IP assets and film finance - a primer on standard practices in the U.S.

Economic Research Working Paper No. 74/2023 IP assets and film finance – a primer on standard practices in the U.S. Alexander Cuntz, Alessio Muscarnera, Prince C. Oguguo, Matthias Sahli IP assets and film finance -a primer on standard practices in the U.S.*Alexander Cuntz†Alessio Muscarnera†Prince C. Oguguo†Matthias Sahli‡September 21, 2023AbstractThis paper offers a primer on the basic economics of film finance and standard practices in the U.S.movie industry. It takes the U.S. movie industry as a case in point to study how excess risk and uncertaintyaround financing new projects are processed and managed by private sector entities and what market-based solutions are developed to prevent market failure. The paper summarizes the most common types offinancial deals on the ground and reoccurring funding sources for new content production and distributionin the past twenty years. In particular, this research discusses the prominent role of intellectual property(IP) in financial transactions in the audiovisual sector. Research findings are based on a series of semi-structured interviews, commissioned expert memoranda, and a dedicated panel held with selected industryexperts in November 2022. In addition, we conduct exploratory analysis and provide descriptive evidenceon credit and intangible collateral use in the industry using data from Uniform Commercial Code (UCC)filings and official IP registers. In light of the digital transformation of the audiovisual sector, the researchdocuments industry trends and the most recent changes in the financing of U.S. film. We conclude with anoutline of generic policy options for an upgrade of the financing environment in the U.S. and beyond.Keywords:movie industry, finance, intellectual property, collateral, loan, digitiza-tion.JEL Classification: G20, L82, O34, Z11*The views expressed are those of the authors, and do not necessarily reflect the views of theWorld Intellectual Property Organization or its member states. The authors would like to thankRobert Brauneis, Joseph Calabrese, Carsten Fink, Bill Grantham, Michael Kos, Brent Lutes, AllisonMages, David Nimmer, Guy Pessach, Bernd Riefler, Xiyin Tang as well as workshop participantsat WIPO. Copyright related data made publicly available by the U.S. Copyright Office is gratefullyacknowledged.†World Intellectual Property Organization, Department for Economics and Data Analytics, 34,chemin des Colombettes, CH-1211 Geneva.‡World Intellectual Property Organization, Department for Economics and Data Analytics, 34,chemin des Colombettes, CH-1211 Geneva; University of Neuchâtel, Institute of Economic Research,A.-L. Breguet 2, CH-2000 Neuchâtel. 1 Background and related literatureMovies often require large-upfront investment and title success is hard to predict,even with more data becoming available in the digital age (Caves et al.,2000).Still, with the many blockbusters created in the last couple of years and the riseof streaming services, the global film industry is booming and keeps attractingsignificant outside investment.For example, the top 1000 movies alone generated a total U.S. box office in-come of U.S. Dollar (USD) 166 billion and required a total investment and overallbudget of USD 112 billion, with the oldest movie released in 1937.1As Figure1il-lustrates, over the last 40 years of movie production history, the average revenuegenerated per title was approximately USD 20 to 60 million, with a steadily increas-ing, average production budget ranging between USD 20 to 60 million in the sameperiod (yearly averages in absolute and real terms, cf. Figure2). Based on the data,we calculate and plot domestic carrying capacity of the average title released in agiven year in Figure3. This can help approximate investment profitability and isdefined as the ratio between domestic box office income from theatrical releaseto production budget as reported in the data. Even though the data is incompletefor various reasons,2investment in film can be highly lucrative as successful titles1The numbers are derived from web-scraping theThe-Numberschart website in November2022. We report inflated USD (millions) $ based on the annual average Consumer Price Index (AllUrban, All Items, U.S. City) average around the year 2021. The larger data sample (compared to thetop 1000 titles) is furthermore restricted to movies released between 1980 and 2022. It is importantto note that the data is based on a chart list of the most successful movies of all times in terms oftheir U.S./domestic box office income. Hence, it is biased towards more popular titles and doesnot well reflect investment and revenue generated for smaller and less successful movie projects,including those not completed or released.2Note that underlying measures of income and budget for these more popular film titles areimperfect for various reasons and hence domestic carrying capacity ratios warrant cautious inter-pretation. First, domestic box office income does only reflec