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.
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.
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.
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.
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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.