How blockbuster franchises are created to gain a profit
Apart from the tales of competitiveness and predatorial behaviour, both find themselves influenced by hedge funds. This isn’t something entirely new – ever since Hollywood became the Mecca of filmmaking, many movies were financed by moguls from New York and the East coast. But now it’s increasingly being looked at as an investment by hedge fund managers, and quite a profitable one at that.
The interest in the glamorous world of movies has always been a lure for bankers and investors, but in the last 10 or so years we’ve seen a quantitative approach to movie creation, with the ultimate goal of making a solid profit. It’s now broken down to an investment – expenses for actors (famous or not so much), a good script (whatever that is), a good director, CGI, marketing etc. The trouble with all this is that it’s still a movie – no one can really guarantee if all these components will be good enough to actually make people spend their money.
Enter the hedge funds. Their approach is to identify costs and limit risk as good investors do. And when they applied their model to predict movie success it came up with several key factors:
- the movies have to be based on successful books whose popularity is viewed as a strong and measurable predictor
- there has to be a potential for multiple movies in the books, at least for three more movies
- all have to have a PG-13 rating
- the main audience has to be in the 15-25 age range with strong appeal to 25-35 year olds
Mark Rachesky, the former right hand man of Carl Icahn, made his first masterstroke in the movie business by supporting Marvel Entertainment before they managed to capitalise on their Spider-Man franchise. “It opened my eyes to the value of content,” he said. Through his MHR Fund Management he made Lions Gate one of his first large investments in 2004. He has been increasing his share in them ever since, even though he had a bitter conflict with his former mentor over what types of movies the studio should be producing.
It turns out he made the right call – his role in The Hunger Games franchise was crucial. He spearheaded the investment into a book series that was less known than Twilight, but had the potential to captivate both male and female audiences over several age demographics in the lucrative sci-fi action genre. To this date, the two movies have grossed over $830 million with a profit of over $600 million, and as proof of their success there will be a fourth movie.
Anchorage Capital Group LLC is another hedge fund that got into the business of producing franchise based movies and they also have an impressive portfolio through the MGM studio: the James Bond thriller “Skyfall” and the fantasy series “The Hobbit”. You can see the similarities though – all have multiple sequels and have proven audiences that would continue going to the cinema, even if there are weak points in the previous movies. Not to mention they come from books.
So next time you go to the movies and talk about the visual effects and how much the stars make, remember that someone else funded it before a single scene was shot. Whether in Hollywood or Wall Street, it’s all about the risk.