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Philadelphia Needs A Film Investing Revolution

A lot of people in Philadelphia love and support the arts. Comcast sponsors a number of local film festivals. But they don’t engage in much local film investing. Banks regularly fund and promote theatre shows. There are a lot of talented people here. It is strange, though, that the film industry itself has virtually no presence here. No major studios (including Universal which is owned by Comcast) have a studio producing films here. There is approximately (1) actual film distribution company left – shout out to Rich over at Breaking Glass Pictures. If you’re an actor let me know if you ever meet a talent rep here. Agents or managers? They’re all in NYC.

We are going to rebuild the entertainment economy here. If you’re into that hit us up.

There Is No Ecosystem Here To Support Building A Filmmaking Economy

Banks in general are wary of entertainment investing because it’s so volatile and unpredictable. However it takes banking on some level to support the development of any property – including intellectual property. There is also a huge disconnect between artists and the business of entertainment in Philadelphia. So many artists relegate themselves to non-profit financing or grants. That’s great for individuals but it doesn’t do much for an economy. One of the reasons so many would-be great Philadelphian filmmakers left is because they needed an industry to support them.

Here are some of the key factors:

  • There is no established ecosystem to support it.
  • Artists from Philly don’t tend to respect the business.
  • Philly lost its foothold over 100 years ago in a massive fire.
  • Tax credits are often gobbled up by only a few massive productions.
  • Finance professionals and banks don’t understand film investing.

“Say, what?!” Said The Incredulous Artist

Some of these things are relatively easy to overcome. Others are not. For example the tax credit program is “first come first serve,” so it’s possible more productions could be granted them. It is also true that PA’s tax credit program has a limited amount of capital it can allocate: $60,000,000 so there is not an infinite amount of money the state can lend. In fact, if you do the math, PA grants 25% to qualified productions. If you need to finance against the tax credit (most do) the state can only bare to support $240,000,000 in production.

So if (1) $100MM budget movie is filmed here, that eats up +40% of the budget! If the filmmakers making that film live, work, and operate out of Los Angeles then this will only provide limited utility for the state. People who work on those films won’t be able to support themselves on 1 gig per year. We need some kind of revolution in film investing to support growing an actual economy. But there are other problems…

First, Learn About The Dollars At Play Here

Here is how much was spent on content by the major studios back in 2017:

  • NBCUniversal: $10,200,000,000
  • Fox: $8,000,000,000
  • TimeWarner: $8,000,000,000
  • Disney: $7,800,000,000
  • Netflix: $6,300,000,000
  • Viacom: $5,400,000,000
  • Amazon: $4,500,000,000
  • CBS: $4,200,000,000
  • Hulu: $2,500,000,000
  • Discovery Channel: $2,200,000,000
  • Apple: $1,000,000,000
  • Facebook: $1,000,000,000

That’s a $61,100,000,000 economic opportunity. If it takes approximately $5B – $10B in order to compete in this game, you can expect to see the spending exceed $100,000,000,000 across the board within the next 5 years. It doesn’t seem that this industry is as inflated as other markets like software technology which has limited usage compared to streaming media content. People may be saturated with the amount they can consume right now, but that just means there will be competition for that new peak level of engagement. In other words, all of these companies will need to spend more to win.

Proof It’s Scaling Quickly (For Now)

For an understanding about how fast this is scaling, consider that Netflix is now estimated to spend about $15,000,000,000 on content in 2019 according to Variety. That’s an almost 6x increase over the course of 2 years! So the market for content is insane right now. It won’t last forever, but it will level out somewhere. Currently Philadelphia is barely capturing 2.5% of the amount spent by the media conglomerate in our own backyard!

New BIG Players In The Film Investing Game

Disney is going to be launching their own OTT app: Disney+. Plus Disney now fully owns Hulu. Speaking of Disney, did you hear about Jeffrey Katzenberg and Meg Whitman? They are launching an app called Quibi which will show short-form (10-15 minute episodes or less) content from major studios.

Their backing came from pretty much every major studio, to the tune of about $1,000,000,000 to get them started. It also appears they’ve closed their first $100,000,000 in ad revenue – before the app has even launched. This signals something very exciting is happening in the media production, distribution, and marketing world.

Box office records are still getting smashed by Marvel films, so don’t think people have stopped going to the theaters. TV isn’t dead either. Not by a long shot. In fact a lot of streaming services are embracing a business model that looks an awful lot like TV though they now rely on cable providers to deliver their “free” services. In any event, it is likely that these models collide and change, but the increased amount of leisure time people have now is being off-set by more media consumption.

Think Of Film Investing Like Real Estate Investing

A film is a piece of intellectual property. When I say this people often say, “Yeah but if we construct a building, at least there’s a real asset available even if the project fails.” Oh really? Tell that to all the abandoned buildings here in Philadelphia going unoccupied. What happened in 08′ when the housing market collapsed? Yes, real estate has a practical function in that it is a necessity (shelter) and generally its very strong. However, it’s not infallible. You’re also not guaranteed to sell or lease your property.

But back to the metaphor. With real estate you start with land. In film you start with a pitch. That’s the raw idea. It is the basis for the intellectual property you will develop. On a building you have blueprints, sketches, and marketing plans. For a film you have the script, a pitch deck, and projections of earnings. You could liken contractors to producers. A GC (general contractor) is like an EP (executive producer) in that they oversee the entire production, including financing. The sub-contractors on a construction/real estate project are similar to the producers on a film. You have lighting specialists, set designers, hair & make-up. You get the picture.

Some key differences that make film investing more desirable are:

  • You can lease film exhibition rights to multiple people – you cannot lease a single physical space to more than 1 tenant at a time.
  • There is virtually no maintenance once a film project is complete – its distribution rights simply get renegotiated whenever they run out (like when a lease is up).
  • If you create a winning or sustainable franchise – you have a reliable source of income from a core group of fans of that intellectual property. Like Marvel.
  • Currently there are great media tax credit programs in our state and other places within the United States and Canada.
  • Merchandising opportunities abound with the right kind of film property especially when they are marketed well.
  • Less ongoing liability. There are risks to production, but in a construction you can have a problem resurface structurally decades later.

Slates Are Ideal For Film Investing, Though They’re Costly

A few years after the great recession (2010), CNBC writer Shelly K. Schwartz wrote an article titled, “Investing In The Big Screen Can Be A Profitable Story.” Part of the secret for big cash investments like major Hollywood films is the concept of slate investing. Hal Vogel is an economist who teaches a course on “media investing and economics” at Columbia University. He is also the founder of Vogel Capital Management.

Vogel says,

“You should never invest in just one film, but rather a portfolio of films…odds are that you’re going to fail on some of them.”

Hedge funds, financial managers, and venture capitalists often pool money together with banks to fund a slate. A slate is a group of films treated like a “sleeve” in the parlance of venture capitalists. Typically to invest in this manner requires one to be accredited. Think back to the fact that Pennsylvania only can allocate enough capital to support about $240,000,000 in production per year.

Check out this story from last year about Legendary Entertainment securing a $1,000,000,000 credit facility. That’s just a credit facility they have. Nobody is producing slates in Philadelphia, or anywhere in Pennsylvania. No major studios have first look deals with producers in our city or state.

Philadelphia Film Investing Needs To Create Its Own Model

Part of what keeps NYC and LA going is they have a well oiled machine. Talent agents and reps help to vet creatives. Producers bring money, organization, and management to execute projects. Investors are keen to how it works and they make calculated bets on which slates or independent productions will return on their capital. Audiences are expecting to continuously see new and exciting work so they pay for it. These are institutions and have been in existence for ~100 years.

See if you can follow this. If you can you get the prize…

Talent needs development to be prepared for professional work. That requires managers and agents. They build up the artist and help negotiate their contracts with no conflict of interest with the production companies or financiers. That’s all in an ideal world, by the way. It has very much changed in Hollywood in ways we’ll deal with in future articles. Anyway…in Philadelphia since there is not enough capital to feed producers, there is less work for artists. Since artists aren’t getting enough work here there are no managers or agents.

A manager/agent gets 10% (each; typically) of an artists’ fees. Break it down. If an actor makes $100,000 per year (WHICH WOULD BE A LOT FOR AN AVERAGE ACTOR) their agent/manager gets $10,000. THAT IS NOT ENOUGH TO LIVE OFF OF. Therefore a talent rep would need to rep at least (10) talent to make as much as their average client makes. Do you see the problem here? That’s just on the talent / management side.

If none of this is going to be possible fast, we’re likely going to need to vertically integrate something in order to compete. I’m afraid that if we lose out on the next 5 years of growth in this industry it will be lost for another generation. That’s something we’re not willing to put up with or accept.

Some Bank With Chutzpah Needs To Step Up To The Plate

Without banks providing some kind of skin in the game it’s going to be really tough to get private equity or other investors to put up their money to invest in films. Yes. It will be a risk for that/those banks. Of course it would. In addition to a bank or some banks getting with the program, we will need help from the outside. There’s no avoiding it. Somebody like Apple, Hulu, Netflix, or Disney should look to Philadelphia as an open playing field. They will help to offset the bank’s risk. It will also help create a new economy for our city where many people badly need a good job.

Wanna Make Some Movies?

You know where to find us now. See you soon…