Content Strategy and underwriting groups within traditional studios look to underwrite films that they believe will at least financially break even in the majority of scenarios that are modeled out. Due to COVID and changing consumer habits, theatrical releases have become less predictable and traditional comps do not hold up. This creates a reality where it is tougher to model out the financial performance of a film, and profit projections have most likely dropped for unreleased projects. As the theatrical window becomes less bankable, it has created a murky financial outlook for most traditional studios. Larger studios have taken material losses as their most valuable IP relies on theatrical sales, and due to liquidity constraints and obligations to borrowers, many smaller studios have to sell unreleased projects to streamers for a loss or a modest return.

The likely outcome of the current market environment is the acceleration of the trend of larger studios with a sizable IP library making fewer bets on original content as internal operators will be financially incentivized to stick to known IP either through adaptation from other media or through construction of their own IP continuity (MCU). Content strategy decisions of well-capitalized studios will have trickle-down effects on small and independent studios who primarily develop and produce original content. Studios without output deals to streamers such as Netflix or Amazon, will probably face a liquidity crunch in the short to medium term. These studios most likely have an asset back facility, revolver, or a blanket corporate facility facilitated by a major bank to fund content investments. Each of these financing structures typically offer poor advance rates to collateralize future cash flows that a studio can borrow against. The terms of a borrowing base generally make studios operate with very little liquidity on a month to month basis and requires active management to make sure a company stays compliant. The current theatrical market makes using a facility to fund projects that aren’t simply cost plus deals incredibly risky, even if there is strong conviction on a project. This essentially forces these studios to become content arms dealers to larger distributors and handcuffs the creative decision making to only align to what a handful of buyers want. Additionally, decreased demand for original content reduces the probability studios with distribution arms will co finance films aimed for a theatrical release, which again only increases the risk profile of financing original content. All of these headwinds reduce the bargaining power for small and independent studios which lowers future liquidity projections and increases a company's overall risk. 

On the creative and production side of the business, independent financing of indie / small budget (sub $10MM) films based upon original IP has come back to life in 2022. However, financing has been incredibly conventional and comes with stipulations. Much of the current film financing has been originating in Europe and requires producers and studios to presale European distribution rights. De-risking a project through distribution rights sales before a film is made can be a good thing. Outside of the obvious financial considerations, having upfront funding allows for offers to be made immediately to talent which increases the negotiation power of creatives and producers with distributors. However, being forced to sell distribution rights to fund a project gives producers less options to monetize a film and reduces the financial upside for all parties (studios and creatives) as presale participation waterfalls usually don’t pay in excess of the upfront minimum guarantee unless there is major outperformance of a project. 

There is an immediate need in the market for novel financing models to address the pain points of small / independent studios and creatives. A DAO can be a source of financing that operates within the existing system yet alleviates many of the pain points that exist from traditional sources of capital within the Hollywood ecosystem.

Content Strategy and underwriting groups within traditional studios look to underwrite films that they believe will at least financially break even in the majority of scenarios that are modeled out. Due to COVID and changing consumer habits, theatrical releases have become less predictable and traditional comps do not hold up. This creates a reality where it is tougher to model out the financial performance of a film, and profit projections have most likely dropped for unreleased projects. As the theatrical window becomes less bankable, it has created a murky financial outlook for most traditional studios. Larger studios have taken material losses as their most valuable IP relies on theatrical sales, and due to liquidity constraints and obligations to borrowers, many smaller studios have to sell unreleased projects to streamers for a loss or a modest return.

The likely outcome of the current market environment is the acceleration of the trend of larger studios with a sizable IP library making fewer bets on original content as internal operators will be financially incentivized to stick to known IP either through adaptation from other media or through construction of their own IP continuity (MCU). Content strategy decisions of well-capitalized studios will have trickle-down effects on small and independent studios who primarily develop and produce original content. Studios without output deals to streamers such as Netflix or Amazon, will probably face a liquidity crunch in the short to medium term. These studios most likely have an asset back facility, revolver, or a blanket corporate facility facilitated by a major bank to fund content investments. Each of these financing structures typically offer poor advance rates to collateralize future cash flows that a studio can borrow against. The terms of a borrowing base generally make studios operate with very little liquidity on a month to month basis and requires active management to make sure a company stays compliant. The current theatrical market makes using a facility to fund projects that aren’t simply cost plus deals incredibly risky, even if there is strong conviction on a project. This essentially forces these studios to become content arms dealers to larger distributors and handcuffs the creative decision making to only align to what a handful of buyers want. Additionally, decreased demand for original content reduces the probability studios with distribution arms will co finance films aimed for a theatrical release, which again only increases the risk profile of financing original content. All of these headwinds reduce the bargaining power for small and independent studios which lowers future liquidity projections and increases a company's overall risk. 

On the creative and production side of the business, independent financing of indie / small budget (sub $10MM) films based upon original IP has come back to life in 2022. However, financing has been incredibly conventional and comes with stipulations. Much of the current film financing has been originating in Europe and requires producers and studios to presale European distribution rights. De-risking a project through distribution rights sales before a film is made can be a good thing. Outside of the obvious financial considerations, having upfront funding allows for offers to be made immediately to talent which increases the negotiation power of creatives and producers with distributors. However, being forced to sell distribution rights to fund a project gives producers less options to monetize a film and reduces the financial upside for all parties (studios and creatives) as presale participation waterfalls usually don’t pay in excess of the upfront minimum guarantee unless there is major outperformance of a project. 

There is an immediate need in the market for novel financing models to address the pain points of small / independent studios and creatives. A DAO can be a source of financing that operates within the existing system yet alleviates many of the pain points that exist from traditional sources of capital within the Hollywood ecosystem.