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Can a value investment approach be applied to Hollywood?

On the off chance somebody ever wanted to give The Value Perspective the Hollywood treatment, there is a surprisingly contrarian – and therefore perfect – candidate to produce the film

10/08/2017

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

Should anyone ever decide to make a film version of The Value Perspective – a possibility of which we have been dreaming since Michael Lewis’s excellent Moneyball received the Hollywood treatment – there is one person who would have to be involved in the project.

No, it is not Brad Pitt or any other screen idol to play various members of the team but a somewhat less well-known producer by the name of Jason Blum.

While it turns out we are aware of a number of his films – even if we have not seen very many – we only came across Blum’s name recently while listening to a Planet Money podcast.

Titled The Scariest Thing in Hollywood, this initially focused on the Hollywood rule of thumb that bigger is better and biggest is best. Once the car chase would only happen 90 minutes into a film – now it seems the car chase often is the film.

Traditional blockbusters

This blockbuster mentality has arguably reached its peak with the ‘Fast and the Furious’ action film franchise – eight movies that between them have cost more than $1bn (£766m) to make but have taken well over five times that in worldwide box-office receipts.

According to The Numbers, this year’s instalment – The Fate of the Furious – cost $250m but has already joined its immediate predecessor in grossing more than $1bn.

To our way of thinking, here on The Value Perspective, this ‘big returns on big prices’ model has echoes of the so-called ‘FANG’ stocks of Facebook, Amazon, Netflix and Google, which we touched on most recently in Why ‘winter is coming’ for overvalued growth stocks.

 

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Our own preferences are naturally more contrarian but, until we came across Blum, it was not obvious that word even existed in the Hollywood dictionary.

The ‘Blum’ effect

According to Planet Money, however, Blum has turned the Hollywood business model on its head – and has been very profitable in doing so.

The secret to his success, apparently, is his adherence to three ‘golden rules’, which are all designed to keep a very tight rein on costs – clearly the very embodiment of contrarianism in the context of Hollywood.

  1. First, Blum does not use many locations – and, if a scene can be filmed indoors, so much the better.
  2. Next, he does not give speaking parts to extras as even a single word of dialogue will inflate their daily rate by a factor of five.
  3. Finally, and in a similar vein, he is very careful about his overall wage bill, opting to align the interests of his cast and crew with an element of performance-related pay by way of box-office bonuses.

To illustrate just how far removed this unwavering focus on costs and alignment differs from the traditional Hollywood ‘bigger = better’ philosophy, just consider how the ‘sunk costs fallacy’ now informs the thinking of many film-makers.

Sunk costs fallacy

This is the idea that, if things are not going well, you actually spend more money – just blow up one more building, make that car chase one-minute longer and so on.

This instinct to throw good money after bad – or, as investors would put it, to make poor capital allocation decisions – means of course that, while the ‘Fast and the Furious’ franchise may be raking in the cash (apparently the ninth and 10th instalments are already revving their way towards the starting grid) – movie history is littered with examples of huge-budget films that have gone on to be similarly huge flops.

The 2002 Eddie Murphy vehicle, The Adventures of Pluto Nash, for example, cost $100m to make and yet took just $7.1m in box office receipts around the world.

Blum, on the other hand, operates a very strict budget he is happy to spend – but not a penny more.

Planet Money tells the story of a director who only needed a small injection of extra cash to complete his film but Blum refused to oblige. Much like value investors, he has a very disciplined process and he knows that, if he abides by it, he will make money more often than not.

Some hits and some misses, like value

2015 – when this Planet Money podcast was first broadcast – was a particular endorsement of Blum’s approach, with half a dozen of his films featuring among the year’s 20 most successful, including Paranormal Activity, The Purge and the triple-Oscar-winning Whiplash. With the honourable exception of that last one, these were generally low-budget horror movies.

As such, a number will be destined to go straight to DVD or into the darker recesses of Netflix but, unlike most people in Hollywood, Blum is unafraid of failure.

He knows not every movie can be a hit (indeed some 40% of his do not make money) but he also knows sticking to his disciplined process means he should come out ahead on average – a fact of which value investors and, as we saw in Moneyball, some baseball managers are keenly aware.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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