General Electric's (NYSE: GE) Universal Pictures asset received some good news the other day -- 75% of the studio's movie projects for the next few years will be funded, in part, by a financing entity known as Relativity Capital. According to The Hollywood Reporter, the deal calls for Relativity to help cover production costs, but not marketing programs; it could see about $500 million spread out over as many as 45 movies. Also, this is being described as a bona fide partnership -- not only will Relativity share in profits generated by ancillary channels, such as home video and television sales, but it will also have the power to co-greenlight a project, and it will be able to review the talent and budget attached to each project.
Financing by hedge funds and private equity is certainly not new in Hollywood; it's been around for a long time. So has the practice of selling off international rights and partnerships between studio competitors. Remember James Cameron's Titanic? It took the studio segments of both Viacom (NYSE: VIA) and News Corp. (NYSE: NWS) to shoulder that costly celluloid endeavor. But, although I recognize that filmmaking is extremely risky, and that a flop is very much in the cards whether or not big stars are in a film, I also have to wonder if it might be better for studios to simply lessen their risk by making much cheaper movies and foregoing the distribution of risk. What's my beef with distribution of risk? Well, I'm not the first to say this, and it's pretty obvious at any rate: hedge your bet, and you also limit your upside score in terms of a windfall.
Taking on more risk allows a studio to make more money. Yes, they can lose more money, too; that's why I'll beat the drum again and again concerning movie budgets: Hollywood must figure out a way to bring budgets down, and they must limit compensation packages to expensive talent. Also, studios must work on being more economical when it comes to promotional campaigns. Studios over at Disney (NYSE: DIS) and Time Warner (NYSE: TWX) are part of bigger media conglomerates, and they are so vertically integrated that they could cut marketing costs significantly, in my opinion at least, via better synergies between all the various platforms. Yeah, I understand the need to spread the risk. But, heck, I also want media companies that I have an investment in to make as much green as possible.
Disclosure: I own shares in Disney and General Electric.
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Reader Comments (Page 1 of 1)
3-04-2008 @ 3:39PM
maggie mayer said...
If a studio wants to smash the pygg and bring in the big guns (talent-wise) and then reach out for assistance to cover the difference, what's the beef? While I understand that maximizing invested dollars is primary to the investors, the studios are well within their rights to turn outside for a deeper well to draw from. Knowing that any amount of positive return is what one is looking for, wouldn't a split share of a blockbuster's revenue be better than a lesser return of a smaller sleeper? (or perish the thought, a loss?!)Creative financing has been a tenant of film making since it's inception as an industry. Knowing that studios will be reaching far and wide to cover costs may or may not be a comfort to investors, but hopefully it will keep the industry viable for the mass consumption it is geared toward.