IP assets and film finance - a primer on standard practices in the U.S.

IPassetsandfilm EconomicResearchWorkingPaperNo.74/2023 finance–aprimeronstandardpracticesintheU.S. AlexanderCuntz,AlessioMuscarnera,PrinceC.Oguguo,MatthiasSahli IPassetsandfilmfinance- aprimeronstandardpracticesintheU.S.* AlexanderCuntz†AlessioMuscarnera† PrinceC.Oguguo†MatthiasSahli‡ September21,2023 Abstract ThispaperoffersaprimeronthebasiceconomicsoffilmfinanceandstandardpracticesintheU.S.movieindustry.IttakestheU.S.movieindustryasacaseinpointtostudyhowexcessriskanduncertaintyaroundfinancingnewprojectsareprocessedandmanagedbyprivatesectorentitiesandwhatmarket-basedsolutionsaredevelopedtopreventmarketfailure.Thepapersummarizesthemostcommontypesoffinancialdealsonthegroundandreoccurringfundingsourcesfornewcontentproductionanddistributioninthepasttwentyyears.Inparticular,thisresearchdiscussestheprominentroleofintellectualproperty(IP)infinancialtransactionsintheaudiovisualsector.Researchfindingsarebasedonaseriesofsemi-structuredinterviews,commissionedexpertmemoranda,andadedicatedpanelheldwithselectedindustryexpertsinNovember2022.Inaddition,weconductexploratoryanalysisandprovidedescriptiveevidenceoncreditandintangiblecollateraluseintheindustryusingdatafromUniformCommercialCode(UCC)filingsandofficialIPregisters.Inlightofthedigitaltransformationoftheaudiovisualsector,theresearchdocumentsindustrytrendsandthemostrecentchangesinthefinancingofU.S.film.WeconcludewithanoutlineofgenericpolicyoptionsforanupgradeofthefinancingenvironmentintheU.S.andbeyond. Keywords:movieindustry,finance,intellectualproperty,collateral,loan,digitiza-tion. JELClassification:G20,L82,O34,Z11 *Theviewsexpressedarethoseoftheauthors,anddonotnecessarilyreflecttheviewsoftheWorldIntellectualPropertyOrganizationoritsmemberstates.TheauthorswouldliketothankRobertBrauneis,JosephCalabrese,CarstenFink,BillGrantham,MichaelKos,BrentLutes,AllisonMages,DavidNimmer,GuyPessach,BerndRiefler,XiyinTangaswellasworkshopparticipantsatWIPO.CopyrightrelateddatamadepubliclyavailablebytheU.S.CopyrightOfficeisgratefullyacknowledged. †WorldIntellectualPropertyOrganization,DepartmentforEconomicsandDataAnalytics,34,chemindesColombettes,CH-1211Geneva. ‡WorldIntellectualPropertyOrganization,DepartmentforEconomicsandDataAnalytics,34,chemindesColombettes,CH-1211Geneva;UniversityofNeuchâtel,InstituteofEconomicResearch,A.-L.Breguet2,CH-2000Neuchâtel. 1Backgroundandrelatedliterature Moviesoftenrequirelarge-upfrontinvestmentandtitlesuccessishardtopredict,evenwithmoredatabecomingavailableinthedigitalage(Cavesetal.,2000).Still,withthemanyblockbusterscreatedinthelastcoupleofyearsandtheriseofstreamingservices,theglobalfilmindustryisboomingandkeepsattractingsignificantoutsideinvestment. Forexample,thetop1000moviesalonegeneratedatotalU.S.boxofficein-comeofU.S.Dollar(USD)166billionandrequiredatotalinvestmentandoverallbudgetofUSD112billion,withtheoldestmoviereleasedin1937.1AsFigure1il-lustrates,overthelast40yearsofmovieproductionhistory,theaveragerevenuegeneratedpertitlewasapproximatelyUSD20to60million,withasteadilyincreas-ing,averageproductionbudgetrangingbetweenUSD20to60millioninthesameperiod(yearlyaveragesinabsoluteandrealterms,cf.Figure2).Basedonthedata,wecalculateandplotdomesticcarryingcapacityoftheaveragetitlereleasedinagivenyearinFigure3.Thiscanhelpapproximateinvestmentprofitabilityandisdefinedastheratiobetweendomesticboxofficeincomefromtheatricalreleasetoproductionbudgetasreportedinthedata.Eventhoughthedataisincompleteforvariousreasons,2investmentinfilmcanbehighlylucrativeassuccessfultitles 1Thenumbersarederivedfromweb-scrapingtheThe-NumberschartwebsiteinNovember2022.WereportinflatedUSD(millions)$basedontheannualaverageConsumerPriceIndex(AllUrban,AllItems,U.S.City)averagearoundtheyear2021.Thelargerdatasample(comparedtothetop1000titles)isfurthermorerestrictedtomoviesreleasedbetween1980and2022.ItisimportanttonotethatthedataisbasedonachartlistofthemostsuccessfulmoviesofalltimesintermsoftheirU.S./domesticboxofficeincome.Hence,itisbiasedtowardsmorepopulartitlesanddoesnotwellreflectinvestmentandrevenuegeneratedforsmallerandlesssuccessfulmovieprojects,includingthosenotcompletedorreleased. 2Notethatunderlyingmeasuresofincomeandbudgetforthesemorepopularfilmtitlesareimperfectforvariousreasonsandhencedomesticcarryingcapacityratioswarrantcautiousinter-pretation.First,domesticboxofficeincomedoesonlyreflectpartoftheoverallincomegeneratedbyafilm,inparticularwiththeriseofdigitalchannelsinmorerecentyears.Itdoesnottakeintoaccountmultipleothersourcesofpotentialincome(e.g.incomefromonlinestreaming,abroad seemtorecoup(attheminimum)2to3timesthecoreinvestmenttheyrequireupfront(productionbudget).Atthesametime,giventhatdomesticcarryingca-pacityhasbeenstronglyfluctuatingoverthecourseofthelast40years(and,morerecently,declining),itbecomesclearthatpotentialhigh-returninvestmentinU.S.filmcanbeaveryriskyundertaking.Notably,manysuccessfulfilmsrelyonexter-nalfinanceandtheywouldnothavebeenrealized(orwouldhavebeenproducedonamuchsmallerbudget)ifcompanieshadbeenrestrictedtousingtheirownfunds.However,asbankruptcyandp