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Studios' win-win stance best kept secret.

Today, there is little chance that, a financially disciplined Hollywood studio can lose money on its investments in films.

American studios don't use their own money to produce and promote films. In effect, they operate on a risk-fee basis, maximizing a stream of funds coming their way.

The financial resources available to the studios to finance movies are varied: from debt-financing (bank loans) to equity financing (limited partnerships, public offerings in the security market) to off balance-sheet financing.

These operations have reached such a level of sophistication that even P&A (print and advertising) financing can easily be raised from the outside. This analysis could explain why the costs of producing movies in the U.S. have been escalating to the point that, according to the MPAA, studios spend an average of $40 million per movie, including marketing, cost of money, studio overhead and distribution. To recoup this money, a studio needs four million U.S. moviegoers Or 2,300 people per theater in a typical 1,800 screen release. This translates into a needed minimum of a five-week run, even though the average is 12 weeks for a major release.

Let's take a look at the big picture. Studios took the lion's share of the 4.9 billion of the theatrical gross generated in 1992 by releasing some 100 in-house produced movies. This translates into an average $25 million net revenue per movie just in the domestic market. Gross U.S. video sales represented another $10 billion, or a source of another $3 billion a year for the studios. Domestic TV sales and ancillary rights added $2 billion per year. International theatrical releases, combined with other rights, could push total average revenue per movie to over $150 million.

Let's now look at a specific studio situation. On the average, a studio has an output of 12 movies a year and eight distribution deals. Cash budgets for the in-house negative costs are estimated at $260 million, $140 million for P&A costs and $80 million for the built-in overhead.

Therefore, some $260 million to finance negative costs are to be raised through bank loans with the straightforward revolving credit line. Another form of debt financing negative costs is to use a specific project as collateral for a bank loan. This off balance-sheet financing is done by using the distributor's (i.e. the studio's) letter of credit as if it were a pre-sale. With borrowed money, some studios can even finance independent producers, charging interest rates that have been know to reach 18 per cent and studio overheads that, although averaging 20 per cent, can get as high as 40 per cent of the budget.

One form of studio financing is the so-called negative pick-up (i.e. it purchases the complete picture from a producer). In this case, the producer uses the studio's pre-production commitment to secure financing from a lender. Other agreements include acquisition deals and rent-a-distributor deals. In each case studio money is never on the line. In the worst-case scenario, the studio will tap into the acquired project cash flow to service the project's loan (similar to a LBO),

P&A costs can be financed up to $15 million per movie by specialized financial services (such as MPI, Ltd) that require 2/3 of the loan collateralized. This collateral can take several forms: letter of credit from an acceptable financial institution, foreign market pre-sale, etc. Usually, 70 per cent of P&A financing is used in media.

Under this scenario, the overall risk factor for a studio tends to be very low. If, for example, a studio produces 10 Chaplin-type box office "flops," seemingly losing a total of $300 million, but comes out with only two A Few Good Men-type successes, generating for itself $130 million $260 million in box office receipts), its failure rate is 84 per cent at the U.S. theatrical level. Even at this high rate of failure, foreign revenues and other U.S. and ancillary sales for the 12 movies will ultimately push total revenues in the $500 million range, thus generating profits of $100 million a year for the studio.

All this without touching one penny from its own pocket, while developing a valuable library.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:US studios don't use their own money to promote and produce movies
Publication:Video Age International
Date:Apr 1, 1993
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