Lenders beware: A warning about film libraries
Commentary: A movie library is not like real estateHave you ever been a lender against a film library that isn't performing up to someone's projections and wondered what to do? And perhaps management has asked you to let it use all the current income to keep paying for overhead and development to "refreshen" the library, instead of paying down your loan?
What's a lender to do?
Now, all this is hypothetical, and I'm sure this hasn't happened yet, but we might as well get ready for a rainy day by preparing a strategy. It boils down to whether you buy into the theory that a film library is like real estate -- in that any dips in value may be temporary and might come back if the economy improves -- or whether you view it like a coal mine, which decreases in value as the coal is mined.
If you accept the real estate analogy, you might be inclined to permit current income to be used to fund overhead and development on the theory that current income is like rent, so even if it is spent, the underlying asset hasn't lost its value. On the other hand, if you adopt the coal mine analogy, every dollar of income spent on overhead and perhaps development is a dollar less that you will ever see. Poof.
So here are some thoughts on how to sort out the conundrum.
Even if films were locked away in a vault and not exploited at all, values decline over time because the public clamors for whatever is new, and old films are ... well, old films.
Films generally have a short shelf life, usually declining substantially in value as each year passes. Further, the major source revenue for film libraries is television sales, particularly foreign sales. TV sales are driven by advertising, and advertising revenue for film libraries is declining steadily owing to several factors:
-- There has been a rising tide of successful local-language production around the world. More and more broadcast time in foreign countries is devoted to these productions, resulting in less time (and less money) for English-language film libraries.
-- There has been a flood of reality-based programming around the world, mainly because of the low cost and popularity of such programming. Again, the more broadcast time that is devoted to these shows, the less time and ad revenue left over for film libraries.
-- There has been a substantial migration of advertising revenue from television to the Internet. There is only a finite amount of ad revenue to go around, so what advertisers giveth on the one hand to the Web, they taketh away with the other from TV.
-- There is a steady decrease in television advertising because of TiVo and other DVRs that permit the public to zap commercials. Why pay for what the public won't even watch?
-- Many film libraries have built-in obsolescence, as they include movies that have been licensed from third parties for a limited number of years or are subject to termination or reversion under the Copyright Act. Rights to these films expire of their own accord as time slips by.
So no, film libraries are not like real estate; they are distinctly more akin to a coal mine (if not a sinkhole). So when lenders permit current income to be used to pay overhead, it is gone, gone, gone. Red ink in the morning, lenders take warning.
The counter-argument is that the next "big thing," such as VOD or laser-wristwatch video, will pump up the value of film libraries by permitting them to be re-exploited in a new medium, as once happened with the onset of video exploitation.
The problem with this argument is that each new media on the horizon is not that fundamentally different from existing media, so each new thing simply cannibalizes the others, and the net result is more or less a wash. For example, Blu-ray Disc sales are accelerating, but it appears to be at the expense of DVD sales.
It also is argued that development of new films will "refresh" the value of the library by permitting old titles to be packaged and sold with new titles, so 2+2=5. My only answer to this is that the buyers I represent can do math, and they don't want to pay more than 4, no matter how it's calculated. They don't mind buying old films, but not for more than they are worth, and they might buy them independently of them being packaged with new fare.
So lenders that view film libraries as real estate might end up being canaries in a coal mine.
Schuyler M. Moore is a regular commentator for The Hollywood Reporter. A lawyer at Stroock, he also is author of "The Biz and What They Don't Teach You in Law School." He is an adjunct professor at UCLA Law School and UCLA Anderson School of Management. He can be reached at firstname.lastname@example.org.