Celluloid Arb
| Jun 13th, 2007 | Filed under: CAPM / Alpha Theory | By: Alpha Male |
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You’d be excused for thinking we’re a little obsessed with the Capital Asset Pricing Model. But Alpha is a concept that can be applied to all sorts of regression situations, from the talent displayed by inner city high school principals in turning out scholarship winners, and in the ability of an NFL coach to exceed pre-season expectations.
Now we have another example of such “non-traditional alpha”. Hedge funds (technically private equity funds) have been dabbling in film financing for some time (witness Perry Capital, GLG Partners, Dune Capital, ABRY Partners, Stark Investments, Melrose Partners, Credit Suisse and Merrill Lynch). Tom Cruise recently brought this concept to the mass media after he got himself unceremoniously canned from Paramount and reincarnated United Artists with the apparent help of various hedge funds.
And just last week, Morgan Stanley announced plans to sell a bond backed by one studio’s individual movie projects. Bloomberg cites a source who says it will ”pay investors a return from box-office receipts, merchandising, pay-TV contracts and other revenue” from films made or distributed by that studio over the next two years.
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[...] All About Alpha with a really interesting post on how one might generate some alpha from the film industry. [...]
[...] Celluoid ARb [...]
Thanks for posting such an interesting theory. It seems to leave out revenue streams from Foreign pre sales/licensing, and various Tax incentives, as well as other kinds of combo financing packages that offset film costs. For instance, the financing package Paramount Pictures put together for the Lara Croft: Tomb Raider deal that they utilized a German Tax shelter and profited before the movie began production.
Using a similar model, risk can be significantly mitigated and profits can be seen before movies are made.
[...] Most demand curves are downward-sloping, which means some buyers are willing to pay a lot more than others for the same product. Naturally, a producer would want to offer their wares at the highest price than can be extracted from each buyer or segment of buyers. Anyone who lined up for Apple’s new US$600 iPhone recently is well aware of this phenomenon. The successive release of a movie in theaters, then DVD, then pay TV, and then on network television can also be described as “skimming the consumer surplus” (see related posting). [...]