Sierra Nielsen October 29, 2023 Class 7, Film Finance Exercise 1. What is an equity driven finance structure? An equity-driven finance structure is a method of raising funds for a company or project by selling ownership shares to investors. This means that in exchange for their investment, they offer them a stake in the company. 2. How has Netflix changed the pre-sales market? Netflix has changed the pre-sale market because they use a strategy in which they become the only distributor of films in exchange for an amount in excess of the budget. 3. Describe the pre-sales method of film financing. The pre-sales method of film financing is a common approach used in the film industry to secure funding for a movie before it goes into production. Pre-sales typically occur on a country- by-country basis, but occasionally they involve global rights to a single distributor. There are two different types of pre-sale methods of film financing which are with cash-flow or with delivery guarantee from VOD company. 4. How are pre-production expenses covered in the pre-sales film finance model? These costs are included in the pre-sales film finance model and are covered by "bridge" lenders, or lenders who are prepared to lend money to cover pre-production costs without any assurance of completion. 5. Describe two methods of "gap" financing. The first method of "gap" financing is a "gap" loan which is based on a sales agent's estimates of what the film will hopefully sell for. "Gap" loans are typically risker than pre-sale loans because costs go up, typically with up-front fees equal to 10-12% of the loan and interest at three to five points over LIBOR. The second method of "gap" financing is a "bridge" loan which are lenders that are usually willing to make loans in order to fund pre-production expenses with no completion guarantee in place. These lenders are not loaning based on pre-sales or sale estimates which means their expectation of repayment comes from being paid off by the pre- sale or gap lender when the completion bond closes. Therefore, if for any reason the film collapses before this happens, bridge lenders are out of luck. This type of loan is the riskiest therefore they come at a higher cost typically front fees equal to at least 10% of the loan and interest is as high as 1% per week. 6. Why is it better for advertisers to invest in films, rather than just use product placement?
Sierra Nielsen October 29, 2023 Product placement alone does not fully satisfy advertisers for many reasons. One reason being that they cannot control the exact contours of whether and how their product will be used and they are not able to control the content in the film itself. By just using product placement advertisers may often be left with people having possibly negative associations with their product due to how it is shown in the film. Therefore, it is better for advertisers to invest in films because it allows them to have control over the creative aspects of the film itself and, specifically, the use of their products. Advertisers also have a source for recoupment of their investment, plus a profit if the film works if they invest in the film rather than just product placement. 7. Describe what is mean by a foreign co-production. Foreign co-production allows many countries to enter into treaties that permits production activities within any of the signatory countries to count toward meeting the quota agreement, since it is often difficult to make a film that meets all the quota requirements for a single country. Foreign co-production also allows the value of the film to increase because it can be sold for a higher amount in different countries.
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