​January 12, 2021

– 15 MINUTE READ –

Licensing or buying content (movies, TV shows, documentaries, talk shows, etc.) is fundamentally the same thing. The terms of payment and the contracts are different (paying over time, versus paying up-front) – but they are both remarkably similar ways to aggregate content for an OTT Streaming channel.  

Like Home Entertainment (DVD) distributors and Broadcast (cable & free TV)  before them, many Streamers start out licensing content from many sources, but then find it essential to create their own original shows. They may contract with known third party producers or have their in-house creative/producers/crews make the programming.  

William “Bill” Sondheim, a long-time media executive, who has built, run, and purchased streaming media companies brings his own unique insider insights on how to build a better streaming business.  

Stephen J. Kerr, a 25-year veteran corporate and intellectual property appraiser, as well as an M&A intermediary, who has bought, sold, and valued streaming and home media companies, contributes his investment banking perspective to this topic. 
​
This second article focuses mainly on purchasing and licensing content from independent third parties.

As we mentioned in our first article on this subject, excellent content with poor distribution is as ineffective as terrific distribution with poor content.  Neither will lead to success.  Only top shelf content coupled with broad distribution succeeds.  The more tailored to the specific audience, the better.

We’ve valued and sold many copyrighted and classic film and television libraries over the years, but those transactions seem to be hard to find these days.  Most of the best independent film libraries have been sold/licensed a long time ago, and the major studios that control the largest IP archives have all but closed their doors to licensing – instead, they prefer to populate their own OTT streaming channels with their own branded content. 

↑ Download this PDF of INFOGRAPHIC ↓ ​

November 16, 2020 

– 10 MINUTE READ – 

PREAMBLE:

This is the first in a short series of succinct articles.  Included in these pieces are questions posed by Stephen Kerr, and William Sondheim, along with their perspectives, and answers - via direct quotes - from owners and executives of streaming media companies who were recently interviewed. 

William “Bill” Sondheim, a long-time media executive, who has built, run, and purchased streaming media companies brings his own unique insider insights on how to build a better streaming business.  

Stephen J. Kerr, a 25-year veteran corporate and intellectual property appraiser, as well as an M&A intermediary, who has bought, sold, and valued streaming and home media companies, contributes his investment banking perspective to this topic.  

The industry execs, we interviewed, share their “in-the-trenches” perspectives, and experiences, on the “OTT” streaming media industry.

 

Sondheim and Kerr agree that more needs to be written about and for the more than 400 small and mid-sized streaming media companies in North America, plus the hundreds of others overseas.  What is published in the media trade publications mostly focuses on the five or six heavyweight streaming channels (like Netflix, Apple+, and Amazon Prime), which are all owned by giant media conglomerates.  

Much of what is written about the huge, multinational streamers is not very helpful to the abundant streaming company owners and executives hustling and struggling to compete in the crowded streaming media space.

Here it begins – everything streamers may want to know and are not afraid to ask.

_____________________________

WHAT ARE THE FOUR PRINCIPAL ASSETS OF THE STREAMING MEDIA BUSINESS?

Both, Sondheim and Kerr, concur that CONTENT, DISTRIBUTION, SUBSCRIBERS / VIEWERS, and INFRASTRUCTURE / MANAGEMENT are any streamer’s four principal assets.   

​How well these assets have been managed, and how fast they have grown and evolved, are what create and sustain strong streaming media businesses.  
 
Sondheim’s advice is aimed at strengthening a streamer from the inside out.  
 
Kerr’s guidance relates to making media companies more valuable from the perspective of bankers, investors, and suitors.   
 
Both points of view are important to smaller and mid-sized streaming media businesses.

 

 PREAMBLE:

This second article of our two-part series was written to educate, illuminate, and advise streaming company owners about their business – and its future. We continue discussion with our industry experts regarding the present and future value of streaming companies, as well as the state of the industry.
We are long past the time when anyone needs to justify the existence of streaming media as a business.  Traditional broadcast media is not going anywhere… yet. But streaming video services are clearly the future of the entertainment industry.

→ We’ve been saying for years that, “Consumers want their entertainment, when-ever, where-ever, and how-ever they want to view it.”And now they have it.  

Here is Part Two (Expert Answers to Questions 6 - 10). 
Part 1 was published in May.

6. If a Streamer has plateaued and stopped growing, how does a new owner create a higher value than the current owner? ​

First, please note that we now refer to app based channels like Netflix, Amazon, Hulu and hundreds of others, as “Streaming” channels, or STREAMERS, not OTT.  OTT has become an outdated term; let’s retire it. 

If you’re reading this article, then you’re probably in the content production and/or distribution business – and we believe you need to know this information and understand this business.  

Streaming media is here to stay. 

​Over the coming years it will continue to grow into an even more dominant media form.  Netflix is merely one of hundreds of new Streaming platforms around the world, and they are closing in on 150 million subscribers.  Other than press coverage about the major streaming channels, most of the creators of content, and distributors of films and television programming do not fully understand this business.  Hundreds of streaming channels have been created and launched around the world over the past ten years, with new ones debuting every week.  Streamers have become a dominant source of news and entertainment for global consumers that all media professionals need to study and comprehend.  

The continued decline (or complete absence) of DVD/Blu-Ray revenue, coupled with falling foreign sales income, has hit film and television distributors hard.  The rise of OTT channel revenue has not begun to replace that lost income.  Many veteran foreign sales agents informed us they have started domestic (USA) film marketing divisions to offset lower offshore film sales.  Others tell us they have created strategic alliances with would-be competitors, and increased the number of films they executive produce – all this to help rebuild their bottom lines.

The prognosis for 2019 is much the same.  

One of the bright spots continues to be Asia, where the gargantuan China market is just opening up to more Western IP.  Any foreign sales company without an Asia sales specialist on staff is missing out. 

​PREAMBLE:
We wrote this article because we wanted to help our indie TV & film producer / distributor business associates better understand current OTT opportunities.  We recently interviewed several of our OTT-channel business associates to get the inside scoop on how to capitalize on over-the-top content.

Most content creators are only aware of the biggest OTT platforms like Netflix, Amazon and Hulu, but have you heard of 420TV, PureFlix, Fuse, Outside TV, The Film Detective, Viceland, The Blaze, Shout! Factory TV, the Dove Channel, UP, Ride TV, WE TV, World Fishing Network, RFD-TV, Z Living or AFRO?  These are just a few of the hundreds of new channels available through Sling TV or as downloads to your ROKU, Apple TV, Fire TV, or game platforms – such as Xbox, PlayStation or Wii. 
​

PREAMBLE: 
We had a conversation the other day with a prospective new client about the value of a motion picture library that they were looking to acquire – and the comparative value of the company that owns those films.  That conversation reminded us how outmoded the thinking is for many entertainment professionals who see the value of their film assets as unchanging. 
____________________________________________________

​As appraisers, we look at valuation differently than the creators of movies and docs do.  We are most interested in the remaining economic life left in the assets, and less interested in the critical success of the film when it was first released in theaters.  Yes, the cast, director and box office success of every film does play a part in its Future Value, but how exploited the film was upon release, and the state of the distribution rights, weighs heavily on its Present Value. 
​

Let’s explain by way of an example:  If you have two movies, one was critically acclaimed and sold extensively around the world under long term contracts, it may not be worth as much as a lesser known film of equal quality, that was not widely released.  The reason is that the second film can still be sold in global markets where it has not yet been exposed. And, the first, better known film could have exhausted 90% of its territory avails. 
​

​➜ ​The Present Value of any asset is directly proportional to its revenue producing future. ​

Even a great motion picture, or documentary, that has been heavily sold around the world under long-term contracts, can have very little future economic value – just a few years after it was released.
​

(Big Screen, Small Screen – they all scream “TV”)

PREAMBLE: At the most recent American Film Market, we met with more than 25 film distribution companies.  About one-third of those companies said that they have no plans what-so-ever to enter the television series space, another third are just now starting to consider developing TV series, and the other third of the companies are actively developing series for the television market.

​We wrote this article because 99% of the films that independent distributors sell to the world will never see the inside of a multi-plex.  In fact, few will ever be released in theaters in any form.  So why are some indie movie producers and distributors still telling themselves (and telling us) that they’re only in the movie business?  Studios have long known they are in both the film and television businesses, and in this article, we explain why Indies should acknowledge that they are too.  

Stephen J. Kerr (SJK): Netflix, Amazon, Hulu, HBO, Cinemax, Epix, Vimeo, Sling, Google Play, Crackle, YouTube, TruTV, Hallmark Channels, Oxygen, BBC, TF1, TFD, IFC, AMC, Pivot, Starz, Showtime, SyFy, A&E, MTV, Univision, NatGeo, USA Networks, Bravo, Smithsonian, BET, Discovery, FXX, CMT, OWN, Spike, TLC, VUDU, Comedy Central, soon Apple and Facebook, and of course ABC, NBC, CBS, and FOX – in actuality – are all the places people watch movies… and are all essentially television.  By television, of course we mean the screens of actual televisions, plus laptops, smart tablets, smartphones, gaming platforms, and airplane screens.  

Even those 1% of films that get a limited or wide theatrical release are in movie theaters for – at most – three to four weeks of their entire lifespan.  So, it’s time to ask yourselves, what business are you in?  The movie business or the television business? 

​The answer is, of course, both.

​PREAMBLE:
We wrote this piece for entertainment professionals who own a film and/or television content distribution business, because they know what challenges impact their businesses. Challenges like lower revenue from foreign sales; disintermediation due to self- distribution; rising acquisition costs for quality productions; the need to invest earlier in films in order to lock up distribution rights; increased risk from foreign competitors, and more.  It has never been easy to be in the film distribution business, but lately the hurdles seem to be growing, and a clear path forward more challenging. 

​

Stephen J. Kerr (SJK): The last few years have been tough for film distributors, but it has also been one of the best of times to distribute content.  There are more places today to sell movies, documentaries and television serials than ever before. 

The world is a smaller place, with previously insignificant markets like India, South America, Africa and Southeast Asia now becoming viable markets for American entertainment. 

​With 500+ cable channels and as many OTT channels blooming on the internet and on your TV, there is an audience for almost every conceivable form of entertainment.  The challenge is that with all those choices, the audiences for each movie and show are smaller, and therefore content is less valuable. 
  
Being a film distributor has its rewards: lunch on the Cours Masséna in Cannes with actors, auteurs, and producers; red carpet photos with beautiful people at Sundance and Tribeca Film Festivals; pitching film buyers in Santa Monica, Berlin and Hong Kong.  That’s the fun part.
​

​For more than 25 years our company has developed film, television, and other media properties – as well as provided business development, branding advice, and investment banking expertise. However, our primary service has always been advising business owners on how to value, buy or sell their media companies.
 
Some of the most challenging assignments we get are advising film distributors and sales agencies. 
​
We will refer to both film distribution companies and sales agencies as simply film distributors. The reason is that the line between what the entertainment industry has historically defined as a distributor and a sales agent has blurred to the point of being indistinguishable from one another.
 
Around the world, distributors often provide the same basic functions as do foreign sales agents; and, sales agencies sometimes provide complete film distribution services, both worldwide and in their home territory.

Buying, selling, merging and valuing film distributors is not impossible, in fact, it is done all the time. For the health of the film industry it is critical that media entrepreneurs know that they can buy other companies, sell their own businesses, or merge with strategic partners. 
​

​→ ​The Value Drivers

Our firm is all about helping companies build and realize their highest value: whether it is in film, television, music, video games, publishing or online.  As you get ready to go to Cannes, we want you to think about what makes your company valuable, and to consider what you can do to enhance that value as you do your work of buying and selling films. 

If you want to buy or sell all the rights to a film, you do not necessarily have to call an appraisal company to arrive at a fairly accurate value of the property.

My firm has been valuing book, music, software, film and television (intellectual) properties for more than 25 years and we have also studied the valuation techniques of many other firms as well, and for the most part, it comes down to “apples to apples”.

 → STEP ONE
Break down the film, or films, by director, star(s), genre, original box office (or DVD) revenue and foreign/domestic exposure.  ​
​

Sarah Nean Bruce (SNB): Why should film distributors be interested in hearing about 4K / Ultra High Definition content and delivery platforms?

Stephen J. Kerr (SJK): To deny the onrush of 4K/UHD as the new standard in motion picture, online and television delivery makes about as much sense as denying climate change. You can ignore it all you want, but to your own peril… Both are coming anyway. 

SNB: How come 4K is in your forecast? 

SJK: For several years now, virtually every major motion picture and most television shows have been shot on film, or on 4K, 6K, and even 8K - digital cameras. Almost every significant post production house around the world has already upgraded their editing equipment and software to the new 4K standard. According to an April 2016 article in Home Media Magazine,  

​SNB: With so many new 4K Ultra HD televisions, computers and handheld devices being sold, where can consumers access 4K movies and television shows?

SJK: Sony, Warner Bros, Paramount, Universal, Fox, Disney and Lionsgate all have major 4K initiatives in place. 0The technological problems of encoding, storing, transferring and displaying 4K content have mostly been resolved. Nearly every one of the OTT streaming devices – including Google Chromecast, Apple TV, ROKU Premiere+, Amazon Fire, Dragon Box, and about a dozen others – are “4K Ready.” 

In addition, most 4K Ultra HD televisions being delivered by manufacturers today have 4K pre-loaded apps that allow viewers to stream and download movies and other UltraHD programming. 


SNB: Can you explain why there isn’t a lot of 4K content available even though there are so many 4K content delivery devices (including new smartphones and game consoles)?

SJK: We estimate that only about 1% of the movies, games and other programs are currently available to consumers in 4K.  

While the big movie studios, and a few major independents – like Shout! Factory – are gearing up for this new platform, many of the independent distributors and producers are still lagging behind. 

If they continue to do so, they will most likely lose out on this huge emerging market opportunity. 


SNB: Why aren’t more of the independent distributors capitalizing on the growing demand for 4K content?

SJK: Other than technology leaders like Dean Devlin at Electric Entertainment, who says that he has been “mastering in 4K for years,” I think most sales agents and distributors have not recognized that 4K is the de facto heir apparent to HD.  

More importantly, I think most independent distribution companies do not yet know how to monetize their existing content in 4K / UHD, that is presently in 2K or 1080p / HD. Nor do they know how to make the new crop of 4K films and television shows available to the growing number of 4K-ready platforms. 

The home consumer installation of 4K televisions, computer screens, and handheld devices had been relatively small up to 2016, but it has grown rapidly in the past year. Just go to any Best Buy or Costco and watch the stream of 4K Ultra HD devices rolling out the front door. 2014, or 2015, was probably not the time to jump on the 4K bandwagon – but 2016 was, and 2017 is most definitely the year to go 4K. 

4K/Ultra HD, is the undisputed darling of the over-the-top (OTT) streaming video community. Amazon Studios is shooting all of its original content in 4K; Netflix is out with their $11.99-per-month 4K streaming package for Ultra HD content. YouTube, UltraFlix, Sony and M-Go, among others, are all trying to fill the 4K void. And where the OTT providers go, the cable companies cannot and will not be far behind.


SNB: How can producers and distributors monetize their newest films, documentaries and serial programs in the emerging 4K/UHD space?

SJK:

• Step 1: Require all new content be shot, edited, mastered, and delivered in 4K/UHD.  Ultra HD content can always be down-converted beautifully into HD (2K or 1080p) for those deliverables. 

• Step 2: Reach out to your domestic and foreign broadcast/content delivery partners and ask them what their 4K delivery standards are, and what their protocols are to transfer 4K files. 

• Step 3: Re-release, in 4K, films that debuted last year (or even a year or two ago) that were probably shot in 4K. 
  

• Step 4: Scan in or transfer (cross-conversion) 35mm and 65mm film to brilliant 4K. And finally, perhaps up-convert the very best of your older, most popular content, originally shot on 2K/HD digital cameras, to 4K/UHD.  
  

Just like any other release strategy, costs should be weighed against the potential economic benefit. (Older 2K or 1080p content can be up-converted to 4K for about $50.00 per minute.) 


SNB: What kind of films and documentaries work best for 4K/UHD?

SJK: It’s true that not all content benefits from 4K viewing. That’s why early adopters are looking for movies with great visual effects - like sci-fi, historical dramas or animation; plus heart-thumping action, or eye-popping landscapes/cityscapes; also creature features.

Visually exciting films/docs, with bold or beautiful imagery, benefit the most in 4K/UltraHD. Romantic comedies, home-town dramas, or contained thrillers may, or may not, benefit from being viewed in 4K. 

It’s all about the visceral - ‘theater-like’ - experience.

We recommend distributors do a low-cost 4K conversion test of a select scene to evaluate whether the content would be demonstratively better in 4K/UHD, or not. 


SNB: To me, some 4K programming looks too stark, and more like video than cinema. And we have read that 8K televisions are already being tested by the manufacturers! What can you say about this? 

SJK: There are “cinema” settings on most of the newer smart televisions that smooth out the image and give viewers a more “movie theater” look and experience. These in-TV adjustments help make images look less like video, and more like 35mm film. 

The industry is just catching up to the new 4K / Ultra HD standard. The positive aspect of 4K resolution is that it approximates the clarity and richness of 35mm film that we have come to know and love over the past 100 years. 

As to 8K, television manufacturers tell us that format is not in their current plans and is probably be more than a decade away. A move to 8K by the electronics manufacturers would neither benefit the industry, nor the consumer.
​

PREAMBLE:
Stephen Kerr, has been an appraiser of film and television properties for more than 25 years.  He recently finished the valuation of a major film library for the owners/distributors of those titles.  What Kerr gleaned, about the state of the film industry and current market value of independently produced movies, by interviewing almost a dozen highly respected domestic and international film distributors might surprise people.  It is not easy for most filmmakers to be objective about the documentaries and movies that they just spent two years of their lives and millions of dollars to make.  Distributors have to be objective, they know that films are a product that gets consumed and then put on the shelf like every other entertainment or intellectual property, including books, music and videogames.  Sarah Nean Bruce interviewed Mr. Kerr to get his take on the current state of the film industry and respective value of film assets – past their release dates. 
*****************************************************

Sarah Nean Bruce (SB): Our company just finished appraising more than 250 films properties in a film library? Can you explain if these films were older properties or more recently released films?
SK: The vast majority of the film library was purchased less than 10 years ago with a large percentage having been acquired within the past five years. 

SB: Can you tell us whether the distributor own limited rights or worldwide rights?
SK: Yes, the company owned most of the films in perpetuity and all world, all media rights.  Some of the films had been released theatrically, but most were of the “straight-to-video” variety with one minor, known actor, or no “name” stars in them at all.  I should point out that almost all of these films had already been sold to multiple international territories before, and had been released on DVD, on broadcast or cable television, and online. 

SB: What were your unbiased conclusions about the film library?
SK: When we valued each title against similar films that had been purchased by other companies, we determined that, on average, the 250+ films owned by our client had a value of a little bit less than $7,000 each.  Some of the newer movies had values of up to $45,000 and some of the older, Standard Definition films and 4x5 format films had almost no value what-so-ever.  When we factored in the present value of the future income potential of the entire film library, based on the past four years’ sales trend line, we lowered the average value of each property to about $4,800.  Both the $7,000 valuation and the $4,800 valuation numbers are correct: the first is the market value of the titles against all other movie titles of a similar age and quality; and the second value is what we call “operating in place” value, or the present economic value that these titles represent to the owners, if nothing in the marketplace changes.[i]

SB: Is it unusual for you to give your clients two different values of the same intellectual properties?
SK:  Not really.  If you take a diamond ring in to be appraised, you may get more than one value from the Gemological Appraiser.  The first value is the “market value” of the diamond as determined by the world market for all diamonds of a certain cut and quality, and a second value if you want to sell your diamond ring to the jeweler right then and there.  The Jeweler has to factor in how long that ring might sit on the shelf before being resold to someone, and the risk they are taking with the money they are paying for it.  Both values are correct in their own way.

SB: I understand that movies and documentaries are only worth as much as people are willing to pay for them. But why are values so disparate?   
SK:  All movies and television shows have both an intrinsic value and an extrinsic value.  The intrinsic (or subjective) value represents what was spent to make the program/film, the “entertainment” value of the property, and the lasting social or cultural impact that film has left.  The extrinsic (or objective) value represents the pure international, commodity value of the film – against all other films.  Movies and television shows are bartered around the world to foreign distributors, DVD retailers (think Redbox), cable networks, OTT, and television broadcasters every day.[ii]   

SB: Can you elaborate on why one film is more or less valuable than another?
SK:  What we continually find in our research is that the number one value driver in a film is its cast; more than the director; more than the price paid to make it.  In most cases, movie stars sell films, and that is true for movies sold to Argentina, Australia, Austria, or Alabama.  Cast has remained the single largest value driver for films.  Having said that, poor storytelling in a movie with big stars is going to perform poorly.  Audiences are savvy.  Just ask the Walt Disney Company about Johnny Depp and “The Lone Ranger”.  The film’s intrinsic “entertainment value” was so low as to render the extrinsic value of the property close to zero.  Quality, “high value” films are more than the sum of their parts, or their actors.

SB: What kind of movies and documentaries seem to have a more enduring value?
SK: According to the distributors that we interviewed for this valuation: films that have remained perennial sellers in their catalogs have been family films (especially animation), international-set spy thrillers and intrigues, historical dramas, biographies, science fiction, films about/with music, some “creature” features, and war/combat films.  The genres that seem to be presently out of favor with international film distributors are horror/thrillers, romantic comedies (rom-coms), urban/ethnic films, westerns, low-end religious themed movies, and ‘animal-centric’ family movies.  

SB: What information and advice can you give filmmakers, and film distributors, based on the information that was compiled while doing this valuation study?
SK: What has become apparent to everyone in the industry is that there are simply too many poor quality films made each year.  The sheer number of movies hitting the market drags down the value of all films.  Overseas filmmakers are doing a better and better job fulfilling the needs of their own domestic, film going customers; so-much-so that North American films are not getting the reception they once enjoyed, which lowers the international market value for Canadian and American productions. Just a few years ago a decent American-made movie could count on getting up to 80% of its revenue from foreign sales.  Today, that figure is probably less than 20%.  Movies made for less than $5 million, with low or no recognizable cast, are the most vulnerable in the global film marketplace.  There is a reason the studios have all but stopped making comedies, dramas and thrillers, and have concentrated their efforts on making “tent-pole” animated, science fiction (Star Wars), comic book heroes, and disaster movies.  They sell.  My advice to would-be filmmakers and film distributors is “less is more”.  Better to make or sell fewer films with lasting, social and entertainment value, than more “forgettable” films without recognizable actors or universal themes that will stand the test of time – in there lies the value.

SB: Most filmmakers cannot afford to make movies with big-name movie stars, historical dramas or lavish sets.  What advice do you have for them?
SK:  Sarah, as you know: great film making has always been about telling great stories.  You don’t need Leonardo DiCaprio or Denzel Washington to tell a great story.  Nor do you need twenty million dollars and exotic locations. Movies that have long lasting value are movies that touch people’s lives and hearts.  The original Rocky was not a big budget movie; Little Miss Sunshine was not an expensive movie; and Beasts of the Southern Wild was not a big budget movie.  But they all had themes and performances that resonated with countless millions of movie goers around the world. 

The proliferation of low quality films that was brought on by the rise of the DVD market in the 1990’s did not do filmmakers any service.  It simply encouraged them to make more low quality films.  The DVD as a medium is all but dead, and over-the-top delivery services like Netflix and Amazon are not replacing that lost revenue.  Movie makers are better off making one great film every three years than three poor quality movies every year.  We hope what the client learned from our evaluation of their film library was that maybe they should focus on having 25 really good movies in their catalog instead of 250 so-so ones. 

The Absolutely True Stories of Indie
STORY-TELLING & STORY-SELLING
 
A series of conversational articles and brief essays on
The Art & Science of the Entertainment Media Business
Written by Stephen J. Kerr & Sarah Nean Bruce
 
Stephen J. Kerr and Sarah Nean Bruce operate
Bel Age Medias in Santa Monica, California USA
 
[i] Diamonds & Rust, Stephen Kerr, March 2013
[ii] Valuing A Single Film or Film Library, Stephen Kerr, April 2014

Absolutely True Stories of Indie Story-Telling & Story-Selling 
PREAMBLE: 
We wrote this conversational piece for entertainment professionals who raise money for, or pitch finished entertainment properties – whether they are film, television, live performances, or online. 


The seminal issue in this article is that we often do it wrong.  
You see, it’s all about perspective.  The other person’s, not ours.  
And when we come to understand this fully and we learn to change the dialog from what we want – to what they need, then our success rate goes up.  
Way up.  ~ SJK & SNB 

self-interest/ˌsɛlfˈɪn tər ɪst, -trɪst, ˈsɛlf-/ 
noun 
1.   one's  personal  interest  or  advantage
2.   the  act  or  an  instance  of  pursuing one's  own  interest 

Sarah Nean Bruce (SNB): Stephen, why did you write an article about Economics and specifically about people acting on their own self-interest – for the entertainment profession?

Stephen J. Kerr (SJK): My undergraduate degree was in Economics, a subject I didn’t personally have much interest in at the time (in my early 20s) and one that I did not think I would use much in life.  I thought all that theoretical non-sense about “supply and demand” was for pale little men working in darkened rooms of the corporate machines. 

Of course, like many opinions we form in our youth, I was wrong.

SNB: What does economic theory have to do with entertainment?

SJK: As a financial, business and marketing adviser to media companies for these past 35 years, I have drawn on my knowledge of both micro and macro-economics almost every day.  One of the greatest lessons we learn in Economics is that humans perform fast economic calculations every time they act and their goal is always to maximize their payout.  People will quickly figure out the “payout table” and work to maximize their “economic advantage.”

SNB: What is the practical advice of this theoretical economic ‘payout’ concept? 

SJK: When we approach an investor or distributor to back our movie, play or television show, it is good to remember people act in their own self-interest. 

The conversation we are having is, “This is a great plot with fabulous actors that we’re going to shoot in Australia for $20 million.”  But, what the investor is thinking is, “Wonder if I can double or triple my money, meet Charlize Theron, and get to walk the Red Carpet at the Oscars?”  When a US film distributor is pitching our movie to a regional distributor in France, the American distributor is saying, “This is a fantastic action film with Charlize Theron and Ben Affleck, directed by Antoine Fuqua, and should do big numbers in France. Pay me a lot of money for it.”  But what the French distributor is thinking is, “I wonder if I can get Charlize Theron to come to Paris if I pick up this chien.”

SNB: So you are saying people don’t act so much on best intentions as they do on self-satisfying motivations?

SJK: It is self-deluding to think that the people we are pitching care about “art” or “great cinema”. It is often more about “How much can we make off of this movie” than it is “How good is this film.” There is nothing wrong with acting in one’s self-interest. Once we understand we are all acting consistently, it is simply a matter of aligning personal interests with someone’s broader objective.

SNB: Are you implying that selflessness and generosity are not genuine or sincere intentions?

SJK: If you want to argue that people sometimes do things out of the goodness of their hearts and for selfless reasons, I would contend that even seemingly altruistic actions stem from a self-serving place: When we give money to charity; when we spend hours helping some young filmmaker; when we speak at conferences pro bono; or when we help some hapless person find their lost dog at the mall – we are all acting in our own self-interest.  It makes us sad to see people in distress, so we give money to charity.  It gives us personal satisfaction to give a young filmmaker a leg up in the business.  It helps our professional development if people see us as a figure of authority at an industry conference.  And, it makes us feel important when we reunite a distraught person with their beloved pooch. 

You see, self-interest.

SNB: So what is the crux of all this self-interest?

SJK: The modern notions of free enterprise and free markets are based on the premise that we can rely on people to solve the complex math that results in the best economic return toward their own self-interests. The truth is, it is much more reliable to count on people acting toward their own self-interest than it is to expect them to act in the interests of a broader, more abstract, sense of community. 

SNB: How does this apply directly to pitching and selling?

SJK: We should remember this (the concept of others’ self-interest) when we write our next Business Plan, Pitch Bible, Marketing Brochure, or Project Grant.  What motivates us and what motivates others can be something entirely different.  It is essential we consider our audience and focus on their needs when developing a pitch.  What is in their self-interest?  What would make them excited about backing our project over the 20 others that they are looking at this month? 

Film financiers like Megan Ellison (Annapurna Pictures) are generally not as motivated by making more money as they are by creating legacies.  Studio execs, like Nick Manzi the head of acquisitions at Lionsgate, are more motivated by keeping their jobs and keeping their studios in the black than they are by acquiring one more picture. 

We closely study the culture of the company that we are pitching to insure that our project is going to the right person and satisfying a need that they have right now.

“Men are Moved by two levers only:
fear and self-interest.”  
―  Napoléon Bonaparte 


SNB: What is the #1 self-interest of working in the entertainment medias business? 

SJK: One enormous self-interest is not to make a mistake.  Betting on the right horses makes us a legend in the entertainment industry, and betting on the wrong ones gets us fired.  We need to keep in mind it is just as smart for us to resolve an acquisition person’s concerns about making a big mistake, as it is for us to convince them that acquiring our film, serial, or rights, is in their company’s best interest.  The more consumer research that we can do to lower a broadcasters or studios perception of risk, the lower their concern will be on making a risky decision. As a producer, investment banker, distributor, or even director, our job is to make other people look good – and smart. 

It is simply acting in our own self-interest.


This is a periodic column called: 
The Absolutely True Stories of Indie 
STORY-TELLING & STORY-SELLING 
A series of conversational articles and brief essays on
The Art & Science of the Entertainment Media Business
Written by Stephen J. Kerr + Sarah Nean Bruce

It’s been more than three years since President Barack Obama signed the JOBS Act creating Rule 506(c) of SEC Regulation D, allowing private placement issuers to use “general solicitation” to raise money from qualified investors. The SEC released final rules under Title IV June 19, 2015. These rules, commonly referred to as Reg A+ and allow for non-accredited investors to participate in private offerings.  According to 2014 data by the SEC, more than $14 billion has already been raised by early adopters who have taken advantage of the opportunity to publicly advertise their offerings. The legislation has three central provisions. The first makes it easier to launch startups through the use of crowdfunding. The second allows venture-capital firms and others seeking investment to make "general solicitations"— appeals via mass media, or social media – to potential investors. The third is called the "IPO on-ramp." This provision makes it easier for a company to go public, in part by allowing its owners to make less onerous disclosures.

I refer to this as the “Poor Man’s IPO.”  It allows companies to raise up to $50 million per year in a SEC registered and reviewed offering.  Shares are freely trade-able upon their issuance, offer lighter financial and non-financial disclosures compared to a full-on IPO, and ongoing reporting requirements which are reduced both in terms of the quantity of information and the frequency of reports.  Rule 506(c) gives you the opportunity to reach a much broader audience and potentially reduce your cost of raising capital. It also gives a whole new group of investors the chance to participate in private placements.

Rule 506(b) is familiar to most of us in this finance industry. Companies using this rule can sell securities to any number of accredited investors, and up to 35 non-accredited investors. You don’t have to verify investors’ accredited status yourself, but you must not advertise the offering publicly in what’s known as “general solicitation.” And, you must take great care to only offer your securities to buyers that you already know and believe to be accredited.

The new Rule 506(c) allows you to advertise your offering. There need not be a prior relationship with the investors who buy your securities. But, you do have to verify that anyone who actually invests is an accredited investor.  When issuers advertise their offering, they can raise more money, faster, by appealing to a wider range of investors. You don’t have to rely on “friends & family” or the traditional gatekeepers to help find suitable investors.  Now you can make your case directly to the market and let the strength of the offering speak for itself.  From the investor’s perspective, an advertised 506(c) placement is a huge new opportunity, too. Investors can more easily search for placements that suit their needs, and they don’t have to have any kind of insider connections to uncover the best offerings.  It’s much more a level playing field now.

For entertainment entrepreneurs you now have two attractive options to raise large amounts of money for your movie, television show(s) or slate of projects: Tier 1 allows issuers to raise up to $20 million, but you cannot make general solicitations to the public; Tier 2, allows you to raise up to $50 million and advertise your offering.  In both Tier 1 and Tier 2 offerings issuers must submit, and have approved, an “offering circular” to the SEC.  For Tier 2 offerings, the SEC included a provision that allows you to ‘test the waters’ — allowing you to validate investor demand prior to preparing a full-blown offering circular.  Tier 1 offerings (up to $20 million) are not exempt from blue sky filings, which require issuers to file documentation with each state that they plan to raise capital in. While Tier 2 (up to $50 million) offerings are exempt from blue sky filings, Tier 2 issuers must make semi-annual and annual filings with the SEC that include audited financial statements for the two most recent years, along with narrative disclosures.

These new fundraising tools work best for companies with highly recognizable brands and market awareness.  But the process is there for everyone to take advantage of.  All you need is a good securities lawyer and experienced CFO, and you could raise up to $50 million using the Reg A+ system.  For example: If you are Michael Mann and you wanted to make the sequel to Hancock - you could simply set up a production company under Tier 2 guidelines and raise up to $50 million from the public, without having to file all the onerous IPO paperwork or submit to tedious Sarbanes Oxley accounting requirements.   

It should be noted that if all you need is less than $5 million, Reg D 504 and 505 offerings are still the best way to go. No blue sky provisions, no need for audited statements and no reporting requirements.  All you have to do is file a Form D with the SEC and you are in business.  504 offerings can be advertised to the public, but you can only raise up to $1 million in 12 months.  505 offerings allow you to raise up to $5 million in 12 months from accredited investors and up to 35 non-accredited investors – but no general solicitations are allowed.

So, times have changed... Entertainment entrepreneurs who don’t at least consider the new Rule 506(c) are leaving valuable options on the table.  And as fundraising efforts continue to shift online, becoming more transparent and efficient, entertainment fundraisers will win as they enjoy better, faster, cheaper access to the capital they need to thrive.

If you’ve embarked down the road of raising money, following your road map (sometimes referred to as a business plan) and packed your knapsack with stock, the next stop on the money trail should be the Private Placement Memorandum.  The PPM is beautiful in both its simplicity and in its purpose.  This one short document (about 10 pages) is both an executive summary of your business plan and an action call for cash.

If you have completed your business plan and are now ready to raise money you need a PPM.  Unlike the article I wrote last month about seeking loans that are convertible to stock, this is a straight up offering to sell stock in your company. You can download various versions of the Private Placement Memorandum off any legal website or contact me and I’ll email you a blank copy in WORD.

Why I love the PPM…let me count the clauses.

INTRODUCTION
First things, first; tell them who you are, where you are, and how your company is organized:  [your company] is an [blank] company based in [blank], [your state], organized [when] ago by [your executive team] who currently serves as its officers and board members. The principal business of [your company] is [what….] [your company] was incorporated under the laws of [state] on [date], and has its principal offices at [your legal address]

DESCRIPTION OF OFFERING
The company hereby offers an aggregate of [#] shares of its common stock for sale at a price of $___ per share.  The Description of Offering is a three paragraph overview of the deal, how many shares are being offered at what price.  It also sets out how many shares have already been issued to the founders and current stockholders.  Most PPMs escrow the funds.  Let’s say you are raising $3 million:  The investors’ money is held in a bank escrow account until at least $1 million has been collected and deposited. That is referred to as the “threshold”.  Once $1 million has been raised the funds can be released to the company for its use.  If the offering fails to produce a minimum of $[000] by [specific date], the sale will be cancelled and the deposits will be returned to the subscribers, with interest at a rate of __% from the date of deposit. This protects the interests of the early investors should the offering fail to raise the threshold amount.  

USE OF PROCEEDS
The proceeds of the offering will be budgeted for a variety of different purposes. Management presently contemplates the following allocation of the proceeds from this offering:  This is a clear and succinct statement of how you plan to use the money.

CONTROL & DILUTION
The shares of stock that are being offered through this prospectus represent __% of the total shares of the company. If the offering is completed, [current stockholders] (who currently own 100% of the outstanding shares) will own __% of the shares, and will remain in control (usually) of the company.  This section goes into the details of who currently holds the stock and the value of those holdings.  It also lays out the rationale for the current stock price and the price point of the offering being made.

DESCRIPTION OF THE BUSINESS
This is information that is excerpted from your business plan.  It is usually no more than a page or page and a half.  It covers the origins of the company, a short description of its product/service, the compelling reason for its existence, sales and marketing aspects, and competitive landscape.  Again, brevity is beautiful here.  This is basically your “elevator speech”.

MANAGEMENT, BOARD OF DIRECTORS  & KEY EMPLOYEES
This is the easiest section to fill out.  It should have three sub sections, your executive management team (usually the founders), your board of directors (if any) and your key employees; [company] currently employs __# individuals, in addition to [management], and hires other individuals on a part time or commission basis for sales, editorial work, production, design and other matters.  Once again it pays to be brief here, no more than 200 words to describe the background of each person. You are not trying to impress your potential investors here, that’s what your business plan is for.

DESCRIPTION OF COMMON STOCK
The authorized capital stock of the company consists of [#] shares of common stock, the only class of stock authorized to be issued. Each share of common stock of the company, when validly issued and outstanding, is entitled to one vote on all matters to be voted on by stockholders, to equal dividends and to a pro rata share in the company's net assets in the event of dissolution, liquidation or winding up of the company. Shareholders are entitled to cumulative votes for the election of directors. The common shares, when fully paid, will be non assessable and are not subject to any liability for further call and have no pre emptive subscription rights as to any securities of the company. This clause basically sets forth the rights of the stockholders.

Under this section you also provide a “Cap Table” which sets out the capitalization of the company prior to the offering and after the offering, assuming that you will attract sufficient capital to sell out your entire offering.

INVESTMENT CONSIDERATIONS
This is the part of your offering where you try to scare your potential investors off.  It states that this is NOT a tax shelter; the market for the shares will be highly limited; that the company does not plan to pay “significant dividends” in the near future; that the investors should be prepared to hold this investment for a very long time; and that this venture is almost entirely dependent on the talents, experience and business relationships of the founders – and should anything happen to them that this entire business could close up shop.  Still want to invest?  You also have to explain in this section that the founders hold a vast majority of the shares and therefore almost 100% control over the business.  Any rights that new shareholders have must be set forth in a separate shareholder’s agreement. 

That’s about it.  The Private Placement Memorandum is your business plan in a nutshell, with a very specific request for funds attached.  Your PPM needs to be accompanied by a Subscription Agreement.  The Subscription Agreement is the document that the investor fills out and states among other things that they are a “Qualified Investor” with substantial financial holdings and know the risks that they are taking with this investment.  The investor can either attach a check to the Subscription Agreement, or more often wire funds directly into your escrow account. 

For those of you unfamiliar with corporate finance even these simple documents can seem complex, but for financial professionals like us, and most attorneys, these documents are simply tools of the trade.  If you have a compelling business venture you will want to attract investors — and they will want to give you money.   My beautiful little PPM is one of the tools you will need to get this done.  If you feel that you could use some guidance through the process, please feel free to call on us.

Would you like to raise investment capital from friends, family and people who don’t even know you yet?  This article will show you how we accomplished this quickly and efficiently for one of our clients.

Our firm was retained by a Northern California entertainment start up to set up and raise from outside investors up to $1.5 million.  The company had been in business for about one year and had completed their business plan along with the first phase of their product development.  There were three founding executives, each of whom had put in about $175,000 of their own capital.

Our first job was to restructure the company.  Like most small startups the founders had established the business as a Limited Liability Company.  The problem with LLCs is that the owners hold “membership shares” in the company, not stock.  Instead of selling stock we suggested that investors make “Bridge Loans” to the new “C” corporation that could be converted into common stock at a future date.  There is really no good mechanism to do this as an LLC, so we converted the original LLC into a Nevada based “C” corporation.  

Once the company was converted into a “C” corporation all sorts of options opened up for fundraising.  For example, “C” corps may have more than one class of stock.  You can have founder’s shares, common voting shares, common non-voting shares, preferred voting and non-voting as well.  Even the common and preferred shares can be priced differently depending on when the shares are purchased.  Example: “A” round common stock could be priced at $1 per share; and later “B” round common stock could be priced at $2 per share (or more), depending on the overall increased value of the company.  Note: the difference between common and preferred stock is that preferred stock always pays a fixed dividend, which must be paid to the preferred stockholders before any common stock dividend may be paid out.

Upon setting up the initial “C” corporation with 10,000,000 shares, we issued 6,000,000 shares to the three founding executives, plus another 225,000 shares, unevenly divided, among the first 5 employees, depending on their rank and length of employment.  An additional 1,275,000 shares were set aside as an incentive stock pool for new officers and employees.  A block of 1,500,000 shares of the initial stock was set aside for the Bridge Financing warrant holders.  The final 1,000,000 shares were put in reserve for new common stock holders and strategic partners.

Three important documents needed to be created to enable us to move forward:

• Bridge Financing Agreement – This is a seven page memorandum that sets forth all of the terms of the Bridge Loan, including the issue of warrants, valuation, rights, representations and warranties (if any), governing law, assigns, and timing.  The minimum loan amount allowed was $25,000;
• Warrant To Purchase Common Stock – A warrant is a right to convert a loan into common stock and establishes the price that the Bridge Loan can be converted, and when.  In this case, we established that after two years the Bridge Loans could be converted into common stock at the transfer price of $1 per share.  The Bridge Loan terms do not require that the loan holders convert their loans into company stock, but they do establish the mechanism and the timetable to do so;
• Promissory Note – This is the loan document.  In this case, the company agreed to pay the Bridge Loan holders 2% interest only, per annum, on their note for two years. After two years the note could be converted to common stock at the note holder’s discretion, through the exercise of the warrants.  The Note also establishes that “Maker may prepay all or any portion of the principal indebtedness without penalty at any time.” But also that “Maker shall not pay any dividends to its shareholders until all principal and interest on this Note has been paid in full.”

Once all the financing documents were completed, we were ready to meet with investors and accept checks and wire transfers.  My team, which included the three founders, was able to meet with about 36 groups and raised $1,115,000 from 24 investors.  The entire process took about 12 months to complete.  The two single largest investors were invited to join the board of directors as representatives of all the note holders.  As note holders, the investors had voting rights and some “super majority” rights that prevented the founders from making any business altering decisions that the note holders would not approve of (like giving themselves huge raises or changing the fundamental business of the company). 

After two years almost all of the initial 24 warrant holders converted their warrants into common stock.  The value of the initial stock went up from $1 per share to $2.50 per share for later investors. 

We are not saying that this is the only way to raise money for young, start-up companies, but it was an efficient one for these entrepreneurs.  What made this effort successful for this company was the fact that their project was based on a bestselling book by two of the founders, and they had already created a large and ardent following by the time they engaged my firm to do fundraising for them. 

Crowdfunding is becoming so (for want of a better word) crowded, and raising money from institutional investors often costs more and takes longer.  This method allows companies with a good business to raise fairly large amounts of money from investors in a way that benefits everyone.

If you too have a compelling venture and well thought out business plan, then this road map for raising capital may get you on your journey as well. 

Let us know if you need an experienced guide.

In the world of horse racing the handicappers look at how the racehorse has performed over the past season and then match that up with the track record of the jockey to determine if it is a winning combination.  They weigh that against all the other horses and jockeys in the race to determine if it is a good bet.  

When considering what films to make, producers have to make critical choices about selecting the genre, plot and the characters.  Due to marketing and financing considerations, it often comes down to a choice between betting on a genre specific project such as a thriller, scifi, action or horror movie, without any recognizable stars in it, or going with a bankable movie star and/or director.  So, do you bet on the horse (genre+plot+script) or the jockey (highly recognizable actor)? 

Distributors can sometimes establish a market value for genre films before they are completed, thus making the likelihood for pre-sales far greater than ‘execution-dependent’ films.  It is more difficult to assess the audience appeal of execution-dependent films based on the concept alone, as their success is contingent upon a number of unpredictable factors, such as reviews and release timing.  Such films have historically achieved lower pre-sales as the market tends to wait and see the finished product; hence, the need to rely on bankable stars and/or a name director to promote these films at the markets.

Unfortunately, this has also resulted in a glut of low-budget, genre driven movies; so much so that the distributors/foreign sales agents are now starting to reject these projects unless they also have a movie star attached in a lead role.  No longer will Eric Roberts or Gary Busey fit the bill.  An oversupply of low budget films has pushed down demand and allowed the international buyers to be more selective. 

I would have to also add that the person who bets on the horse and jockey also needs to consider what kinds of race they are running.  Is it a steeplechase, quarter horse, or thoroughbred race? Different races call for different kinds of horses and jockeys.  The bottom line is that money can be made in each kind of race, if you know what you're doing.1

Such is film.  The films sold at Cannes are vastly different from those sold at Fantastic Fest. Direct to video horror movies may surpass an Oscar nominee with a small theatrical release in earnings.  An Oscar winner may outpace the summer blockbuster over years of VOD and TV deals.  It's all relative as long as you position yourself well in the race of your choosing.  No matter what race you run, make sure you know what you are getting into.  That way you can increase your chances of winning every time.1

Investors often see genre driven films as low risk, quick turnaround opportunities, but they are also drawn to the higher quality projects with internationally bankable stars and directors with an attractive risk/return profile.  Everything depends on the distribution that the producers can line up.

So, do you bet on the horse or the jockey?  Increasingly, the answer is both.  Just like in horse racing, the handicappers are putting their money down on the combination of the two and comparing that to all the other horses and jockeys in the field.

Today, filmmakers run the risk of making that $250,000 scifi thriller, without finding any sales agent that will take it.  It’s kind of like building a mansion out of cardboard, just because you could do it, does it mean that you should?  That does not mean that a $100 million high concept film starring Johnny Depp and Morgan Freeman is a sure bet either, just look at what a disaster Transcendence was for Warner Bros.  As Mark Lágrimas says, “…money can be made in each kind of race, if you know what you're doing.”

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1 Contributed by Mark Lágrimas, a former Disney, MGM & CBS film & television analyst.  Now an independent filmmaker with Best Served Cold Productions.