Hollywood Finance: Surviving In The Midst of A Meltdown

On September 19th, DreamWorks SKG and sibling company Paramount Pictures inked finalized a negotiation ending a long, two-year partnership. Steven Spielberg (that’s where the ‘S’ comes in, in ‘SKG’) signed a deal with India-based Reliance Big Entertainment ensuring $500 million in equity, as well as securing $700 million in credit through JP Morgan to back a new, $1.2 billion film company. This new venture is just one of many recent deals in Hollywood that have guaranteed billions of dollars in financing over the next few years. But wait. One minute I’m reading about the suffering economy, and the “impending doom” and “horrible reality” that awaits me, and the next minute I’m reading about the $230 million budget for just one movie, (the upcoming 007 sequel Quantum of Solace), along an entire slew of films that have just been slated for the next couple years that will no doubt have budgets that exceed $100 million. How can this be? Where is this money coming from? After yesterday’s stock market “meltdown” as only one of the more recent events that have threatened the very possibility of a functional economy, one must wonder: If every industry in America is failing right now, how is the film industry still finding the capital it needs to not only survive, but thrive?

This week, I’ve chosen to explore the blogosphere, and comment on two separate, but related posts that explore not only the recent split between DreamWorks and Paramount, but also other financing negotiations and how today’s economy is affecting the film industry. The first article, “Surreal Separation: Why Did DreamWorks Say Bye Bye to Par?” examines the DreamWorks-Paramount split and the repercussions of that negotiation, and was written by Editor in Chief of Variety magazine, Peter Bart. The second article, “Wall Street Finance ‘Banking’ On Hollywood?” which was written by Julia Boorstin, writer for both cnbc.com and Fortune magazine. For your convenience, I have copied both of my comments below.

“Surreal Separation: Why Did DreamWorks Say Bye Bye to Par?”
Comment:
Thank you Mr. Bart for clarifying so simply the reasons for why DreamWorks and Paramount Pictures have decided to end their partnership. While many people may be confused as to why these companies would want to sever their ties, it makes complete sense that a company which has put out very successful films believes they could operate much more successfully with their own financing. I can understand your comment about DreamWorks setting up a new distribution deal with Universal, but I don’t really understand why the most likely candidate for setting up a distribution deal with DreamWorks is Universal. How did you come to that conclusion for a studio instead of a studio like MGM? Has either DreamWorks or Steven Spielberg commented on a possible distribution deal with Universal or is that merely speculation? The only other question I was left with after reading your post was ‘Who came out the victor?’ Will DreamWorks be able to sustain itself over a long-term period on its own? Will Paramount experience the reduction in overhead through losing DreamWorks like they projected? And finally, if neither party came out the victor, but this was a win-win for both parties, and both parties wanted out of their relationship, why didn’t this deal occur months and months ago? While I understand your posts are not intended to examine an issue in depth, I think some explanation on these issues would really help clarify a lot of questions that readers have.

Overall, I really enjoyed the post, and I especially like your overall conclusion about Hollywood and its role in our economy, that it really doesn’t make sense, and we shouldn’t always demand that they do, especially in the film industry. When has the film industry ever really made sense? I also agree, that no matter what happens to our country, people will always want to go to the movies. While you have no answer now, is this an issue that you see yourself re-visiting? Thank you again for your explanation.

“Wall Street Finance ‘Banking’ On Hollywood?”
Comment:
Thank you Ms. Boorstin for your article explaining the financial role in Hollywood today. While I do believe the economy is in a state of shock right now, I do also believe and agree that “the entertainment industry is having no problem securing bank-financed credit.” Your explanation of the DreamWorks-Paramount negotiations was fairly brief, and on strictly a financial based approach, which is completely understandable for cnbc.com. However, I think a little bit more financial information, or possibly future projections could help readers gain a broader scope in the issue. Which big titles over the next year or two is this deal really affecting? Now that DreamWorks is on their own per se, how many films will they be able to produce each year with their secured financing? Also, what were the financial repercussions of this deal? Were there any at all? I also think your reference to Ryan Kavanaugh’s company Relativity Media and Relativity Capital is a very good example showing the outrageous capital that is being created in Hollywood these days. However, I think if you included some of the other studios or players that Relativity will be working with, readers can get a better idea of what possible films, or where in general the billions of dollars that Relativity has generated is going to go.

Aside from your explanations of recent financial booms for Hollywood, I was especially interested by your overall theory that Hollywood is counter-cyclical. While I did somewhat agree with blogger Peter Bart in that there really is no obvious explanation to anything in Hollywood, I believe that a counter-cyclical cycle is very possible. Hollywood does seem to act differently than any other industry, throughout its existence. While we may be in the midst of a possible depression, it does amaze me to see so much advertising and marketing for new television, video games, and movies. However, I think some other reasons as to why Hollywood is counter-cyclical would really help readers understand your view. Thank you for your take on the entertainment industry and the economy.