Why Invest in Film & TV
“Over the past five years, global spending on entertainment and media has risen from $1.6 trillion to $2.1 trillion, a 5.7 percent compound annual advance….” (Global Entertainment Media Outlook 2018-2022) Total spending will rise at a compound annual growth rate (CAGR) of 4.4% over the next five years, but with sharp differences among industry segments and sectors within them and across territories. The fastest growth will be in digitally driven segments, with virtual reality leading the way, followed by over-the-top content (OTT).
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These are astonishing figures, but when you consider the breadth and depth of media, it’s easy to see why. Alongside food, clothing and energy, media is one of the few industries that pervades into the lives of practically every consumer on the planet - delivering content ranging from news to gaming, films, TV programmes and more. As technology has advanced, the number of channels (and types of content) has grown meaning that investors can now access everything from global hits to niche events and productions targeting specific communities.
Entertainment and media are growing and globalising. Media assets that once would have only been shown or experienced in their country of origin are now global instruments, which can be exploited in markets worldwide. Previously developing economies such as India, Latin America and Asia have also become incredible consumers (and producers) of media. These fundamentals represent a powerful case for investors.
Looking at Film
William Goldman said this, “…in this business, nobody knows anything…” otherwise it would be sure fire and completely fail-safe! The great thing about film is that the capital structures allow an investors to pick where they want to be on the risk-return spectrum. If they’re looking for lower risk, they can sit where the banks used to, advancing money against known collateral (usually in the form of tax-credits or pre-sales). If investors want more risk, but equally more return, they would have more exposure to the film’s performance, and how it plays in the markets.
Looking at TV
When it comes to TV production, we’re still looking for the same basic ingredients as with film. The track record of the producer, access to distribution, and our own assessment of how well the piece of content will perform internationally. That latter element is what an investor should look for to drive a higher return, this ability to cross-over and travel across borders. Notice, TV has a very different risk-profile to film. When an investor, for example, invests in a studio movie, he/she is taking equity risk. Thereafter, it’s all about how the film performs. TV, particularly in the UK, has a much lower risk economic model for investors. A wise investor will commit at the point where a producer puts forward a programme that has a commission behind it from a broadcaster. Under the terms of trade for the UK, that broadcast commission will often account for a large proportion of the budget, so to a certain degree, provided the producer can make and deliver that programme on time and on budget (which of course, is where the due diligence comes in), financial exposure is mitigated.
There is however some risk about how that programme will perform in ancillary markets, but that’s what is often attractive. The demand for premium content globally is increasing, and the quality of UK prime-time drama has improved leaps and bounds in the past decade. Therefore, it’s a very valuable commodity to invest internationally. The demand for content is there, and it’s growing. The digital world has become the ‘new norm’. There are new entrants commissioning content all the time. YouTube recently started to commission their own content for the first time. The great thing about TV versus film is that it’s very suitable to mobile forms of consumption.
Looking at the future
It’s that ongoing demand for content that drives the market. Whether it’s mobile, gaming or otherwise, it falls under the same bracket. All an investor has to do is look at the project growth in each sub-sector of media, whether it’s film, gaming, or eBooks… it’s huge! From a venture capital standpoint, going beyond pure content, it’s a great time to be investing in UK creative industry companies.
What does this mean for investors and risk managers?
Entertainment and media have typically been seen as high-risk areas for investors, but there are solid ways of controlling risk exposure, and generating significant returns. Like most sectors, entertainment and media require an appreciation of the ‘asset‘ and underlying market, but luckily there are few people on the planet who aren’t consumers of media, and so there is naturally an appreciation for what investors are putting their money into. For risk managers, the ‘models‘ applied to quantifying exposure in an investment may not work as intended when deploying them in this sector. While one can quantify the previous success of a director and production team, and quantify the value of distribution, the fact is, the ultimate risk is that the finished product is not something which engages the consumer. And that’s a very tough nut to put into numbers. In this sense, while risk managers can create parameters by which the investment is seen as good value or not, they must defer to their human side to determine whether it’s a good investment.
Ultimately, media and entertainment is a sector with strong fundamentals, and with a real growth opportunity. That’s rare in this current market, and a reason for investors to take note.
