Dumb Movie Money

The Wall Street Journal reports (subscription required) on the increasing role of hedge funds in the movie business.  It is not immeidately clear if they picked Ryan Kavanaugh, famous primarily for having made a series of missteps in the dot-bomb venture capital business that got him sued more than once, because he is a likely rags-to-riches story, or to gently remind the reader of the meaning of "dumb money."  Either way, it makes for outstanding "Vegetable Captial" material here.

Certainly, funding films must feel a lot like the venture business.  Reading the Journal article it becomes clear that all the people in line in front of an equity investor when it comes time to pay out, including exhibitors, the studio distribution fees, payback for production and marketing costs, actors and directors, make up for a pretty large black hole that has to be filled before investors see a dime.  It must feel quite like being a later stage investor coming in behind a massive wall of pre-existing preferences.  (That sounds redundant).  The Journal gives "Batman Begins" as an example.  $150 million in budgeted costs, $372 million in worldwide ticket sales and Kavanaugh's investment entity, "Legendary Pictures LLC," is still in the red by "several million dollars."

Considering that Legendary put up 50% of the budget for the film (the standing arrangement) and that even if a film has is a pretty big hit in the box office Legendary has to make their money back on notoriously fickle DVD sales, even a slight downturn in the film world could be pretty lethal.

And that's not all.  Studios seem to be smart enough to keep the good stuff for themselves, either funding the "sure things," (Harry Potter is the Journal's example) internally, or using debt rather than parsing out equity.  This locks in the upside for studios, who don't have to share a percentage of the take on these big franchise hits.  Instead they are looking to outside money to fund their riskier capital needs.

Nope, that's not even all.  Even McBusiness Week has figured out that the trend today is away from the box office.  The industry has been pushing up ticket prices and dumbing down theater size and the experience of going to the cinema for years.  Consumers are beginning to grow annoyed.  Luckily for us we have Mark Cuban to tell us that the studios should just release for DVD, Video on Demand and theaters on the same day.  As if the compression of the "lag time" between theater release and DVD release wasn't already headed that way on its own.  Less time to work off those preferences before investors get their take.  As a percentage of revenue for a film the box office has gone down to 17.5%.  Robust DVD sales might buoy the stakes of the likes of Legendary.  We'll see.

So how does Legendary intend to add value and pick winners?  Monte Carlo simulations.