ON AIR STAR
00:00:00 | 3:02:50

SUPPORT KCRW!

close

FROM THIS EPISODE

 

I'm Matt Holzman with The Business Brief, a guide to what's happening in and around the business this week.

Show business is the most glamorous business in the history of business. It's so glamorous that it's easy to forget that it's a business nonetheless.

If you read Variety, you'll see front page articles about which star signed on to which project and which agent defected to which agency. But the business underpinnings of the business get short shrift. That stuff just isn't very that glamorous.

Take for instance the really staggering news that film financers Relativity Media will funnel a billion -– maybe billions of hedge-fund money into Universal Pictures. This huge chunk of change will finance 75% of Universal's movies through 2011….75%.

Imagine if Ford announced that a hedge fund was going to underwrite 75% of all the cars it makes for the next three years. Would it be headline news? You betcha.

I know ford. Ford is a friend of mine. And Universal is no ford. So I'm not suggesting that the deal deserved a banner headline on the front page of the New York Times. But i do think that it deserved more than a single 400-word article in Variety – which, from what i can tell, is what it got.

Now, OPM -– that's other people's money -– has been pouring into Hollywood as long as there has been a Hollywood. Lewis J. Selznick, the father of Gone with the Wind producer David O. Selznick, reportedly funded his World Film Company in the 1910's with Wall Street money. But World Film is long gone, and I'm guessing it took its investors' dough with it. And the business continues to use the lure of the exotic like a carnival barker outside a freak show to get unsuspecting rubes into their tent, and then unceremoniously shove them out the back with their pockets picked. The related joke is "how do you make a million dollars in Hollywood? Invest a billion."

So why do sophisticated investors -– who've certainly heard the joke -– continue to trust Hollywood with their money? Unlike the dentist from Des Moines who might have been seduced by the promise of hobnobbing with the stars, the big investors just need a place to put their money. Hedge funds and the like have just about run out of other places that might deliver the kind of profits they've become know for. Why do the studios take the money? Largely, to mitigate risk, to protect against the downside. Hollywood hates the downside.

Of course, the downside is limited to the cost of a film, while the upside is...well, unlimited. So mitigating risk comes at a high cost in a business where the profits from big hits pay for an awful lot of flops. The studios are giving away an awful lot of an unlimited upside for a fixed investment. Seems like a bad deal for the studios until you realize that most of the time, the sure money-makers -– the franchise films, the based on the biggest kid's book in history films –- are not included in these deals.

But Universal's recent deal is different. The studio can reportedly withhold only two movies during the three-year terms of the deal. So the investors stand to take a lot of profit away from the studio. But how did we get here?

Well, movie budgets got bloated, so the studios went to outside investors to protect against the dreaded downside. But easy money and limited downside allowed budgets to get even bigger, creating a vicious cycle. Easy money also made it easier to make more and more and more movies –- not all that deserved to be made. The bottom line is that the studios are now hooked on outside money...and it seems Universal has the biggest jones.

Nobody in Hollywood seems to be questioning the wisdom of these big deals. But perhaps General Electric stockholders will demand to know why one of their subsidiaries has gone from wisely mitigating risk to avoiding it all together...at the cost of the profit that supposed to end up in their pockets.

One other issue. You may have heard about this little sub-prime mortgage thing that seems to be nibbling away at our financial system like a flesh-eating virus. Money is getting scarce. What will happen to capital-addicted Hollywood if the stuff dries up? Where will the money junkies go for their fix? I tell you, the withdrawals will not be glamorous.

For KCRW, I'm Matt Holzman, and that's The Business Brief.

 

 

Upcoming

View Schedule

New Episodes

Events

View All Events

iTUNES SPOTIFY
AMAZON RDIO
FACEBOOK EMAIL
TWITTER COPY LINK
FACEBOOK TWITTER

Player Embed Code

COPY EMBED