All That Glitters – The Economics of Film Funding

When filmmakers come together with creative ideas, insights and strategies, they all have one question on their minds. "Will this be a hit or a miss"? And mind you, this is a very valid fear because what happens after the release of a film can have a multitude of effects on those involved. We've all been told over the years that "Failure is a greater teacher than success can ever be"; but when it comes at the cost of all of those involved in investing their time, money, energy and effort, the struggle gets real. What is it then, that makes people want to make films and invest in the 'Business-of-cinema'?

The value of investing in a film lies in how films are seen in a certain society. The more they are seen as a source of entertainment, education and social impact, the higher the value it has in that certain society. This brings us to the methods in which films are usually funded.

A) Debt Financing - A method whereby a company or an individual investor borrows money - only to be repaid at the end of a pre-decided time period with an additional arranged interest.

B) Equity Investment - This is a method whereby individual investors pool-in money (in cash / 'liquid') to the production of film, in exchange for ownership / a stake in the film. The profits earned from this are also a part of their return-on-investment.

C) Selling Rights (pre-sales) - This is a method that works usually before the completion of a film, whereby distributors and media partners are given rights to the film either for a fixed term - or for a set frequency of media showcase, that will be applicable indefinitely.

D) Government Grants – This is a method whereby a government program that is specific to film making is employed to provide subsidy or tax credit to the film. This happens provided most or at least a part of the film is filmed in that state OR if the film uses a certain percentage of its crew and cast from the state. This is done in hope that it will attract other film makers to do the same, as well as to give employment opportunity to individuals within the state.

E) Tax incentives – Certain countries or states give tax or cash incentives for labour costs or production costs while making films/ TV productions / OTT productions / video games. These are also called ‘Soft Money’ incentives and are usually applicable when most or at least a certain part of the film is shot within the physical boundaries of the state. They sometimes also have the obligation / option to use the state’s institutions.

It is not uncommon for two or more creative entities to own and finance a movie with divided equity stake. Norm of the North (2016) CGI animated movie was co-produced by Splash Entertainment, Assemblage Entertainment and Telegael and distributed by Lionsgate in North America. These strategic deals not only provide financing but also reduces the risk exposure of the party involved. For example, Luc Besson’ movie Valerian (2017) didn’t perform too well in the box office, but it had minimal financial risk. Europa Corp distributed the movie in France and had a deal with STX to distribute in the US and other territories even before the movie was made. Valerian covered 96% of the budget with pre-sales techniques, thus minimizing the financial risk.

Hedge funds and private equity players who are the relatively ‘new kids in the block’ actively invest in co-financing vehicles with studios that generate returns that aren’t correlated to the equity markets. They not only help in reducing the risk of financing the film, but also bring in tax benefits to the investing companies because of where the investment comes from. Sometimes, there is also a social benefit that comes with the financing of films – that could support social causes and hence bring in government relief. Investments in film are complicated because of the various parties involved, but manage to become a vehicle for the success and social gain.

With the dawn of block chain technology, the crowd funding model is evolving to a place where backers contribute to a film funding in exchange for equity participation. Braid (2018) was the first film to use this method to raise funding of $1.7mn. While this method is popular in Europe, Hollywood and rest of the world are considering legal and regulatory aspects of implementing the model. Crowd-funding is another means by which films often try to raise financial support from independent film producers. However, the perception of investing in crowd-funded films is rapidly changing and gaining popularity.

What is it still that makes investing in films such an irresistible gamble? Let's take the example of CG animation films in the year 2016. They made only about 2% of the total number of films released in that particular year. Yet, they raked in more than 21% of the overall movie revenue for the year. How was this possible? It pays to remember that while sometimes the cost of making such films are typically higher than other films, their earnings can also be astonishingly high. Strong animation brands take advantage of this model and have been able to create a shelf-life that ensures a constant revenue for years. It is also important to emphasize that Animation remains one of the most profitable mediums of filmed entertainment.

While the popular methods of film financing listed above continue to remain as popular, their structure and combination has constantly evolved and has enabled investors to take bolder, more aggressively-calculated approaches. Commercialisation and globalisation have propelled the economic model of films and content.

‘Commercialisation’ is a term that has been popular since the 1950s. What it roughly means is to make economic benefit of a product, a service, a process or a combination of it all. Cinema has been a part of all our lives for more than 100 years but with a growing commercial consumption culture, companies came to use film as a symbiotic medium of economic gain. While the product that is showcased in a film gains benefit by reaching out to all of the film’s audience, the film also gains from the company that manufactures the product, financially. This is another way of making an equity investment in the film. Selling of the product or service, by associating with the film and the characters therein is what is commonly known as merchandising or product placements. The ‘James Bond’ film Skyfall (2012) covered close to 40% of its budget through the product placement of the beer brand – Heineken. The science of branding also studies this method in detail by the name ‘Brand Endorsements and Merchandising’. Film franchises like Cars (2006) have been able to make over $10 billion through brand endorsements and merchandising alone. Similarly, the Toy Story series of films have earned $11 billion till date through this method.

Globalisation is another concept that has helped aid film and commercial consumption. As markets around the world opened up to more variety, the size of a film’s audience also grew manifold. Variations in each market and the opportunities therein have given film financers, film makers and other commercial companies the ability to showcase the combination of art and commercialisation, all around the world.

Film distributors and exhibitors play a heavy role in every film. They carry the film to the audience and are almost always influenced by pre-sales strategies, adopted by the producers of the film. These are strategies used to promote the film even before it releases and is done in many ways like: showcasing film trailers, interviews, selling authorised merchandise and now, with the help of social media – the promotion of the film across many channels. Each form of social media speaks to its own niche audience. During all of this, if consumers are receptive during the pre-sales of the film, it is good news for the distributors. However, if the consumers don’t seem enthusiastic about the film, the distributors take very careful steps to showcase the film and do not exhibit the film in all of their screens. A heavy level of investment goes on in understanding the producer, distributor and consumer dynamics before the release of every film.

So amidst all of that blitz and glamour, what we usually miss out on are the complexities of film financing. The star-studded and fame-oriented world of media and entertainment, almost always brings with it a whole deal of ‘Good, Bad and Ugly’, but very necessary money.