Free The Hollywood Economist by Edward Jay Epstein

1981 Thomas McGrath, a Harvard MBA at Columbia, pioneeredthem. They rapidly became part of Hollywood’s invisible money-making apparatus. Paramount, for example, made a quarter of billion dollars from just three deals: $50 million dollars from Toshiba for agreeing to release
Titanic
on DVD in time for Christmas sales, $150 million from Panasonic for agreeing to allow them take over video replication from another manufacturer (Thompson), and $50 million from the law firm of Ziffrin, Brittenham and Circuit City stores for agreeing to support the DIVX format. Since the DIVX format was never launched, Paramount got to keep the money.
    The $150 million Toshiba paid Paramount and Dreamworks not to release their titles on Blu-ray was a worthy continuation of this tradition. Such windfalls, even if not visible to the public, are what assure studios a true Hollywood Ending: bottom-line profits even when their films fail at the box office.

ROMANCING THE HEDGE FUNDS
     
    Ever since Hollywood established its powerful hold over the global imagination, its studios have sought outside investors to help pay for their movies. The list of these “civilians” stretchesfrom William Randolph Hearst, Joe Kennedy, and Howard Hughes in the 1920s to Edgar Bronfman, Sr., Mel Simon, Paul Allen, and Philip Anschutz in more recent times. Some such super-rich investors wanted to participate in the selection, casting, and production of the movies. (Hearst, Kennedy, and Hughes, for example, all insisted that their mistresses be given choice roles.) Other civilians, such as the thousands of investors in Disney’s Silver Screen partnerships, sought only the tax-sheltering benefits, but the IRS almost entirely eliminated this loophole by the early 1980s. And some civilians, including hedge funds, actually thought they could make money by negotiating more favorable deals with the studios.
    But whatever motives such civilians may have for putting money in Hollywood movies, why do studios want outside funding? When I put the question to a thirty year veteran of studio corporate financing in December 2008, he shot back:
    “No journalist who has ever written about movie financing has ever bothered to ask the question: why are the world’s largest and most solvent media companies raising outside capital? Journalists all seem buy, hook, line, sinker, and press release, the line that we [studios] need money.” He noted that it was in a studio’s interest to cry poverty,if only to get stars and their agents to reduce their demands for compensation, adding, “In my thirty years in this business I have never ceased to be amazed by this gullibility.” Yes, studios can self-finance their entire slate of movies, and, unlike independent producers, they have sufficient revenues flowing from licensing of DVDs and TV rights to meet any film financing needs. The reason for recruiting outside financing is that the studios can make an “asymmetric deal” with an outsider, which means the outside investor gets a smaller share of the total earnings than does the studio on an equal investment of capital. And it is not only journalists who are gullible. Take JP Morgan Chase, which sent out a “teaser” to hedge funds, reading, “Despite compelling economic returns, major film studios are capital constrained and often must seek co-financing arrangements with other studios and other outside sources,” and offered hedge funds “a unique opportunity to participate in the most profitable segment of the motion picture industry.”
    Hedge funds brimming with excess capital—at least up until the crash in 2008—made perfect civilian recruits for Hollywood, except that hedge fund managers had neither the expertise nor time to evaluate the prospects of individual films. In2003, Isaac Palmer, then a young senior vice president at Paramount, came up with a brilliant solution. Studios could offer hedge funds a cut of their internal rate of return. This internal rate of return is