ENTERTAINMENT

"You can't succeed in Hollywood if you're discouraged by being told 'no' because regardless of the actual quality of your ideas, or even the quality of your track record, you'll get told 'no' all the time.  You must have the confidence to push forward."

Hollywood Producer Brian Grazer (Apollo 13, A Beautiful Mind), quoted from his recent book, A Curious Mind

 

Privos Entertainment:  Hollywood and Film Finance 2017

Privos Entertainment works with global family offices, their funds, and portfolio companies on a wide range of Hollywood investments in film finance, digital and social media, music, gaming, and entertainment.   In Los Angles, our entertainment and media business is booming.  As studio movies and network TV become even more powerful global businesses, our people and family office partners are participating in the incredible opportunities that are unique to Hollywood.  

Amid the chaos of the world, Hollywood and its global entertainment business continues to defy expectations as it turns out billions of global revenue and leads the world in the entertainment industry. 

89th Academy Awards:  The February 26, 2017 Winners

We all watched the 89th Academy Awards on February 26 when Moonlight won the best picture (two minutes after La La Land), and Hollywood crowned Mashershala Ali (Best Supporting Actor), Viola Davis (Fences), Zootopia (Best animated feature), La La Land (Best Cinematography),  Damien Chazelle (Best Director, La La Land),  Casey Affleck (Best Actor, Manchester by the Sea), and Emma Stone (Best Actress, La La Land).

Record Hollywood Numbers US and Overseas

Privos Entertainment reports that Hollywood worldwide grossed $38.1B last year making it one of the best performing years in history.  2016 US domestic box office hit a record $11.37B, while international box office fell 3.7% to $26.73B but came roaring back in the beginning of this year with Disney/ Lucasfilm's Rogue One: A Star Wars Story which, at $914.1M globally, is posed to hit the $1B mark soon.   

The Hollywood studios and their international market share crowned Disney the king with a record $4.60B at the international box office; its powerhouse brands have become the envy of the industry, from Lucasfilm to Marvel, Pixar, and Walt Disney Animation, and Live Action, each big hits with overseas audiences.   

In 2016, Disney grossed globally $7.60B, the first time in history that Hollywood has seen a studio pass the $7B mark.  Disney grew its Chinese performance of Pixar titles to record numbers.  Privos reports that this is the 4th consecutive year in which at least three of the studio's new releases surpassed $700M worldwide.  Last year, the top grossing film assets were Captain America: Civil War, Finding Dory, Zootopia, the Jungle Book and Rouge One: A Star Wars Story.  Storytelling drove sales in the box office.  WDA's Zootpia came in as the No. 2 film of the year with $235.6M.  

In 2017, top world-wide box offices include:  Beauty and the Beast ($1.185B); The Fate of the Furious ($1.158B); Logan ($606.2M); Kong: Skull Island ($562.5M); The Boss Baby ($434.9M); and Guardians of the Galaxy Vol 2B ($427.6M).

However, Privos reports that the consensus was that 2016 numbers simply were not as good, with sequels bleeding into overseas.  The challenge of putting people in cinema seats is becoming greater given all the wealth of entertainment, devices, and other forms of entertainment.  Studios are mindful of the competition in the market.  Privos reports that constantly fluctuating currency rates and thus lower returns are a big issue in the international box offices for our family office partners who are active investors in film, media and entertainment.  

88th Academy Awards:  Last Year's Winners

On February 28, the 88th annual Academy Awards named Spotlight the best picture of the year and best original screenplay, a film which recounts journalistic efforts to expose child abuse in the Catholic Church.  Separately, George Miller’s apocalyptic Mad Max: Fury Road swept through the crafts categories, winning six awards; The Revenant, Alejandro G. Inarritu’s cinematically stunning survival tale, then moved to the fore, claiming the awards for best cinematography, directing and actor, which went to Leonardo DiCaprio who spoke passionately during his acceptance speech about the environment noting that 2015 was the hottest year in recorded history.  

We are impressed that DiCaprio took the opportunity during his acceptance speech to discuss the themes that we have witnessed at COP21.  DiCaprio stated, “Climate change is real,” said DiCaprio. “It is happening right now. It is the most urgent threat facing our entire species, and we need to work collectively together and stop procrastinating. We need to support leaders around the world who do not speak for the big polluters or the big corporations, but who speak for all of humanity, for the indigenous people of the world, for the billions and billions of underprivileged people who will be most affected by this, for our children’s children, and for those people out there whose voices have been drowned out by the politics of greed. I thank you all for this amazing award tonight. Let us not take this planet for granted. I do not take tonight for granted. Thank you so very much.”

The $2 Billion Star Wars Effect:  Why Global Family Offices Are Investing In Entertainment

Separately, reflecting on the 88th Academy Awards, Privos, as a global business, has witnessed the explosion of Hollywood and increased escapism, as more people temporarily depart their day-to-day reality by simply going to the movies.  In December 2015, Hollywood made history with the release of Star Wars: The Force Awakens, J.J. Abrams' block buster.  Star Wars beat all records hauling in $238 million in North American, with a global launch of $517 million in the first weekend release of the movie.  Today, in March of this year, the film, with a $200MM production budget, will return gross sales in excess of two billion dollars, if you can fathom that success.  Thus, despite the chaos and uncertainty in the world, people spent a half a billion dollars seeing the Star Wars movie in the first weekend of its release, which is a testament to the staying power and creativity of Hollywood and the world's thirst for entertainment and new media.  Privos Entertainment, based in Los Angeles, is enjoying the global success of Hollywood and new media with our international family office partners who allocate to entertainment, film, gaming, music, and new media.

Yet, under the red carpet lights and behind scenes, Hollywood is still reeling from the carnage and stress of the bankruptcy of Relativity Media, watching Ryan Kavanaugh attempt to steer his company out of Chapter 11 with the hiring of Kevin Spacey as the chairman of Relativity Studios and producer Dana Brunetti as president.  

The success of our entertainment and media business is being fueled by the international reach of Hollywood, which you can see manifested in the incredible growth of Los Angeles.  In LA, new high profile skyscrapers are transforming the skyline of the city, including Grand Tower being built by the South Korean shipping corporation Hanging Group.  Orange blossoms are in bloom, writers are commanding huge fees, block parties and restaurants from Century City to Malibu, off the PCH, are booked to capacity, and our partners are enjoying ski weekends in Tahoe and winter weekend retreats in Palm Springs.  Even the new iPhone means increased profits for the entertainment business - from film to music - as Apple’s greater penetration in overseas markets results in more deals being inked in Los Angeles  

In addition to Hollywood’s addiction to the red-carpet drama and all its associated buzz, Los Angeles is the global center of all things cultural – from music to movies to a golden age of television.  In addition, there is a revival of the arts, with MOCA’s new director and a string of new exhibitions.

International Markets

With much of Hollywood’s fortune and success coming from international markets, particularly China, South Korea, the Middle East, Latin America, and Southeast Asia, international family offices are turning to Privos for help in navigating all aspects of international entertainment and media investments.  Global business is driving Hollywood’s success, and the results are impressive; for example, the international revenue from Disney/Marvel’s Iron Man 3 was $805.7 million, double the U.S. domestic revenue.  International gaming sales topped $3.5 billion last year alone. 

In international markets, Hollywood is talking about China’s new plans to support its movie and entertainment business.  In 2013, China added over 5,000 movie screens, brining its total to nearly 18,200 (compared to about 40,000 in the U.S.). Chinese President Xi Jinping has called the film business a “pillar industry” in China.  His government is encouraging the construction of even more theaters, offering tax incentives for real estate developers who put movie theaters in shopping centers particularly in small cities in the country.  China is also looking to turn its movie theaters into multi-media cultural centers, offering sporting events and music concerts.  China is also expanding its entertainment footprint into the States with China’s Wanda acquiring U.S. AMC theater chain.  China’s Bison Capital has taken a stake in Hollywood’s talent agency Resolution.

J.J. Abrams' Star Wars: The Force Awakens, made history with a late 2015 release date, shattering numerous box-office records by grossing $238 million in north American - the biggest opening of all time, for a global launch of $517 million.  The previous biggest U.S. domestic opening was during the summer of 2015 with Jurassic World with $208.8 million and a global launch of $524.0, which has the advantage of opening day-and-date in China.  In March of this year, The Force Awakens will pass gross sales in excess of $2B mark, a truly astonishing accomplishment.

Further, Gucci just opened their new 22,000 square feet Rodeo Drive flagship boutique for the 10,000 employee company that has been in Hollywood dressing celebrities for the past 40 years, including Elizabeth Taylor who carried a Gucci Bamboo bag.  The new store, one of three Gucci locations in Los Angeles, features a glam new silver facade gives the Italian fashion house a new crown jewel to boast among Rodeo Drive’s venerable lineup of luxury labels.  China and Asia accounts for a third of the company’s worldwide sales, and it will use the upcoming launch of Gucci Beauty to tie Hollywood with China and other emerging markets.

Past Successes

According to Hollywood Reporter, Hollywood's domestic and international 2015 sales reported to date are staggering: Spectre ($413M); Hotel Transylvania 2 ($252.6M); The Martian ($270M); The Hunger Games:  Mockingly - Part 2 ($75.8M); Hunger Games: Mockingjay - Part 1 ($440.7M) American Sniper ($361 million); Taken 3 (268.8 million); Big Hero 6 ($505.1 million); the Imitation Game ($150.7 million); The Hobbit: The Battle of the Five Armies ($939.3 million); Night at the Museum 3 ($325.9 million); Seventh Son ($65 million); Running Man ($57.0 million); SpongeBob Movie ($84.6 million).  Variety reports that Universal-Illumination Entertainment's Minions has crossed this summer the $1 billion milestone at the worldwide box office.

In 2014, the blockbuster movies gross sales were equally mind blowing: Frozen (Disney, $1.009.4 billion); Gravity (Warner Bros., $712 million); the Lego Movie (Warner Bros., $360 million); American Hustle (Sony, $249 million); RoboCop (Sony $220 million); 300: Rise of an Empire (Warner Bros., $177 million); 12 Years as a Slave (Fox Searchlight, $158 million); Ride Along (Universal, $140 million).  In addition, The Wolf of Wall StreetAmerican Hustle, and The Grand Budapest Hotel  , are showing strong box office returns in international markets.  Huge global revenue is also being generated from recent releases of Lucy, Dawn of the Planet of the ApesSex TapeTeenage Mutant Ninja TurtlesNon-StopInto the Storm, the Guardians of the Galaxy, and Hercules.

Two years ago, the 86th Annual Academy Awards generated nearly $100 million in ad revenue with buyers spending close to $2 million for a 30-second spot watched by 43.7 million viewers. 12 Years a Slave, distributed by Fox Searchlight, won the best picture, the first time that Hollywood conferred its top honor to the work of a black director.  Cate Blanchette won the best actress award for Blue Jasmine; and Dallas Buyers Club Matthew McConaughey took the best actor award along with Jaret Leto who won best supporting actor for his work in the film.  Gravity took home seven awards, the most of any film.  Last year, the following films received critical acclaim, including, Man of Steel sequel, The Book ThiefHerInside Llewyn DavisSaving Mr. Banks,  RushGravityAll is Lost, Don JonCaptain PhillipsPrisonersBlue Jasmine, and Lone Survivor.  In addition, Frozen, Hunger Games, Thor: The Dark World, and Gravity are racking up impressive numbers.  Today, YouTube has replaced MTV as the primary outlet for music videos and so-called "Lyric Videos" are the hottest marketing tools online, with the infamous trailer for the Amazing Spider-Man 2 is witnessing nearly 20 million weekly views.

China and Entertainment

In international markets, Hollywood is talking about China’s new plans to support its movie and entertainment business.  In 2013, China added over 5,000 movie screens, brining its total to nearly 18,200 (compared to about 40,000 in the U.S.). Chinese President Xi Jinping has called the film business a “pillar industry” in China.  His government is encouraging the construction of even more theaters, offering tax incentives for real estate developers who put movie theaters in shopping centers particularly in small cities in the country.  China is also looking to turn its movie theaters into multi-media cultural centers, offering sporting events and music concerts.  China is also expanding its entertainment footprint into the States with China’s Wanda acquiring U.S. AMC theater chain.  China’s Bison Capital has taken a stake in Hollywood’s talent agency Resolution.

Yet underneath the glitz of Hollywood, there is real difficulties financing movies outside of the major studios; Harvey Weinstein discussed this hard reality in his recent keynote speech at the UCLA Entertainment Symposium.  Common complaints include a glut of sequels, prequels, and reboots; some reboots like Dark Knight  have been successful others less so. 

Hollywood:  A Global Search for Capital

Despite all the success and glitz, under the surface in Hollywood there are fundamental problems today securing capital for just about everyone participating in the entertainment and media food chain.  Money is truly hard to find and the studios are balking at the chance to bankroll anything but the sure thing.  Billion-dollar directors (family offices in their own right) whose whole lives have been making studio films are out raising capital themselves for independent films.  Despite fierce determination, they are coming up short as midrange films with "a story" have been abandoned in favor of big-budget films on a tighter budget.

You have to look no further than the recent bankruptcy of Relativity Media, the 11-year old digital-age entertainment company run by Ryan Kavanaugh, that claimed clever financing and data analysis could help it unlock the secret to box office riches.   The strategy failed and today a swarm of disgruntled investors and other creditors are fighting for scraps in U.S. federal court supervised auction process.  For any investor looking for lessons learned in Hollywood, you must study the Relativity Media bankruptcy and the public filings which can shed light over the current reality of new media.  

Relativity Media:  Lessons Learned

The Relativity Media bankruptcy aside, the reality today in LA is that the liquidity crisis in Hollywood can also be seen vividly in the scores of well known producers who cannot line up financing and are forced to the sidelines.  Those producers without financial sponsors are regulated to the bench, oftentimes returning to studio jobs for those lucky to find a creative new home.  Producers are also forced to take reduced fees to get a movie made and is then pushed against his or her will into a profit-sharing pool that might include A talent and other producers who want a cut of the action.  The good days appear to be over as producers are getting crushed on the front and back end, with no hope of building a sustainable business.  The reality is that producers are loosing their creative edge and forced to placate studio marketing departments looking for the next horror, vampires, car crashes, or superheros box office hit. Yet, despite the day to day stress, producers all dream of financing their own projects, with their own material, and one day owning their own studios.   The only thing that stands in their way is lack of capital.

In film finance, leading studio executives, directors, producers, and fund managers are all on a global hunt for capital and co-investment partners, as the U.S. and international capital markets are increasingly closed to the entertainment business.  Today, Hollywood executives are flying from LAX to foreign destinations, attempting to close deals with capital partners but are coming home largely empty handed.  We know of one Hollywood family office producer who made over 50 trips to China for capital but came back empty handed not appreciating that he was talking to all the wrong people on the Mainland.  

Thus, promising investor meetings trying to pin down foreign capital commitment do not materialize as Hollywood does not have true access to the international financial and family office community, nor do "creatives" speak the same finance language as a CFA or seasoned finance executive in New York, London, or Hong Kong.  Adding fuel to the fire,  international entertainment investors have all been burned, or have a partner who lost money with a Hollywood producer and the byzantine fee structure that takes care of everyone down the film food chain except the actual investor.  Yet despite the risk, international family office investors are still interested in investing in film, media, and entertainment as Hollywood is the envy of the world.

Despite its sex appeal, investors have not forgotten Hollywood's much publicized 2013 summer of busts, including pricy flops as The Lone Ranger and R.I.P.D. that have made it increasing difficult to close traditional sources of film financing.  Studios are debating whether to alter their strategies to commit to the large budget tent pole and are tightening coffers more than 20% or more.  For example, an Iron Man like template with an original budget of $140 million is now being made for a fraction and only those producers who can come in under budget and on schedule will get the nod.  Skyrocketing costs are crushing profitability at a time when more big-budget movies are in the market chasing illusive investor capital.   

In our experience, film financing is a complex process that requires experienced, hardened financial professionals based both on the ground in Los Angeles and in major money centers globally.  Put another way, without both a local partner living and working in Hollywood, “doing lunches,” and taking the right meetings, family offices interested in investing in the entertainment business will never truly gain access to the right deals or opportunities.  That is why our People are so critical to the success of Privos' entertainment business.

Despite tales of excess development money chasing too few deals in Hollywood, the truth is that the lack of capital is being manifested across Hollywood in additional ways:  the Big Five broadcast networks are slow in buying new dramas; entertainment related apps are not being launched; script deals and commitments are harder to come by; writers are more interested in chasing their own passion projects; the “Netflix effect” is forcing some players to the sidelines and ABC, CBS, Fox and NBC often cannot compete and the movement of viewers away from movies to television due to multiplexes around the world filled with movies that no one wants to see.  We are also seeing actors, and their family offices, insisting on being paid “scale,” taking what amounts to a “success fee” for their efforts in lieu rights to their own intellectual property, and even branching out into gaming, TV, and other intellectual property licensing deals to supplement their income.  Studios like Sony that spent $150 million on Angels & Demons or now cutting budgets to $50M for the same quality film.  Content is king, for those in the know.

A lack of capital in Hollywood can also trigger the metaphorical parade of horribles:  money runs out for a film; a release date is pushed back; preproduction tasks are off schedule; a completion bond falls through; film-makers are sent home until an equity partner or bank loans are secured for the project; or a drama is not green lighted by a network due to financial constraints.  Creators of all levels and independent filmmakers are also feeling the pain of searching in vain for capital that is frequently promised but hard to close, despite best efforts of numerous people involved in the process.  

The good news is that worldwide sales from international markets is the saving grace for Hollywood and one reason why global family office investors and investors, with deep ties to their local foreign host market, are in demand as a capital partner.  In 2014, ticket sales reached $4.7 billion, a notable 7 percent increase compared with the previous year record of $4.4 billion, set in 2011.  Truly, it is international distribution which has saved the day.  For example, Guillermo del Toro’s Pacific Rim, which the studio put up 75 percent of the film’s $200 million budget, struggled to crack $100 million in the U.S. market; however, the film recovered enough from international sales to cross $400 million worldwide, including $100 million in China.   Brad Pitt’s World War Z took $250 million or more to make and its international haul of $526 million worldwide was the film’s saving grace.  Paramount’s Star Trek Into Darkness, with a cost of $190 million, has earned nearly $459 million worldwide, its international sales exceeding expectations at $231 million.  In television, international distribution also help the five broadcast networks exceed their revenue targets and market a new network smash.  Last season, there were 23 new comedy offerings.  Showtime, with its TV hit Homeland, earned a total of $692 million last year, with international distributing adding to its profits.

Privos Entertainment

At Privos, our people have expertise working with investors on a wide range of entertainment projects from print and media to gaming.  We help our international family office partners with a wide range of entertainment related opportunities.  We also help Hollywood producers, actors, talent and LA based family offices craft a solid business plan, work outside of the studio systems, raise capital from international investors and family offices, and execute on global capital opportunities.  Our people have experience work working to secure equity and debt financing, negotiating tax credits, and selling off rights to foreign distributors that help films soar commercially worldwide.

Our family office network in Hollywood is unrivaled.  Our people and partners work closely with directors and producers, film and music publicists, foreign distributors, talent bookers, foreign news correspondents, singers, actors, literary managers, programming and development executives, international film agents, cinematographers, independent film producers, TV anchors, studio executives, journalists, entertainment attorneys, and theater owners.   We have deep ties and experience in London and with the European and UK film finance industry, which has been assisted by British and European talent which is taking an increasing visible role in Hollywood.  In Doha, we have been involved in the Doha Film Festival; in Asia, we work with leading family offices who are involved in the world-wide entertainment business.  

We also work closely and partner with powerful Hollywood Stylists are credited for helping catapult unknown talent into Oscar winners.  Stylists keep established fashion A-list and Hollywood family office royalty clients fresh, relevant, and in fashion acclaim.  They are the new albeit low profile power brokers in Hollywood (for instance, the sudden success of unknown actress Lupita Nyong whose stylist, Micaela Erlanger, made the gutsy decision to put the Yale actress into a white smocked Prada gown at Toronto Film Festival premier of 12 Years a Slave, and the rest is history).  Many are alums of London’s Central Saint Martins (Stella McCartney and John Galliano) and New York’s F.I.T. and Parsons. Hollywood talent agents and related companies are the driving force behind talent’s success and are a Who’s Who in LA such as CAA, UTA, APA, Management 360, ICM, WME.Gersh, 3 Arts, ICM, Edelstein Laird, Hasen Jacobson, Mdia Four, Ziffren Britterham, LBI, Jackoway Tyerman, APA, Gendler & Kelly, Jill Kaplan, Felker Toczek, Anderson & Smith; Gersh, ICM, Resolution; j.k.a., PMK-BNC, and others.

Our people and family office partners also participate regularly in the international film festivals including Venice, Telluride, Cannes, Tribeca, Seattle, Doha and are active at Berlin’s European Film Market and this coming November’s American Film Market in Santa Monica, California, where over 10,000 deals will be sealed worth in excess of $5 billion. Last year, the Toronto Film Festival, a magnet for the studios and always a venue for heightened deal making,  showed 288 features to a high profile audience of critics, including WikiLeaks drams, The Fifth EstateEnough SaidAugust: Osage CountyRushParkland and American Dreams in China.  Toronto is also a growing film market where sales agents sell of foreign rights to unfinished films and deals are made, especially in light of the recent Cannes Film Festival where the lack of product was an issue.  Our People and partners are all working these exciting events and help our family office partners understand where and how to play in this complicated entertainment space.

We always welcome the opportunity to meet and work with new friends and colleagues in the entertainment and media business, including those of you in the gaming, digital medial, social media, as well as Hollywood bankers, lawyers, accountants and others in traditional film finance and new media.  We are global entertainment professionals and welcome the opportunity to work with new family offices and others interested in the global entertainment business.