Appendix F Impacts of Financing

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1 Appendix F Impacts of Financing Self-financing: Impact on Content & Performance Owner in clear control Can reflect own opinions and aesthetics Can pursue own judgment»better information»but same also safeguards, projects may be based on internal politics rather than detached evaluation Innovation Availability of internal funds can allow greater risk of radical innovations Can take greater risks in smaller But it s with one s own money, which may reduce risk taking in large projects Empirical evidence: Kamien and Schwartz, M. Kamien and N. Schwartz, Self-financing of an R&D project. American Economic Review 68 (1978), pp

2 Impact of Debt Financing on Content t Behavior Lenders do not usually require profit maximization, only financial soundness No upside needed, just no downside Will therefore give management more autonomy, as long as financial basics are ok, relative to equity holders such as financial institutions investing in growth. But less risk taking for radical innovation than for internal funding (small and medium range) Impact of Secured Debt on Content The more secured a lender is, the greater support of risky activities by firm in content, technology, etc. 2

3 Content productions will rarely have collateral of value until near completion. Could have a slate of films as collateral Which means that larger films can get higher risk content funded Impact of Short Term vs. Long Term Debt on Media Company Behavior A media company that must seek frequent re-financing is under greater performance pressure, under greater pressure not to be perceived to be risky and it needs to be non-risky, noncontroversial in content, technology, IPRs, labor relations. Long-term Debt and Media Firm Behavior 3

4 Greater time horizon for managers to create & innovate But investors require a risk premium for this loss of control i.e., creative long-term opportunity is also more expensive than short-term Impact of Securitization Financing on Content? Tends to favor established artists and firms with track record David Bowie John Steinbeck Telecom Italia Madame Tussaud Impact of Vendor Financing on Content? 4

5 Pre-sales require experienced sales agent to make presale arrangements. Talent agencies bundle foreign presale arrangements, intl co productions deals, gov t subsidies, etc. This arrangement favors established producers with track record. Projects that require financing by distributors of supplies give these significant influence over content. Hollywood studios and TV networks over independent producers Distributors have superior access to cheaper financing since the riskiness of their portfolios is lower than that of each project. Even though the investment is sunk, they are distributors likely to push harder for films in which they have a financial stake, losting that investment looks bad for the studio managers. The right to make final editing ( final cut ) is an important right assigned in film financing contracts. Distributors ib t generally retain final cut for films they finance. 5

6 In that way the distributor (studio) can make changes to make the film more commercially successful (happy endings, less ambiguity, less controversy.). Film makers choosing independent financing are often willing to sacrifice the higher monetary rewards associated with studio productions in exchange for the creative freedom associated with independent finance. Film Example 1: Mr. Jones The screenplay of Mr. Jones written by filmmaker Mike Figgis, was a dark story about the relationship between a manicdepressive man (Richard Gere). In test screenings, audiences did not like Gere s depressive side. urprice=5.9900&type=photo&posterid=306310&url=htt p:// 6

7 Tristar (the studio-financer) therefore asked recut of movie by Figgis to de-emphasize the depressive side. Figgis refused, and Tristar exercised its control and replaced him. Film Example 2: Rain Man At the airlines urging, United Artists (studio) cut scene in which Dustin Hoffman shouted airline crash statistics to avoid boarding a plane. Barry Levinson protested that the scene was crucial to the film splot and characterization, but studio had contractual rights. Studio financing contract will also usually require a rating of better than NC

8 Financing contracts often specify minimum technical quality standards for the films technical features, such as audio. Any financing contract will specify a budget and a deadline. Require producers to insure the productions against hazards such as cast-member deaths, damage to the film stock, and so on. This tactic favors big-budget film as the profit on more modestly budgeted films would be consumed by the legal and administrative costs. Source: 8

9 Impact of Government Financing on Media Firms? If the private-sector, market-based funding mechanism creates media content that diverges in scope or depth from that of too many people. The public sector is likely to create additional funding mechanisms. Public funding usually tied (explicitly or inexplicitly) to: Political balance in public affairs coverage Quality national culture Content themes, team more likely to be controlled by appointees decisions, or try to be inoffensive. Similar for system based on voluntary donations Do not antagonize 9

10 High quality classics and historic documentaries fit these constraints t best Jane Eyre, Baseball 10