The Clarity and Color of Film Finance
Colin Whitlow
“Let me show you how this is done. First thing, hold the glass up and examine the wine against the light. You're looking for color and clarity. Just, get a sense of it.” – Miles Raymond, Sideways
I believe the film industry is weakened by the absence of an objective, transparent measuring tool for would-be film investors. Many mature industries have created an index of some sort to help the investment community get a read on the sector’s financial climate. The Dow Jones Industrial Average serves as a benchmark for mainstream market activity. The Case-Shiller Indices are well-respected indicators of real estate performance. But the film industry has no such barometer. Some risk prone investors become involved in films with virtually no useful financial information to go on, making a hopeful jump into the abyss with the belief that the journey will have been fun regardless of its outcome. A small group of experienced investors understand how to create assurances for themselves, increasing their chances of financial success. The overwhelming majority of investors, however, choose not to invest in film at all, finding alternative vehicles that provide greater transparency into the mechanisms related to financial returns and the set of past comparables. Both filmmakers and investors suffer from the continued opacity surrounding investment opportunities.
Under the belief that the presence of an objective film index might help alleviate this issue and lead to more sustainable and intentional investment practices, I am researching methodologies through which such an index could be made. Once I have collected sufficient information about the challenges, data types and partners that would need to be involved in making such an index a reality, I will move toward the execution stage. At the moment, I find myself defining the rules for this process…
First thing’s first – what is an index really? In simple language, it’s a set of investments combined to form a score that can be compared at various places in time relative to its own base value.
Line graphs depicting stock performances over time are fairly standard visual indicators commonly used to aid the decision-making process of investors. However, there is no simple or obvious way to make a similar tool related to the performance of film investment – at least not without setting a few things straight. There are a plethora of ways in which films are unlike stocks - below are a few:
- - Stocks hold value that is theoretically ongoing whereas the revenue-generating life of a film is finite. A film index needs a standard basis to gather revenue information.
- - Companies available for trade on the public market are highly regulated while even studios and production companies owned by publicly traded conglomerates do not disclose financial returns on a per-film basis. A useful film index requires data its users trust.
- - Stock markets allow for high volumes of ongoing trading from many different sources, which all fall into a standardized system, whereas films typically require funding at the front end from a small number of sources and generate revenue from a widely diverse and disparate set of streams during specific windows.
Luckily, there exist other indices related to investments I find much more analogous to films. One such index is Liv-ex, a global marketplace for buyers and sellers of fine wine. As I’ve begun studying the Liv-ex system, I’ve found the practical and philosophical questions its founders tackled highly analogous to the exercise I must go through in constructing the film index. Two core elements are of utmost importance:
1. Defining the criteria for inclusion
As Liv-ex’s director, James Miles, said, “To be regarded as a fine wine, a wine must have the potential to both improve in bottle and appreciate in value, and be actively sought after in the secondary market. To satisfy this requirement, a wine must have a long track record (often centuries rather than decades) and have received strong critical acclaim.”
It is essential that a film index articulate a fine level of specificity in setting the boundaries that demarcate what films it includes. There are many different types of boundaries one might choose. The key, I believe, will be to select a rubric that is meaningful for investors and filmmakers alike and that produces a score that can be used to make projections beyond the list of included films into other parts of the industry. Is an ongoing slate of films made by 25 film producers meaningful? What about a set of sub-indices built within genres? Should the budget of the film be a factor? The length? With the aid of some statistical analysis, practical considerations regarding the ability to get specific data and common sense, I will gradually determine the pieces that might best be used to construct the model.
2. Defining the index’s value
In Liv-ex’s case, James Miles points to the index as a tool investors can use to calibrate fine wine as an asset class within their portfolio, comparable to others such as gold and real estate. He points to the ability for “growers to finance their crop, which for fine wine is often not ready for drinking for a decade or more” – essentially the idea that it provides greater stability for the content, errrr, crop producers. And he points to the burdens of transaction fees leading to low liquidity and slow working capital cycle times throughout the industry, with the transparency of an index serving to lessen those challenges. The analogous value of an index to the film industry is fairly direct.
"Liv-ex Fine Wine 1000" Index
I have begun speaking with Liv-ex staff and will continue to seek their guidance over the coming months (as well as from other indices serving similarly atypical financial instruments). Down the road when I begin to experiment with functional models, my initial attempts will almost certainly need refining. Everything from the Dow to Liv-ex have gone through periods of revision. With each iteration I’ll seek to bring a useful model for insight into film investment into greater focus. I’m looking forward to working with many of you and sharing my progress.
* To learn more about Liv-ex, visit their website here.