail and lose money. I really believe you can make money on a systematic basis, but you have to be incredibly selective, incredibly careful and apply rigorous underwriting standards. Hopefully, this book will assist those interested investors in avoiding most of the pitfalls that abound. If I have one guiding maxim, it is “less is more.” You are lucky if you can find one or two or maybe three compelling projects a year that warrant an equity investment. The potential universe is larger with respect to mezzanine investment, which recoups ahead of equity, because the probability of loss is so much lower. I had one client several years ago who expressed an ambition to finance 8–10 films a year. I told him that made no sense: Even the studios have difficulty finding 8–10 attractive projects to make in a given year if we strip out sequels and acquisitions from their schedule. Not surprisingly, this former client stretched on too many projects, either opting in on projects with questionable commercial appeal or accepting budgets that were too high relative to projec- tions, resulting in an unfavorable breakeven analysis. He left a lot of money on the table before he imposed a more careful selection process, and, while he has not recouped anything close to his cumulative losses, he has probably recovered a meaningful portion of his overall investment—and he is still an active player in the space. Writing this book proved to be an invaluable exercise in compelling me to address many of the key challenges facing investors in the movie industry today.