10-Year Individual Investor Rate of Return

The September issue of Registered Rep contained an in-depth analysis on how devastating the last 10 years have been for the individual investor.  Registered Rep’s research concludes that the average return over the last decade for individual investors was 0%.

“…We estimate that long-term real (adjusted for inflation), actual (after taxes, fees and market timing) returns for the average investor, to be around 0 percent.”

To put that in perspective, since 1871 the average 10-year rate of return for the S&P 500 index is 7.4% (inflation adjusted).  As institutional investors continue to leave the film industry and the foreign pre sales market continues to decline, the film industry’s business model is going to vastly change.  Today, filmmakers are scrambling for financing, relying more on soft money from tax credits and individual film investors than ever before.  Yet even with the market’s 50% retracement from the bottom, the film industry derives little benefit.  Although financing from soft money mitigates downside, in a market that champions liquidity, film is perceived as a risky asset allocation.

Film Industry Articles You Should Read

What happens when animation keeps going Up?

The Hollywood Reporter’s Risky Biz Blog reports that 2009 is poised to be the first time ever that more than five movies will exceed $100m in box office revenues.  Up, Ice Age and Monsters vs. Aliens already did it, and the Alvin and the Chipmunks sequel — er, squeakuel — will do it; the only question is whether Meatballs and Disney’s hand-drawn The Princess and the Frog have the stuff.  Even without them, the sector could get over the hump thanks to Pixar’s re-release of the two Toy Story pics.

A New Venue for Indie Films: Your iPhone

Did you see the latest Jude Law movie?  The film titled Rage is a murder mystery from art house director Sally Potter.  Potter went an entirely different route for her new indie flick: Rage premiered exclusively on the iPhone through the mobile application Babelgum. This begs the question, does anyone really want to watch a full-length film on their mobile phone?  Industry insiders are watching (pun intended) with deep curiosity.

Sites Specific: Can Streaming Save Indie Film?

The way we watch movies is changing. And no one knows how, in the not so distant future, cinema’s going to be consumed — especially those independent and art films that are increasingly unloved by the Hollywood distribution system. Multiplexes may not be the place for defiantly indie cinema, but are iPods, Xboxes, laptops and flat-screens their next best hope?

ReadWriteWeb’s Top 5 Web Trends of 2009:

1. Structured Data
2. The Real-Time Web
3. Personalization
4. Mobile Web & Augmented Reality
5. Internet of Things

THR: Distributor Report Cards

• Lionsgate
• Overture Films
• Summit Entertainment
• The Weinstein Co.
• Focus Features
• Fox Searchlight
• Miramax
• Sony Pictures Classics
• Freestyle Releasing
• IFC Films
• Magnolia Pictures
• Here Films
• Oscilloscope Laboratories
• Peach Arch
• Roadside Attractions
• Samuel Goldwyn Films
• Zeitgeist Films

Strong Figures For The 2009 Summer Box Office

The Summer is make or break time for the studios.  The period between May 1st and Labor Day typically accounts for 40% of the year’s total box office revenues.  With the U.S. coming out of an economic recession, the premise of film as a recessionary resistant industry has been tested yet again.  According to Paul Dergarabedian of Hollywood.com, 2009 summer box office ticket sales totaled a record $4.25 billion, beating the previous record of $4.2 billion set in 2008.

Does box office revenue measure the health of the film industry?

While domestic revenue from ticket sales climbed about 2% at the Summer box office, attendance dropped 2%.  Over the past decade, movie theater admissions have been relatively flat, hovering around 1.4 billion.  Increasing ticket prices to achieve revenue growth has been an ongoing trend.  Looking forward, 3D and Imax will comprise a larger portion of box office admissions and ticket prices will continue to increase.  However, box office revenues and theater attendance are just indicators.  Profit is the only measurement of health.  Paul Dergarabedian makes some points on the subject below in an interview with KCRW’s The Business.

 

 

Does lower theater attendance matter?

Because movies are so much cheaper than their entertainment alternatives, tickets have a high degree of price elasticity (click image to enlarge).  As better theater experiences from 4K digital screens, to 3D and Imax proliferate, ticket prices will continue to increase.  And unlike television, the film industry is not solely predicated on viewership.  The degree to which attendance is a factor hinges on production costs.  Bottom line, all that matters is profit – how much did the film cost and how much did it make.

Adobe Announces Screenwriting Software

Adobe Systems’ recently announced Adobe Story, the newest addition to the popular Creative Suite product line.  Adobe describes Story as “A collaborative scriptwriting tool for film, broadcast, and rich media.  Adobe Story enables the online pre-production workflow for those who want to collaborate and expand their ideas anytime, anywhere, with anyone.”  Adobe Story is an obvious addition to the most robust software suite for designers, developers, filmmakers, and recording artists… what took them so long?

According to Adobe’s documentation there are four different roles that you can assign to someone you wish to share your screenplay with:

Co-authors
Co-authors can add, modify, or delete content from the script.  However, they cannot delete the script itself.  Co-authors can also, like reviewers, comment on the script.

Reviewers
Reviewers can add comments to the script but cannot edit it.

Viewers
Viewers have read-only permissions to the script.  They can read the script but cannot modify content or add comments to it.

Taggers
Taggers can add extra information to the script.  This information could include location details, schedule, instructions, and so on.

StreamingMedia.com was given a preview of Adobe Story and made the following observations about the new screenwriting product.

• Because Adobe stores the metadata for each character and portion of the script, the product has the potential to eliminate one of the bottlenecks of metadata in the production process: the need to rekey information, gathered in pre-production, into the production and post-production workflow.”

• Adobe has made security a clear priority in developing Story. Besides a user name and password required to login and work on the web version of the application, collaborators must also have an invitation from to work together on specific projects.

• One problem we noticed was that anyone that has privileges to a given project can edit another person’s comments without any trace. In the second comment down, Tim added the sentence after the hyphen to my comment, but there’s nothing to indicate that on the screen. We’d like to see additional security that only allows the original commenter to edit his or her comments, or at least some sort of tracking of individual users’ modifications to others’ comments.

• Color-coding is included for each character given a bio. Story only allows for six colors, so for now you’ll have to stick to writing scripts with no more than six main characters in them. Sorry, soap opera or epic screenwriters; you’ll have to wait until Adobe enhances this feature to keep track of your casts of thousands. It would be nice to see the color-coding show up in the script for either the character’s name or name and dialogue.

• The script editing is pretty standard as far as screenwriting software goes, and it can ingest FinalDraft as well as Word documents that have been created in a script format; one nice feature, though, is a handy tool called Smart Type that automatically suggest a variety of commonly used words and descriptions in order to speed up the process of writing your script. I found this very helpful and quickly got used to the “interruptions” that really freed me up to write meaningful dialogue instead of consistent script terms.  Spell check would be a helpful addition to the screenwriting portion.

For screenshots and more, visit StreamingMedia.com’s Story review.

Does Blockbuster Have A Chance?

The New York Times recently published an article about the threat of Redbox to movie studios.  The article gives a brief summary of Redbox’s growth from 12 kiosks in 2004 to over 22,000 by year-end.  With declining DVD sales already a major problem for studios, movie vending machines throw gasoline on a hot fire by renting DVD’s at a fraction of the competitions’ cost.  Redbox is the dominant player in the growing movie vending machine business that now comprises 19% of the movie rental market.  20th Century Fox, Warner Brothers and Universal are fighting back by refusing to sell movies to Redbox for the first month following their release.

The question that I am left with among all Redbox and Netflix’s recent publicity is:  where the hell is Blockbuster?  Blockbuster’s lack of a digital media strategy has already lost them the online battle with Netflix (Dan Rayburn gave Blockbuster a virtual beat-down on the subject) and now it appears Blockbuster is going after Redbox and the DVD vending machine market???  The New York Times reports, “There are now about 500 Blockbuster Express machines, and plans call for 2,500 more by the end of the year; the company expects to open 7,000 in 2010…”  Sooooooo let me get this strait, Blockbuster wants to go into business with themselves and cannibalize their own model?  I have not done enough research to have a definitive opinion, but it certainly appears that way.

Netflix vs. YouTube Market Reaction Poll

When the concept of DVD-by-mail emerged in 1999 from a small startup called Netflix people completely dismissed it.  The common notion was “Why would I ever want to get my DVD’s in the mail when I can just stop at Blockbuster?”  Fast-forward to the present and Netflix commands 36% of the DVD rental market.  Netlfix founder and CEO Reed Hastings has done an incredible job of identifying a problem, building an enthusiastic customer base and leveraging his solution’s largest competitive advantage, convenience.

The chatter about YouTube entering the space, prompts an intriguing question:  how will the market receive YouTube as a competitor?  Sceneclips has a poll running through Friday that we started on Twitter to gauge market reaction.  We would appreciate your opinion below.  Also feel free add comments and send the poll to your friends.

Institutional Investors Changing Independent Film

In the last post I wrote about how the dynamics of the film industry are changing. Stars are no longer a reliable predictor of financial returns for film investors.  Return on investment today is far more predicated on a film’s marketability.  However, the predominant factor that I believe will influence the film industry over the next few years is capital availability.

Throughout 2006 and 2007, Hollywood received a large influx of capital from Wall Street hedge funds and investment banks.  The recession has prompted this institutional capital to shift their asset allocations to more liquid investments.  Asset allocation is how investors divide capital among different asset classes like stocks, bonds, leveraged buyouts and venture capital.  Film is an illiquid asset.  Because films do not trade on an open market, investors have little to no liquidity once an investment is made.   Furthermore, the lack of a market mechanism prohibits film investors from determining the exact value of an investment.  This increases the risk perception of film investments as well as the return expectations.

I believe the rebalancing of asset allocations among institutional capital will result in two broad impacts for the film industry.

1. The number of films produced by MPAA studios will continue to decline.
2. The disparity between studio and independent budgets will grow.

The reason that institutional capital left Hollywood, and why I believe it will stay away for a few years, boils down to two elements: liquidity and the rebalancing of asset allocations.

Institutional investors favor liquidity
Liquid assets like stocks and bonds are more conservative because they have efficient markets of buyers and sellers that determine the exact value of assets.  In addition to liquidity, markets allow institutional fund managers to determine the performance of their investments on a daily basis.

Redemptions are causing institutional investors to rebalance their asset allocations
The economic crisis created a panic among investors and brought on a wave of institutional redemptions.  This forced institutions to sell their liquid assets to meet redemptions, causing billions of dollars to flow out of the capital markets.  The result was the contraction of institutions, particularly hedge funds (many hedge funds have merged or gone under).  Because of the sell-off, illiquid assets now comprise a larger proportion of institutional investment portfolios.  This has and will continue to result in the decline of investment in illiquid assets.

The argument to refute my first point is that studio film production will not decline because film is a recessionary-resistant industry that tends to outperform in economic downturns.  I agree that the film industry has historically outperformed in bad times.  However, as institutional capital shifts asset allocations to more liquid investments the result is that instead of investing in Miramax’s fall film slate, institutions will simply invest in Miramax’s parent company, Disney.  This preserves liquidity while maintaining an entertainment investment pure-play.  In return, Disney will focus on maximizing intellectual property, resulting in a decrease in the number of films produced and an increase in film budgets.  Studios will narrow their focus to generate the highest returns on the most marketable properties.

Institutional asset reallocation is the crux of my second point.  I believe that asset reallocation will result in a budget disparity because less institutional capital will be available for independent films to be financed.  However, that does not translate to a decline in the production of independent films – it just changes the model.  New distribution channels are creating opportunities for low and ultra-low budget independent films to generate attractive returns.  The emerging viability among low and ultra-low budget indies will likely result in growing popularity among individual film investors.

Only time will tell if my theories become a reality.  It is certainly a tough time to raise capital, but that should motivate filmmakers!  Change always sparks innovation.

Who Is Today’s Biggest A-list Star?

In an economic downturn the green light turns red as many projects get sidelined.  The projects that do progress often move forward with smaller budgets and many concessions.  In this time when even the stars’ quotes are getting slashed in half, the question is not “Who is the film industry’s biggest star?”.  The question is “What is the film industry’s biggest star?”.  The answer, marketability.

In today’s climate, marketability is the single most important element in raising capital.  Few A-listers command audiences like they did in the past.  In the last two years there has been a growing trend of stars failing to open movies.  As the New York Times recently reported, “A-list movie stars have long been measured by their ability to fill theaters on opening weekend. But never have so many failed to deliver…”

Viewers today are much more focused on original stories with identifiable characters.  Comic book movies are perhaps the best example of this.  You can argue that most of the comic book movies have massive budgets and star casts, but that is not why they have been so successful – Disney did not buy Marvel for $4 billion because of their big-budget, star-powered films.  Disney bought Marvel for their intellectual property.  Comic book movies are filled with compelling characters that appeal to broad markets.  Disney bought Marvel because Marvel is marketable, and now Disney is sitting on top of a mountain of original stories.

Stars may be A-list to the public, but not to investors.  To investors, money is the only measure of star power.  So long as the public is not filling theaters for A-listers, marketability will remain the biggest star.  While this does put independent filmmakers on a more even playing field, the macro picture for film financing suggests a cloudy future – more on this in the next post.