Joint venture reporting is typically a visible item for finance executives. Frequently, these partnerships are with high-profile clients or business partnerships, and a company collects revenue for the joint venture and spends a portion of revenue on marketing and other content creation expenses. For the JV partner, these expenses are unknowns, and reporting offers insight into these transactions. The JV partner will frequently track views or sales to attempt to track revenue activity and will be looking for reporting to support the numbers they are expecting.

Professional and detailed reporting solves some of those challenges and engenders trust between partners. Creating a process for collecting data, preparing reporting and documenting support files can standardize a typically deal-specific project and create time efficiencies.

Document the Unique Requirements of the Joint Venture Agreement

Each joint venture agreement will have its unique requirements, so it’s important to document the key items. This will create an easy way to look at all deals and remove the need to read the contract too many times.

Companies can accomplish such documentation with a standardized one-page deal sheet for each agreement that rolls into top-level tracking. This tracking will support not only the needs of the finance team but also the needs of executive management, sales teams, marketing teams, business affairs and auditors. It will also support the FP&A team’s ability to forecast and analyze budget to actuals.

Depending on the needs and the size of your joint venture finance and reporting requirements, this tracking can be performed with contract management software, database software or an Excel document that summarizes the individual deal sheets. For example, your summary could have columns for the main tracking notes from the deal sheets, such as term dates, reporting due dates, contact information, G&A rates, split percentages or any top-level fields that management needs to understand at a glance. It could then have a row for each deal. Some important items to consider include:

• Term of the agreement
• Reporting dates (e.g., is it semi-annual reporting with a 90-day due date?)
• Contact list and information for all reporting recipients
• Advances against share of net profits
• G&A fee
• Profit split percentage
• Answers to relevant questions like:
  • Is data stored in the accounting systems using a project number that can be used to identify projects?
  • What support is required to be included in the reporting package?
  • Is the recipient going to import data detail reports into their systems and is a specific file format required?
  • Is this reporting cross-collateralized with any other agreements?
  • What is the internal approval process?

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Standardize the Joint Venture Reporting Template

Similar to the deal summaries, standardizing the joint venture reporting format will save time in preparing the reporting, training staff and approvals. It is important to take the time to build out every possible option in the template, so the accounting team can efficiently prepare consistent reporting for all deals. Create a template that includes all fields and all support documentation for all agreements – from the basic agreements to the most complicated agreements. You may not use all fields in each report, but every option should be available. This step is critical in standardizing your reporting and creating efficient processes for training of the team and timely reporting.

It is frequently beneficial to bring in an external expert to interview the team, guide the process and identify questions to ask to ensure templates cover all possible options and are easy to use for the accountants running the actual reporting. Here are a few places to start:

Include:

• All revenue streams
• COGS
• Operating expenses
• Advances
• G&A fee
• Return reserve calculation, if applicable
• Inventory obsolescence, if applicable

Document:

• Source of each data item
• Timing of when each item will be available for reporting
• Partner with IT/Data Team to build reports to pull each data item
• Determine supporting documentation to retain with each reporting for audit purposes – internal and external

Prepare the Joint Venture Reporting at Period End

When the reporting period has ended, and it’s time to prepare the reporting, ensure you:

• Review your list and determine reporting required for this period end.
• Run the reports needed to pull all revenue, COGS and operating expenses. It is critical to make sure that all activity is picked up. Any missed expenses could create an overpayment. Any missed revenue could create a trust concern with the JV partner.
• Create the reporting, and save down all support documents. The documents are critical in the event the JV partner questions the reporting. You will need to support your numbers, review with internal teams (and/or the JV partner) and determine if any data is missing. These documents are also important to support calculations for internal and/or external audits.
• Review actuals against budget. This is especially important for items such as marketing expense, recording/content creation expense, art expense or any other items where the expense has been incurred or is committed, but is not currently in AP. It is important to review these known expenses against any potential payments to avoid a future overpayment.

Consider These Additional Process Best Practices

There are additional items to consider when creating your joint venture reporting process:

• Document the process to submit payments to AP for timely payment. This will require meeting with the head of AP to review documentation and needed approval(s).
• Each month, the team will need to accrue the joint venture reporting expense based on revenue recognized. This can be a template set up in the ERP system that automatically pulls revenue and expenses each month and is accrued as a percentage of the net. This could also be accomplished as part of the top-level tracking spreadsheet. Using Excel, you can pull in the month’s revenue and expenses, as wells as profit split percentages, advances and other specific data from the tracking to calculate an estimated payment based on the activity for the month. This will need to be booked each month as part of the month-end close.
• Create a process to true up accruals against actual payments in the months in which reporting is rendered. If there is a material variance, it is important to understand if you need to revisit your process or if there is an explainable anomaly.

Final Thoughts

As much as we strive for perfection in our reporting, sometimes errors will happen. If you find yourself facing an error, it is critical to understand how the error happened, how it could have been avoided and how to correct processes as needed. Most importantly, clean and direct communication with the client/artist/business partner is critical to establish trust. In the case of an error:

1. Restate reporting and provide support documentation,
2. Clearly walk through the error and the correction and
3. Issue any additional payment immediately.

Clear communication and documented processes can standardize reporting that is often unique, complex and time consuming. If you need support with your joint venture reporting, then we invite you to download our entertainment finance service explainer below. You can also visit our financial planning and analysis page to learn more about how we can help with related matters.

As with any industry, the entertainment business has grown and changed drastically over the last decade. Streaming content, which was once considered a niche part of the entertainment industry, has now become an integral part of how we consume television and film. This change has posed a significant challenge as executives and C-level leaders want to know how their company is performing, what segments or product lines are profitable and even which regions or territories are driving the business or adding pressure to overall revenue and operating cash flow. As such, the skill of storytelling in finance has become an integral part of FP&A in recent years. Good finance teams have embraced financial and other data to tell stories that resonate with leadership and external stakeholders.  

The Components of Storytelling in Finance

Senior management, and the teams that report to them, are continuously expanding their roles to provide visibility into company performance and add valuable insight to the constant changes as the business moves forward. To be better partners to the business, finance teams must increase their capacity to communicate effectively. More specifically, they must bridge the gap between the company’s financial performance and the company’s strategy and day-to-day tactical decisions. Storytelling is a vital component in bridging that gap and building understanding that supports strategy and decision making.

To better understand storytelling in finance and how it can add value, we must first identify the different components of the information and separate them in different categories:

Data

Data is the fundamental foundation upon which the story is built. In the world of financial reporting and forecasting, a vast amount of information needs to be analyzed, whether it’s in the form of a summarized report or a mass unfiltered data dump from the organization’s software systems. Data is measurable and gives the best approximation of the performance of a business from a financial perspective. However, the process of interpreting and drawing conclusions from this information can often be very challenging. For the finance team, an integral function is to vet the data to ensure its accuracy and integrity.

Trends & Patterns

Trends and patterns often evolve over time in the data of a particular business or segment. Understanding and identifying these trends can lead to specific conclusions and provide guidance to management to draw upon for important business decisions. Data visualization tools such as spreadsheets, charts and tables provide an accessible way for a broader audience to grasp the meaning of the data with relative ease.

Actionable Insights

Actionable insights emerge from the knowledge and understanding of the trends and patterns in a broad context of how a company operates. The role of finance is to use the detailed information to provide a high-level interpretation of what that data means. Storytelling is a powerful approach in communicating the actionable insights to the decision makers of the organization without getting lost in the details.

Know and Understand Your Audience

A good story begins with a complete understanding of the audience. The storytelling is often directed towards senior leadership who are looking for answers about their business. Knowing their needs and what they care about is essential to crafting a compelling narrative.

Tailoring not only the content, but the manner through which it is told, is critical to meaningful storytelling. Be short and concise when speaking to leadership, as they do not need to be inundated with various facts and figures. They understand their business and are only looking at a few key items to gain confidence that the organization’s strategy is in line with the business or needs corrective measures going forward. When speaking with the leadership of an organization, it is always important to be succinct in the message.

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Best Practices for Great Storytelling in Finance

It’s important to follow some best practices for gathering information to effectively use storytelling in the FP&A process:

Use the best tools.

Transforming data into meaningful and actionable insights requires the right reporting and data visualization tools for any FP&A team to be successful. Utilizing software such as Tableau, Infogram, and even Microsoft Excel will help automate manual tasks and provide real-time updates so that more time and resources can be spent analyzing the data instead of inputting and manipulating the information.

Use one source of truth.

Many organizations run multiple business applications, each with its own way of reporting information. The general ledger may be used by one application whereas, the forecasts uploaded by the specific sales teams or territories may use another software. These systems may be convenient for what they are but may fall apart when a more refined analysis is required. Having one system that is the single source of truth eliminates any debate about which numbers are correct and provides a single perspective to view an organization’s financial information.

Use good visuals to support your storytelling.

The adage a picture is worth a thousand words is extremely important in the FP&A storytelling process. By leveraging the power of data visualization some insights that otherwise may have been missed can now be uncovered using pictures, graphs, charts, and models. Trends and projections can be easily illustrated in charts and graphs so that anyone can quickly understand and process. Great visuals must accompany great stories.

Refine the message.

Sometimes the story does not align with the data and the message needs some refinement. It’s important to be agile in finding the right story even if it requires some trial and error. Use colleagues to get a different perspective to test other strategies that may align more with the story. In the end, it’s important to draw a logical conclusion about which message works.

How Communication Improves Storytelling in Finance

When FP&A fails in its role, it is primarily due to a preoccupation with the data itself. For example, they might focus on increased revenue or decreased costs and their certain percentages, rather than the reason(s) the numbers moved—which are the crux of the story.

Along with implementing the best practices noted above, it is important for FP&A leaders to have a very strong relationship with their business partners, who are essentially the owners of the data. The FP&A team should meet with the various department heads on a consistent basis, usually monthly, to discuss not only the needs of the Finance team but also the financial needs, strategies and goals of the individual department. These are important to know, so that the story being told can align on a divisional as well as organizational level.

The Finance department, and more specifically, the FP&A team, is unique in that it touches every aspect of the organization along with every business leader of each department. This is because each area has a budget and strategic goals defined by company’s executives. By analyzing the results generated by each division and how that data syncs to the financial results, FP&A professionals can connect the two to tell a more impactful story. Having consistent conversations with department heads will also help shape the story should the data change over a specific period.

It is important to understand that Finance and FP&A does not drive the business of an organization; they are there to assist the business leaders who are charged with that task. They don’t create strategy, promote the organization through marketing efforts or generate new customers. Building trust and communication with the organizational leaders – and gathering information and business insight about their functional areas – will help the FP&A team tell a story in a very sharp and concise manner.

Improve Storytelling in Finance in Your Organization

FP&A storytelling is one of the most powerful forms of organizational communication. By adding a narrative that is supported by sound financial analysis the finance teams can bridge the gap between very detailed information and the actionable insights that drive good business decisions.

If you’d like support improving your organization’s FP&A efforts, or need additional bandwidth to achieve your strategic objectives, we invite you to reach out! Our growing consulting team is ready to help you in whatever you need. You can visit the services area of our website to learn more about how we can help. You might also be interested in the guide below if you’d like to learn more about forecasting process:

Over the last five years, dozens of digital games have been created by studios that utilize blockchain and non-fungible token (NFT) technology. This has generated a growing consumer segment and heightened demand, even as the industry is still very much in the early innings. These technologies also create a familiar circumstance for finance professionals, specifically those who engage in forecasting exercises for early-stage, high-growth companies. How are they to incorporate and model technologies that are in the infancy of their lifecycle? In this blog, I will provide an overview of the blockchain and NFT technology sector, cover some unique opportunities and challenges and discuss best practices for high-growth startups to employ for long-range planning.

Let’s first define some terms, starting with blockchain and NFTs.

What is blockchain?

Blockchain enables businesses to verify identities, reduce fraud, reduce costs and protect sensitive customer data. In essence, the blockchain acts as a trusted ledger – a digital ledger of transactions where the task of verification is distributed across the entire computer network on the blockchain. Blockchain-based content is therefore decentralized across a vast network of individuals, versus traditional models where assets are owned by a single party or central bank. Transactions conducted in the blockchain are verified through a network consensus model and have inherent transparency with all users.

The development of a blockchain and the digital economy that flows from it enables individuals and businesses to verify scarcity and create a clean chain of title in the record of ownership of digital assets.

What are non-fungible tokens (NFTs)?

NFTs are digitally based assets verified on the blockchain that are indivisible, ownable and tradeable. They are also characterized by scarcity, which is what makes them unique and valuable. Digital games are the most likely vehicles to carry NFTs into the mainstream and reach the widest potential utilization by making them a central component of gaming economics going forward.

Growing Popularity of NFTs is Changing the Gaming Landscape

Last year, venture capital firms invested more money than ever into high-growth startups in blockchain, crypto and NFT, reported to be a record $33 billion in VC funding. The amount of cash flowing into the sector exceeded all prior years combined, driving up valuations of emerging companies in the space to never-before-seen levels.

Blockchain has become a serious disruptor of a host of industries, including technology, healthcare, gaming, financial services and others. IBM announced it is investing more than $200 million in research, and the vast majority of US- and European-based banks are pursuing blockchain applications as well.

The growing popularity of NFTs cannot be ignored. In terms of gaming, the early adoption has been driven by shifting economic power from producers to players. What’s more, the original creator can earn royalty revenue with each subsequent sale.

These assets can also be transferred outside the game economy, in effect making an intangible asset tangible. Numerous marketplaces exist which facilitate the issuance or purchase of NFTs by use of digital wallets and currencies. NFTs have also been made popular in applications unrelated to gaming, including art, music, and sports.

NFTs have truly unique characteristics making each NFT distinct from the next, including size and developer. As a result, NFTs cannot be interchanged with another asset, unlike cryptocurrencies such as Bitcoin, where one unit of Bitcoin is identical to any other. (This is what makes Bitcoin a fungible asset.) The same attribute describes fiat currency, such as the U.S. Dollar, as any dollar in circulation is interchangeable with any other.

High-Growth Startup Case Study: Mythical Games

With high potential for profit-making in the NFT space, several promising startups have been launched to capitalize on the opportunity. During a recent consulting engagement with LA-based Mythical Games, I had the opportunity to work closely with the head of finance to craft a long-term financial plan for the business, and document lessons learned and best practices for finance which I will share momentarily. But first, an introduction.

Mythical Games is one of the first companies to bring to market playable NFTs, using blockchain and digital ledgers, allowing players to earn money during game play and simultaneously providing players a marketplace where game characters can be bought and sold and customized to each player’s preferences.

Mythical is also looking to license its unique platform to other gaming companies to allow those partners to create their own content with playable NFT characters with the similar playable and sellable attributes. Mythical offers players a “play-to-earn” attribute, empowering gamers to make money from their time spent playing. As the playability of the games improves, the perceived quality gap between NFT games and traditional AAA games will shrink.

Financial Forecasting Best Practices for High-Growth Startups in Blockchain and NFTs

There are unique challenges and opportunities for finance professionals operating within high-growth startups in new and fast-growing industries such as blockchain and NFT gaming. Forecasting with limited historical information either internally or industry-wide brings about the need for creative yet analytically sound methodologies. For example, how does one look 3-years into the future during a long-range planning exercise when relevant historical data is either quickly outdated or nonexistent?

Indeed, a lot of changes have occurred as well in traditional media with the accelerated adoption of streaming. Even so, Disney, Universal, Warner Media and the other major studios have an advantage that smaller blockchain gaming startups do not have – namely, the existence of long-standing IP with readily available comps to leverage for forecasting purposes.

The reality is that more iterations vs. prior versions will be required during the forecasting process for emerging blockchain and NFT technology companies as the learning curve accelerates.

Developing KPIs for a Young Blockchain Gaming Company

Opportunity arises for financial professionals to craft key performance indicators based on whatever available data are available and relevant. In the blockchain gaming space, common KPIs include:

• Average Revenue per Active User
• Average Revenue per Paying User
• Average Daily Active Users
• Average Users per Month
• Take Rate, Burn Rate, Cash Balance

Over the span of a three-year outlook, we can expect to see broad increases in the number of users as the marketplace becomes available to all players who wish to participate. Emerging companies in the industry should focus their efforts on building or funding a targeted portfolio of game launches over time that provide consistent recurring revenue with specific P&L assumptions by project based on type, release date, marketing plan, participation strategy and developmental resources required. 

Consistent growth over time allows a blockchain startup to increase scale in content, transactions, customers and data, all of which can serve to boost long-term revenue, market share and margins, while hitting established KPI targets.

Learn More About KPIs

Scenario Analysis for High-Growth Startups in the Absence of Robust Historical Data

It is recommended that one-year forecasts and longer-range plans incorporate scenario analysis as a powerful alternative to more traditional forecast methods. It is helpful to create categories such as low, base and high cases of performance achievement. Then, assign generic revenue assumptions to each scenario. Also ensure that revenue and expense trajectories are in line with recent industry trends.

One sound approach with gaming and entertainment companies operating in the blockchain space is to assume a certain percentage of projects are hits (i.e., successes) versus misses (i.e., failures) and define hits and misses by an ultimate or lifetime level of gross revenue. An added layer of sophistication is to raise the hit scenario revenue threshold in later forecast years to account for enhancements in productivity as the young startup matures. This approach will also naturally align with future stretch goals.

Expect Labor Efficiency as a New Industry Matures

On the expense side, focus on forecasting the main spend priorities as articulated by leadership, including headcount, outsourcing, marketing, G&A, etc. In blockchain or NFT startups, modeling headcount accurately (generally ramp ups) is crucial to producing reasonable operating income forecasts.

Specific to headcount, as a young gaming company develops and releases more content, conceivably there should be meaningful resource efficiency. It is reasonable to assume increasing heads over time as the number of deals increases but decreasing incremental heads per deal/acquisition. Scale not only drives decreases in incremental headcount per deal, but also drives revenue growth and margin expansion.

Finance professionals operating in this exciting, fast-growth environment should account for all these factors when building out the long-range forecast.

Learn More About Planning for High-Growth Startups and Organizations

If you interested in learning more about planning, we invite you to download our 5-year strategic planning timeline below! And of course, if you need FP&A support, you can contact us to explore how our team of 115+ Consultants can help.

The recorded music industry is one of the fastest changing industries, and as a result, recorded music forecasting methodologies change constantly. The popularity of physical music ownership gave way to digital ownership of recorded music, which gave way to the streaming era and a new level of data and forecasting complexity. In the current environment, the challenge of bringing streaming data in-house in a scalable, usable way provides the FP&A department with a great opportunity. They have the chance to increase recorded music forecast accuracy in less time than previously possible.

In light of the expansion of data and complexity in this space, let’s review some of the new data available and how it impacts recorded music forecasting methodologies.

Data Needs and Opportunities

The most common data that already exists in any music company is traditional ERP or accounting system data. This data usually provides the units sold, the wholesale price and net revenue. FP&A needs some other data inputs from outside vendors to better generate a forecast.

Music Connect Data provides unit sales through retail stores and streaming services. Although Music Connect Data provides digital sales data, most music companies rely on royalty statements provided by digital vendors (e.g., Spotify, Amazon, Apple, etc.) because they have more detailed data. Digital vendors can provide units, price and the amount owed the music company for each sale. This data is very valuable for forecasting because it allows us to calculate historical Earnings Per Play Rate (EPPR), which is the average rate paid to the music company per stream of a song.

We need EPPR because streaming companies do not pay music companies per stream—because the customer pays a flat fee for unlimited streaming of a streaming company’s catalog. The streaming company then calculates the percentage of total times a song was streamed, and then it pays out based on that percentage of the total revenue collected and the royalty rate for that song.

EPPR helps make the forecast more accurate because we are not assuming a rate, as we don’t have easy access to the data. It allows us to have different rates for different streaming companies and change rates as necessary. This will help us better explain performance—now that we have detailed pricing per song.

In the past, FP&A departments would have to ask for help from the Marketing department to help get one static data dump of streaming data to build their pricing forecasts. Now, with new user-facing tools (e.g., Tableau, Looker), FP&A departments can get the detail they need to improve forecasting.

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Challenges to Getting Data

As is often the case, the hardest part with collecting this data is convincing Management that this is necessary and cost effective. To collect data on every stream requires ingesting a very large amount of data as it has different formats per streaming company.

Another challenge will be parsing the data so that it can be linked with internal metadata for each song. Without the linking of internal metadata, it will be difficult to leverage the data collected. Examples of metadata that is needed to leverage streaming data include ISRC, UPC, MPM and Customer ID.

Another difficulty is collecting this data in a way that it can best serve all the stakeholders. Marketing’s needs won’t necessarily line up with Finance’s needs. By including FP&A departments early in the development of their data strategy, FP&A departments can increase their forecasting accuracy.

Want to learn more about stakeholder management? Check out this related article: “Sprechen sie Stakeholderitsch?” A Finance Consultant’s Notes on Stakeholder Management

Benefits from FP&A Inclusion in the Company’s Data Management Strategy

There are numerous benefits to including FP&A needs early into the company’s data management strategy. I have personally witnessed this approach improve forecast accuracy by 22% (Year Over Year), when comparing actuals to forecast accuracy. I’ve seen it improve music catalog forecasting by 36%, as we have increased visibility into the category via higher quality data queries. Also, variances are much easier to explain, as the new model is an all-in-one solution across all partners and revenue types. Actuals take about 70% less time to run into the file, as it is flattened out and keyed for ease when applying lookups with minimal to no further mapping required.

Since the forecast model has proven over time to be both accurate and transparent, it is currently used to calculate our annual stretch targets at the all-in level and as the source from which our international territories are building their guidance. Due to the speed with which the forecast can be generated, it gives everyone time to analyze and provide context to the forecast. This is in stark contrast to the past, where only the numbers were provided by the deadline. Generally, the FP&A Department spends much less time in a reporting mindset and far more on the analysis side. This allows us to provide much more added value than previously possible.

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An ultimate is an entertainment industry-specific forecasting model that is an all-encompassing P&L from a title perspective. In other words, for a specific entertainment asset (e.g., film, TV show):

• What are all its potential revenue streams?
• What are all its associated costs?
• How profitable do we expect it to perform over its lifecycle?

Ultimate forecasting models are necessary tools for entertainment companies to gauge investment profitability scenarios for both future concept and existing projects.

In a recent project, I had the opportunity to support an entertainment company in building a model to run scenarios for by-title ultimates. When constructing a bottoms-up, by-title ultimate model, you should include obvious considerations such as release windows and production costs, but less-obvious considerations will help to fine-tune the forecasting ability your model. Let’s go over some of those less-obvious considerations now.

Use Comparable Title Release Data to Get Out of the Model and Into the Real World

If a production company has a new intellectual property concept for a film, how can it successfully gauge its expected profitability at the box office? Many factors can go into forecasting box office performance, including seasonality of release, number and location of theaters, level of competition, the praise or criticism of others and the brand equity of key cast members. If you are a huge studio like Warner Bros., you can probably leverage data from your deep release library to take an educated guess, but what if you are a small- to mid-sized production company with only a handful of releases under your belt? Or what if it is the first film a company is producing? 

The answer to building a reliable forecast lies in leveraging comparable title release data. Entertainment industry data companies likes Nielsen and ComScore can provide reports on by-title revenue across a variety of release windows, including theatrical box office. But which titles should be selected as the most comparable titles for your project? You should work to identify 3-5 comparable titles to your film by answering the following questions:

• Which films have lead actors with a similar market reach to that of your film’s lead actors?  Leverage tools such as the celebrity “e-scores” from E-Poll Market Research to uncover comparable celebrity reach. Then, leverage websites such as imdb.com to find recent films that these comparable lead actors have starred in.
• Which of the recent films containing comparable actors also have a similar level of investment (production budget) with a similar release date as your film? Leverage free online tools such as the-numbers.com to discover titles with similar budgets and release dates.

Taking an average of box office receipts across comparable titles will offer a great foundation to begin forecasting theatrical release window profitability for a new title.

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Apply Decay Curves to Release Windows to Improve Scenario Analysis

Once you have sized up expected revenue within each release window for a given asset, how do you forecast the allocation of revenue among the periods within each window?

A nuance about by-title ultimate cost amortization is that capitalized production costs are amortized based on a current period’s proportionate share of ultimate revenue, so it is important to consider the timing of expected revenue. This is where the almighty “decay curve” comes into play.

The flow of revenue often follows a decay-curve pattern within a given release window: After an influx of sales or transaction revenue at release and shortly after, the revenue exponentially declines with time. A good ultimate model should have a decay curve for each release window to toggle scenarios of how ultimate revenue could be collected—and in turn, how capitalized production costs should be amortized.

Learn more about scenario analysis:

• Scenario Analysis and Sensitivity Analysis in Financial Forecasting
• Scenario Analysis Example: Business Planning During the Pandemic

Allocate Your SG&A Across Multiple Projects Equitably

If you are a smaller production company in a growth period, you face the challenge of appropriately allocating your corporate overhead to a by-title P&L ultimate as you move from being singularly focused on one project to producing multiple titles in tandem.

A time allocation approach can be leveraged to do this equitably. Those employees actively involved with producing or publishing assets (e.g., producers) can forecast how they would split their time among projects within a given forecast period. Then their overhead (i.e., their fully burdened compensation), plus the general company overhead (including the compensation of supporting shared-service functions, such as Finance and Human Resources employees) can follow this forecasted by-title time allocation. Labor is usually the largest cost line item on a P&L, so it is crucial to have a basis to equitably gauge what share of this burden should be allocated to a particular project.

Embrace Nuance and Flexibility

No one can predict the exact ultimate profitability of a new project with 100% certainty, but a good ultimate forecasting model paves the way to derive a sense of comfort in your investment. An ultimate model allows you to run multiple scenarios to sensitivity test a given investment versus its expected performance over time. Due to all the nuances in releasing an entertainment asset through various windows, it is important to incorporate multiple tools within your model to provide flexibility in forecasting different outcomes.

If you’d like support, we have entertainment finance and accounting consultants who can help you through the process. You can learn about how we work with our clients in our media and entertainment finance services guide.

You can also download our free ebook, which explores how operational finance can be employed to make your entertainment company more effective:

The COVID-19 pandemic caused seismic changes in the entertainment industry as movie theaters shuttered and productions were forced to go on hiatus. With so many consumers quarantined, the industry witnessed a remarkable level of adoption of streaming at home as anticipated new subscriptions in 2021 were pulled forward into 2020. More than that, the pandemic also shattered the long-standing distribution paradigm. In this blog, I’ll explore the implications of new hybrid film release strategy approaches by movie studios and how forecasting film ultimates has become more complex in the current environment. I’ll also cover Average Revenue Per User (ARPU) as applied to streaming services – and how this key performance indicator is critical for finance leaders to measure and forecast accurately.

In Film Release Strategy News, Flexible Windowing is Here to Stay

Stopping and restarting a major marketing effort as a movie progresses from a long theatrical window to the home entertainment window is a terribly inefficient use of capital. Motivated by a desire to piggyback on the awareness resulting from a movie’s theatrical marketing campaign, studios attempted several times pre-pandemic to shorten the theatrical window, only to face intense pushback from exhibitors.

As it happened, COVID-era lockdowns and theater closures emboldened Hollywood executives to experiment with new approaches to film release strategy. One such experiment, premium video-on-demand (PVOD), has become the hottest industry craze. Studios have shattered the traditional 90-day exclusive theatrical window by offering their movies early for a premium price at home. In doing so, they’ve ushered in the age of the hybrid release option, in which a film is released theatrically and on PVOD simultaneously. This “day-and-date” strategy is now firmly in the studio’s arsenal, along with a shortened exclusive theatrical window such as 45, 31 or even 17 days.

The distribution flexibility that the day-and-date affords is a matter of subjectivity. Disney CEO Bob Chapek remarked, “We’re really celebrating that flexibility…we’re trying to offer consumers more choice.” The National Association of Theater Owners had a much different take following the July 9^th day-and-date release of Black Widow, calling the hybrid release a “pandemic-era artifact that should be left to history with the pandemic itself.”

Consumers have benefitted the most from this change: they have access to more content on more platforms than ever before. This change has also been good for studios, which have been desirous of greater distribution flexibility for many years. It took an exogenous shock on the scale of a global pandemic to overcome the inertia, and there is no turning back.

This new age of hybrid releases as a part of film release strategy also means pressure will be placed on finance managers to create robust forecast models able to accommodate a wider range of potential financial outcomes. One size does not fit all in the new world of film distribution.

Is PVOD Revenue Really a Net Gain?

Even before COVID-19, studios distributed blockbusters that sell the most tickets and popcorn differently than niche films that win Oscars and festival awards. But now, especially within the tentpole category, maximum flexibility will dominate the consciousness of Hollywood C-Suite executives.

The marketing efficiency gained from a compressed theatrical window is not in question, nor is the fact that PVOD margins are terrific – a fact often overlooked by theater owners that emphasize total revenue when criticizing hybrid releases.

However, what remains inconclusive is the extent to which hybrid releases will cannibalize theatrical sales. It’s also unclear if PVOD will provide a consistently additive revenue stream above what would have been realized from a more traditional VOD window after accounting for lost grosses at the box office. Revenue that is merely pulled forward is not truly additive.

The (Slow) Comeback of the Cinematic Experience

Movie theaters are reopening, and several analysts put the theatrical business back to normalized levels of capacity and revenue eventually – though perhaps not for a few years. The shared experience of being in a theater with other people is not something that advancements in technology can fully replicate at home. There is good reason to expect a rebound in movie exhibition, although the relationship with content creators has been permanently altered.

Universal Pictures recently struck multi-year deals with exhibitors to dramatically shorten the exclusive theatrical window. In exchange, they’re offering the theater chains a cut of the new digital rental revenues. The agreements allow the studio to release a movie on PVOD platforms such as iTunes or Amazon Prime in either 17 or 31 days post-theatrical release, depending on whether the movie hits a $50-million opening box office threshold.

Disney is likewise emphasizing optimal flexibility, with movies such as Black Widow and Jungle Cruise going day-and-date, while other planned releases such as Free Guy and Shang-Chi going with a shortened 45-day window. Warner Bros. isn’t eliminating all exclusive theatrical releases either but will pursue flexible windowing that will be equally difficult to predict from slate to slate. In July, WarnerMedia CEO Jason Kilar stated that the company will produce 10 movies next year exclusively for its streaming service HBO Max, while reserving the right to release tentpoles at the local multiplex. It’s fair to say that exclusive theatrical windows are not going extinct. Some movies will still have an exclusive theatrical run, but not all. And for those that do, the window will be considerably shortened.

Flexible Wi(n)dow Results in the First Breach of Contract Lawsuit

Another consequence of day-and-date releases and condensed windows is the way A-list actor compensation is likely to be structured. On July 29^th, it was reported that actress Scarlett Johansson is suing Disney for breach of contract. The lawsuit claims the studio knowingly violated Ms. Johansson’s Black Widow contract by shifting profits out of the theatrical window and into Disney+ PVOD, while leaving key partners (such as talent) out of the new financial equation. In this case, the hybrid film release strategy may have cost Ms. Johansson tens of millions of dollars in backend compensation tied to box office ticket sales.

Regardless of the legal outcome, we should anticipate the highly public nature of this dispute to impact contract negotiations going forward, and in turn, the structure of participations and residuals for high profile talent. In the context of calculating talent bonuses, finance departments will have a key role to play in determining the right metrics to gauge a film’s success on streaming, as simply pulling up box office receipts on Monday morning is no longer sufficient.

Ultimates Forecasting in the New Distribution Paradigm

Finance managers responsible for forecasting movie performance typically run several box office scenarios and utilize comparables analysis to derive long-range revenue and net contribution conversions across the home entertainment windows. The value of all future cash flows over a 7- to 10-year timeframe is referred to as a film “ultimate.” About two weeks prior to domestic theatrical release, finance managers update their expectations for box office returns and the corresponding film ultimates in the various transactional and licensing markets – with particular emphasis on how revised baseline forecasts compare to what was originally planned.

The distribution flexibility studios now enjoy will allow for greater revenue optimization within the film slate. And yet, finance departments should be prepared for higher window-by-window variances in cases where the actual release strategy differs from what was assumed during the planning period.

Learn more about Ultimates in these related posts:

• “Entertainment Finance: Perfecting Film Ultimates”
• “Common Mistakes When Creating a Film Ultimate”
• “Adjusting Film Ultimates in Response to COVID-19 Impacts”

How Comparable are Comparables?

Another forecasting challenge will be finding good, meaningful comparables (“comps”). Finance managers build ultimates by leveraging historical comps, which are catalog titles in the same franchise or recent titles in the same genre.

Although still valuable as model inputs, comparable titles from only a couple years ago will reflect results from renting and selling movies in a strikingly different distribution landscape than what we see today.

Entertainment finance professionals are accustomed to updating methodologies as technology changes the content delivery mechanism. For example, over the past decade, we have seen a rapid decline in DVD/BluRay revenues as a share of the overall economic pie, while electronic sell through (also referred to as “electronic home video”) and VOD have grown significantly. Ultimates needed to account for this fundamental shift from physical to digital and will once again need to be refined to accommodate the current trend toward flexible windowing.

Assumptions, They Are A-Changin’

The underlying assumptions driving ultimates (such as decay curves) are generally only adjusted once per year, at the end of the year. Considering the dramatic disruption to windowing over the past 18 months – the effects of which haven’t fully settled – these assumptions may need to be revisited more frequently.

In terms of decays, an average film would traditionally decay about 50% per week in the standard theatrical window of old. But that’s not the level we are seeing so far on hybrid releases. Marvel’s Black Widow is a good case study. Despite opening weekend domestic box office of $80 million, week-two grosses fell 68% to $26 million.

That’s a steep decline in only one week and the steepest ever for a Marvel release. It’s exacerbated by the fact that viewers could simultaneously stream the film on Disney+’s Premier Access for thirty dollars. This begets a host of questions:

• Would those PVOD viewers have still been there in a more traditional post-theatrical VOD window while also showing up to theaters?
• Would piracy have had less of an impact on theatrical grosses without day-and-date being a factor?
• Was the second week drop-off driven by PVOD or by the fact that audiences were simply underwhelmed by the movie?

There are no conclusive answers to these questions, but finance managers should be thinking of creative ways to use data to lead us toward clearer understanding.

Don’t Forget the Potential Impact to International Markets

It will be important for finance managers to carefully evaluate their approach in estimating content sales ultimates in international markets. As a matter of practice, finance managers model international ultimates by running regressions on domestic box office (DBO) versus international box office (IBO) for previously released comparable titles. Then, for any upcoming film about to be released commercially, they use this historical relationship to estimate the corresponding IBO for every given DBO scenario in an expected range.

The estimated IBOs are converted to international revenue and profit ultimates across all release windows such as DVD/BluRay, electronic home video, VOD, Pay TV, and Free TV. Finance managers build these pre-release ultimates on a by-territory basis, consolidate the results into a total international view and then combine them with the domestic model to gain a global perspective. This approach remains sound. However, close attention should be paid to how shifting domestic release strategies such as day-and-date theatrical with PVOD will impact IBO projections – and consequently, all downstream international financial returns.

ARPU & Why It Matters

While the industry press likes to focus on which streaming service is ahead or behind expectations on subscriber count, the metric that should be given more attention – and the one closely followed by Wall Street – is Average Revenue per User (ARPU).

Investors care not only about the amount of revenue generated, but the quality of that revenue. That’s where ARPU comes into play. The number of subscribers is certainly an important measure of consumer demand for a streamer’s product offering, and it makes for great headlines. However, the real winners in the “streaming wars” will be those that best monetize their subscribers by converting them into higher levels of revenue received on a per-user basis.

The ARPU metric is not unique to entertainment. It’s widely used in companies that rely on monthly recurring revenue from subscriptions, whether from selling memberships in a streaming platform or from selling software licenses. The basic idea is the same:

ARPU = Total Monthly Subscription Revenue / Average Number of Users of the Service

Beginning MRR in Current Month = Ending Revenue in Prior Month + Revenue from Projected New Subscribers and Upgrades to Higher Price Tiers – Revenue from Cancels and Downgrades to Lower Price Tiers

Therefore, the key to boosting ARPU is to increase revenue growth faster than user growth, either by raising the standard price point over time (as players like Netflix and Disney have done) or by encouraging customers to pay more for premium offerings such as bundled content, Ultra HD availability, ad-free experiences and the ability to stream to multiple devices at the same time. (That’s the nice thing about math: it gives some very clear guidelines.)

Subscriber Growth & ARPU: An Inherent Trade-off?

Not all subscriber growth generates the same financial returns. ARPU can take a hit if a streaming service hits saturation in the domestic market and must look elsewhere to keep up with the rate of subscriber growth that Wall Street expects. The total addressable market is massive. However, if a significant percentage of new subscribers comes from less lucrative territories where rollout prices are much lower, this will put downward pressure on ARPU. As was revealed in Disney’s recent quarterly results, the launch of Disney+ Hotstar in India lowered Disney’s overall ARPU. Raw subscription growth in lower priced regions will lower ARPU over time if prices are not raised elsewhere to compensate. The deadly combination that a streaming platform does not want to see is both slowing subscriber growth and declining ARPU.

Netflix’s ARPU dominance over Disney+ has been a hot topic of late, and the numbers (sourced from company reports) tell the story:

• Netflix’s domestic ARPU sits at $14.54 per month.
• Disney+’s ARPU excluding Hotstar is $5.61.
• Netflix Global ARPU increased 8% in its most recent quarter.
• Disney+ Global ARPU declined 29% to $3.99 in its most recent quarter.

Comparing paid membership counts, Netflix is king with 209 million subscribers, followed by Disney with roughly half that amount at 104 million. But Netflix had a 12-year head start. In the next handful of years, it’s not unreasonable to expect Disney+ to surpass Netflix in global paid membership count – but still fall far short in revenue due to ARPU. Disney+ isn’t going to catch Netflix in the ARPU game for a long time to come.

Investment in Content Boosts Customer Retention

Having the highest ARPU in all the land isn’t necessarily Disney’s main objective, however. The biggest players in the space, particularly Disney, have strong IP that allows them to continue pumping out branded films and series to boost user adds and keep existing users in the monthly recurring revenue base.

Content is king, but it’s also expensive. Where does the money come from to pay for all this new original programming? Through the higher fees charged to streaming customers. Higher fees raise ARPU, as discussed, while customer attrition (also called “churn”) is held in check by funneling the added revenue into the budgets of new, high-quality productions that satisfy the desires of paying customers.

At the end of March, Disney+ initiated its first price hike in the first 16 months of launch and reported no increase in churn. The price increase was even more pronounced in Europe, where churn actually improved because more content offerings were added to the mix. Netflix also reported churn in the most recent quarter below prior-year levels, despite U.S. price increases in its standard and premium plans, providing further evidence that growth in perceived product value can support higher pricing.

It will take years for the dust to settle on the streaming wars, and there will be winners and losers. Only those services that offer high perceived value relative to cost will survive. Finance managers will need to continually hone their forecast methodologies, test their assumptions and focus on the right performance metrics to position their companies for long-term operational success and profitability.

You can learn more about subscription modeling in our Subscription-Based Financial Model Guide.

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About the Author

Chris has 15 years of diverse finance experience across a variety of industries including entertainment, healthcare, distribution, retail, financial services, and information technology. He has held various positions in middle-market, high-growth and Fortune 500 companies. Prior to 8020, Chris held manager and senior manager finance positions at The Walt Disney Company, Focus Features (a division of NBCUniversal), Blue Cross Blue Shield Association, and SpartanNash Company. He consulted for Universal Pictures Home Entertainment and Zacks Investment Research after beginning his career as Equity Research Analyst for Piper Jaffray. Chris has a broad range of experience in financial reporting, budgeting, financial modeling, M&A transactions, contract negotiations, strategic planning, business development and post-acquisition integration. He holds a M.S. in Applied Economics and Management from Cornell University and a B.S. in Applied Economics from the University of Minnesota.

In a prior client engagement, I served as the founding Finance Partner for a large entertainment studio launching an app as a joint venture with other major entertainment companies. I came on board to no finance infrastructure, and the client was operating against a fixed development timeline and investment commitment. Nonetheless, I developed all of their forecasting, reporting and scenario planning models to manage their operational strategy. Let’s go over best practices in joint venture finance that I gleaned from that experience.

Tip #1: Understand all salient deal points.

When I first came to the client’s office, I quickly discovered they were operating without any financial planning and reporting infrastructure. They had already hired an executive team, droves of software engineers and data engineers, as well as marketing folks. They had leased office space and started to pay third-party vendors. 

In other words, they were burning through cash without a plan for how to manage it responsibly within a development budget.

To immediately tackle this problem, my first step was to sit down with the General Counsel and discuss the key deal points. Namely:

• How frequently was the client obligated to report to its investment partners, and at what level of detail? 
• On what basis was the required reporting (e.g., cash, accrual, etc.)? 
• What was the current investment commitment and timeline, as well as the required product deliverables within that timeline?

I discovered that the joint venture partners had agreed to a monthly reporting structure on a cash basis. There was an established development budget cap, as well as an annual approved budget for its first year of post-launch operations.

Tip #2: Design a Chart of Accounts and necessary reporting attributes in the company’s Enterprise Resource Planning (ERP) system.

Once I had a clear understanding of the deal requirements, the next step was to discern expectations from key team members. I conferred with all executive team leads to understand their respective internal needs for reporting and research. For example, the Head of Product may want to know forecasted data usage from Amazon Web Services, while the VP of Marketing may want to categorize spend by type of campaign (e.g., email/push vs. print). 

Taking these perspectives into consideration, I constructed a bottoms-up Chart of Accounts to meet the flexibility in reporting to the organization. The client used SAP for its ERP system, and I leveraged SAP’s “WBS Elements” feature to create additional data attributes within a specific account. This allowed for even more granular reporting where needed.

Tip #3: Establish a comprehensive vendor management process.

As mentioned, the client was burning cash without a plan. They had already contracted with a few essential third-party vendors in order to operate. However, there was no clear-cut process on how to pay these vendors. 

I established a central email account for vendors to digitally submit invoices, and I spoke with the legal team to have invoice instructions changed within future vendor agreements. Leveraging the new Chart of Accounts, I created a guide on how to “code” invoices to the proper accounts. Then, I trained the office administrators on invoice coding, and I gave them shared access to the invoice mailbox.

Vendors were finally being paid on time, and invoices were coded to the correct accounts. (What a concept!) But how would future payments be forecasted and managed? A monthly meeting was established with the team leads to stay afloat of the current and future vendor pipeline. I built an Excel tracking tool to monitor by-vendor SLA terms, timelines, and anticipated rate increases.

Tip #4: Build a bottoms-up operational forecast model.

Now that the urgent building blocks were in place, I could finally tackle building a robust financial model. I started by working from a download of monthly actuals from the new Chart of Accounts. I leveraged trends from historical monthly spending and created SG&A account forecasts. Then, I layered on:

1. commitment schedule from the third-party vendor tracking,
2. by-employee labor tracking, and 
3. a by-account topside worksheet to enable flexibility in forecasting special circumstances. 

Whenever any product is being developed, labor is usually the largest expense line item. Due to this, I ensured the forecast model allowed for any possible changes in headcount and their associated costs. I set up a weekly meeting with Human Resources to stay in close touch with any anticipated staff updates. I also informed HR about the cash available to spend on labor, which influenced some hiring and role re-leveling decisions.

In order to both inform guidance internally and report to investment partners, I amalgamated the granular detail into a high-level reporting summary based on categorized cost drivers. I wanted to clearly speak to the “punch lines” of the forecast model, particularly when the audience included some executives who lacked a Finance background.

Tip #5: Construct a robust reporting suite.

To complete the client’s finance infrastructure, I constructed a monthly reporting template that seamlessly integrated with the forecast model. I additionally ensured the monthly reporting template suite satisfied all of the requisite deal points contemplated in the master agreement. A cadence was established to review the monthly reporting package with the respective investment partners and answer any of their questions.

By thoughtfully approaching how to establish the client’s finance and operations infrastructure, I was able to deliver both the initial development and first year post-launch operating costs within budget. I also had the intel to construct a detailed, bottoms-up budget for their second year of operations, which was approved by all investment partners on the Board of Directors. The client is still operating today and continues to leverage the models and accounts I constructed to help manage their business.

Learn More About Joint Venture Finance or Other FP&A Disciplines

Along with joint venture finance expertise, we offer a wide range of services to help drive your finance and accounting functions forward. If you found this post valuable and are looking for similar support within your company, we invite you to explore our entertainment finance consulting services. You can also learn more about building longer-term financial planning strategies by downloading our insightful timeline:

About the Author

Jaime has 12 years of diverse finance and project management experience in the real estate, entertainment, video games, and technology industries. Prior to joining 8020, Jaime was the Director of Studio Finance and Operations at Activision Publishing and had previously worked for WB Games, Warner Bros. Entertainment, Mesa West Capital, and SL Green Realty Corp. Her expertise centers around financial planning & analysis, operational strategy, budgeting and forecasting, cause of change analysis, reporting, cash flow forecasting, asset valuation, process design, and financial systems implementations. Jaime holds a Bachelor of Science degree in Economics from the Wharton School of Business at the University of Pennsylvania.