Irrational Exuberance: Wall Street Rediscovers Hollywood

Ah, we have another one for the nostalgia file: the return of Wall Street to Hollywood. Back in the day — when home video was still seen as a risky business — tax law favored investment in movies. A lot of doctors and dentists bought shares in partnerships that invested heavily in the movies. Sure, there were some money-makers, but, as the doctors and dentist learned, sometimes you have to finance a lot of duds before you get to a real winner.

Now the investors are back and more eager than ever to get them some of that Hollywood glitter. In the deals of old, the investors partnered with the studio, sharing the risk based on overall dollars put into the production. The upshot was that there was a solid system behind the movie-making process. You know, studios, sound stages, payroll departments, marketing teams. The downside was that a lot of bad movies were made in the 80s. These days, in an attempt to “bypass” the studios, investors are making deals with producers directly.

It sort of makes sense, what with production budgets — or, perhaps it’s more accurate to say production slates — being slashed. But even as these filmmakers go it alone, they will be looking to the studios for infrastructure support. Going and doing worldwide distribution on your lonesome is hard work, time consuming, and not always the best idea from a financial perspective. One-off deals won’t always command the highest dollar, and for those producers who take advantage of advances on television licensing deals to fund productions, they’ll need a solid track record to get that extra money needed to pay the bills.

Then there’s the aftermath. Once a movie has its premiere, the long tail (ha!) of movie-making sets in. You have to pay your participations, your residuals, ongoing licensing deals with all manner of outlets. You need to make sure they are reporting back to you correctly (i.e., with checks and/or wire transfers). There’s reporting and paying of investors. Either the independent producers or the investors are going to be forced to create mini-studios to manage the accounting that accompanies the release of motion pictures.

This is not meant to be discouraging for investors. I think Hollywood could use all the independence it needs. But striking it rich in Hollywood is a lot like winning the lottery, though the odds are probably a little better. While investment dollars flow rapidly into production budgets, the return on the investment takes a far more circuitous route.

And then there will be fees — there are always fees — as third parties take their cut off the top before the investors are repaid. As the New York Times notes, since being truly independent is still hard, many producers will still need a studio to do the tough work, and that comes at a price: ye olde distribution fee, a percentage of every dollar that is retained by the studio to cover its costs. Don’t forget, the investment firm/bank/whatever will be taking administrative fees as well.

Those who invest in Hollywood are taking a risk. When it pays off, it will pay off in big ways. When it doesn’t…well, rest assured that you are not the first to be lured into dreams of riches.

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