This is how the industry standard revenue recoupment works in the film industry. The Beverly Fund spent $32.5 million and will receive $22.5 million, a loss of $10 million. Sony ultimately will receive $77.5 million, resulting in a gain of $10 million. The end result is that Sony spent $32.5 million on the production budget and $35 million in advertising, for a total spend of $67.5 million. Sony will receive $22.5 million and the Beverly Fund will also receive $22.5 million. What’s left of the $100 million is now $45 million, to be split equally between the Beverly Fund and Sony. Then it will recoup its $35 million P&A expense. If this film makes $100 million dollars, Sony will first take $20 million (20%) as a distribution fee. Let’s assume that Sony agreed to take a 20% distribution fee on each Beverly Slate movie, lower than the industry average, in order to attract investors into the Beverly Fund. As per the agreement, the Beverly Fund will pay half the production cost and Sony will pay half, both paying $32.5 million dollars.
#Film slate movie#
Suppose this ‘average movie’ is a real movie that will be released under the terms of the Beverly Slate agreement and has the same attributes: a $65 million budget and a P&A expense of $35 million. The average cost of producing a major studio movie is $65 million dollars, with the average P&A expense being $35 million dollars. The expenses it can recoup, before the Beverly fund is entitled to any money, is referred to as the “Prints and Advertising” (“P&A”) expenses, which is essentially the advertising budget of a film. It is unknown what distribution fee Sony took for this deal, but the average distribution fee in the industry is 30%. Herein lies why equal investment does not entail equal returns. The remaining balance, per film, would then be split evenly between the Beverly Fund and Sony. It was agreed that when money was earned from the exploitation of co-financed films, Sony would first receive a distribution fee and then recoup its expenses. The cash recoupment provisions agreed upon in the co-financing slate agreement follows the current industry standard.
Sony agreed to commit $500 million of its own capital, which meant that the Beverly Slate would consist of $1 billion in spending power for up to 45 films over a 5-year period, solely for production costs. The Beverly Fund was established by Relativity Media in 2007 to satisfy a $500 million slate finance agreement with Sony Pictures. Rather, the fund will receive much less than half of the film’s cash flow, and this difference will be compounded over each film in a slate. If a studio and a fund split a film’s budget down the middle, with each investing an amount equal to half of the film’s budget (50/50 partners), one might think that both the studio and the fund will be entitled to half of the film’s cash flow. Shared recoupment of a film’s cash flow is the relevant element in this analysis, specifically the fund’s entitlement to a portion of each film’s cash flow. The money raised is used to satisfy the funds’ co-financing obligation with the studio, and in exchange the fund is entitled to a portion of the cash flow generated by the films produced.
The third-party raises money for the fund through its own capital or by issuing bonds, which are either underwritten by a bank or sold piecemeal to various interested parties. In its basic form, a fund is created by a third-party partner that acts as a co-investor in a studios’ films. The mechanics of slate financing are relatively simple. The value proposition is that investing in one film is risky, but with an investment spread across films of many genres, types, and sizes, that risk can be diversified. This investment vehicle allows studios to decrease its cash expenditure on production costs and enables a third-party to gain investment exposure to a diverse slate of films. Slate financing is when a film studio solicits investors to co-finance multiple films (a ‘slate’ of films) instead of one film. Slate finance is a popular method of risk-diversification in film finance. I will use Sony Pictures and Relativity Media’s ’07 Beverly Slate agreement to demonstrate that equal investment does not lead to equal returns, and that a film studio, due to its role as a distributor, is advantaged in the revenue recoupment process. Although film-specific risk is reduced through the diversification achieved with slate financing, slate finance in its current form is an unfavorable vehicle for investors due to the revenue recoupment practices of film studios.
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