Investing in Media in a recession
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152 W. 25 th Street, Suite 1202, New York, NY 10001 (212) 462‐2600 [email protected] Box Office Is Up Despite the Recession. Okay, Now What? By Loren Sklar The New York Times published an article recently about record‐breaking box office numbers so far this year ‐‐ "In Downturns, Americans Flock to the Movies" NYT 3/1/09. The phenomenon of long lines at the box office during economic upheaval is not new; it dates back to the Great Depression. This tendency to seek escape at the movies persisted in the recessions of 1990 and 2001, and the uptick is particularly strong this year with box office receipts 17.5% higher than the same period a year ago. Chart 1: Domestic Box Office in a Recession Source: Variety Okay, so film is one of the few areas of growth in this recession. How does someone invest in film? Unfortunately, stocks are an ineffective vehicle. The film studios are owned by media conglomerates that derive only a small portion of their revenue from film production. The counter‐cyclical effect of film exposure is overwhelmed by the larger exposure to consumer spending on vacation packages or consumer electronics. As a result, the media conglomerates have not performed well during or immediately following past recessionary periods. 0 1 $2.0 $4.0 $6.0 $8.0 $10.0 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 U.S. Box OfBice (in billions) Recession U.S. Box Ofbice Gross, 12mth trailing
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Transcript of Investing in Media in a recession
152W.25thStreet,Suite1202,NewYork,NY10001(212)462‐[email protected],NowWhat?ByLorenSklarThe New York Times published an article recently about record‐breaking box officenumbers so far thisyear ‐‐ "InDownturns,AmericansFlock to theMovies"NYT3/1/09.Thephenomenonof long lines at theboxofficeduring economicupheaval isnotnew; itdatesbacktotheGreatDepression.Thistendencytoseekescapeatthemoviespersistedintherecessionsof1990and2001,and theuptick isparticularlystrong thisyearwithboxofficereceipts17.5%higherthanthesameperiodayearago.Chart1:DomesticBoxOfficeinaRecession
Source:Variety
Okay,sofilmisoneofthefewareasofgrowthinthisrecession.Howdoessomeoneinvestin film? Unfortunately, stocks are an ineffective vehicle. The film studios are owned bymedia conglomerates that derive only a small portion of their revenue from filmproduction. The counter‐cyclical effect of film exposure is overwhelmed by the largerexposuretoconsumerspendingonvacationpackagesorconsumerelectronics.Asaresult,themedia conglomerateshavenotperformedwell duringor immediately followingpastrecessionaryperiods.
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Chart2:DisneyStockinaRecession
Source:Bloomberg
In fact,after the2001recession,Disneystockdidnot tradeabove its recessionmidpointpriceof$28.34untilJanuary25,2005,aperiodofmorethan42months.Chart3:SonyStockinaRecession
Source:Bloomberg
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Sony,withitsgreaterdependenceontechnologyproducts, faredevenworse.Tothisday,more than 90 months later, it continues to trade below its recession midpoint price of$65.75.While it is possible to invest directly in the equity tranche of a studio slate, early slateinvestors suffered disappointing returns as the studios cherry‐picked which films wereincluded,omittingtheestablishedfranchisefilmsandlayingoffriskierprojectsonoutsidebackers. Subsequent slates were more inclusive, but the minimum investment is still$100M or more, too expensive for many investors. However, a savvy investor couldassemble a portfolio of smaller, independently‐financed films for $10Ms rather than$100Ms. This might be a more affordable route to investing in what is, historically, aprofitableindustryinbadeconomictimes.NEXTMONTH:Howmanyfilmsareneededtoachieveadiversifiedportfolio?ThewriterspentthreeyearsworkingontheEquityDerivativeStrategiesteamatGoldmanSachsandfiveyearsasanassistantdirectorandproductionassistantonnumerousfilmsincluding2006SundanceselectionFlannelPajamasandtheupcomingUniversalPicturesblockbusterDuplicity.Hismostrecentlectureonthetopicofquantitativefilmfinance,“FilmFinanceasRiskCapital:ExploringaMisunderstoodAssetClass”,waspresentedattheInstituteofInternationalFilmFinanceinNewYorkCity.Thismaterialisforinformationalpurposesonly.Wearesolicitingnoactionbaseduponit.It is not a prospectus, does not imply and shall not be construed as an offering for anysecurity, nor does it constitute investment, legal or tax advice fromChatsby Films or itsrepresentatives. Filmmaking is a high‐risk venture and is not suitable for all investors.Please consultwith your investment, legal and/or tax advisor(s) before proceedingwithanyinvestmentinfilm.
