Which investment yield better returns?

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Today I will talk about making money in showbiz ( especially cinemas) and will answer the following 6 questions:-

1. How can you and me get involved in financing a cinema?

2. What are the odds of making money from a cinema?

3. What's the average rate of return on investment in Hollywood and Bollywood movies?

4. How many production houses are listed and traded on the stock exchange?

5. How much returns have the studio stocks given over time?

6. Does it make sense to invest in a movie or the production house stock for better returns?

Let's begin. Have you ever wondered how a producer or production house funds a film, and if you have the opportunity to finance one? Financing for a movie can work in various ways. There are four broad methods in which one can obtain financing for a film, whether he/she is an independent producer or a production house.

1. Debt finance from Private investors/Lending institutions.

2. Equity financing in the form of stake sale in the production house/producers company

3. Pre-Sales- A movie may get funding in the form of rights sales ( satellite , distribution , OTT etc) even before the movie goes on production , if the producer/production house has a good track record and brand value. Additionally the changes of pre-sale increases if the movie has popular actors, director, music director etc which increases the chances of it’s post release success.

4. Crowdfunding- Crowdfunding a film involves the production team releasing their pitch, trailer, and/or cast list and urging regular folks to contribute their own funds towards reaching the production's target. Many low-budget films have been able to secure a fraction or the entirety of their funding via crowdfunding campaigns.

Now, the question is, can individuals like you and me be a part of the film financing process? The answer is, yes! If you are an HNI, you may finance a movie by reaching out to a production house or a producer expressing your interest. Movies are expensive investments, and one needs to have a lot of money to finance a movie. Alternatively, there are crowdfunding platforms like Indigogo, Seek&Spark, and Slated, on which moviemakers publish trailers and plans for their upcoming movies. One can invest smaller sums via the crowdfunding route as well .

In addition there are these registered AIFs ( Alternate investment funds) like the SEBI registered ( India Regulator) Cinema Investment fund called TECF ( Third Eye Cinema Fund) through which an individual can invest in projects.

Now let me address the big elephant in the room -the odds of a film recovering it’s investment and generating returns on investment. But first, look at the table below to understand the income that a movies can generate.

Now that you have understood the revenue stream let's understand how the income from a movie release is distributed amongst it's various stakeholders. To help you understand I have taken a very interesting example from stephenfollows.com ( Stephen Follows is a noted analyst from media industry and has written columns in NY Times, Guardian and Telegraph in the past)

Let’s assume that a fictional movie made on a $30 million budget generates an income of $75 million worldwide. The typical revenue share would look like this.

If an investor puts in $30 million, he/she can expect a return of 106%, which translates to a profit of 6%. However, this figure is not set in stone and the success or failure of movies can greatly impact the return on investment. Nevertheless, experienced producers are unlikely to invest in movies that are doomed to fail and can generally ensure that their investments are recovered at the very least. To gain a better understanding of returns on investments, it is also important to look at the valuations and historical returns of publicly listed companies across various global stock exchanges. After analysing data from the movie industries in both India and the US, it can be safely concluded that an average profit of 6-10% can be realistically achieved with a cinema investment.

Let’s look at the film production companies listed on the stock exchange, their stock price and the earnings per share.

Data from moneycontrol.com as on 24th March 2023.

Furthermore, when examining the stock performance of film production companies listed on the Indian stock exchange, the results are as follows-

On the other hand let’s look at the current stock prices and 5 year performance of Disney, Warner Bros and Netflix on Nasdaq.

Disney Stock

The performance of film studios in India and the US, as indicated by their stock prices, demonstrates that they have not been able to match the average returns generated by the movies they produce.

Furthermore, when considering investments, it can be observed that holding a production house's stock for approximately 5 years has resulted in an average return of less than 5%. In contrast, investing in movies can yield an average return of around 6-10% over a two-year period (factoring in the time from concept to post-release returns), resulting in potential returns of 12-25% on the capital invested, which is significantly higher than holding stock.

While some may consider investing directly in cinemas to be a risky proposition, it is worth noting that holding company stock also involves risk. With the rapid growth of digital and social media influence, investing in showbiz, particularly cinema, can yield even greater returns. However, it is important to conduct thorough due diligence before investing in any cinema project.

Disclaimer- This analysis is solely intended for educational purposes and should not be construed as an offer to invest. It is highly recommended that individuals conduct their own research and seek professional advice before making any investment decisions.

‘Pearls from the Past’.

Do you know that the world’s first motion camera was called a Kinetograph and was created by William Dickson under the guidance of the Great Inventor Thomas Alva Edison in the year 1890. By 1892 he announced the invention of the Kinetoscope, a machine that could project the moving images onto a screen. In 1894, Edison initiated public film screenings in the recently-opened "Kinetograph Parlours."

Concluding this weekly newsletter, I'll sign off until next week.

Regards,

Vipul