Spring 2009

Money Man

David Shaheen, head of JP Morgan Chase’s Entertainment Group, reflects on what impact the economic crisis might have on the industry and the $8 billion the bank has loaned it.

1. Let’s cut right to the chase: How is the financial crisis going to affect the flow of money into the industry from investors and outside sources?

Investors invest in Hollywood for very specific reasons. I believe there are strategic investors who need to invest in film production companies and will continue to do so. There are high net-worth individuals who want to invest in the business either on a single picture basis or in a company. And I don’t think those reasons have changed as a result of the economic situation. In fact, you could argue that films, at a minimum, are uncorrelated to the economic cycle. At a time when everyone’s 401(k) and retirement plans are down 40-plus percent, the film business doesn’t sound so risky anymore. As a result of what’s happened in the stock market, the proportion of liquid net worth going to alternative assets has automatically increased. So the money will still be there from individuals with high net-worth. I think the hedge fund private equity money that had flowed into the industry over the past five years is all but gone, at least for the time being.

2. So where are companies going to be looking for money now?

What people like to do is make movies with other people’s money, and presumably other people’s money that they don’t necessarily need to give back. A lot of times, people will say, ‘Where is the dumb money coming from?’ And that doesn’t really exist in today’s environment. So the reality of it is money that will flow into the business will be from sophisticated investors who understand the business and have very strong strategic rationale for doing so. They’re also going to be targeting investments with high-profile and established management teams who have a track record they can get behind and understand. For the most part, I think that’s where the money for the next several years is going to come from.

3. Since the Great Depression, Hollywood has been considered recession-proof. Do you think that’s still true?

I wouldn’t use the term “recession-proof.” There are some elements of the business that are recession-resistant and, at a minimum, are not correlated to the underlying economic conditions. Would I go so far as to say it’s anti-cyclical or counter-cyclical? In certain elements, that may in fact be the case. We’re seeing some real strength in the world of theatrical exhibition and box office. The other challenge is that the studios have so many businesses that in some way, shape or form are touched by the economic situation. But the pure film business itself certainly demonstrates some recession-resistant qualities.

4. Is there any upside to the economic crisis for the business?

I do think there are elements in the economic environment that can help the health of the industry. Such as, there will be fewer films made. There’s just less capital out there. We went through a phase over the past five years where a significant amount of money got pumped into the system in Hollywood, and a lot of movies were made. Some would argue too many, which only makes it harder at the box office. The competition for screens and holding screens is more difficult, advertising spending is inflated because you need to rise above the fray and differentiate your film. So all that is a huge strain on the economics of any given film. When there are fewer films and ad time is cheaper, that may be one element of the economic climate that could help films.

5. Theatrical films may hold up, but what about DVD and television?

Certain segments of the video marketplace are down while in other places you see some strength. Perhaps people are not as quick to put down money to buy a DVD, but you’re seeing some strength in the rental and the discount rental markets. So there’s some reshuffling there. TV concerns me from the standpoint of advertising dollars going away at a rapid clip, which certainly puts pressure on those parties to pay for new product. Now, the argument can be made that they still need to put something on the air. So maybe there’s some benefit to reality or unscripted [programming]. Library or catalogue content can be a cheap alternative to new product as well.

6. JP Morgan has been investing in movies going back to the silent era, and the bank has something like $8 billion in loan commitments to companies such as DreamWorks, Revolution, Lakeshore and MGM. Do you see that figure shrinking because of the economy?

No, not necessarily. We are very much still in business. We’re very much still providing capital to independent film and television production companies and distribution companies. I would say there certainly is a challenge in the capital markets today and a more limited supply of investors who are willing to invest in all layers of the capital structure for films. But we’re still very actively in the market with current deals.

7. You usually like to lay off much of your investment with a syndicate of other banks. Do you see that becoming more difficult?

Yeah, but this is not anything unprecedented. Keep in mind we’re focused on providing loans to the business, and not equity investments. On the loan side, we go through periods where there is a very high supply of investors looking to participate in deals, and we go through low points when it’s much more challenging and a number of banks leave the business, oftentimes for no reason associated with the entertainment business as much as it is them pulling back. It could be European banks pulling back from doing business in the United States or just banks closing down divisions for cost savings. And we’re clearly in one of those periods right now, where there are fewer banks out there looking to participate in these syndicated loans.

8. What criteria do you use to evaluate investments?

We have very sophisticated film models and data going back years that we can draw upon to do analysis as to the kind of films, how they perform, and what the ancillary revenue streams are worth for a given box office performance. So it’s very much the same way that the major studios develop their film models. In our case, it’s really about asking, what is the proper capital structure? How much debt can we put against a certain business plan and how can we use our database of actual film data and models to project what the range of outcomes might be?

9. Do you read scripts?

No. It’s funny, I’ve been here 15 years and have never read a single script. There are bankers who do that from time to time, but for us, we treat this like a business and we’re bankers. Our clients don’t want to think that we’re out there giving them script notes, nor would we be any good at it.

10. So how significant do you think the long-term effects of the economic crisis will be on the entertainment industry?

Right now I’m a little bit more concerned about the long-term effects on the banking business. But I think there is always going to be a need for content. There’s an age-old debate as to what’s more important, content or distribution. And I’m a believer that there’s always a place for good content and it’s a critical piece of the puzzle. So fewer films being produced in the years to come is probably a healthy thing for the business right now. I think access to the capital markets is going to be very challenged for the near-term, the next year or two. But people are creative in this business, and that includes the bankers and all the participants in Hollywood. So I think there will always be a way to get good content made.

10 Questions

Question and answer sessions with prominent figures outside the Guild about current creative and business issues.

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