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Adjusting Film Ultimates in Response to COVID-19 Impacts

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The COVID-19 pandemic will force studio finance professionals to make changes to their film ultimates for this year’s film slate, and it will have a lingering impact on revenues for the foreseeable future. Theaters will reopen to lower attendance that will likely remain low for an extended period. Since theatrical revenue is generally the largest revenue stream on a film ultimate, adjustments to projections need to account for this. Below are some considerations to think about when adjusting film ultimates for the market impact of the novel coronavirus.

Greenlight Ultimates for Smaller-Budget Films

Smaller-budget films will likely be the biggest casualty of the COVID-19 pandemic. A vaccine for the virus is not likely to arrive within the next 12 months, and as a result, we can anticipate smaller theater audiences in the foreseeable future. To increase the probability of larger audiences and more revenue, studios will likely allocate their resources to projects with broader appeal. That means smaller-budget films will have little room to show profit and get greenlit. These films have a smaller revenue stream, and studios will not want to risk the advertising spend for minimal revenue. These greenlight ultimates will require more detailed scenarios focused on what the film profit will look like as straight-to-digital releases in order to justify moving forward on the project.

Appropriate Theatrical Window

The COVID-19 pandemic has caused studios to reevaluate the appropriate theatrical release window before films are available digitally. Historically, this window has been three months, but this has been upended by closed theaters. It is unlikely that distributors will be able to force a three-month window once the theaters reopen. Studios will have more control choosing when a film releases digitally, and it will be critical to do the appropriate financial due diligence to determine the best digital release date.

Digital rentals cannibalizing theatrical business is a risk, if releases cross-over between the two channels, so studios must analyze the potential impacts. Tentpole releases may require an earlier digital release to supplement other revenue lines such as licensing while not negatively impacting box office revenue. For other films, having an earlier digital release date may eat into box office sales. Accurate projections of this risk must made.

Digital Footprint by Territory

Film ultimates during this period will see an increase to overall digital sales. Estimates must account for the prevalence of streaming and digital download use in each international territory. Many countries are behind in streaming platform use and do not have the capacity for large digital revenue increases. Since film ultimates are a consolidation of all revenue sources across all territories for the film, estimates should include a deep dive analysis into the digital capacity of each territory to ensure digital revenues are not over inflated.

Advertising Cutbacks and Targeting

Advertising is the primary lever that finance teams can pull to make tangible changes when creating a film ultimate once a film is released. Getting a firm grasp on the most efficient allocation of advertising costs will be more instrumental than usual in determining film profit levels.

For most films, it will be very challenging to completely offset the revenue lost at the box office with digital, home entertainment, and other revenue streams. To maintain the most profit, an advertising cost analysis will be imperative. Films with earlier digital releases dates can piggyback the digital campaign off the theatrical advertising if they are out simultaneously to save costs. Advertising for digital releases should be focused on territories where streaming has a larger footprint in the marketplace.

Additionally, to effectively utilize all advertising dollars across the slate, a significant percentage of advertising will need to be allocated towards the large tentpole films that drive the most revenue. This will leave considerably less advertising dollars for smaller budget films (as mentioned earlier).

TV Revenue Impact

The Premium and Cable TV licensing revenue stream will also feel the impact from the decrease on box office revenue moving forward. Many broadcasting deals between studios and media ownership of TV stations like HBO, Showtime, TNT, etc. include escalators in fees paid that are dependent on each film’s box office performance.

All films will be affected, but the greatest impact will come from larger tentpole films. These films were expected to have top box office numbers and carry the lion share of slate profit, but the expected lower box office results will result in reduced TV revenue as well. This will have a significant impact on the profit for the full film slate, and could result in film investment cuts on the film slate overall. The potential impact will need to be built into the film ultimate revenue estimates. It will likely include a revisit to how TV distribution agreements are structured, and take into account the larger focus on digital rentals that will supplement theatrical revenue moving forward.

Participations Considerations

Participations calculations will be challenging as studios try to determine profitability with the likely shift in theatrical revenues to digital revenues. New digital revenue channels in streaming have made these deals more complicated over the last several years. A sudden spike in the dependence on these revenue streams, could result in a significant miscalculation on the affect to film ultimates. This emphasizes the importance of having a detailed oriented finance team to estimate out these costs.

Want to learn more?

If you’d like to learn more about best practices for staying competitive as a studio, we cover key best practices our operational finance in entertainment ebook.

We also offer additional information about our entertainment finance services in our free, downloadable service sheet:

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The Potential Impacts of COVID-19 on Film Ultimate Revenue

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The COVID-19 pandemic has had a substantial impact on almost all businesses and industries. The film industry is no exception, and it is more likely than most to have sustained permanent changes even after the outbreak subsides. This event will likely accelerate the years-long trend of digital revenue making up a larger share of total film ultimates and forcing studios to adjust how they view other lines of revenue in the Ultimate. The following article will discuss the potential impacts of COVID-19 on film ultimate revenue.

Shortening of Theatrical Release

Historically, the center of the film ultimate has been the theatrical release. Theatrical rentals not only yield the largest direct source of revenue, but in many deals, box office receipts dictate the amount of revenue the studio charges premium and basic cable TV stations to air films.  

The theatrical release schedule has largely been shut down due to COVID-19 and will likely continue to cause an extended period of lower theatrical sales. With distributors like AMC possibly preparing to file bankruptcy, studios will have unprecedented leverage to dictate new terms with theaters, likely resulting in a shortening of the theatrical release “window.” The “window” is the 3-month period from the time a movie releases in theaters to when it is first available on-demand. Major theater chains of have been insistent on keeping this window to protect their ticket sales, while studios have been pushing shorter windows to take advantage of film awareness to drive revenue for downloads and rentals. Studios are now likely to get the changes they want and reap more digital revenue in the process.

Additionally, studios can budget less advertising costs in the ultimate as digital advertising can piggyback off the theatrical advertising schedule. Shortening of the window will result in the same advertising dollars driving sales to both lines of business, rather than paying for a separate schedule to support digital sales after the window has ended.

Accelerated Digital Revenue

Revenue from Digital platforms was already becoming a larger portion of creating film ultimates, but the COVID-19 pandemic has accelerated that trend. Global usage is expected to grow 20% on streaming, and services like Disney+ have reported 22 million new subscribers since the COVID outbreak in February. This shift makes it imperative for studios to accurately account for the digital revenue increases in film ultimates. Digital revenues have more than made up for the plummeting of physical DVD and Blu Ray sales. However, it will be critical to adjust revenue projections to account for digital revenues that will replace some lost theatrical profit. This won’t be a one-size-fits-all for all marketplaces and film types.

In markets like the US, where digital consumption is high, major releases can do massive digital rental numbers. Trolls: World Tour, which was just released during the virus outbreak, is reported to have the biggest domestic digital opening ever. Universal is reporting it did about 10x more than its previous leader, Jurassic World: Fallen Kingdom, which did around $2-$3 million in rentals its digital opening weekend. Clearly the domestic revenue potential is there, but additional financial analysis is needed to determine the optimal on-demand rental release date to prevent cannibalization of theatrical revenue moving forward.

In international markets, like Italy, streaming is in its infancy and has a more linear TV market. These markets will have different ultimate projections, and there won’t be the same opportunity. International box office sales have become equally as important as domestic sales for studios, therefore accurate projections in each market will need to be made, accounting for the effectiveness of the digital footprint in each territory. Strategic planning of advertising dollars will be needed to account for the increase in digital revenues in strong digital markets, while addressing territories that lack the digital presence necessary to make up for theatrical revenue shortfalls.

More Reliance on Tent-Pole Features

The shift to streaming will change the way revenue is projected in the ultimate for certain types of films. In most territories, a shift to streaming means placing more emphasis on films with a universal international appeal and tent-pole features, where the studio will get more return on investment. Films with more regional or market-dependent appeal will have less margin for error on sales results and are likely to have more stringent cost estimates. Tent-pole releases are the films studios rely upon to cover the total slate theatrical profit and make up for the theatrical losses on the  films with less broad-based appeal.

This is a big reason for the significant shift to summer-focused blockbuster film events today. The COVID-19 outbreak will likely continue to accelerate that trend with a shorter release schedule and less box office revenue for smaller films.

Have more questions about film ultimate revenue? Want more expert tips?

If you want to learn more about best practices, consider downloading our operational finance in entertainment guide.

We also have a deep bench of finance and accounting expertise ready to deploy. If you’d like to learn about how we work with entertainment companies, you can contact us or download our entertainment finance services sheet:

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6 Factors That Impact How to Value a Content Library

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The past few years have seen dramatic changes in the entertainment industry. The success of streaming video on-demand (SVOD) services such as Netflix, HBO Now and Hulu has spawned a rush of imitators. Seemingly every media company has announced plans to launch an SVOD channel with hopes of capturing those direct-to-consumer subscription dollars. This has led to a massive increase in the demand for content to try and attract and hold subscribers’ interests – and a lot of questions about how to value a content library. While much of the attention goes to new films or TV series on these SVOD platforms, the majority of their content is actually comprised of library titles, meaning films or television shows that were produced years or even decades ago. 

An increased demand for older library content begs the question: What’s the content worth?

Film and television library values have fluctuated dramatically over the years as the fortunes of the entertainment industry have changed. When DVD sales started to slump after 2007, content library values declined dramatically. Miramax’s 700 film library was once valued at $2 billion, but with DVD’s decline, the library was sold for just $660 million in 2010. As digital revenues have steadily increased and SVOD platforms have proliferated, there is renewed interest from many parties in acquiring film and television libraries.

Whether you are buying, holding or selling a library, there are important things to consider in order to accurately evaluate what it is worth.

Titles and Rights

First and foremost is determining exactly what is for sale. Just because a company may have rights to a title, it doesn’t necessarily mean that it owns all the rights to the title. It’s extremely common to see various rights sold or licensed to third parties. International rights are often sold off to help finance a production, so it’s possible a company may only have rights to exploit a title in specific countries. Likewise, streaming or television rights may already be licensed to third parties for years into the future. 

As these are some of the biggest potential revenue streams for library titles, the inability to exploit these rights can dramatically decrease a title’s value. Does a title have digital rights? If so, which ones? “Digital” is a vague term that can be used to refer to digital streaming rights as well as digital transactional rights like Video on-demand (VOD) or Electronic sell-through (EST). Older titles that were produced prior to the invention of home video or SVOD may not be exploitable through these newer distribution channels unless those rights have been cleared and verified. 

Verifying a title’s rights is vital to determine a proper valuation. Many companies keep track of all their titles and associated rights in a Rights Management System such as Rightsline or Filmtrack. However, it’s just as likely the rights are being tracked and summarized in a spreadsheet or even an old, hand-typed list. (I’ve seen this on more than one occasion). Regardless, in order to perform proper due diligence, you should examine the original title contracts and any addenda to verify that they corroborate the information in the database or list provided by the library owner. If dealing with a smaller library, it’s advisable to review contracts for all titles. When evaluating a large library, it may only be feasible to review a select sample of contracts.

Title Quality

Not all titles are created equal. Even titles that appear similar in many respects can have dramatically different valuations. The Matrix and Replicas are both sci-fi movies that star Keanu Reeves, but The Matrix has made hundreds of millions of dollars over the past 20 years and will undoubtedly make millions more in the years ahead. Meanwhile Replicas made only $4M at the domestic Box Office and may be hard pressed to recoup its production and marketing costs.  

When reviewing a larger content library, it is helpful to categorize each title based on its likely value. I like to rank them as A, B, C, or D titles with A titles being the best and having the highest valuations. Factors that contribute to the ranking would be a title’s recent financial performance, its age, Box Office / TV ratings, known actors or directors, and genre. An A title might still generate significant revenues on DVD and Blu-Ray, whereas a C or D title wouldn’t justify the cost to release a title in these formats. By ranking each title, one can better evaluate the future financial prospects of the library. 

Availability and Condition of the Assets

One aspect that is often overlooked in how to value a content library is the availability and condition of the physical and digital assets. Will you be taking ownership of film reels, tapes, or discs? Do subtitles exist? Has the film ever been digitized? If certain elements like subtitles are missing, you may need to recreate them so you can release the film. If a film has never been digitized, you will need to create digital files in order to license it to Netflix or sell it on Apple TV. Missing assets mean additional costs required to effectively monetize a library, and these should be included in the valuation. 

Film and video can degrade over time, and if you are taking ownership of a movie or television program, it’s important to check the image and sound quality, particularly if it’s for an older title. Digital restoration can improve the quality, but it can also be expensive. If the quality is too bad, the title may not be releasable and therefore have no value. 

Outstanding Obligations

Are there any outstanding debts or financial obligations attached to this library? Most films and television shows owe residuals and participations to the various guilds and profit participants who helped to create the content. Make sure these payments are current. Similarly, you should ensure there are no legal settlements or lawsuits pending that would result in additional costs or limit the ability to exploit specific titles in the library.

Current Market

The rapid pace of change the entertainment industry has experienced over the last few years is likely to continue. When valuing a content library, it’s vital that this propensity for change be taken into account. While the recent financial performance of a title is the best indicator of its future value, you can’t assume that its performance will remain constant year-over-year. 

A decade ago, any valuation of a film library would likely have assumed DVD sales to make up a significant portion of the library’s future revenues. Today, only A titles are likely to generate these revenues after the initial 12 – 24 months of release, and a C or D title may never even be released on DVD or Blu-Ray. Streaming and TV licensing are currently the two largest revenue streams for most library titles, but forecasting these revenues can be challenging. Analyzing recent streaming or TV sales for a title or comp titles is the best place to start. Pricing trends will surely evolve as new SVOD players enter or leave the marketplace and cable companies struggle with cord cutters. Therefore, it’s important to communicate with your sales team and other players in the marketplace who are best positioned to know what buyers are willing to pay for content and where the market is headed. 

Content Has Different Values to Different Organizations

It’s worth remembering that different organizations may arrive at different valuations based on their assumptions and capabilities. A company like Disney is able to utilize its global distribution team, output deals, consumer product partnerships and theme parks to exploit its titles. Most other companies don’t have this level of infrastructure to help monetize a title. Therefore, it’s important to consider your company’s capabilities when thinking about how to value a content library. Does it have the ability to sell and distribute physical and digital content? What about internationally? If you will be utilizing third parties to sell and distribute your content, you can expect to give up a significant percentage of potential sales. All of these factors must be considered when considering how to value a content library.  

Have more questions about how to value a content library? Want more expert tips?

We have a deep bench of finance and accounting experts ready to deploy. If you’d like to learn about how we work with entertainment companies, you can download our free entertainment finance services sheet. (Or you can also contact 8020 Consulting directly to speak to a client services specialist.)

Get Our Entertainment Finance Best Practices Ebook

About the Author

Chris has over 12 years of finance, operations and project management experience in the entertainment, non-profit and bio-medical industries. Prior to joining 8020, he worked as a Senior Manager in FP&A at Paramount Pictures. Additionally, he held various positions at Advanced Bionics, Warner Bros and RLJ Entertainment. His background includes extensive experience in content acquisition and distribution, financial planning and analysis, budgeting and forecasting, financial modeling, valuation analyses, and process improvement. Chris holds an MBA from the University of Southern California’s Marshall School of Business.

Know Your Rights: A Guide to Rights Management Systems (RMS)

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Managing the rights related to its proprietary content is core in every entertainment company. With technology, more media formats and platforms exist than ever before. Contracts are also more complicated and multi-layered than they have historically been. Managing content contracts across all media platforms has become extremely challenging and complicated. Today’s companies have multiple internal systems (e.g., ERPs, BI Tools, Supply Chain Systems, etc.) that must integrate and create synergy across the board to achieve increased accuracy and efficiency. On top of these systems, an entertainment company also needs a system that can create and streamline workflows within the company and with external parties enabling automation and tracking. This is where Rights Management Systems come into play.

What Makes for Good Rights Management Systems

A Rights Management System (RMS) is key to an entertainment company’s abilities to address the challenges and needs detailed above. Here are some of the key benefits of a good RMS:

System Integration and Interoperability

A good RMS integrates with other existing systems across multiple business functions (Accounting/Finance, Operations, Legal, Marketing) with minimal manual intervention needed. APIs can be maximized to every extent possible.

Data Integrity and Portability

In best-practice setups, an RMS houses all the relevant data within an organization and serves to be the “single source of truth” (SSOT). This reduces the risk of having multiple versions of the same data set, which can lead to inaccuracy within the organization. All users of the data source the one official data set and work off of that.

A good RMS not only serves as the SSOT, but also makes it relatively easy to get information in and out. Managing one data set in terms of structure, format, accuracy, etc. – as opposed to multiple silos of data, across systems – is much simpler and time efficient.

Supply Chain

An RMS allows integration with the supply chain/distribution system. That allows it to automatically send orders to the supply chain system for automated delivery to the customer/platform.

Integration of Participations and Residuals

Another benefit is improved management of participations and residuals via consolidation of information in the RMS and automation of this process as much as is feasible, as well as calculation of participations and residuals (if desired).

Sales Avails

An RMS system empowers the Sales team to sell more content by providing available content that is “sellable” in real time. The RMS provides the listing of titles that can be sold by content type (e.g., movie, TV series), genre, territory, media type, etc., in real time. The less time the sales team spends on sourcing and curating available content, the more time it has to actively sell content.

Automation

An RMS is an automated solution that will connect various data sets automatically, consolidate the data and allow the end user to access all the information in one place using a single software solution. Automation of processes is a significant benefit as the RMS can replace human capital even as scale of operations increase. The goal is to have a system that still works “while everyone is sleeping.”

Mapping of Processes and Procedures

An RMS allows you to map how business processes and information move through the company and how content (and its Rights data) moves through the organization from Product (Movie Title/Episode) Inception through Product Sales. You can look for BPI opportunities that can be achieved with the RMS.

Increased Accuracy & Timeliness

An RMS reduces the risk of errors created by manual entries or manual manipulation of data. It also offers the ability to analyze actual results with a more robust reporting system will allow for a timelier monthly close. Real-time results will allow users to make decisions faster.

Higher Level of Transparency

Having one integrated system will provide key metrics and financial results to be shared with all groups simultaneously.

Improved Reporting

Use of the RMS will allow for quick and easy access to custom reports. Automated dashboards for executive reporting can also be set up to auto run/populate.

Scalability

The system will be able to support the company’s growth without impacting performance or accuracy.  In addition, if necessary, the modular nature of an RMS will allow the company to customize the solution in order to add on functionality, while retaining the original functionality.

Rights Management Systems Connect Departments

In conclusion, an RMS is the backbone of an entertainment company and creates synergy across departments/functions. The RMS connects all the departments in terms of data, processes, systems and people in order to have the entire organization function as one unified team.

There are a few RMS solutions in the market today, but only a couple serve all the purposes highlighted above. From hands-on experience, Rightsline Software is the best system solution currently available. 8020 Consulting has vast experience in the end-to-end implementation of Rightsline Software and has worked with several entertainment companies to achieve success. You can learn more in our entertainment finance services sheet.

We also offer a guide for studios looking to be more competitive through operational finance. You can download it here:

Get Our Entertainment Finance Best Practices Ebook

About the Author

Vikram possesses 17 years of experience focused in Financial Planning and Analysis across a variety of industries such as Entertainment, IT Communications, Banking, Food and Beverage, Investment Consulting, Retail, Publishing, Aircraft Distribution, and Real Estate. Vikram’s core competencies include managing finance teams and operations (Supply Chain/Inventory Management, Cost Accounting), conceptualizing and leading budgeting and forecasting processes relating to the P&L, Capital Planning, Balance Sheet and Cash Flow analysis for both mid-sized and Fortune 1000 Companies. Vikram has project managed and led several system implementations such as Rightsline, Anaplan, Hyperion Essbase, and TM1 Cognos. Vikram attended Willamette University (Oregon) where he received his MBA specializing in Finance. He also holds a Bachelor’s degree in Finance and Accounting from Christ College in Bangalore and a Master’s degree in Finance and Accounting from Bangalore University.

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Common Mistakes When Creating a Film Ultimate

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Creating a Film Ultimate has become a common exercise for studios as they look to estimate the total revenues from a film to justify the large production costs of making a movie. Although studios have been creating Ultimates for years, several common mistakes often take place during the Ultimates process. Some of these mistakes are resource related, some are due to poor planning and some center on mitigating outside influences. In the following article, let’s expand our exploration into Film Ultimates by discussing mistake-prone areas of Film Ultimates.

Inaccurate Participations Calculations

Participations are clearly an important aspect of the cost of movie Ultimates, yet an area that tends to lead to a lot of mistakes. Participation contracts have become increasingly more complex over the years as movie talent works to extract as much value from their likeness as possible. At the same time, new avenues of revenue are being used by studios to recoup their costs. Solid working relationships between legal, finance and accounting are paramount in ensuring contracts are read, understood and translated properly into forecasting systems. 

Having a specialized finance professional is key in making sure that participations are calculated accurately throughout the process and any rate triggers are captured. They should understand contracts and be comfortable digging into the details, while bringing the financial acumen and creativity to build that understanding into your financial system or Excel model.

Lack of an Enterprise Resource Planning (ERP) System

The importance of an ERP system is something that is recognized in corporations, as they need to combine actuals and forecast into a flexible, single tool that can be used by several different departments. Many forecasting solutions now offer some type of Ultimates building process that can be purchased as an add-on, or they may offer a custom build depending on your budget.

However, having seen ultimate spreadsheets with 25-30 tabs that link to other sets of Excel templates, the chances of “fat finger” mistakes aren’t something you should have to worry about. Having a finance professional who has experience in ERP systems is critical when building a new Ultimates solution. (We’ve covered common ERP implementation mistakes and offered insight into selecting ERP solutions previously.)

Misaligned Licensing Revenues

Licensing revenue has become a staple in creating a Film Ultimate, as studios have unlocked the long-term earning potential that consumer products, games, and even theme park entertainment can offer a studio, all without the burden of production costs or inventory risk. Simply receiving a minimum guarantee based on royalties earned has added to both revenues and operating income for studios.

Studios need to be aware of the latest market trends when factoring in licensing revenues. For example, as toy play patterns continue to evolve or as gaming changes from console-based games to mobile- and free-premium-based gaming, studios need to be more connected to consumer purchasing behavior to determine projected revenues. Further, with the changing retail landscape, big box retailers are shifting shelf space up/down on a frequent basis and have moved away from license merchandise in apparel in favor of in-house brands. It is important that your finance team has built enough of a relationship with sales and category managers to understand the changing environment and be savvy enough to build those potential trends into the Ultimates process.

Learn more about best practices for competitive studios in our ebook:

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Comparative Analysis that Lacks Consistency

The Ultimates Process may also lack proper comparative analysis when determining the potential revenue for a title, comparing the new title to titles that share similar features or by comparing the previous version of the title when it’s a sequel or further iteration of a movie series. Usually this mistake can come in either of two situations.

One vulnerability occurs when the film has a different release timing than the comparable title, and the studio fails to do enough analysis to truly consider variables such as seasonality, or additional bumps from proximity to holidays (e.g., Easter Sunday, Christmas or Thanksgiving Break, or Summer Blockbuster season).

Secondly, studios may assume sequels will produce the same level of revenues without taking a step back to examine the total makeup of the film. Have audiences really clamored for a second installment of your film? (Planes 2, anyone?) Or, is the market already flooded with merchandise from the original film? (Cars 3 merchandise was difficult to sell as Cars and Cars 2 merchandise had become staples in the marketplace.)

Inaccurately Factoring Title Performance in the International Market

With significant revenue (sometimes well above 50 percent) coming from distribution outside of a film’s home country, it is vital that film companies understand all the international components and how to properly structure an ultimate model. A common oversight in perfecting a Film Ultimates model that utilizes future film revenue from the international market is failing to consider the release windows of a film in the International Free TV, Pay TV, SVOD and Home Entertainment spaces. Each release window of the film requires its own unique financial model that takes into consideration the nuances of those international markets within those windows, which is vital to fully monetize the film product.

Not Factoring in Future Currency Movement

Another common oversight when creating a film Ultimates model is not taking into consideration the proper exchange rates involved when international revenue is being forecasted in a particular window that may occur two or three years out. By properly developing currency exchange rate models within the Ultimates, a studio can make informed decisions to help minimize risks and maximize returns.

Change in the Home Entertainment (Declining DVD and Blu-Ray) Environment

The Motion Picture Association of America (MPAA) in its annual Theatrical Home Entertainment Market Environment (THEME) report revealed that physical media sales have decreased significantly worldwide over the past five years. Whereas physical media sales have fallen off, digital spending has more than made up for the gap. Another common oversight when creating a film Ultimates model forecast is not properly monetizing this change. Digital Home Entertainment contracts are complex with many nuances that need to be considered in the Ultimates model, given that digital film downloads (both Domestic and International) are on the rise. Having a well-experienced entertainment finance professional or consultant will help avoid any oversights when planning.

Need Help Creating a Film Ultimate?

Although these common mistakes happen all the time, they can be easily mitigated by seasoned finance professionals with experience in the Ultimates Process. If you have any questions, please contact 8020 Consulting for this unique Entertainment finance expertise. You can also download our free breakdown of our services by clicking the button below.

Download Our Entertainment Finance Service Sheet

About the Author

Lester has over 15 years of professional finance experience in strategic planning, forecasting and budgeting, financial analysis, and business evaluation. Prior to joining 8020 Consulting, Lester was the Director of Business Planning and Analysis at Warner Bros. and had previously worked as a Senior Manager of Retail Analysis and Manager of Finance for The Walt Disney Company. Additionally, Lester has held positions at Thomson Reuters and Public Financial Management. In his career, Lester also operated as the Chief Financial Officer for a consumer goods start-up company, where he oversaw the Accounting, Finance, Operations and HR functions. Lester’s expertise centers around FP&A, budgeting and forecasting, financial modeling, cause of change analysis, consolidation, industry analysis, and project management. Lester holds a Bachelor of Arts in Economics from Stanford University, and an MBA in Corporate Strategy and Finance from The University of Michigan, Ross School of Business.

Entertainment Finance: Perfecting Film Ultimates

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The Ultimates Process is an important part of evaluating a film’s performance. In this blog, we offer insights into the process and how to build and refine a Film Ultimate.

What is a film ultimate?

A film ultimate is the most complete prediction of the revenue a film will generate during its “first cycle” (i.e., 7-10 years from theatrical release) and allows all departments within a studio to better coordinate events and expectations to make the theatrical release a success.

Starting from the release date, the value of the future cash flow from all streams of revenue relating to the film are factored into the forecast. Although most major film studios conduct some sort of Ultimates process, it is important for all Entertainment Studios to perform such an analysis at least 18-24 months before a film is released.

forecasting ultimates release windows

Film Ultimate Revenues

Building perfect Film Ultimates starts with compiling all worldwide revenue streams throughout the lifetime of the film release. This involves coordination with several departments, and getting all stakeholders “on calendar” is critical to a film’s success. Let’s briefly look at each of these revenue streams:

Theatrical (U.S. and Non-U.S.)

This refers to revenue recognized over the exhibition period. Movies can run 4 months, as a film is released depending on the international release schedule, but most movies have about a 4- to 6-week run in theaters with about a 50% decay rate per week, depending on release timing, competitive releases, and movie genre.

Licensing and Merchandising

This refers to product placement that can be recognized as products hit shelves as early as 4-6 weeks before the film’s release. This can have a long tail based on the affinity of the brand and willingness of major retailers to keep the products on shelves.

PPV / VOD

The replacement of the traditional Blockbuster model, Pay-per-view and Video-on-demand occurs directly after the theatrical run, and it’s a great way to access the digital market.

Subscription Video On Demand (SVOD)

This is the most common revenue model many online video streaming businesses use today. Consider Netflix or Hulu Plus as examples, where users pay a fixed subscription fee once a month and have unlimited access to a variety of video content available on that platform. Studios are paid by these SVOD platforms through licensing agreements, which include a large upfront fee and/or a royalty for every viewing of your movie. 

Home Entertainment

This usually occurs 3-4 months after the movie’s release. Although the market for DVD/Blu-ray/Digital has been declining over the last decade, Home Entertainment is still a large revenue driver for studios. Figuring out a way to differentiate this product vs. all the other PPV/VOD/SVOD choices is key to keeping the value proposition in Home Entertainment.

Pay TV

This refers to traditional Cable TV and Satellite TV. Studios make a significant amount of money from selling TV rights to networks on both premium and basic cable. However, with the cord-cutting phenomenon’s gaining momentum over the last few years, this revenue stream has begun to decline.

Free TV

Also known as Basic TV, this works very similarly to Pay TV, with licensing agreements selling TV rights to the broadcast networks.

Film Ultimate Costs / Expenses

Perfecting Film Ultimates not only consists of acknowledging revenue drivers, but also taking a careful look at the cost side. These are the estimated total costs directly associated with generation of ultimate revenues. Major cost drivers to understand when building the model are noted below:

Cost Amortization

This is based on estimated gross margin for the life of the film, which may change throughout the film’s life. A two-year calculation scenario is noted below to help walk you through this.

High Level Two-Year Amortization Schedule

Above is a Year 1 Scenario indicating Film Ultimate Revenues of $60 and Ultimate Costs at $40, which gives you $20 Ultimate Gross Margin while Year 1 revenue is $20. Applying the amortization schedule formula, we arrive at $13 as our costs to amortize (i.e., amortization expense) in Year 1.

Above is a Year 2 Scenario indicating Film Ultimate Revenues of $60 and Ultimate To-Go Costs at $27, which gives you $13 Ultimate Gross Margin while Year 2 revenue is $15. Applying the amortization schedule formula, we arrive at $10 as our costs to amortize (i.e., amortization expense) in Year 2.

However, in the film business, the Ultimate model may need to be changed as revised revenue assumption numbers materialize (e.g., SVOD viewing assumptions change). Below is an example of a revised Ultimate Revenue ($5 decrease) and the impact to the Ultimate model. You will notice that Gross Margin is now $8 due to Ultimate Revenue decreasing to $35. Applying the amortization schedule formula, we arrive at $12 as our costs to amortize (i.e., amortization expense) in Year 2.

Participations

This is conditional compensation for creative talent (e.g., actors, writers, directors, producers). Compensation paid, if any, is based on contractually agree-upon formulas and cash received (i.e., not revenue recognized). Formulas vary depending on star power of talent (e.g., gross deal vs. net deal).

Residuals

This is additional compensation for “ancillary” markets (e.g., DVD, pay TV, cable, network TV, etc). This is based on the percentage of gross revenues received by a distributor from ancillary markets. Compensation payments made to individuals or to the guilds on behalf of members such as SAG-AFTRA, DGA, WGA, AFM and IATSE.

Other Considerations

Other considerations in Film Ultimates Costs and Expenses include:

  • Tax Incentives and Credits offered by various cities, states and countries to entice filming in their locale, which is treated as a reduction to film costs.
  • Impairments after release of film due to certain events or changes in circumstances (e.g., Film Performance, Costs in excess of budget, delays, etc.).

Taking a Long-Term Approach to Film Ultimates

If you want to better understand and properly valuate your Film Ultimates, you need a partnership with both the domestic and international finance teams to intimately understand the revenue and cost drivers that go into the model, which will help you make better choices. And if there are any unforeseen changes to your assumptions, you need to understand why they changed and how it will impact business.

The injection of an in-house specialist or dedicated consultant into the mix can be just the boost that your finance teams need to structure the kinds of intensive financial ultimate models that keep their companies not just afloat in the short term, but thriving over the long haul. For a detailed look at how 8020 Consulting can help, download our entertainment finance services sheet.

If you’d like a broader exploration of operational finance in entertainment, you can also download our best practices guide for competitive mid-level studios by clicking the button below.

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About the Author

Lester has over 15 years of professional finance experience in strategic planning, forecasting and budgeting, financial analysis, and business evaluation. Prior to joining 8020 Consulting, Lester was the Director of Business Planning and Analysis at Warner Bros. and had previously worked as a Senior Manager of Retail Analysis and Manager of Finance for The Walt Disney Company. Additionally, Lester has held positions at Thomson Reuters and Public Financial Management. In his career, Lester also operated as the Chief Financial Officer for a consumer goods start-up company, where he oversaw the Accounting, Finance, Operations and HR functions. Lester’s expertise centers around FP&A, budgeting and forecasting, financial modeling, cause of change analysis, consolidation, industry analysis, and project management. Lester holds a Bachelor of Arts in Economics from Stanford University, and an MBA in Corporate Strategy and Finance from The University of Michigan, Ross School of Business.

Notes from the Field: Finance in Entertainment Startups

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Years ago, I led the financial team at Overture Films. Overture was imagined and run as a filmmaker-friendly studio, and it was built by experienced executives from the MGM of yore. It ran similar to a startup in that we operated lean, independently, and flexibly, but as a subsidiary of Liberty Media, we had the benefits of access to capital.

In reflecting on my experience, I can’t stress enough that finance needs to be a business partner within the organization, especially for entertainment startups, in order to achieve and sustain business growth.

Lesson 1: Finance First

In a lot of studios, the left hand doesn’t necessarily always talk with the right. Often, the marketing department will create campaigns that aren’t aligned with budget, or executives will spend money before it’s realized.

Cash is king in startups. You need to be able to justify every expense. In the entertainment industry, marketing, distribution, and all other facets of your business come to market together. So it’s important to integrate your finance team with your business units. Through operational finance in entertainment best practices and clear communication, a startup studio can make smarter decisions based on cash.

Lesson 2: Hire Experienced Financial Professionals

If you’re able to hire a resourceful group of financial professionals like the team at Overture, do it. At the very least, you must have a financial leader—either a director or VP—who is hands on and understands how to be a good business partner to the studio.

Generally speaking, startups don’t have a lot of depth or a breadth of experience in their financial departments. We often see advanced titles that don’t necessarily equate to financial professionals’ experience. This is often a weakness, as experience, flexibility, and knowing how to work through constraints are critical to operate effectively as a startup. In the financial role, you have to be able to work with what you have on hand. That can mean working in Excel rather than advanced financial systems, chasing down data, or working cross-departmentally to achieve broader business objectives.

At Overture, I was hands on as a financial leader, but not a micromanager. I set roles and responsibilities, believed in cross training, and trusted my team to be experts in their roles. My job was to set the tone and offer no room for drama within the team. I also made sure team members were introduced to other groups and had face time with them. The culture meant we had open communication within the financial team and productive collaboration with other departments.

I think it’s important for financial leaders to hire team members who are better than them in their respected skillset. Team members must be hungry to work, love what they do, and believe in the company. That allows the finance and accounting team to be able to expand its reach beyond number crunching and have a real impact on operations.

Lesson 3: Put Ego Aside

If you’re working with limited cash flow, you must be humble. You can’t support divas spending potential earnings or have a freewheeling marketing department that spends more money than you’ll make back. To be successful, studios need to work hard to remove ego from their decision making.

Setting clear goals always helps. Buy-in for clear goals removes interpretation and makes individuals accountable to business objectives.

I’ve found that enabling typically non-financially minded teams to report better and understand data best practices in entertainment and operational finance can be helpful too. If teams are all focused on reporting in the same ways, it changes “let’s hope for the best” attitudes in the corporate seats to more productive discussions based on financial data and analysis.

Ultimately, if you want to grow your startup studio intelligently, you need to have a partnership with finance to make better choices. You need to spend your cash wisely. And you need to focus on growth. In a financial leadership seat, it can also help to develop a thick skin and work to stay ahead of the other folks in the organization and the industry. If you’re striving to stay ahead, you’ll pave the way for your team and your function.

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About the Author

June has 11 years of finance experience in strategic planning, forecasting and budgeting, financial analysis, business valuation, restructuring, merger and acquisition, system implementation, contract negotiation and operations. Her industry experience spans the apparel, food and beverage, entertainment, manufacturing and pharmaceutical industries at companies including Patagonia, Overture Films, Technicolor and Catalyst Pharmaceutical Group. Her core competencies include business plan development, project management, system integration/implementation, process improvement, cost savings initiatives, and shareholder package. June holds an MBA from Pepperdine University, Graziadio School of Business and Management and a Bachelor of Arts from the University of California, San Diego.

Distribution Finance in Entertainment: 3 Tips for Better Deal-Making

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Distribution finance in entertainment is about quantifying and maximizing the value of opportunities. Sounds straightforward enough, but in a field so complex and fluid, it’s not always easy to stay ahead of the knowledge curve. Distribution deal-making can be a particularly thorny area, with even seemingly small decisions having dramatic effects on profits. How can content producers work with their distribution teams to build the most effective deals possible – and get buyers interested?

While every deal is different, we’ve found the following advice helpful across the board:

Tip 1: Engage Buyers and Build Upside Potential into Your Distribution Deal by Including a Bonus Structure

You’ve done your research and believe you’ve got a winner, but buyers have proven elusive. To get over the hurdles, consider forgoing a higher initial price today in favor of a bonus structure that could generate exponential returns down the line. Buyers will have the price cushion they need to move forward, and you will have your signed deal. Yes, you’ll be taking a risk, but it will be a measured and well justified one, particularly if you are in a “deal or no deal” situation. If your product’s performance lives up to expectations and your bonus structure is carefully crafted, profits tomorrow could far offset any deferred today.

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Tip 2: Understand the Nuances of Distribution Deal Types – or Find Someone Who Does

Deal type can be make-or-break when it comes to distribution finance, with most deals falling into one of two categories:

  • A La Carte – With this relatively high-risk, high-reward deal type, distributors are choosing individual products to pitch and sell. They can demand top dollar, but buyers may be wary.
  • Output – Here, distributors are pitching and selling bundled products, sometimes their company’s entire output. Content in the bundle can be great and, to put it tactfully, not so great. Buyers have to take the duds in order to get the most promising material, while content producers can rest easy knowing they have a safe and steady distribution base. With more modest pricing for potentially lucrative products within the bundle, financial rewards for these producers may be limited, but their risks will be, too.

To make the most effective deal type decision, distributors need to have a thorough understanding of individual markets. For example, the Australian market has been known to favor American content. Given this affinity, a hot television program could be shopped a la carte at a relatively higher price rather than being buried with other programming in an output deal. Asia, on the other hand, has used American content as off-hours filler, and buyers may not pay a la carte pricing if this is their intention. Output deals may work better in markets like these where demand just isn’t as fierce as it might be elsewhere.

The goal is not to leave money on the table or your product without an exploitation platform. That means knowing what each market wants and what deal type will serve you best given that demand.

Tip 3: Take Off Your Numbers Blinders and Appreciate the Distribution Finance Landscape

It’s easy for all involved to have tunnel vision when it comes to distribution finance, but numbers blinders have to come off in order to make the most profitable deal choices. The best decisions come from a distribution team that makes it a priority to stay fully versed on developments across the entire spectrum of an increasingly unstable landscape. With time-shifted viewing becoming the norm and more and more viewers cutting the traditional cable cord by opting for newer platforms like Netflix, teams must think about how the viewing experience has changed and how these changes can and should affect distribution deal creation and negotiation. Teams that can’t anticipate changes and pivot quickly to them simply won’t make the best deals for their companies.

Within the entertainment industry’s overall distribution finance landscape, special attention should be paid to the evolution of key performance indicators (KPIs). In just one case, the old C3 metric that focused on “live +3” has already been eclipsed by numerous metrics that extend the measurement period and arguably allow for a more accurate viewership picture given the changing habits of content consumers. Knowing which KPIs to utilize and how to interpret them can help you in all aspects of distribution finance, giving you vital background information to inform your deal-making process.

Accounting Generalists Can Only Get You So Far

Distribution finance in entertainment is not without its fair share of landmines, some that can be nothing short of catastrophic for content producers. As with so many industries today, a specialist’s knowledge has become critical to quantifying and maximizing the value of opportunities. Accounting generalists typically don’t have the expertise that would allow them to offer the best possible counsel, especially when it comes time to structure distribution deals.

Companies interested in strategic finance in entertainment must seek specialists. Among their many possible contributions, specialists can add insight into the nuances of distribution platforms and the timing required for optimal product exploitation. They understand the risks and rewards of a la carte deals vs. output deals and can even help clients to craft creative hybrids of the two. They also know when to recognize revenue, avoiding the miscalculations that are all too common among rookies and generalists who tend to call in their chips prematurely. On the international front, specialists can assist distribution finance teams by anticipating the content appetites of their focused regions or countries.

The injection of an in-house specialist or dedicated consultant into the mix can be just the boost that distribution teams need to structure the kinds of deals that keep their companies not just afloat in the short term, but thriving over the long.

Want to read more?

You can learn more about entertainment finance through our blog, which covers a wide range of high-level financial subjects. For tips on making your entertainment studio more competitive, you can also download our free operational finance in entertainment ebook. It offers best practices and other advice for better decision making. Just click the button below to get your copy:

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Why Strategic Finance in Entertainment is so Complex

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Every industry has its own set of strategic finance challenges and nuances, but the field of entertainment can be particularly difficult to navigate. Money and reputations are unrelentingly on the line, and one bad strategic decision can devastate a studio, production house, or other enterprise. What is it about entertainment that makes this arena so demanding? In today’s post, we’ll explore strategic finance in entertainment and find out why skilled strategists are needed not just at the top of an organization but throughout its major divisions.

An Overview of Strategic Finance in Entertainment

With its widely varied sectors, the entertainment industry does not easily lend itself to broad financial brush strokes. Movies, television, and music garner the lion’s share of public attention, but the field extends to sectors including live production and its related elements, gaming/casinos, promoters, venue operations, and the ever-evolving online world of product distribution, to name a few. Strategy that successfully lifts one sector might well spell disaster for another.

Strategic Vision Across Sectors

Whatever the sector, the overarching goal of strategic finance in entertainment is to maximize corporate value. The industry is no different than any other in that regard, but value maximization in entertainment could mean anything from choosing the right property for a studio acquisition to deciding on avenues or markets for television content distribution. Strategic decisions like these can define an entertainment company and make or break its future, and they involve a sea of big picture issues that are as varied as the industry’s wide range of sectors. As we will discuss, even the most far-sighted lead financial strategists can benefit from astute division level support that augments the broad sector knowledge they must possess.

Timing is Everything

The breadth of entertainment sectors is not the only thing that makes strategic finance in the field so challenging. With today’s hot entertainment idea or property all too often tomorrow’s old news, visionary financial strategists in entertainment need to be especially attentive to timing, whether it be deciding on a theatrical release date or when to launch a superstar’s mega-tour. Nowhere is timing more pressing than in entertainment, tied up as the field is with technology and where opportunities and obstacles can shift seemingly overnight on the public’s often fickle tastes.

Spanning the Globe

In addition, skilled financial strategists in entertainment today need to be knowledgeable about markets far beyond domestic ones. The right international moves can turn a failing project around or boost a successful one even higher, but the need for global acumen adds another layer of complexity to the field.

Strategic Finance in Entertainment – Driving Success From the Top Down and Middle Up

Beyond the Back Office

While all strategic finance experts understand the basics of back office accounting, back office accountants are more concerned with tracking costs, collecting revenue, paying bills, and meeting basic accounting requirements than they are with tying financial elements together into a coherent, guiding strategy that powers a company boldly forward. Strategic finance in entertainment is the realm of the visionary who makes overarching, potentially company-defining decisions in conjunction with creative leadership.

Informed by the Middle

That said, one might be inclined to think of strategic finance decisions as those being made solely at the top. While a heavy hitting, often publicly recognized C-level financial strategist may be the norm for today’s leading entertainment companies, not all successful strategy originates here. In an industry with so many diverse sectors, division level strategists can deliver insights and recommendations that significantly shape senior level vision.

However, not all entertainment companies can afford to have – or can find – experienced financial strategists for every division. Even if these positions are filled, people can leave or transition to other roles. In all of these instances, outside consultants can serve to fill staff or knowledge gaps that might otherwise have serious strategic repercussions if left unaddressed.

On Division Level Input

According to strategic finance specialist Alex Chang, information gleaned from this division level can be pivotal. “A top level strategic finance leader may have the vision and creativity to identify opportunities across different verticals (e.g. Amazon and Netflix), produce content, and build infrastructure to exploit/distribute content, but he or she will nonetheless benefit enormously from the input of divisional strategic finance heads, those who dig in deeply on specific subjects every day and can help take C-level vision to another level.”

When division level strategic expertise is lacking or absent, Chang describes how consultants can step in: “Among other services, consultants can share insights with salespeople to help them make better decisions and structure stronger deals, all while offering strategic perspective on types of shows, pros and cons of certain markets, property valuation, building sound financial models that estimate return on investment – and so much more.”

Chang also notes the importance of a fresh perspective coming from someone who might see things a bit differently and bring new ideas to the table. “For example, a consultant might come in and see the benefit of taking a short-term loss in order to gain entry into a new market like China that will ultimately deliver enormous long-term profits,” he explains.

As Chang sums up, “Few fields are as exciting – and as demanding – as entertainment. With sound financial strategy in place, whether from in-house talent, top notch consultants, or a combination of the two, a company can weather the inevitable ups and down that come with such a fluid and dynamic industry.”

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Be on the lookout for our upcoming post offering Distribution Finance in Entertainment, or sign up here to have blog updates delivered straight to your inbox. If you’d like to learn more about how 8020 Consulting can help your entertainment company with strategic finance, you can also contact us.

For tips on making your entertainment studio more competitive, you can also download our free operational finance in entertainment ebook. It offers best practices and other advice for better decision making. Just click the button below to get your copy:

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