Film and television libraries have always been valuable in Hollywood.
Now, however, the plethora of emerging distribution platforms and the uncertainty as to which will become the gold standard of content delivery is spiking interest in the archives of films and television shows and the like, pushing up their prices and fueling major deals.
With DVD perceived as peaking, Hollywood’s focus is on finding alternative ways to reach consumers. Additionally, the demand from digital and wireless platforms is putting content, top quality and otherwise, at a premium.
The beneficiaries other than the studios, which are selling or leasing their libraries for unprecedented prices are in many cases private equity firms. In the same way that they’ve changed the film financing landscape through a string of recent megadeals, the equity firms are shaking up the library market.
“The costs of capital have been very, very cheap for private equity the lowest of any player out there, which puts them in a great position right now,” said Natexis Bleichroeder analyst Alan Gould. “For private equity, a library is like a bond how much can we get out of it each year?”
Private equity’s watermark deal was the recent $900 million acquisition of the 59-title DreamWorks library, by a group led by billionaire George Soros. Viacom Inc.’s Paramount Studios, which will retain the exclusive rights to distribute the library for five years, needed the money from Soros Strategic Partners and Dune Entertainment to defray the cost of the $1.6 billion DreamWorks acquisition. The deal is intriguing and reflects the unclear future of digital distribution in that it allows Paramount the option to buy back the library in five years.
Mark Cuban and Todd Wagner’s 2929 Entertainment recently sold its Rysher Entertainment library to Qualia Capital LLC. The $100 million acquisition gives Qualia more than 200 feature films and 2,000 hours of television programming. Paramount Pictures will continue to distribute the titles in the Rysher library.
Analysts and studio execs estimate that for most private investment groups, all but the best libraries have a prime shelf life of about seven to 10 years. That works better for private equity firms which are more likely to turn around the libraries than nurture and expand them than it does for studios.
“I’ve been covering the industry for 20 years, and rarely have people overpaid for a library,” Gould said. “Private equity firms are not trying to build an empire, they just want to see how much cash they can get out of it.”
For studios, the explosion of distribution platforms has provided a bonanza, albeit a tricky one. The question faced by the companies that control content is whether to cash in now through a sale, or to hang on until the distribution landscape becomes clearer and then maximize profits.
As the studios mull their library plays, the emerging distribution platforms like iTunes and video on demand along with the ever-present content demand created by cable’s growth are opening up niche markets. Even B- and C-tier titles that haven’t flourished on DVD are finding some demand.
Attractive Image
“When you’re talking about control of (content) rights, that will never get old,” said David Borshell, COO of Image Entertainment Inc. “But more important is the ability to exploit programming through numerous channels.”
The Chatsworth-based company’s attractive CD and DVD library make it an attractive target in today’s climate. Image has about 3,000 exclusive DVD titles and 250 exclusive CD titles domestically, with about 300 more international programs.
Image has resisted the takeover bids so far, but hired Lazard last month to evaluate the company’s businesses and strategic options. It also just launched its own distribution division, hoping to pick up titles or small libraries from other small independent audio and video firms that it can distribute itself.
“With our library, the distribution channel should bring quite a bit of money to the bottom line,” Borshell said. “The key is surviving and continuing to grow with technology and succeed without being forced out of the market or gobbled up.”
The primary suitor for Image’s library has been Lions Gate Entertainment Corp., which made a $93 million stock-based offer for the firm in September of 2005. That deal was rejected, setting off a contentious battle between the two firms.
Lions Gate subsequently sued, seeking to force Image’s board of directors to stand for re-election in hopes of replacing them with shareholders receptive to a sale. To fight that move, Image has postponed its shareholders meeting until September.
Lions Gate knows the value of a library its archive, which includes this year’s Academy Award winner for best picture, “Crash,” is the company’s crown jewel. The library brings in more than $200 million a year and is among the most progressive in terms of marketing to new distribution platforms. The studio brings in $30,000 to $50,000 a week from iTunes downloads of its cable show “Weeds” alone.
Lions Gate also has a majority stake in CinemaNow, a Web site that offers permanent movie downloads for purchase, making the library even more valuable since it’s now tied to a virtual distribution arm. A company spokesman said Lions Gate regards the library as an annuity, and the free cash flow from the library covers more than two-thirds of company overhead costs. Lions Gate held more than 8,000 titles until last fall, when all rights to the 3,000-title Republic library reverted to Paramount. That’s created a void the company is anxious to fill.
