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A Rolling Deal...

A Rolling Deal gathers No Loss

"Will you have the kindness to announce that I am writing my life & that fifty-seven different publishers have applied for the chance of publishing it. Such is the fact – and if it wasn’t, why still it ain’t a bad announcement."

P.T. Barnum
Letter to a newspaper editor
October 6, 1854

In the past few years, there have been a number of comparisons of business with entertainment. While it’s little surprise to most that entertainment is business, a growing thread of discussion suggests that business is really entertainment.

Proponents of this Hollywood view of business see much in the New Economy and dot.com world to support their contentions. After all, much work in the digital age is done through project teams which come and go like cast and crew members on films. And modern CEOs are likened more to benign motivational storytellers than to stern "captain of industry" taskmasters of the past. They are archivists of corporate mythology. More like coaches than judges. Success is a factor of how well they conjure and tell the corporate mythology.

Most of the Hollywood view has centered on internal operational aspects, the daily working environment of business. There has been little comment on external comparisons between Hollywood and New Economy business, on how they are financed rather than how they are run.

The Hollywood metaphor for business operations might be helpful and enlightening. But the Hollywood method of dot.com finance has proven already to be an unmitigated disaster. It was responsible for the spectacular rise and fall of the greatest speculative bubble in history.

A few things are helpful to understand about making entertainment in Hollywood. I’m a native Angeleno and was involved in the entertainment business for a while until I escaped (by the skin of my teeth) up north.

The math is like something out of the Madhatter’s Tea Party. Only a very small percentage of projects floating around get made into films or TV shows and of these only a small percentage ultimately make money. In a normal industry, or for that matter most industries, the money made from this small group of successful products would be used to finance growth in the industry.

But in the Wonderland World of Hollywood the math is a little different. The bottom line of Hollywood products which make it through the box offices to audiences is only a small part of the amount of money Hollywood makes from offshoots such as toys and candy. A film can bomb at the box office and come back like a vampire from the dead to haunt late night television and video stores for years until a profit is finally squeaked out or losses at least greatly reduced.

As great as all of this reversioning and morphing Hollywood products into other things is, sometimes like squeezing a decent varietal wine out of a bunch of dead grapes, the real money changes hands behind the old curtain, before the act even starts, the film even made, before the curtain even opens in the first place. Hollywood knows very well that a lot of money can be made from projects that never see the light of day. The trick is to get on the project bandwagon for a while as it increases in value as it plods along toward the gates of some studio. Then get off the bandwagon and take your money out. Make sure you’re not holding the ball when the music stops and everyone else has gone home.

The scheme is relatively simple and should be familiar to any who have ever been Amway members or participated in some pyramid marketing concept.

A writer creates a treatment of a few pages for a story idea. He then sells an option to this idea for six months. Let’s say he sells it for $5,000 to some ambiguous producer. This producer then begins attaching "talent" to the project. He has a friend who has a friend who has a friend who knows a decent high B level director. A meeting is set up and the director agrees to come aboard with the project. The director knows someone who knows someone who knows someone who roomed with the sister of last years Academy Award winner. The sister is contacted and she sets up a meeting with her Academy Award winning sister. The star decides to come aboard on the project. A few months have gone by and there is still only the few page idea treatment. But the producer is able to sell the deal to ultimately make a screenplay of the few pages to a studio for half a million. Initially, the studio is excited about the project. But a few months after they acquire the "property" new management comes in and they "red light" the project. Half a million has been made without the product ever seeing the light of box office day.

Can you still see the nut under the shells or have we totally lost you?

Much of the art of deal-making in Hollywood involves making sure that these projects keep growing by attaching more big marquee "talent" to them. God forbid that they would ever be actually made into real products that could be tested at the box office market. They are worth so much more just floating around like big bloated Rose Parade floats than their value in a real marketplace where people buy a ticket. If truth be told, the real Hollywood "dream" is not to make that Academy award winning film but rather to simply pass the whole "package" onto the next guy for a few bucks extra and make sure you’re not holding the bag when the music stops playing and the old chickens come home to roost.

This Hollywood deal-making shuffle has always been part of business or, if "business" is too nice of a word for it, let’s simply say part of making bucks in general. Industries like real estate and its development deals has seen a good number of these ponzi-like schemes.

But for the most part, the Hollywood "rolling deal gathers no loss" philosophy was developed and perfected in the land of tall palm trees and giggly starlets. And, up until the final years of the 20th century, despite certain beach-heads in other industries, it was largely contained in Hollywood. In the late 90s, though, the Hollywood method of finance spread up north to the venture capital firms along Sand Hill Road in Palo Alto.

The result was that venture capitalists became almost indistinguishable from that huge, ambiguous group in Los Angeles who call themselves producers. Like their Hollywood counterparts, the VCs strategy with new dot.com firms centered mainly around attaching various "elements" to projects that would make them more valuable at the final jumping off, and cashing out point. In Hollywood the jumping off point was that "promised land" sale of the movie deal to the studio. Up north it was passing the old hot potato to the public through an IPO. There is an argument that the dot.com deals were even easier to make money on because, more often than not, the simple "attachment" of particular "marquee value" venture capital firms to a dot.com idea was all the "above the line" talent needed to insure an initial IPO.

Yes, it almost seems like an out-dated "bricks and mortar" type of idea but ultimately a capitalistic economy is supposed to make products and services that compete in the consumer marketplace and (theoretically) make a profit.

Film Deals, Dot.Com IPOs and Real-World Products

As David Wessel reminds in "E-Progress Depends On E-Profits" from the 1/11/2001 Wall Street Journal, "Nearly as important as the effort to cram more computing power on a chip is the quest to find a way to make money from the Internet. Until it generates profits as well as page views, the Internet won’t realize its potential to improve our lives. No profits, no progress." In the article, Wessel quotes Alan Greenspan’s favorite economic historian, Paul David of Oxford University who reminds "The key is translating productivity into profits."

But still one needs to distinguish deals from products. As we noted, deals are prevalent in other industries like real estate and, in fact, have been around a lot longer than the real estate industry or our capitalistic economy.

In this period of deflated New Economy mania, the search is on for ways to make the Internet profitable, to find that business engine. The deal makers have been found out and a much more cynical and skeptical group of investors is no longer willing to play the dot.com deal making game.

Don’t count deal making out though. It is still the preferred method of making money in the entertainment industry. And, as entertainment consultant Michael Wolf suggests in his 1999 Entertainment Economy, our entire economy is looking more like the entertainment business.

Will a new profitable business engine be found for the New Economy? Or will deals emerge in some new powerful mutant form? One thing seems certain. Selling the promise of an idea has always been a lot less risky and more profitable than creating the promised idea in measly product form.

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Copyright © 2001 John Fraim