Malaysia Needs to Overhaul Its Filming Industry

The industry is becoming popular amongst investors fraternity in the United States (“US”) as the growth in the international entertainment market is huge - best illustrated by the fact that the international box office is growing at a much faster rate than the US’s. Hollywood studios have shifted focus to large films (USD200 million each).

ILMING industry seems to show a great deal of money - both from production side as well as economic profit side. We hear Hollywood boasts its films across the globe like a phoenix full of inferno. When we turn our heads to the local (Malaysian) scene, the fire extinguished. What has happened? or rather, what did not happen? Surely Hollywood is not the only success story? I even heard that Hollywood is not ranked #1. I was told that #1 goes to Bollywood. #2 goes to one of the African nations,... cannot remember which one. Hollywood is at #3. Other nations are also performing far better such as Hong Kong, Korea and even our neighbouring Indonesia and Thailand. So what can we do to make Malaysia as awesome as those countries as far as the filming industry is concerned?

Recently I was privileged enough to visit Hollywood. Apart from the themed rides and the photo with the HOLLYWOOD sign on the hill, I took quite a considerable amount of time talking to many people from the filming industry in Hollywood. They include studio producers, independent producers, bankers, lawyers, insurance guys, distribution companies, talent agencies, private equities and Emmy Award winners (directors/producers). It was a rewarding experience. I now understand what is in the ecosystem in Hollywood that is not in ours (Malaysia). These missing components are quite critical that they carry with them the role of bricks to a wall. So, I would like to share the salient points that I have gathered and most of it are behind the scenes matters - the boring stuff that happens behind the actors and the cameras but without them, there will not be any filming industry (funny enough that without them, Malaysia still has a film industry - hmmmmm.... ) Oh well, here goes:
                                  

HOLLYWOOD ECOSYSTEM

         

STUDIO VS INDEPENDENT PRODUCERS

Studio producers manages from A to Z – Pre-production, production, post-production, sales and distribution, financing, legal, accounting, licensing and merchandising. Their primary focus is making $$. Independent producers are more passionate with the artistic and cultural perspectives of a movie. They are more conducive for a nation’s identity building activities. Both studio and the independent producers agree on one thing : "The road to success (whether financially or artistically) would be a strong story telling."

DEBT FILM FINANCING

Gap and bridge financing for Government rebates is a necessity in the industry to fill in the gaps caused by timing of cash injections. Both bridge for rebates as well as gap financing works on Last in Last Out ("LIFO") basis for its recovery. It is also used to pre-finance pre-sales. Typically at an interest of 10% and fees of 2% totaling 12% annualised for a tenure of 12 to 18 months. Government rebates need to secure investor’s confidence. Often the banks will require a consultant to ensure that criteria for rebate is adhered to as many cases suggest that Government keeps on changing the rules. This may cause an issue of Government not honouring the rebates.

Completion Bonds are only entered into when all financing is secured. Risks can be reduced when there is involvement of a re-insurance party. Essentially the bond is an underwriting for any sort fall if the budget is blown and pay all parties if movie not completed. A cross between underwriting and insurance on completion. Other insurance such as the ones for actors comes out from production costs.

PRIVATE EQUITY FILM FINANCING

Private Equity is the most conducive way to equity-finance a film. It gives some level of comfort on the control over the operations of a production. The typical outcome (cut-off of 7 years) for a slate of projects for equity funding consideration would be:

• 25% movies breakeven
• 50% with IRR 20% to 25%
• 25% mega profits! 

The industry is becoming popular amongst investors fraternity in the United States (“US”) as the growth in the international entertainment market is huge - best illustrated by the fact that the international box office is growing at a much faster rate than the US’s. Hollywood studios have shifted focus to large films (USD200 million each) reducing the number of films made. Hence, plenty of room for private investors to finance smaller movies. They can do so by putting in place variables that can reduce risks. These are the factors that can help reduce the risks of production activities:

• Slate of projects rather than just into 1 project - diversification
• Deep industry access (projects and talent)
• Experienced team members and crew with proven success
• Higher reliance on debt financing (75% minimum)
• Maximise non-recourse Government rebates
• Maximise bankable pre-sales
• Minimal overheads
• Do co-productions instead of sole-productions

SALES AND DISTRIBUTION FOR FILMS

Backstop is a method where a procurement party values a particular Intellectual Property (“IP”) and buys the option to purchase the IPs before the producers shop around for buyers. A pre-sale so to say – a Backstop broker. They are also heavily involved in subsequent sale and distribution activities including licensing of rights and securing Minimum Guarantee (“MG”). If sold to another distributor, the latter distributor recovers all expenses and MGs paid to the Backstop broker with the surplus (“overges”) shared between the Backstop broker and the distributor based on a predetermined split. Typically, the revenue streams involved are as follows:

• Theatrical - Ticket sales split slightly in favour of exhibitors
• Home Entertainment - DVDs, pay-per-view, license fees
• TV cable & Broadcast - On air exclusively (Pay-TV) or syndication (Free-to-Air)

LEGAL ADMINISTRATION OF FILMS

Legal Counsel specific for the industry is important. Normally each movie is parked under a separate Special Purpose Vehicle (“SPV”) to limit the exposure of each movie. The lawyers look after the legal matters of these SPVs inclusive of the licensing arrangements. Collateral for financing is also a legal matter. Normally the original IP is not collateralised and only the derivative IPs are collateralised (e.g. licensing rights). Other forms of collaterals would be assignment of Government rebates and MG from distributors.

“6 charged in $5M movie fraud scheme” was reported in the Los Angeles Daily News on Friday, 28 February 2014. This shows how important the involvement of a law firm is for the industry. Fraud is everywhere. Protection and prevention is required.


ACCOUNTING THE FILM COLLECTIONS

The first USD100,000 to USD200,000 comes from the Producer after having formed up the preliminary team of main casts, directors and script writers. Release of funds for production is done when a 3rd party accounting firm confirms all monies of investment is in escrow with the lawyers. Waterfall distribution of recovery is the method used when collections are in. The accounting firm acts as a de facto credit agency for collection and the recipients of recoveries are categorised and prioritsed as follows:

Recovery of Investment plus Profit

• Priority 1: Distributor Financier (MG + 15%-25% fees)
• Priority 2: Gap Financier and Banks
• Priority 3: Limited Partners (Incl. actors/writers/directors profit share)
• Priority 4: General Partners

Fees only

• Completion Bond Underwriter
• Lawyers
• Accountants

LESSON FOR MALAYSIA

For Malaysia to grow further in their filming industry, the below critical 10 steps must be introduced in the film ecosystem:

1. Strong reinforcement of the IP valuation framework and IP market place.
2. Strong reinforcement of the film rebate system
3. Government incentives to encourage investors/angels on filming funds.
4. Legal profession to establish services for IP management.
5. Accounting profession to establish services for IP cash flow management.
6. Insurance sector to establish underwriting of film projects.
7. Re-insurance sector to widen scope of industry to include filming.
8. Banking sector to establish entertainment division.
9. Exchange filming ideas vs financiers.
10. Open the market to investors/financiers and service providers to experts from other countries

So, yeahhh,.... can we make this happen? I was told that relevant Government agencies have already started efforts on some of the above. I cannot wait to see the result of those efforts upon achieving the desired state of ecosystem.

Both studio and the independent producers agree on one thing : "The road to success (whether financially or artistically) would be a strong story telling."


Johan Ishak
Chief Executive Officer
MyCreative Ventures Sdn Bhd