Navigating the Evolution: Technology’s Influence on Production Financing
How innovative data-driven financial analysis solutions can be advantageous to the entertainment industry, effectively addressing challenges surrounding production financing.
Unveiling the Evolution: Technology's Impact on Entertainment Production Financing
Navigating the challenges of complexities in entertainment production financing for production companies is like solving a puzzle on a tightrope. These challenges include production risks of TV shows and films, financing complexities, outdated financial systems, and shortages of skilled professionals.
Advancements in CGI, virtual productions, and AI integration promise rapid evolution in content creation. Somehow gradually, AI is also making its way in to the financial domain. Technology enabled streaming platforms, driven by changing consumer behaviors, offer both opportunities and challenges in production financing.
In this blog, I will explore the obstacles hindering the integration of technology into financial management and financing within entertainment productions as well as the influence of the streaming revolution. Building on these points, I will elucidate the reasoning behind the creation of 'Duet', detailing the journey that led my partner and me to establish the company. Additionally, I will highlight the benefits of advanced data-driven financial analysis solutions for the industry, effectively tackling challenges related to production financing.
But first, let's revisit the fundamentals of production financing and financial management.
Demystifying Entertainment Production Financing: Navigating the Three Stages of Creation
Financing and financial management in the context of entertainment production, involve several crucial elements:
Financial Planning: Detailed budgeting and scheduling, cashflow forecasting and securing financing for the project.
Tax Incentives Planning: Analyzing shooting locations and local statehood resources in order to leverage governmental tax incentives, reducing the need for equity investments.
Insurance: Optimizing and managing insurance coverages tailored to production needs, thus mitigating risks effectively.
Financial Monitoring: Tracking the actual financial performance against the planned budget and cashflow throughout the production process (actualization).
Production Financing: Orchestrating all financial elements cohesively. This requires expertise in budgeting, scheduling, cash flow management, tax incentive planning, insurance optimization, and ongoing financial monitoring.
Traditionally, TV and film productions involved multiple stakeholders, among them studios, production companies, independent investors, and high-net-worth individuals (HNWIs). This complex network pretty much shaped the financing structure, often relying heavily on equity investment. Debt financing providers were also sought in order to gap budgetary gaps before the production, and to bridge cashflow shortfalls during production.
The following sections explore the intricacies of production financing across the three key stages of IP creation.
For the context of this text, Intellectual Property (IP) refers to television shows, television films, feature films for cinema, and any other audiovisual works intended for presentation through television, the internet, mobile devices, and cinemas.
1. IP Development:
IP Development occurs before production and is greenlit by investors. This stage is pivotal in securing all the necessary funding to execute the production vision. Typically, a mix of equity financing (receiving funds against a commitment to share IP rights) and debt financing (receiving funds against a commitment to repay with an interest) is agreed upon, with equity investors like networks, producers, and distributors as primary IP owners. Additionally, and when equity falls short, gap financing may come into play to bridge the financial divide, leveraging anticipated secured future cashflows like Minimum Guarantees (MG) from Distributors and government tax rebates/credits which can range from 20% to 40% of eligible production costs.
Securing gap financing may entail complex negotiations, elaborate contractual agreements, and meticulous financial planning to ensure eligibility and coordination among all involved parties. It may, therefore become somewhat tricky, especially for indie projects. Completion bonds (a supervisory entity of vetted producers and financial professionals hired by the financers of the IP) mitigate financial risk for high-budget film productions, ensuring budgetary, timely and quality delivery.
Despite challenges, gap financing remains vital for bringing TV and film projects to life.
2. Production Cycle: Pre-Production, Production, Post-Production and Delivery.
Securing short-term lending becomes essential to address cash flow gaps during the actual production cycle (typically, the pre-production, shooting, post-production and delivery). This involves bridge financing, a temporary solution (distinct from IP development gap financing), aimed at smoothing out uneven cash flows unrelated to equity funding shortages. Such chasms may appear out of various factors like cost overruns, timing mismatches between funding cashflows and actual expenses, unexpected costs, or changes in schedules and exchange rates.
One major cause of cash flow shortages is the timing of primary equity funding injections, often not synchronized with production expenses. This mismatch can lead to gaps at different stages, from the outset to the conclusion of production. Delays in initial investors’ funding payments or unexpected events during production can exacerbate these shortages. Additionally, final payments hinge on the completion of all deliverables, potentially creating gaps towards production's end.
Unforeseen circumstances like weather disruptions or talent availability changes can further strain cash flow, necessitating additional funds.
Short-term bridge financing thus becomes crucial, ensuring production continuity despite funding challenges.
However, securing such financing comes not without difficulties. Financial institutions often treat it as non-profitable business. The fact that networks and investors may often hesitate to assign cashflows as collaterals (preferring to delegate this responsibility to the production company) keeps those such loans from financial institutions even further away. Even with their approval, the complex process can lead to delays, undermining the effectiveness of the financing solution.
3. IP Commercialization:
In the IP Commercialization stage, the goal is to secure cash flow in advance for future receivables of a completed production. Traditionally, this involves debt financing, assignment of future receivables, or outright sale of the IP. Owners may choose to sell their future receivables at a discounted rate for immediate funds or leverage them as collateral for growth loans. Alternatively, they may opt to sell the IP outright, valuing it based on methods like Discounted Cash Flow.
It's crucial to note that while debt financing in earlier stages primarily manages production execution risk, in the IP Commercialization stage, it relies solely on the IP's projected success to generate future cash flows. This shift underscores the importance of accurately assessing the completed production's long-term revenue potential when considering financing options.
Unveiling Obstacles: Understanding the Slow Integration of Technology in Entertainment Production Financing
Several factors hinder the integration of technology into TV and film production financing:
Risk and Uncertainty: Equity investment in productions carries inherent risk tied to ever changing audience preferences and market trends. While AI can analyze data for insights, predicting success remains complex. Integrating AI into debt financing equipped with pertinent data may effectively analyze and predict the successful completion of a production however it faces hurdles due to legacy systems primarily managed by banks and entertainment funds.
Complexity of Financing: TV and film projects involve interwoven financing networks spanning investors, studios, distributors, and more. Financial arrangements in the industry involve intricate negotiations, complex agreements, and meticulous financial planning to ensure eligibility and coordination among all parties involved. Integrating technology requires organizing large amounts of data and navigating financial regulations.
Lack of Historical Data: While data on rating and IP commercialization exists, comprehensive historical data linking creative elements to IP success is limited as well as data relating to the production execution stage. Given that AI thrives on large and reliable datasets, the absence of robust historical data may hinder AI-driven financing models in providing accurate predictions and recommendations.
Legacy Software and Skilled Talent Shortage: Even with notable advancements in AI and technology, the financial software utilized in production still lags behind, lacking crucial features like simplified UI, cloud infrastructure and API technology. Moreover, there's a noticeable scarcity of skilled financial and accounting professionals, especially in production. These challenges, coupled with the difficulties in transitioning to new software solutions, act as barriers to the adoption of AI-driven systems.
Regulatory and Ethical Considerations: The integration of AI raises concerns about data privacy, transparency, and bias. Adhering to legal and ethical standards is challenging and yet paramount in implementing AI-driven financing models in the industry.
The Streaming Revolution: Transforming Production Financing in the Entertainment Industry
In today's entertainment landscape, streaming platforms reign supreme, ushering in a new era for production financing. With giants like Netflix, Amazon Prime, Max, Disney+ and Apple leading the charge, traditional financing models are undergoing significant changes notably due to shifts in the ownership and distribution aspects. Let's explore how streaming platforms are reshaping production financing:
In today's entertainment landscape, streaming platforms reign supreme, ushering in a new era for production financing. With giants like Netflix, Amazon Prime, Max, Disney+ and Apple leading the charge, traditional financing models are undergoing significant changes notably due to shifts in the ownership and distribution aspects. Let's explore how streaming platforms are reshaping production financing:
Streaming Business models and Challenges:
Revenue Models: Streaming platforms (SVOD, AVOD, FAST) rely on subscription fees and advertising rather than traditional distribution channels. They prioritize subscriber growth and content library value over the performance of an individual title.
IP Ownership and Profit Sharing: Streaming platforms usually retain exclusive ownership of all IP rights. Their revenue models based on subscription and advertising revenues is making it nearly impossible to estimate the commercial value of individual IPs. This has significantly altered traditional profit-sharing dynamics and was a central issue during the dual Hollywood strikes of 2023. Consequently, upfront compensation frequently surpasses backend participation for producers, talent, and creators.
Profitability Challenges: Intense competition, subscription dynamics, advertising revenue limitations, and cash flow concerns present profitability challenges for streaming platforms. Apart from Netflix, and recently WBD, the majority of streaming platforms are not yet profitable.
How do these business models and challenges impact the foundational aspects of production financing?
Sole IP Ownership: Streaming platforms act as 100% equity investors, abolishing the multi-investor model. However, their profitability challenges may force future streaming co-productions or bundling services.
Increased 'Work for Hire' Model: Producers operate on a commission basis without backend participation, alleviating the need to seek funding in the IP Development stage. However, there's a growing demand for meticulous cashflow management during production.
No Traditional Distribution: Streaming platforms manage content exhibition digitally, diminishing the necessity for conventional distribution channels and their involvement in the financing process.
Reduced Indie Production: Streaming dominance leads to a contraction in independent production market, lessening the demand for equity and debt financing within the indie sector.
What does this mean for production financing?
Contraction of the Equity Investment market: With streaming platforms dominating IP ownership and the indie market contracting, equity investment opportunities shrink.
Reduced Gap Financing: Streaming platforms fully finance their commissioned productions, reducing the need for gap financing in the IP Development stage.
Bridge Financing Unchanged/Growing: The need for short-term bridge financing during production persists, possibly even growing, as it remains detached from ownership and distribution aspects but stays linked to the production's cashflow structure, financial planning, and unforeseen production-related events.
Reduced Debt Financing in IP Commercialization: Given streaming platforms' emphasis on content libraries and the difficulty in estimating the commercial value of individual IPs, debt financing in the IP commercialization stage may not be feasible.
As it seems, in the streaming age, production companies' financing concerns center around effective financial planning and cash flow management throughout the production cycle.
Mastering the Future of Production Financing: The ‘Duet’ Advantage.
As production projects navigate the complexities of today's streaming era, mastering five key elements becomes essential: financial planning, tax incentives planning, insurance, financial monitoring during production, and production financing.
Optimizing cash flow and addressing shortfalls through debt financing during production are critical considerations, requiring careful financial planning and monitoring involving various stakeholders.
Acknowledging the industry's shift towards streaming and the challenges it poses, coupled with the slow adoption of new technology in production financing, motivated me and my partner Eyal Cohen to create ‘Duet’ – an AI-driven financial planning and monitoring platform tailored for entertainment productions, offering embedded financial services like short-term bridge financing and insurance, addressing the evolving needs of the industry.
https://duetway.com (the links in this paragraph will take you offsite outside of Substack)
The story behind creating 'Duet' and its current status is detailed in the end of this blog.
The timing of ‘Duet’s establishment aligns with a pivotal moment in the entertainment industry's transition. As the industry undergoes significant shifts, ‘Duet’s smart and flexible financial solutions are vital in supporting this evolution into a new entertainment era with emerging business paradigms. Facing a temporary backdrop in the industry and despite current challenges, we see an opportunity and anticipate a promising future.
‘Duet’ offers several benefits, including enhancing financial planning to prevent cashflow gaps, bringing together production budget, schedule, and scripts for optimized budgeting and tax incentive planning, and providing continuous real-time cash flow monitoring.
Some of ‘Duet’s planned features are:
Import of budget, schedule, and scripts to analyze and to optimize financial planning.
Auto-generated weekly cashflow projections
Examination, breakdown, and optimization of global tax Incentive programs.
Assessments of insurance needs and coverage purchase from project dashboard.
Integration of accounting and bank data, bringing real-time cashflow monitoring & actualization.
Cost report generating engine.
Collaborative platform and personalized user interface.
Generated documents to be used as legal annexes for agreements.
‘Duet’s innovative flexible financing solutions aim to make the unbankable into bankable by underwriting production financing directly from the financial planning dashboard and leveraging AI and algorithmic underwriting. This approach enhances risk management and reduces complexity, making the process cost-effective.
‘Duet’ also offers innovative financing tools such as:
In-production bridge loans.
Production vendor receivable financing, facilitating accelerated payment to production vendors and lowering production costs.
DUET financing tools are utilized by its Digital Payment Orders and accessible from the financing dashboard.
With ‘Duet’s strategic financing partnerships and advanced monitoring capabilities, production companies can maintain financial stability throughout the production process and access essential production financing for their projects. It is meant to work primarily for the peace of mind of those whose creativity sets them apart.
Initially focusing on debt financing for unscripted TV projects in US, UK and Canada, ‘Duet’ aims to expand its services to include scripted TV & films, equity financing, other entertainment segments, and other territories ensuring a broader reach and greater impact across the global industry of USD 210B+ annual production cost.
Concept product design:
https://duetway.com/#video (the link will take you offsite outside of Substack)
Why did we create 'Duet'?
Eyal and I first crossed paths over a year ago, both in search of our next big venture.
My journey to ‘Duet’ has been quite the rollercoaster. I began my career as a CPA at KPMG, then transitioned into financial management at VISA before diving into the entertainment industry. Joining a small group in Israel that later grew into Dori Media Group, I served as the group's CFO and COO, managing financing and operations for international TV and film productions across multiple continents for sixteen exciting years. Working with major players in the US and Latin America, I oversaw TV productions, TV channels and global distribution for a company traded on the London Stock Exchange. However, by 2017, my passion for technology led me to co-found an insurtech startup for usage based auto insurance, only to exit in late 2022.
Meanwhile, Eyal boasts over 20 years of technological leadership and as development manager at NASDAQ giants like CheckPoint, Broadcom, and Intel, and for the last decade holding a VP role at Silicom (NASDAQ: SILC), developing cyber and security products for enterprises, data centers, and the cloud. Being close to risks mitigation and security practices Eyal developed advanced models of network data profiling and analysis, that in 'Duet' are being applied on behavioral and execution related data, for execution risk analysis.
With our backgrounds perfectly aligning with our vision for ‘Duet’, we aimed to revolutionize financial services for projectile industries, particularly in slow-to-advance areas like payments and financing. Naturally, we decided to begin by targeting the TV and film production sector, which brought me back to my roots, now armed with extensive experience in technology, fintech, and insurtech. To strengthen our team, we enlisted five industry veterans as advisors who were eager to join our journey: Richard Thomson, Mark Itkin, Doug Vargas, Mark Dziak and JP Pettinato (the links will take you offsite outside of Medium).
Over the past year (2023), we established Duet in the US, we've meticulously researched the dynamically changing entertainment industry, fine-tuned our product plans, our business models and pivoted multiple times to ensure our offerings align perfectly with market needs.
At this phase of our journey, we are building, partnering and raising our initial funding. We invite production companies to partner with us around product design and early adopter program. In addition, we promote potential partnerships with financers, payroll companies and finally, we welcome passionate investors to join our journey.