Friday Letter: Content is king

Two recent developments in the entertainment industry have highlighted a trend: direct ownership of intellectual property is a strategy that is drawing increasing numbers of professional asset managers.  

While the long-term viability of almost every traditional form of media company is now in doubt, investor interest in media IP is booming. The logic behind this interest is the growing value of IP – whatever medium or distribution system rules the day, the owner of the content will always get paid. The owner of Tower Records may not have a bright future, but the owner of, say, “Purple Haze” most certainly does.

The market for monetising intellectual property has developed to the point where a Sotheby’s-style auction house now exists. Ocean Tomo Auctions, based in Chicago, announced yesterday an upcoming auction of an interest in the catalogue of Jimi Hendrix music. These valuable rights have been owned by the estate of Michael Frank Jeffery, Hendrix’s manager who died in 1973.

Entertainment assets have been appearing on institutional radar screens for some time. Several years ago, the rights to David Bowie songs were securitised as a bond offering. Alternative investment house Fortress Investment famously extended Michael Jackson a loan backed by the pop star’s catalogue of Beatles songs, the value of which has skyrocketed over the years. The Hendrix auction will no doubt attract bidders who arrive as return-minded investors, not simply well heeled rock fans. 

Out in Hollywood, a recent movie deal is the result of the same development. Organised by Merrill Lynch, a vehicle called Cold Spring Picture will co-finance a “slate” of motion pictures made by The Montecito Picture Company in conjunction with DreamWorks. Film co-finance transactions are a Hollywood mainstay, but what is different in today’s market is the new type of investor showing up with wads of cash. The Cold Spring deal, which involves both equity and debt instruments, includes capital from a consortium of undisclosed hedge funds.

A number of other similar film co-finance deals have been completed in recent months that include hedge fund and private equity investors. These are serious investors who, armed with historic revenue data, believe they have wrapped their arms around the risk of filmed entertainment creation, aka moviemaking.

As with music catalogues, the owners of film catalogues today get paid in many different ways and far into the future, thanks to emerging digital distribution channels, franchising rights, remake rights, video game rights – you name it. These professional money managers are excited about film investment not simply because they might get to attend a premiere, but because they expect to get a solid 20 percent rate of return.

In an expected low-return environment such as today’s, 20 percent is like winning an Oscar.