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Why Oscar winner and ‘value movie’ Get Out resonates with us

Get Out was an outside bet to win the Best Original Screenplay Oscar at the weekend but the identity of its value-oriented producer means we were certainly cheering it on, here on The Value Perspective

05/03/2018

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

As Hollywood winds down from hosting the 90th Academy Awards at the weekend, we were pleased to find out that one of the films we had our eye on for Best Original Screenplay came away with the gong.

For one of the producers behind the hit comedy-horror film Get Out is none other than Jason Blum, who last year we picked out as the person we wanted on board in the unlikely event anyone ever decided to make a film version of The Value Perspective.

For reasons we will come to shortly, Blum has built a reputation as one of the most cost-conscious producers in Hollywood and this makes his more successful films hugely profitable.

As this Gold Derby blog explains, Get Out cost just $5m (£3.6m) to make but has already taken more than $255m worldwide. That makes it some 10 times more profitable than blockbuster Dunkirk, which has taken $525m but cost more than $100m.

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

Is bigger always better?

Titled The Scariest Thing in Hollywood, this podcast 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.

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 to make but have taken well over five times that in worldwide box-office receipts.

According to The Numbers, the latest instalment – The Fate of the Furious – cost $250m to make but quickly joined its immediate predecessor in grossing more than $1bn.

To our way of thinking, this ‘big returns on big prices’ model has echoes of the so-called ‘FANG’ stocks of Facebook, Amazon, Netflix and Google, which we have touched on in articles such as Why ‘winter is coming’ for overvalued growth stocks.

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.

A 'value' mentatlity in Hollywood

According to Planet Money, however, Blum has turned the Hollywood business model on its head – and, as we say, along the way 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. Blum does not use many locations – and, if a scene can be filmed indoors, so much the better.
  2. 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. 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.

The '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 (the ninth and 10th instalments are now 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 that 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.

2015 – when the 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 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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