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Hollywood Drama Heats up as Investing in Movies Cools Off: Should You Jump in?

Risky Business” is:

A)  The title of a big Hollywood hit from the early 1980s that launched actor Tom Cruise to stardom and recorded a spectacular $63.5 million gross;

B)  A description of what investing in movies may be faced with when putting money into Hollywood projects; or

C)  Both.

Well, if the vibe coming from China is any indication, the answer to that question is B. Though the Hollywood dream machine has long held a strong allure for many would-be investors, the retreat of Chinese money from Hollywood is the latest blow to legacy studios and investing in movies in general.

China Pulls Out of Investing in Movies in the U.S.

In 2016, Chinese investment in the U.S. entertainment industry hit $4.78 billion, the  Los Angeles Times reported. As of the fall of 2017, however, the Times reported that investments had plummeted to just $489 million, according to research firm Rhodium Group. China’s leaders have tightened control on money, leaving the country fearful that the outflow of capital could weaken its economy.

As of the fall of 2017…[Chinese] investments had plummeted to just $489 million

“For now, everybody’s laying low. There’s still definitely business being done, but it’s been constrained quite a bit,” Los Angeles movie producer Scott Einbinder told the LA Times. Einbinder’s company, Cristal Pictures, is backed by Hong Kong’s East Light Media.

With China retreating from any substantial involvement, there is a vacuum that has largely gone unfilled by foreign investors. This has forced the industry to look for more domestic sources that may be interested in investing in movies. Paramount, for example, signed co-financing deals with Santa Monica-based David Ellison’s Skydance Media and with Rhode Island’s Hasbro.

The LA Times reported Guillaume de Chalendar, global head of media and entertainment for Bank Leumi, the U.S. division of Israel’s Leumi Group as commenting, “From where we’re sitting, foreign financing seems to be fairly quiet. There are a lot of stories of Chinese investment getting canceled, and there’s not an obvious source of capital to replace that.”

Rather, the changing face of the industry and how people are consuming their entertainment has changed the game for Hollywood

That’s not to say that there is a shortage of capital in the film and TV business. Rather, the changing face of the industry and how people are consuming their entertainment has changed the game for Hollywood. Its legacy studios are at risk of being left behind.

Streaming Movies and TV Changes the Landscape of Investing in Movies

According to the same Los Angeles Times article, Netflix is expected to spend $8 billion on content in 2018, including licensed material and originals—up from $6 billion in 2017. Apple has put forth $1 billion to invest in movies and original shows in 2018.

To illustrate just how powerful companies like Netflix have become, the National Alliance of Theater Owners recently announced that movie theater attendance hit a 24-year low in 2017 — with historic lows reached for Memorial Day and Labor Day weekends — continuing the downward trend since 2005, as reported by The Wrap. Ticket prices rose some 4 percent.

Netflix is expected to spend $8 billion on content in 2018, including licensed material and originals—up from $6 billion in 2017

While things in 2018 may look bleak for the Hollywood entertainment industry, it still grosses $11 billion a year, the Wrap reported. Investors can still make money.

“It’s an industry where you have to know what you’re doing to make money in it,” said Michael Maduell, president of research firm Sovereign Wealth Fund Institute. “They [sovereign wealth funds] are getting an inside look at what’s working and not working.”

You may also be interested in “Amid Stock Market Volatility, Investment in Hollywood can Beat the Odds.

Industry estimates indicate that 60% or more of movies produced each year are box-office dogs. So what’s the appeal? When a movie hits, it can hit big. Films such as “The Blind Side” (which cost $35 million but earned $221 million in the U.S.), “The Hangover” (produced for $35 million and earned $242 million after production costs) and “My Big Fat Greek Wedding” (produced for $5 million but grossed $369 million worldwide) prove the point.

One Company Thrusts Investing in Movies to the Forefront

Yet, for every hit, there are as many, if not more, misses. While movies are an alternative investment offering a hedge against stock market volatility, any allocation to a big-screen project demands caution. Wade Bradley is founder of Media Society Inc., which gathers people to invest in movies the company produces.

If you have an end-game managed risk strategy and mitigate risk at the front end and manage risk through the production and distribution, it is a business that can be highly profitable.

Wade Bradley

There are perks to backing films, such as trips to Sundance and meeting stars on-set, but the Los Angeles Times noted that there have been snags as well in financing those movies.

Despite that, Bradley stands by his business model. “It is a business,” Bradley  told the Los Angeles Times in 2014. “If you have an end-game managed risk strategy and mitigate risk at the front end and manage risk through the production and distribution, it is a business that can be highly profitable.”

The Future of Investing in Movies is Uncertain

As for China, experts believe it is just a matter of time before the nation once again allows money to flow to places like Hollywood.

“While Chinese money is indeed restricted and has been for the last year, it doesn’t mean the spigot has stopped,” said attorney John Burke, who handles film financing deals. “Studios have to worry about who their next partners are going to be, but it’s not like, ‘Oh my God, where do I finance my next film?’ They have capital. The question is, what’s going to be the next wave? We haven’t seen it yet.”

About Bryan Fumagalli

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