The Ether Empire:  Investing in Merchants of the Tale

The Fairytale land of media moguls

The world’s largest investors understand that a global industry generating multi-trillions of dollars a year with the power to shape our hearts and minds is an investment opportunity like no other.

Let me tell you a story.

It is a story of industry; of money and glamour and fame. 

It is a story of starving artists and hungry courtesans seeking wealth and position within a realm of corporate monarchs and worlds filled with wonder, risk and reward.  Into this story, our heroes begin a journey.

It is the story of finding, making and selling content within the global Media & Entertainment Industry.

Content is the life-blood of the industry.

Distribution is its beating heart.

Captivating an audience is its purpose.

Intellectual Property is its food.

Money is its soul.

It has no imagination, only a hunger to feed hunger, mining rare creative talent to mint content, and upon legal ownership of ideas its business is built.

It is an industry of cosmopolitan wealth with a myriad of monopolistic dreams, shamelessly realised, but not by most.  It is a hoard of beasts, riding on the shoulders of artists and flocking to the beat of corporate drums and consumer demand, production process and the celebration of its own glory.

It is the industry with the most consistent growth in history, riding the statistical wave of global human populations, technological expansion and economic integration to realise US$2.5 trillion in revenues this year.  It is composed of multiple kingdoms, fiefdoms and nomads forged into a single empire ruled by no one. 

Cannes Red Carpet
Uma Thurman & her son Levon Roan Thurman-Hawke at Cannes Film Festival 2017. Image credit: PTI.

Rome had “bread and circus” to feed the insatiable appetites of the mob.  Today, we have movies and television shows with a colosseum in the palm of our hands. 

The demand to fill that colosseum with content feeds a US$250 Billion cottage industry of global content production expenditure.

The increasing demand for new entertainment content has not been diminished by economic depression, world wars or by global pandemic. 

Entertainment is today a basic component of modern society; as important to economic and political life as employment, food, housing and health care.  In short, entertainment is big business.  It is a big business that is in constant frenzy to fill that colosseum with the next new show by finding a good script, filling budgets and reaping rewards.

And unto this, investors roam finding both peril and profit.

To the un-accustomed novice, one must say, “Beware!”  You travel amongst the largest investors in the world, placing billions of dollars into companies captained by rogues that shape public opinion and the aspirations of billions of people.

For investors of more humble size, learned counsel, adept guides and professional diligence is key.  Many of these investors have travelled extensively in another empire composed of bits and bytes.  These investors have forged partnerships, and profits, with technology entrepreneurs that seem remarkably similar to a new generation of artists and creatives crafting the next generation of film and television content. 

The tech entrepreneurs embraced their investor partners, learning the critical elements of corporate and capital strategy needed to grow beyond their wildest dreams.  Now those same investors turn an eye to media.

But there are risks in the Ether Empire that make rewards hard to come by.  The fortune tellers craft decks of gold charting a course into an empire of certain riches for those fools who rush in.

As in any gold rush, most of the riches go to those selling tickets to the dream and renting the shovels.  And there is much being shovelled, not all of it gold.  Everything starts with a story, but only those stories that can be accounted for in a balance sheet pass as currency in the Ether Empire. 

The smart money invests in assets.  As an industry trading in stories, it is good business to own the rights to them. 

And that is where we begin.

Content as an Asset Class

Successful content investors within the Ether Empire exploit the core asset of media and entertainment:  Intellectual Property Rights. 

It is these Rights that provide legal license to generate revenues for the telling.  Those rights are easily bought and sold.

Whether comedy or drama, adventure or musical, the true value of any content lies in the story it tells.  Ageless stories that resonate across culture and generation attract the largest, most enduring audiences. 

But only the rights to that story put money in the bank.  Those rights are balance sheet assets. 

Professional investors acquire those assets, or the equity in companies that hold them.  The most valuable of those companies hold rights to produce high quality, in-demand feature films, music, videos games and television content for an increasingly on-line, on-demand world.  They maximise revenue by managing the rights to the stories they tell; and assign those rights in a chain of title, or sell them outright to the most eager outlet.

Collecting the rights to multiple titles that resonate with audiences offer opportunity to build brand value in the name of the company, and value in its equity.  By expanding that intellectual property into collections, sequels, prequels and spin-offs and across media formats such as graphic novels, video games and consumer products as media franchises, those branded companies become rich principalities that the professional investor can own a piece of.

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Competition between cinema screens and television screens will push global content production to ever-increasing numbers, with quality over quantity becoming ever-more valuable.  Quality stands out in a crowd.  Those companies that cultivate the highest quality stories create a nexus between production values and financial valuations.   

Investment capital must be smart capital with a critical insight into global entertainment trends and a keen eye on risk management.  The complexities of film finance are changing with the globalisation of film production and distribution.  Professional investors will focus attention on the structuring of capital investments and the extraction of investment returns.

As demand for high-quality films and television shows continues to grow, the competition between places to produce them heats up.   Countries like the UK, France and certain States in the US offer lucrative incentives to produce films in their backyard.  This attracts high quality production services, professional production crew and offers an enhanced production environment.  Yet another opportunity for the intelligent investor. 

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Money for Nothing

Why the whole planet is competing to attract film & television productions.

Competition for quality content will only increase between cinephiles, digital on-demand viewing and broadcast programming, offering a moment of potential disruption for Media Majors reliant on the status quo.  Capital for production has been equally disrupted.  Although the box office is recovering strongly, the Major Studios no longer have reliable hegemony through massive budget, tent-pole productions that require international box office windows for reliable recoupment and profitability.  This opens the opportunity for more independent productions to find their way into cinemas (particularly as the Media Majors embrace necessary but shorter theatrical windows to support their shiny new SVOD platforms). 

As a result of the COVID-19 induced disruption to the Studio-Cinema dynamic, finance arrangements for complete studio slate deals are in doubt as the quest for high-quality content for digital streaming increasingly dominates demand.  Those shiny new SVOD platforms, so reliant on quantity now suffer audience decay over lack of quality.  This coincides with a dramatic decrease in the risk appetite of large commercial lenders, placing film finance for both Studio and Independent productions under pressure.

Media Majors seek to find the means to continue with business as usual; financing the costs while holding onto the rights.  As a result, private capital is in high demand, with Middle Eastern potentates and Silicon Valley luminaries joining various sovereign funds on Hollywood’s speed-dial list.  But private capital tends to be smart money that seeks sustainable, consistent performance and knows what those rights really are.

Smart money is moving into film equity, not film finance.

As the Major Studios struggle to seek wholesale sources of debt capital, indie producers have come to rely upon creative combinations of equity, debt finance and critical contributions from public subsidies in the form of tax credits and production cost rebates in order to cover their budgets.  The COVID-19 pandemic has disrupted that mix as well.  Most Indie Producers rely on speciality banks and other lenders to secure production money at a steep premium against the promise of distribution revenues and tax credits.  Few are now even willing to discount pre-sales (if they can be found) and tax credits from sovereign states.

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With the Studios now focusing on a strategy of few-a-year “big budget” blockbuster movies and cancelling smaller films and television shows, the smart money of private equity is shifting to the massive capacity of the Indie production market to meet the demand for ever more content from cinema chains, streamers and broadcasters, including the Media Majors themselves.

The debt financiers are beginning to find themselves having to compete against these deep pockets, who view asset management and long-term growth in asset value as more compelling than finance fees.  Even with more smart money looking at the opportunity, knowledge of the industry is critical but lacking, slowing down access to equity capital at a time of increased demand for investment. 

Independent Producers are caught in the middle between relatively predatory distributors upon who lenders depend for risk management and the slow emergence of private equity investors.  Independent Producers are prone to giving away most of their potential upside from the success of a film simply to get them financed.

Smart, available equity capital investors entering the Ether Empire at this moment benefit accordingly.

Smart money is able to filter out “vanity” projects, leaving them for the debt finance houses that have little or no interest in the value of the underlying intellectual property.  Producers see equity investors as partners, and are willing to cut overheads and be far more proactive about budgets and commercial strategy in choosing what movies to make.  Again, equity investors benefit.

The result of asset management mindsets inherent in private equity is that only projects with true commercial prospects make the cut.  A willingness to play the long game, across a full portfolio of projects, allows the professional investor to benefit from growth in enterprise value.

The heroes in our story of the Ether Empire are not the Media Majors and the world’s largest private equity funds.  The heroes of this story are independent production companies that seek to build a portfolio of rights for themselves and the professional investors who help them cultivate the corporate and capital strategies needed to succeed. 

Their stories are only beginning.

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