The Appeal of Investing in Films

 

Are films a good investment opportunity? I think they are for the right kind of investor. Here’s why. I have written this in a Q&A style to answer the Film streaming ITA major questions that prospective investors ask about whether to invest or not.

  1. Why is film investment an attractive investment opportunity? Is it because of the high return or because of the nature of business?

For many investors, the high return is a big draw, because films do have the potential for a very large return, though there is a very high risk with a lot of big “Ifs”. A film can do extremely well if it has a good script, good acting, good production value, has a budget that fits the type of film this is, and strikes a chord with distributors or buyers for the TV, DVD, foreign rights, or other markets. Then, if the film goes into theatrical release, it has the potential to have an even larger audience, though theatrical is not the primary source of income for most films, just the big blockbusters, since the theater owners take about 75% of the box office unless a film goes into a long-term release and there is a high costs for prints (though an increasing number of theaters are going digital). The value of a theatrical release is more for its promotional value for gaining other kinds of sales, except for the huge blockbusters.

Despite the potential for high returns for some films, investors in it for the money have to realize that any film investment is a big risk, because many problems can develop from when a film goes into production to when it is finally released and distributed. Theses risks include the film not being completed because it goes over budget and is unable to get additional financing or there are problems on the set. Another risk is that the film is not well-received by distributors and TV buyers, so it doesn’t get picked up. Or even if a film gets a distribution deal, the risk is that there is little or no money up front, so the film does not see any further returns. So yes – a film can have a high return, but an investor can lose it all.

As a result, for many investors, other key reasons for investing are more important. They believe in the message of the film. They like and support the film producers, cast, and crew. They like the glamour of being involved with a film, including meeting the stars and going to film festivals. They see their investment as an opportunity to travel to distant locations for filming and for promoting the film. And they see investing in the film as a tax write-off, much like giving to a charity.

  1. What kind of investment returns can investors can expect, since many independent productions are not designed for big screens, where are the sales coming from?

If all the stars align, and there is a good film done with a reasonable budget and distributors, buyers, and an audience responds, the film could readily earn 4 to 10 times its cost, making everyone very happy. A low-budget indy scenario for this level of return might be a film shot for $50,000-200,000. It might get $500,000-750,000 for a TV sale and earn $1-2 million more through DVD, streaming, and foreign rights sales, even without a theatrical release.

For most films, the main value of a theatrical release is the PR value of getting the film known, so buyers will want to purchase or rent the DVD and TV buyers will want to show it on one of the premium cable movie channels. Also, most films don’t get a theatrical release, and the funds are earned through other channels.

  1. What kind of movies can usually generate good profits, since the recent Oscar Awards show that a big investment does not necessary mean big returns?

Some of the big blockbusters that pass the $100 million threshold can certainly make a profit from a successful theatrical release, both in the U.S. and abroad. But whether they make a profit depends on their budget. Because of the high salaries of stars that are typical in these films and other high cost items, such as special effects, many blockbusters still may not make a profit. Thus, dollar for dollar, many low-budget indy films may be a better investment, since the multiples are higher with a success; there is more likelihood that a low-budget indy, which is done well at a reasonable budget, will be sold and make back it’s money, and the potential for loss is much less.

 

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