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Speaker 1: Welcome to another episode of Strictly Business, the podcast in

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Speaker 1: which we speak with some of the brightest minds working

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Speaker 1: in the media business today. I'm Andrew Wallenstein with Variety

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Speaker 1: Intelligence Platform. As any producer can tell you, financing film

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Speaker 1: and TV production has changed a lot over the years.

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Speaker 1: So to get some perspective on where it's been and

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Speaker 1: where it's going, who better to talk to than someone

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Speaker 1: who's been active on this side of the business for

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Speaker 1: nearly three decades. In today's episode, I'll talk with Daisy Stall,

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Speaker 1: head of the Entertainment Finance Group at California Bank and Trust.

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Speaker 1: We'll be right back. We're talking today about changes in

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Speaker 1: the ways TV and films get financed with Dais Stall,

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Speaker 1: head of the Entertainment Finance Group at California Bank and Trust.

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Speaker 1: Thanks for being with me, Daisy.

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Speaker 2: It's a pleasure to speak with you. Andy Cool.

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Speaker 1: So I want you to paint a picture of the

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Speaker 1: before and after, because for a very long time, there

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Speaker 1: were certain tried and true ways to do what you do.

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Speaker 1: You sold a script and then secure distribution from all

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Speaker 1: over the world, or you bonded a film. It's not

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Speaker 1: quite that simple anymore, is it.

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Speaker 2: No, No, it's not. You know, as revenue models change,

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Speaker 2: we all in this ecosystem have to change alongside, you know,

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Speaker 2: the revenue changes. So what I'd like to start out

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Speaker 2: with is kind of lay a foundation of what has

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Speaker 2: been in practice and developed over the past thirty five

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Speaker 2: to forty years. So there has been a very developed

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Speaker 2: ecosystem that involves producers, distributors, and capital providers. What I

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Speaker 2: mean by capital providers, I represent bank financing, financial institutions.

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Speaker 2: And the way that the distribution model worked in the

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Speaker 2: past is that you could write a script and you

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Speaker 2: could presell it to one distributor or thirty distributors around

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Speaker 2: the world, and those contracts came to come. They came

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Speaker 2: in a form and developed over time where financial institutions

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Speaker 2: could reliably lend against them, and that developed over time.

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Speaker 2: So it involved multiple aspects including very you know, I

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Speaker 2: hate to use too much legalies, but notices of assignment,

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Speaker 2: where distributors knew that a bank would need a certain

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Speaker 2: legal document and waivers to certain aspects of their distribution

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Speaker 2: agreements in order for the producer to obtain bank financing.

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Speaker 2: So they knew that they had to work with their

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Speaker 2: financial institutions and the bank partners in order to support

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Speaker 2: that producer making its content.

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Speaker 1: It's hard for me to imagine that kind of system

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Speaker 1: persisting in a world where the streaming services have sort

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Speaker 1: of reconfigured the global entertainment landscape.

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Speaker 2: And that's where it felt equalized. You know, twenty thirty

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Speaker 2: years ago, distributors needed to cooperate in order to obtain content.

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Speaker 2: Producers needed to work with the banks to determine what

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Speaker 2: form the contract should look like in order for them

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Speaker 2: to obtain the financing. So usually you would have these

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Speaker 2: three parties working collectively to support the production of film

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Speaker 2: and TV. What has happened over the years is revenue

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Speaker 2: models have been really abended. Now in the early days

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Speaker 2: of streaming, it actually simplified things. So you had, rather

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Speaker 2: than thirty distribution agreements that you know, I'm representing a

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Speaker 2: financial institution, I would have to lend against thirty contracts,

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Speaker 2: I could lend against one. It could be a major

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Speaker 2: conglomerate with the streaming platform. So in that sense it

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Speaker 2: made it slightly easier. But on the other side, the

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Speaker 2: streamer represented you know, their large conglomerate, they had a

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Speaker 2: lot more leverage, you know, and when you have leverage

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Speaker 2: you can dictate more of the business terms. And that's

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Speaker 2: what started to happen. Everybody was, you know, there's this

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Speaker 2: proliferation of production. You know, a lot of content being

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Speaker 2: produced film and TV over the past maybe about seven years.

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Speaker 2: And as the content was being produced and there was

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Speaker 2: a lot more volume and the streamers needed less, they

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Speaker 2: started to have the shift in leverage. They could dictate terms.

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Speaker 2: Once upon a time, somebody could produce a film with

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Speaker 2: equity and then maybe there could be a bidding war

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Speaker 2: and it might be three x the production costs, unbeknownst

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Speaker 2: to the streamer who was picking it up. Then there

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Speaker 2: were other terms that you could pre sell to a

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Speaker 2: streamer and there would be a fixed margin embedded in

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Speaker 2: that contract, so maybe one hundred and fifty percent of

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Speaker 2: your production budget, so you could have a fifty percent margin.

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Speaker 2: And over time that margin has shrunk where instead of

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Speaker 2: one hundred and fifty percent, it could be one hundred

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Speaker 2: and fifteen percent, So there's not that much margin for

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Speaker 2: anything like over budget or financing costs. It may have

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Speaker 2: not been included in the original budget. And now where

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Speaker 2: we're seeing contracts is the streamer or the distributor. I'll

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Speaker 2: use them kind of interchangeably, may not pick up worldwide,

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Speaker 2: they may only pick up domestics. So it leaves the

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Speaker 2: producer left with, Okay, how do I sell the rest

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Speaker 2: of the world or specific territory. So it is really

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Speaker 2: evolved over time, and the leverage seemed to be held

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Speaker 2: by the bigger streamers, and so it really tightened margins

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Speaker 2: for the producers. Producers had to give up the intellectual

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Speaker 2: property in perpetuity. So now when they produce content, it's

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Speaker 2: like a producer for hire. You produce it, you make

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Speaker 2: your margin. You don't own the IP, you can't build

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Speaker 2: the library. There's no further value from that IP that

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Speaker 2: you built. That value is now owned by the streamer

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Speaker 2: or distributor.

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Speaker 1: Just one of the ways that being a producer has

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Speaker 1: gotten very difficult in this town. And also what about

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Speaker 1: when you're what about like non exclusive rights for other

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Speaker 1: windows like fast channels. I mean this didn't even exist

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Speaker 1: five years ago.

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Speaker 2: I'd guess, yeah, so that I would put in a

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Speaker 2: different category. So when we're you know, what I was

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Speaker 2: previously discussing was about new content and producing new content.

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Speaker 2: There is a separate area of existing content. So what

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Speaker 2: has also happened over the years, is there's been a

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Speaker 2: lot of capital going into the system to acquire existing

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Speaker 2: libraries because there is value in these existing libraries that

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Speaker 2: first of all, they are not owned in perpetuity by

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Speaker 2: a streamer, so they can be exploited around the world

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Speaker 2: in different, different and emerging platforms. So when we talk

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Speaker 2: about fast channels, that is for existing content that has

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Speaker 2: been exploited in free TV is now going to other

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Speaker 2: ancillary windows like fast channels on a non exclusive basis.

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Speaker 2: And with respect to that kind of business model for

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Speaker 2: existing libraries, it actually helps expand the revenue generation for

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Speaker 2: that content because it's non exclusive.

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Speaker 1: Got it, so a distinction between old and new content.

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Speaker 1: But you've talked about the shift in the revenue models.

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Speaker 1: I mean, is it Wasn't it always as simple as

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Speaker 1: just a fixed licensed fee? Is that not that simple anymore?

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Speaker 2: No, Actually, it has evolved even within the past seven

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Speaker 2: to eight years. So it initially started as a fixed

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Speaker 2: license fee for the IP in perpetue so the producer

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Speaker 2: didn't known it anymore. Then it transitioned to a fixed

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Speaker 2: license fee for twenty years. Then it moved on to

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Speaker 2: a fixed license fee for maybe fifteen to twenty years.

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Speaker 2: But now it's only a certain territory. So now I've

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Speaker 2: seen maybe two streamers picking up one has a specific

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Speaker 2: territory or window timeframe and the other has the rest.

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Speaker 2: So I've seen two streamers pick up one content, one

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Speaker 2: specific ip. Now I've started to see and this is

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Speaker 2: really in the infancy stage where it looks more like

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Speaker 2: the traditional split rights deals that were happening in the

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Speaker 2: nineties and two thousands, where one domestic distributor and let's

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Speaker 2: say it's a streamer, will pick up specific rights and

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Speaker 2: then the rest of the world will be available to

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Speaker 2: sell to others and they, you know, the producer could

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Speaker 2: hire a sales agent to monetize the rights that were

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Speaker 2: not picked up by that streamer. And now I'm starting

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Speaker 2: to see contracts that are not a fixed license fee

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Speaker 2: from the streamer but looks something like a rev share,

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Speaker 2: which actually gives me hope. You know, it's because rather

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Speaker 2: than just a fixed license fee, you well, in the

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Speaker 2: in the sense of a fixed license fee, you just

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Speaker 2: have one fee and you have you can't monetize in

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Speaker 2: any other ancillary windows. The revenue stops there. But if

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Speaker 2: you have a rev share agreement, everybody's on risk to

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Speaker 2: monetize and keep monetizing beyond a certain platform into other platforms.

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Speaker 2: So the distributor wants to make you know, additional revenue,

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Speaker 2: so they are going to distribute in other areas and

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Speaker 2: they're on risk, and then the producer has potential upside

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Speaker 2: rather than that one license fee. So there's a risk

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Speaker 2: reward analysis that you have to do. So you can

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Speaker 2: have certainty with the fixed license fee, but you miss

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Speaker 2: any upside if you do the revenue shore. You have

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Speaker 2: to have confidence in your partner to exploit the content

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Speaker 2: and increase over and above what you would have received

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Speaker 2: for that fixed license fee and take the upside. Got it? Now?

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Speaker 1: I want you to put this also in the context

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Speaker 1: of what you do coming from a bank talking you know,

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Speaker 1: whether it's senior debt, private credit. How do those sort

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Speaker 1: of different financial tools come to bear here?

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Speaker 2: Well, twenty thirty years ago, a producer could get their

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Speaker 2: film made through pre sale contracts and no equity required.

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Speaker 2: It could be fully financed by a bank, But over time,

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Speaker 2: with the soft international markets and fewer and fewer distributors

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Speaker 2: offering pre sales, it has required additional forms of capital

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Speaker 2: such as equity and or private credit, which is really

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Speaker 2: defined as non bank lenders to step in into the

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Speaker 2: shoes that the banks traditionally held. So now you have

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Speaker 2: multiple forms of capital to produce one project. It could

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Speaker 2: be equity, private credit, and a bank facility, and so

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Speaker 2: they all have different costs of capital. It makes it

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Speaker 2: more expensive for the producer, so that interest, those interest

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Speaker 2: charges eat up what they would otherwise spend on production.

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Speaker 2: What has now happened is because if there are very

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Speaker 2: few pre sales, then it might be easier for the

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Speaker 2: producer to just equity finance the whole project. So I

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Speaker 2: do see in independent film many projects are produced with

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Speaker 2: equity that is provided by not institutional equity like big funds,

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Speaker 2: but more high net worth and family offices on a

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Speaker 2: project by project basis. I also see a lot of

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Speaker 2: private credit come in or trying to penetrate this space

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Speaker 2: because they see that there's a need. There's a big

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Speaker 2: gap between what banks can provide and what they can

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Speaker 2: lend against and their risk tolerance and equity. So private credit,

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Speaker 2: I've seen a lot of folks trying to come in

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Speaker 2: and provide that financing to independent producers. I've seen some done,

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Speaker 2: I've seen some trying to penetrate the space because it's

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Speaker 2: definitely a need that has been identified by those outside

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Speaker 2: of our industry.

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Speaker 1: I remember the days where you know, you'd have private

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Speaker 1: investors come in and be passionate about a particular project,

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Speaker 1: or these member of the Big day, you know, slave

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Speaker 1: financing or do we still see these kinds of arrangements.

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Speaker 2: We do see them. It's harder and harder to raise

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Speaker 2: the capital for them. So ten years ago, ten fifteen

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Speaker 2: years ago, every studio had a slate financing or maybe

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Speaker 2: multiple slate financing partners, every major studio out there. And

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Speaker 2: then those slate deals they wrap up in five years

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Speaker 2: and then they have to find a new partner. It

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Speaker 2: has been harder and harder to find partners, not because

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Speaker 2: of the lack of desire, but usually if you're looking

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Speaker 2: for a slate deal, it's got to be two hundred million,

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Speaker 2: three hundred million in equity raised, so that institutional capital

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Speaker 2: is not as interested in film and co fis today

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Speaker 2: as they were ten fifteen years ago, unless it's no

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Speaker 2: you know, a studio with really known IP if they've

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Speaker 2: got some major franchise that they're forecasting to have huge

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Speaker 2: wide releases. You know in the near term, but you

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Speaker 2: know that institutional capital is not completely dried up, but

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Speaker 2: it's definitely lessened in the past three to five years.

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Speaker 1: We'll be back in just a moment with more with

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Speaker 1: Daisy Stall from California Bank and Trust. Stick around and

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Speaker 1: we are back talking with Daisy Stall, head of the

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Speaker 1: Entertainment Finance group at California Bank and Trust about the

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Speaker 1: ever evolving world of financing content and well. I also,

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Speaker 1: Daisy wanted to get your perspective on something that's not

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Speaker 1: quite financing content, but is something that I know it

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Speaker 1: must be figuring more into your conversations about finance in Hollywood,

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Speaker 1: and that's AI, which, as you know, is sort of

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Speaker 1: working its way into the sort of every little nook

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Speaker 1: and cranny of the supply chain. From your perspective, explain

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Speaker 1: how AI is now figuring into investment opportunities in the

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Speaker 1: role you could play, Well, I.

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Speaker 2: See it from two different sides. So there are the

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Speaker 2: creators that can utilize AI to reduce production budgets and

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Speaker 2: with softer pre sales, you know the need for capital

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Speaker 2: that could make the difference between making a film and

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Speaker 2: not making a film. So I could see uses of

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Speaker 2: AI to help more films get financing. Now, with respect

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Speaker 2: to the finance side, you know, I haven't heard of

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Speaker 2: any AI tool yet, but I do see some potential

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Speaker 2: on you know, kind of on the financial side of

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Speaker 2: the business, in particular complex contracts that have very complex waterfalls.

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Speaker 2: So you know what a waterfall is is that you know,

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Speaker 2: if there is some kind of intellectual property that generates revenues,

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Speaker 2: there can be many participants in those revenues from the

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Speaker 2: day that it's released and exploited to you know, ten

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Speaker 2: twenty years down the road, and that intellectual property and

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Speaker 2: the revenue waterfall we call it participations, or in the

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Speaker 2: music space it's royalties. Those are complex contracts that have

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Speaker 2: entire groups called participations and residuals, and oftentimes, you know,

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Speaker 2: generally they're reliable, but it takes a lot of people. Oftentimes,

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Speaker 2: you know, the recipients of the participations, maybe it's talent,

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Speaker 2: maybe it's the direct the producer. You know, they may

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Speaker 2: have some questions or discrepancies. And then there are processes

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Speaker 2: that are referred to as audits, and they go back

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Speaker 2: and they audit their participation statement or their royalty statement. Well,

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Speaker 2: the use of AI, in my opinion I'm not a technician,

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Speaker 2: but it could be supported by It could support these

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Speaker 2: manual processes to reduce the time that it takes to

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Speaker 2: determine the participations and the respective amounts for each individual.

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Speaker 2: It could decrease potential errors in those calculations, or alternatively,

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Speaker 2: you could use it to audit and come to a

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Speaker 2: resolution of the audit results faster.

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Speaker 1: I see you know, I'm surprised we've made it this

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Speaker 1: far into the conversation and interest rates having come up,

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Speaker 1: so I feel like I got to throw that out

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Speaker 1: there for you. How is that figuring into the current

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Speaker 1: investment picture in Hollywood.

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Speaker 2: Well, it definitely eats away of potential dollars that could

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Speaker 2: go towards physical production. So on the one hand, that's

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Speaker 2: the direct impact. On the other hand, when assets are

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Speaker 2: trading in the market, and what I mean by trading,

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Speaker 2: so you can sell a film or TV library, you

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Speaker 2: could sell a music catalog. The way that these catalogs

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Speaker 2: and libraries are valued is basically taking a forecasted cash

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Speaker 2: flow over the next ten to twenty years. You use

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Speaker 2: an interest rate, which we refer to as net present value,

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Speaker 2: and when interest rates increase, it decreases the valuation. So

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Speaker 2: that's put a little pressure on valuation of these kinds

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Speaker 2: of assets. Nonetheless, if the assets have strong cash flow,

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Speaker 2: there's still interest out there for financing them and for

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Speaker 2: equity to acquire them.

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Speaker 1: Okay, good to know. And look, we've talked a lot

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Speaker 1: of film and TV, but you know the music world

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Speaker 1: as well, and so I'm curious to get your sense

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Speaker 1: almost on a comparative level, just in terms of the

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Speaker 1: attractiveness of music as an industry for investment.

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Speaker 2: Yeah, I've seen a lot of capital go into the

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Speaker 2: music space over the past ten years. Music went through

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Speaker 2: the digitization twenty years ago two twenty ten, and that's

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Speaker 2: what film and TV is going through now. So music

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Speaker 2: had to go through its challenges, and the revenue models

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Speaker 2: have stabilized, have been fairly stabilized, and the cash flows

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Speaker 2: are very reliable from an investor's perspective. So we've seen

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Speaker 2: a lot of a lot of equity coming into the

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Speaker 2: space to acquire catalogs or to support firms that are

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Speaker 2: aggregating and acquiring catalogs. We've seen a lot of capital,

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Speaker 2: both bank debt, private credit, and equity going in to

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Speaker 2: support operators, so music publishers, music labels to provide capital

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Speaker 2: support to those firms in the music industry acquiring catalogs,

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Speaker 2: exploiting catalogs. So it was very hot. It's cooled down

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Speaker 2: a little bit, but it's still a very stable part

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Speaker 2: of the business for capital providers.

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Speaker 1: But when you put in perspective that historical perspective, as

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Speaker 1: you did TV going through the digitization that music and

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Speaker 1: film did ten years ago, what's the takeaway then? For TV?

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Speaker 1: Should we be hopeful that maybe the turbulence of today

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Speaker 1: will give way to a more stable ground tomorrow.

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Speaker 2: I'm hopeful. It just takes time and people have to

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Speaker 2: determine how the revenue model is going to work because

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Speaker 2: it's unsustainable. If a platform is taking rights in perpetuity,

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Speaker 2: what is that platform? How are they going to continue

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Speaker 2: to monetize? How is the producer going to continue to monetize?

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Speaker 2: There is an ecosystem that needs to survive with revenues

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Speaker 2: generated so that they can use that capital to deploy

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Speaker 2: and continue to produce new content. So, you know, it

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Speaker 2: took many, many years for the music industry to stabilize

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Speaker 2: and find a revenue model that worked and was sustainable,

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Speaker 2: and I think, you know it's going to take some time,

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Speaker 2: but my belief is having gone through this and seeing

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Speaker 2: how everything is evolved over thirty years. You know, I

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Speaker 2: am hopeful that the revenue model will continue to evolve.

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Speaker 2: In the next couple of years, there will be more

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Speaker 2: revenue sharing. The form of how that occurs, I can't predict,

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Speaker 2: but I am hopeful.

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Speaker 1: Well. Seems like a good note to end on. Hope

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Speaker 1: is always a good thing, Daisy, thank you for walking

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Speaker 1: us through this today pleasure.

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Speaker 3: Thanks for listening. Be sure to leave us a review

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Speaker 3: at Apple Podcasts or Amazon Music. We love to hear

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Speaker 3: from listeners. Please go to Variety dot com and sign

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Speaker 3: up for the free weekly Strictly Business newsletter, and don't

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Speaker 3: forget to tune in next week for another episode of

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Speaker 3: Strictly Business.

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Speaker 2: Yes,