In 2006, the number of movies released was 607, reflecting an increase of 11% over the previous year. Sources of revenue in the film industry range from national and international box-office revenue to domestic pay-per-view to foreign pay-per-view to DVD rights. Additional revenue comes from merchandise marketing and paid appearances by stars. Investors in films stand to earn from distribution, intellectual property, merchandising, and licensing arrangements as well.
Currently the entertainment industry relies on lawyers or consultants to manage financing and other arrangements, as there has been no organized effort made by an investment bank or advisory group to take advantage of this niche. The entertainment advisory team at JPMorgan Chase intends to convert the investment bank into a one-stop shop for those who want to produce movies and arrange for financing. The unit will provide advice to entertainment and related media businesses from the early stages of projects to their maturity. This development has met with positive and encouraging responses from the banking industry, and JPMorgan Chase is eagerly awaiting the results of this experiment.
According to Miller, who has contributed to JPMorgan Chase's film business for three decades, the new unit's business model is "investment banking with a specific focus on the idiosyncrasies of entertainment." Other films whose funding arrangements he was involved in include Ray, Traffic, The Aviator, Million Dollar Baby, and Mr. and Mrs. Smith. Miller has also supported DreamWorks, Revolution Studios, and Time Warner's New Line Cinema.
This area of investment banking, like all others, requires business analysts to evaluate investment opportunities, assess the risks and returns associated with them, and monitor their progress. Lawyers also have a role to play in entertainment financing since various transactions and related documentation, such as loan documents, distribution agreements, claims to intellectual property rights, merchandising, and licensing arrangements, are involved.
Today there is no dearth of funds with new alternative investments like hedge funds, pension funds, private equity funds, insurance funds, and venture capital funds ready to invest in any potentially profitable venture.
Merrill Lynch's entertainment division has suggested that the entertainment industry can provide median-leveraged returns greater than 20%. The film industry requires a 2:1 debt-to-equity ratio; thus returns on debt are low, and so is risk.
If additional firms follow JPMorgan Chase's lead and financing in the entertainment industry becomes more institutionalized, it will result in fiscal discipline in Hollywood and more funds flowing into the entertainment business.
