Financing and Investing in Film and TV Development and Production in the Age of Blockchain
A Guest Post courtesy of LCX, the Liechtenstein Cryptoassets Exchange
Introduction to Tokenisation – the concept of digital securities and security tokens is still at the early stage of development, but the opportunities of the blockchain industry are promising. The process of tokenizing movie assets, production studios or licensing rights is complex and will have its share of challenges and obstacles. These may be in the form of high costs, scalability, legal complexity, and more.
However, Tokenizing may bring a revolutionary change to the film and movie industry. For the first time, audiences can have more control over media content. Ownership of film rights can be fractionally divided and traded on secondary platforms. This would not only promote the inclusiveness of investors in the industry but would also minimize financial losses of individual investors.
Moreover, the transformation of the movie and TV industry has brought new income sources and tokenization would maximize this potential. Tokenization of Movies is still in its early stages, but it could disrupt and reshape the entire entertainment industry.
Background to the Film & TV Industry – in the last decade or so, the schematics of the film industry have dramatically changed. From the production style to the inherent content itself major shifts are happening.. However, the one factor that has been consistently growing is the rise in revenues and thereby an expansion in the overall value of the film industry.
The global film industry is worth billions of dollars today. In 2019, global box office revenues totalled $42 billion – an all-time high – contributing almost one-third of the estimated $136 billion in the value of worldwide movie production and distribution. In 2020 the coronavirus pandemic caused a 66% decline in revenues according to the Global Entertainment & Media Outlook 2020–2024 by PWC.
Moreover, the film industry has considerably evolved since the ‘black and white prints’. In the olden times, films generated maximum profits through the sale of box office tickets. But now, a movie’s profit no longer depends solely on its box office collection. This opportunity has considerably expanded with new sources such as DVD’s, streaming services, subscriptions, downloads, distributions, Video on Demand services, and more.
The Global Entertainment & Media Outlook 2020–2024 report also highlights that due to the pandemic “the way U.S. studios now reach their customers is changing.” Most have been setting up their own streaming platforms, for example, intensifying the increasingly competitive streaming environment.
As a result the film industry was already experiencing, pre-covid, in 2019, the “biggest shift in the history of Hollywood.”
Why invest in film and tv productions ?
It is fairly certain that movie or TV productions have advanced in every possible way. The broader opportunities have made investments in the industry more lucrative than ever. Furthermore, it has also ensured that a film’s revenue no longer stops or depends upon box office collections.
While making any movie or television, the production house incurs various costs including development, production, marketing, prints, advertising, financing, and overhead costs. Now, the profits may start from cinema but it has gone far beyond it and each stage opens a ‘release window’ i.e. a new type of platform. The release window now ranges from the hospitality industry like airlines that stream TV shows or films to subscription services like Netflix. At each release window, the film or TV show gets a new source of revenue generation.
This research has combined and analyzed 29 Hollywood blockbusters with a budget of over $100 million. According to it, the average revenue generated from these movies came from sources other than theatrical. Moreover, the share of profitability becomes considerably higher with VOD and streaming as the costs of marketing, prints, and advertising are reduced. The analysis of this study clearly suggests that the return of investments in TV line or movie production is no longer restricted to theatrical.
The rise in streams of revenue generation has also driven the interest of investors towards investing in the film industry.
A high rate of return: While investing in movies or TV production houses requires fairly huge capital, the rate of returns are also subsequently higher. The increase in opportunities and alternative methods has possibly made it easier to generate returns on a movie or television.
Advanced innovations have subsequently given new methods and tools for investing in the film industry. Some of the available methods include
- Direct Investments: An individual can directly invest in film making productions by establishing a production house. However, this form of investment requires sizable cash and also poses higher risks. Moreover, an investor would need sufficient liquidity, time, and resources to turn it into a profitable investment.
- Hollywood Stocks: An indirect method of investing in the film industry is to buy shares of popular companies like Disney or Netflix. However, much like other stocks, investing in film industry stocks may not guarantee a return.
- Crowdfunding: An emerging method of indirect investments in this industry is through a crowdfunding platform. It allows High Net Individuals (HNI’s) to collaborate on a common platform. However, usually, Hollywood blockbusters grossing $100 million are produced by professional investors rather than small scale investors. Moreover, the crowdfunding success percentage pertaining to the film industry has been fairly low. For instance, on Kickstarter, this percentage is merely 37.6%.
- Security Token Offerings and Movie Tokens: The tokenization of assets is democratizing investment into the film industry. Tokens may represent financial products sharing future profits or offering fixed returns
Although investing in the film industry has grown more lucrative, there are limited tools available that are fair and plausible. The current infrastructure lacks an inclusive and seamless process of investing in films and TV productions. Let’s explore the challenges of investing in the Hollywood industry.
- Accessibility: The current approach restricts the easy accessibility for investing in movies as the industry comprises few major players and studios that produce blockbuster films. Investors have very limited options to get exposure to huge projects.
- Illiquid Assets: Rights over any film or TV production are completely illiquid assets. You cannot trade it and get access to instant liquidity. Moreover, you would need to hold this asset for a longer duration in order to receive substantial gains. In case if the movie project is not successful, you are likely to lose your investment and hold the illiquid asset in the form of equity rights.
- Accounting: Producing any content for film or TV generally comprises multiple stakeholders at each level. Profits or gains among shareholders are distributed in accordance with the equity rights held over the film. However, Hollywood accounting is an extremely vague affair and creates a difference of opinion among investors, producers, and shareholders.
- Limited Entry: The film industry has grown into a centralized institution with a few major players enjoying the ‘fruits’. Audiences or fans have no rights over a film’s profits. They can be an indirect part of a production house by buying shares of stocks related to the film industry. However, shares of prominent channels are worth a few hundred dollars further limiting the entry to access a film’s profits.
- Lack of Innovation: Although the schematics of the film and TV industry has consistently changed in the last few years with more options to content, the underlying concept still remains the same. There is a lack of innovation in the process, investments, and structure. This has created barriers to access, lack of transparency, and inefficient systems.
Hollywood goes Blockchain
Blockchain technology has given rise to a range of applications in various industries- from hospitality to healthcare. The principles of blockchain enable the creation of digital tokens that represent a tangible or intangible asset.
Tokenization is the process of converting an asset into its digital counterpart and managing it on a blockchain platform. For instance- converting a real estate property into equivalent digital tokens. The tokens, known as security tokens, represent the underlying asset and gain their inherent value from it. A concept that only existed on paper has been now conceived through blockchain technology. Today, the concept of tokenization is explored for a number of industries including real estate, art, financial assets, stocks, and now film industry as well.
In a short span, the concept of Security Token Offerings (STO) has grown increasingly popular. The market of STO’s grew from $65 million in 2017 to nearly $435 million in 2018. Moreover, according to this study, the market of tokenized assets is expected to rise to $1.5 trillion in European Union.
The film industry has taken this innovative approach of tokenization to transform the sector by making it more inclusive, lowering access barriers, alternative models of asset ownership, and enabling the flow of liquidity.
Benefits and Risks of Movie Tokenization
The process of tokenizing a film’s equity or shares into security tokens and further manage it on a blockchain network comes with its own set of risks and benefits. While tokenizing movie assets would open up new opportunities, at the same time it faces subsequent challenges to its adoption.
The risks or potential challenges of tokenization in the movie and film industry include
- Commercial Success: The successful outcome of the commercial activities underlying the issuance of movie tokens depend on the success of the movie. Even if the production is featuring famous actors, experienced directors or celebrities, nobody can predict a blockbuster or market success – at the end the audience will decide.
- Regulations: Blockchain technology is an emerging industry that is also very new. While cryptocurrencies are a grey area in many nations across the world, governments have started to adopt blockchain for various reforms. The country of Liechtenstein stands out due to the new regulatory framework for blockchain companies and trusted technology service providers called TVTG (Token- und VT-Dienstleister-Gesetz), also known as the Blockchain Act. Tokenizing a movie asset as a financial product has to be regulated and approved before it can be adopted on a mainstream level. Moreover, a uniform regulation needs to be adopted across boundaries so as to gain optimum benefits from tokenization.
- Security: Smart contract systems as a whole, the websites and other technological components for or in connection with the issuance or maintaining of security tokens, can be exposed to hacker attacks, leading to the theft or loss of tokens. As a result secure platforms, specialized custody providers for professional investors or simple, but highly secure, technology solutions for retail investors are essential.
Tokenization in movies subsequently opens up innovative methods and promotes widespread adoption of investments in the industry.
- Increased Liquidity: Financial products representing profit sharing or other investor benefits, Equity shares of a film are scarce and mostly illiquid assets. Tokenization enables creating security tokens similar to financial products or film shares and further selling them on exchange platforms. This process allows an investor to gain instant liquidity from selling movie rights over a secure blockchain platform.
- Fractional Ownership: Tokenization facilitates fractional or partial ownership over film rights. Movie assets can be fractionally divided into multiple security tokens through the concept of smart contracts. Investors do not need high capital to make an investment in the industry. Instead, any individual can invest $100 and hold equivalent rights over movie assets.
- Inclusion: Tokenization enables fractional ownership that lowers the barrier of minimum investment in the film industry. Further, an international market allows liquidating a film asset. Due to these factors, retail investors can invest in the film and TV industry. Audiences or fans can access the profits of their favorite film or TV show.
- Real-time Markets: Imagine selling movie rights similar to shares on the stock market. Powered by blockchain, tokenization facilitates an international market to buy or trade film tokens. Any investor can buy a movie token prior to its release, from the 24/7 market and sell it post its release. This would bring a new dimension to investments in the industry.
- Easy Transfer without middlemen: Smart contracts facilitate the easy and secure transfer of ownership of the asset. The blockchain ledger keeps a record of each individual share and permanently stores it. Moreover, ownership for each asset can be traced back and represents a single source of truth.
- Transparency and Efficiency: Multiple stakeholders including producers, investors, and cinemas have a common database that possesses the same data across the entire network. Information is stored on a transparent and tamper proof ledger that further makes the process of Hollywood accounting easier and efficient.
Tokenization of assets, including stocks, real estate as well movies is bringing a revolution to the financial trading and raising/issue markets that will have the same impact, maybe more, than the Big Bang in the 1980’s brought in at the beginning of the digital revolution in the markets. The Film and TV industry is poised to be apart of the new revolution, tokenization.