Why is Private Equity Betting Big on Film Libraries and Music Catalogues?

The Money Machine

Private Equity giants such as Blackstone and Apollo have inked headline grabbing deals and are pumping billions into celebrity performers.

[ updated July 5, 2023 ]

Media outlets ranging from Bloomberg and the Financial Times to Variety and Vanity Fair have been reporting on multiple, record breaking pay outs in the hundreds of millions for what was once the domain of the brand-name movie studios and record labels. 

The news headlines have been appearing in rapid succession.  Recently, the vast majority of media outlets reported that Blackstone-backed Hipgnosis Songs Capital had paid a record US$200 million to Justin Bieber. 

See, Confirmed:  Justin Bieber Sells Out.

Before that, it was a succession of music and film rights deals including Apollo’s US$760 million stake in Legendary Entertainment’s high-quality film library or Blackstone-backed Candle Media’s staggering US$900 million acquisition of Reece Witherspoon’s production company, hello sunshine.

A cursory awareness of these separate announcements belies an apparent outbreak of acquisition fever among the largest private equity investors. 

See, Media Execs Continue to Drive Private Equity Investors into Media & Entertainment.

For private investors and media professionals alike, the attention-grabbing headlines reporting on that apparent feeding frenzy begs a repeated question:  Why? 

The Media C-Suite explains.

The Money Machine

The costs of producing entertainment content for global audiences are likely to exceed US$250 billion across film, television, music and gaming this year.  The vast majority of content creators and production professionals earn their living from that expenditure; earning fees out of production budgets.

The streaming platforms earn revenues from subscribers experiencing that content (and increasingly from advertisers seeking access to those subscribers).  The distribution and delivery of entertainment content to consumer audiences has driven persistent growth in revenues across the global Media & Entertainment industry to over US$2.4 trillion in 2021, according to PWC’s annual review of the industry.  These Industry revenues are expected to grow at a rate of 4.6 CAGR to reach over US$2.93 trillion by 2026.

That is what most private equity investors are hoping to take a piece of as they grapple with their own problems of having too much capital and proportionally too few investment opportunities. 

Read, Entertainment Grows as Private Equity Pours Money into Disruption.

Luckily for this industry, growth in digital delivery demonstrated by the “streaming wars” has resulted in a dramatic increase in consumption of entertainment content.  Such content includes music, with rivalries between the likes of Spotify, Apple and others and “short-form” content with competition to TikTok growing rapidly).  This consumption of content of all description has far outpaced the industry’s capacity for production, resulting in significant competition for nearly any content that can be produced and delivered to distributors and streaming services.

Private equity is investing in that production capacity.

peter chernin, ceo of north road company media c-suite
Peter Chernin, CEO of North Road Company, (Producer of the TV Series Love Is Blind and the Planet of the Apes films) now valued at over US$1Billion after US$150 million investment by the Qatar Investment Authority. Image credit: IMD.

As streaming services expand to new markets and compete with each other, the size of their title libraries becomes their single-most important competitive advantage.  Quantity attracts.  But quality is what retains an audience and keeps subscribers paying monthly fees.  Quality builds fans eager for the next piece of entertainment content and anchors the attention of audiences around an artist, film-maker, or streamer, as a brand.

The resurgence in attendance at the cinema and at live events like concerts in post-pandemic communities is driving further competition to deliver high quality, in demand content. 

This “flight to quality” is resulting in unfulfilled demand for critically-valued film-makers and musical talent with demonstrated commercial success. 

Avoiding Risk

Despite popular perception, the “Major” studios and record labels now owned by the multi-billion dollar publicly-listed media conglomerates tend not to be in the business of making movies, television shows or music albums.  Rather, all of the Studio Majors are in the business of distribution and delivery.  Today, that means streaming platforms and managing the legal rights to distribute entertainment content in different territories around the world. 

The demand for content means that charging money for delivering what an audience wants is relatively risk free.  Investment into digital channels of distribution and delivery across global markets has cultivated Media & Entertainment into one of the world’s largest industries by aggregated annual revenues. 

The risk comes from running out of content.

But creating new entertainment content is an altogether different investment proposition.  That’s why the major streaming platforms and global distributors acquire and commission content rather than develop it themselves.  For that, they rely on Producers.  The vast majority of Producers operate as small to medium-sized enterprises fully independent of capital support from the “Studios”. 

Producers find and contract with creators to develop a new film, television show or an album of songs.  It is the Producer that first acquires the IP, typically as an option agreement to acquire the rights inherent in the copyright.  That Option will allow the Producer to begin development and, if it looks promising, to acquire everything.  With a contract for the full rights, a Producer can sell that contract at a profit, assign it out to another Producer to push it forward and reserve a piece of any future revenues in the form of royalties. 

Film and television rights operate in a similar manner to music rights, where the assets are siloed into copyright to the original source material, licensed rights to produce and record the performance of the content (such as a Master Recording) and licensed rights to charge money for access to the performance.  Management receives fees and percentages from distributors and exhibitors, then pays royalties to the holder of the source materials.

Streaming platforms and global distributors tend to offer contracts to Producers with great scripts that attract known actors, promising to pay lump-sums (known as negative pick-up deals) or percentages of revenues (known as pre-sales agreements), but only once the content is delivered.  Negotiation for access to capital before delivery inevitably leads to signing away the Rights. 

Market Opportunity

Private Equity investors are adept at spotting opportunities within an industry’s supply chains and identifying the pain points for the established players.

The title libraries offered by steaming services are typically held as a contract right, or license, to charge subscribers to enjoy the content in a particular territory for a particular period of time.  These licenses vary from territory to territory and are often for periods of as little as a single year.  Netflix may offer one title in one territory that Disney+ offers in another exclusively. 

Strategically, these competing streaming platforms seek to acquire or commission exclusive rights to content globally and permanently, calling them “originals”.  These proprietary titles accumulate into proprietary content libraries.

Proprietary content libraries are the underlying source of enterprise value that under-pins the brand value of the streaming platforms for the multi-billion publicly-listed media conglomerates.  They are each competing to own the full set of rights to nearly all content delivered through their own streaming platform or distribution network.  To build subscriber numbers, streaming services focus on the size of their title libraries, acquiring the rights to as much content as possible.

As result of this trend over the past five years, the industry’s production capacity has built momentum on quantity over quality to meet demand.  The vast majority of independent film-makers today operate on a project by project basis to produce and sell content to streaming platforms as rapidly as possible before searching for their next story to tell.

But quality content is what retains streaming subscribers and attracts audiences to the cinema.

As a general rule, quality stories tend to concentrate around quality story-tellers with the development experience and networks to identify, acquire and produce quality films, television series and song albums.

michael strahan and tom brady media c-suite
Sports-theme producer Religion of Sports accepted US$50 million from Shamrock Capital. Rumours are that other PE groups are looking hard at them. Founded by sports documentarian Gotham Chopra and NFL legends Michael Strahan and Tom Brady (pictured); Image credit: Walt Disney Television.

Producers that acquire and curate undeveloped IP into development catalogues can rapidly produce new content from a ready pool of balance sheet assets.  They then produce content from this pool and build content libraries that receive royalties from distributors and streamers, adding yet more balance sheet assets.  The management of those rights, shifting from one steamer to another when a license agreement expires, generates considerable revenue.  But it is the potential of new content residing in development catalogues built by proven Producers that are of particular strategic value to the multi-billion dollar publicly-listed media conglomerates.

Private Equity funds have identified this market opportunity with investments into the capital of production companies with both development catalogues and production overseen by experienced film-makers. 

These efforts by Private Equity are designed specifically to address demand from streaming platforms and re-emerging cinema distributors for quality content at scale, offering their investors a combination of long-term revenues and significant returns from corporate acquisitions by the multi-billion dollar publicly-listed media conglomerates.

The play for PE fund managers like Apollo and Blackstone is the ability to aggregate these equity holdings into a portfolio of revenue streams from license fees and royalties.  With enough of them, they can leverage those revenues into further investment capital or returns to their investors.

The number of very large deals is likely to diminish however, as the number of Producers with demonstrated quality content and significant IP in development become more difficult to find.  These emerging Producers are ripe investment targets for smaller PE and venture fund managers, Private Family Offices and HNWIs.  The opportunity for smaller investors is to support the development and marketing capabilities of emerging Producers while positioning them as attractive acquisition targets for the larger investors. 

Read, Where’s the Money? The Rise of the Private Family Office.

The opportunity for emerging Producers is to demonstrate their capability and capacity to meet an industry need for prolific production of quality content, and then start speaking to smaller professional investors as prospective partners.

[ this article was edited for length on 5 July 2023 ]

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