S. Abraham Ravid
Sy Syms Professor of Finance
Movies are the most expensive works of art, with budgets that can reach hundreds of millions of dollars. Ownership of movie properties is fairly well defined, but the new digital era has completely upended the old models of valuing film properties. This valuation is crucial, both for financing the movie in the first place and for any future transactions in the completed film.
For example, our work (Palia et al, 2008) documents how studios parse the rights to show a film in various territories and venues (TV, DVD) to determine how budgets should be split among collaborating studios and production companies. Independent films often sell rights forward to finance their movies, and if the creative team and the financiers cannot agree on a price, the movie may never get made.
Valuation is also crucial when film libraries change hands. For example, the value of the film library of MGM was a big component in the discussions during the trials and tribulations of MGM during the early part of the 21st century that culminated in a bankruptcy filing in 2010. It had never been easy to estimate how many people will watch a particular film and in what venues. However, traditionally, one could value a film based on comparables or, if the film has already been made and shown, on early results (usually U.S. theatrical exhibition).
The digital age has dramatically changed these equations. The first crack in the wall appeared when piracy became an issue. First, there were grainy VHS tapes filmed during screenings and sold around the world. Piracy has graduated since to full-blown good quality copies available illegally on the internet. New valuation models must consider how much of the projected revenue may be lost to piracy. There is broad consensus that there will be a decline in revenues, but the extent is not clear (Danaher and Smith, 2017).
The second challenge to film valuation is more recent. The percentage of film revenues coming from U.S. theaters has been declining for decades. International revenues and home entertainment receipts have seen a tremendous growth (see Ravid, 1999 and our current research). The switch from VHS to DVD did not make a huge difference, except in the quality of the image, and a reasonably stable valuation model could be established.
However, in recent years, streaming has been growing in leaps and bounds. Streaming revenues are expected to surpass global theatrical revenues for the first time this year (Roxborough, 2018). Streaming is a completely different distribution mode, with different pricing structures. Whereas consumers had to rent or buy DVDs or VHS tapes, they can buy unlimited access to, say, all of Netflix content. Therefore, it is very difficult to estimate how much films are worth now as the technology and the pricing models are evolving.
Piracy and streaming have also transformed the traditional “release windows.” Films used to open in the United States, then overseas, and then would go to home entertainment. Now, films may be released on all distribution channels simultaneously or with a short delay.
For example, the Academy Award-winning movie Roma opened on Netflix shortly after a very limited theatrical release in 2018 and then expanded in theaters. Interestingly, streaming and theatrical release coexisted peacefully.
This profound revolution in distribution has made the valuation of film properties very difficult. Independent films, which rely on such valuations and would have been made under the old system, may not be made now as nobody will take the risk of future income. Interestingly, this may explain the large increase in production funded by streaming services, in particular Netflix. Their proprietary data allows them to best analyze the streaming value of films, and thus they can better assess the possible economic success of the properties.
This evolving process illustrates the idea that intellectual property boundaries are important, but valuation is crucial as well.
Danaher, Brett and Michael Smith, “Digital Piracy Film Quality and Social Welfare,” George Mason Law Review, vol. 24, 2017, pp. 923-938.
Roxborough, Scott, “Global Streaming Revenues is set to Outpace Box Office in 2019, Study Finds,” Hollywood Reporter, December 17, 2018.
Palia, Darius, Ravid, S. Abraham, and Reisel, Natalia, “Choosing to Cofinance: Analysis of Project-Specific Alliances in the Movie Industry,” Review of Financial Studies, April 2008, pp. 483-511.
Ravid, S. Abraham, “Information Blockbusters and Stars: A Study of the Film Industry,” Journal of Business, October 1999, pp. 463-392.