The Secret: How do you make money from music?

I thought this morning I want to share something about music business or the business of music. Well, to be honest, it is quite apparent. It is a common sense to some. You should know this before getting into music business. Briefly, it will relate to the artist revenue streams for musicians and composers. Better to be more specific so that you may choose how you want to get involved. 

Do you think selling CDs or the number of online songs downloaded contributing the most of your income?

If you said yes, you are wrong. 

For your information, live shows are the biggest income contributor. Live shows are mostly touring concerts and festivals. These live shows could contribute at least 30-40% margin which is quite lucrative. Well, you won’t get that much from your normal investment savings. You can ask Bono how much they collected for their U2 Vertigo tour with 131 shows. $389 million!

You have to make Jay-Z as a case study. He is one of the most successful artist cum music entrepreneur in the States. He might sell at least 3 million records, but his incomes are coming from other than music - merchandising 'Rocawear'. You may use the same case with Russell Simmons, Dr. Dre and Sean 'P Diddy' Comb. They own record companies and merchandising such as perfumes - 'Unforgivable' by Sean Comb. 

Even One Direction is currently in production of their own 'Our Moment' perfume brand.  

In Malaysia and Indonesia, we have Agnes Monica's Reve, Siti Nurhaliza's SimplySiti, Ungu's Style-In and many more. 

In short, there are several areas that you could strategic targets in order to make money from music including (in order of the biggest contributor):

1.      Live shows

2.      Merchandise / Endorsement deals

3.      Licensing – TV, film scoring and video games

4.      Royalties – performance, sales and sync fees

5.      Commissions

So fellows, release the albums; be famous and get in business of music!!

The Essential of Investment in Creative Industry: A Reality?

In reference to my previous post of Investment in Entertainment: A Myth, I want to reaffirm the reality of investment in creative industry in general.

In my opinion, in Malaysia or Indonesia, we don't have an ecosystem to harness the potential of creative industry. We have bits and pieces everywhere. It is like a huge puzzle without a real possibility to be solved, may be in the short run.

Government Malaysia interventions and promotions of creative products are good but not in the long run. The systemic bias towards quantity or demand rather than quality is becoming a norm. Business sense will kick in to reflect the inherent tendency of viewers preference.

As for me, we don't actually have a total film industry in Malaysia or Indonesia. Simple. We don't have something that Hollywood or Bollywood has.

Do we need to follow Hollywood or Bollywood? Hell ya! Because the structure and fundamental framework they have simulate as an industry.

We don't have dedicated professional writers community at large, casting professionals, professional investors/producers, established distribution network, professional actors (we got a few familiar faces though) etc.

We got a few good directors. We got a lot indies practitioners who do not entirely conform with the mainstream. I suppose in Indonesia, independent film or music movements are bigger than the mainstreams. Indonesia herself is a puzzle, nonetheless.

In Indonesia, it is more like a market mechanism. The market will determine the size of demand and supply, prices, quality, quantity and allocation of resources. Participation from government would be very minimal. Sadly, more on regulating the market mechanism. Don't expect too much on government intervention although I do think that the inflow of capital or investment is necessary to inject and catalyst the market mechanism.

Who is the 'Universal Studios' of Malaysia or Indonesia, anyway?

The Essential of the Business of Fashion: The Investment

It would be a premature to write off a $200 billion industry - fashion. Bigger than books. Bigger than movies and even bigger than music. Global sales of luxury brand, not surprisingly reached more than 106 billion Euro. 

Fashion is not limited to high street brand dresses or clothing lines. Take into account accessories like handbags in which contribute at least $5 billion in sales. 

The embodiment of characteristic representation makes fashion appealing to the masses. Cultural theorists may claim that fashion reflects on the ideal social status representation. 
Economists attempt to define their assumptions of fashion demand or even better to come out with the consumption and conformity - an economic theory of fashion. 

However, for investors, fashion is just another business to acquire, buy out, merge, consolidate, grow and sell. Too often, the business cycle of fashion is longer considering the building up of the goodwill and branding. Even so, the mechanism is still the same. Get in, grow it and get out. 

Needless to say, the risk is as subjective as the industry itself. 

Little that 'we' know many fashion brands are actually backed by private equity investors. British's New Look was backed by Permira and Apax Partners. German's Frontline has Acton Capital Partners on the board. 

You have to mention 'the economy of Milan'. 

Permira, in 2007, completed the buyout of Valentino Fashion Group for $3.5 billion. One of the most talked-about acquisition in the fashion industry. The acquisition included labels Valentino, M Missoni and MCS Marlboro Classics as well as 51% stake in +HUGO BOSS. Of course, Valentino Garavani resigned afterwards. 

The buyout or acquisition is usually taking place on more established and luxury consumer products. Others are more on finding the underexposed or emerging brands into global phenomena. Focus is more on the brand expansion, increased product breadth and depth, and the penetration of new distribution channels. 

The acquisition of Warnaco Group, Inc, the maker of the largest global branded lifestyle apparel companies by PVH Corp proved the investment of fashion should not be taken lightly. Warnaco Group has +Calvin Klein and +Tommy Hilfiger under its roof including +Van Heusen, +IZOD, ARROW, Bass, +Speedo USA, Olga and Warner's. You know the pro-forma revenue of those brands? Over $8 billion. 

The Essential of the Business of Fashion: The Intro

Yes it is all about business, strategy and investment of fashion. Nothing much about haute couture or pret-a-porter. Not even a single clue about garment or material. One needs to understand the areas of fashion design and the market segmentation of fashion first so hence you could deductively indulge in more details about investment in fashion. 

Often we treat the business of fashion as closely related to retailing and supply chain. But the truth is, retailing or marketing comes later after the production or manufacturing stage. Fashion or style is merely the value proposition to the customers about the acceptable appearance given that period of time. You would notice the segmentation is divided to women, men, kids, girls, boys, sportswear, jeans, knitwear, bridal and accessories. Then, to serve specific market segmentation, you would have a line of evening dresses, lingerie, shoes, bags and perfume. 

In general, across socio-economic spectrum, fashion is very influential in defining status. Unconsciously, fashion is adopted for various purposes including seasonal and special occasions as well segregating social groups. The social elite and the upper classes are more in favor to adopt new fashion trend in attempt to be the trendsetters and increased the distinction of disposable income. Hence, you would notice the mass market is also disintegrate to several classes such as fast fashion, no frill, luxury or even bundle. More importantly, the fashion trend is being observed by general consumers via the ways of wealthy, certain group of public figures like celebrities and elite people present themselves. Fashion and lifestyle magazines like +Vogue, +Cosmopolitan Magazine , +ELLE, +Harper's BAZAAR , +Marie Claire and +NYLON Mag have cemented the correlation of fashion and status. 

Coping with the fast changing trend in fashion is not a straight forward proposition. That's why in most cases investors or private equity firms prefer to put their money in more established fashion label that have a substantial growth potential. Risk is intolerably subjective. Investors are more likely to target successful companies that own fashion labels such as Inditex's Zara, +Rocket Internet's Zalora, Stefan Persson's +H&M, +Louis Vuitton and PVH's +Calvin Klein and +Tommy Hilfiger.   

Back then, private equity firms are used to unearth fashion lines that are not very good in term of distribution and market reach. Building up start ups were such a noble cause. However, as the industry is getting tougher and globally competitive, they tend to focus on managing the growth, acquisition and the exit or re-structuring strategies. The hot topic now is the merger of PVH Corp and Warnaco Group. Well, it is quite normal to see the selling of brands nowadays like back in 2008 I had a chance to witness the acquisition +Yves Saint Laurent Beaute by +L'Oreal. 

In the same time, I could not agree more on the notion that the old business model of fashion is under threat. Typically, too much focus on designing dresses without additional complementary accessories hurt the cash line. The cycle of selling a dress, for instance, is very long and potentially may take than a year to realization. The prices for design-rich dresses are also hindering the quicker turnover on the line. Brands like Republic, Jaeger, +Christian Lacroix, Charming Shoppes, British's Viyella and Adams Kids as well as Escada had a tough time to stay alive.  

Nevertheless, fashion is still a business and investors treat fashion as another investment in their portfolio. The business cycle is also applicable and certainly fashion does have its own fashion cycle since the trend changing is a lot quicker than before. The legal and intellectual property issues have been accelerated as the demand, style and trend are becoming global. So, what's next?

         

The Secret of why you should invest in film 2.0

Since I received so many interesting questions from friends and readers about my recent post 'Why you should invest in film', I think it would be fair if I get on with the second version. It is not a comprehensive one but it is a good enough for everybody to gauge the idea behind investment in film and possibly to supply answers based on my experience and knowledge. 

Beforehand, yes I am in the final stage to set up a private equity or venture capital firm. The firm would venture in growing market of media and entertainment in the region. At present, we would work closely with sophisticated investors around the South East Asia region only. I would enclose more once it is up and running. 

Anyway, yes one may say that film projects are in a 'loose' or inefficient market. It is almost impossible to produce a solid valuation model as well as arbitraging the margin but only if you are suggesting for an active management perspective. Meaning, you would be actively involved in script selection, casting, film directing etc. Usually you don't need to go that far. It is better off to leave that part to the studios or production houses though. 

In reference to film financing, in the industry, we are indirectly referring to passive investment arrangements. The arrangement structures are varied depending on the preference and negotiations between the investors and studios, production houses and distributors. The investors may have controlling and non-controlling interests, equity securities or even a simple contractual arrangements. More deliberation in the future post. 

And another reasons why you should invest in film.


6. Flexibility
Investment in film offers a great flexibility. In the UK, the team works closely with the producers to meet the expected ROI target of 100 - 200% on core equity. With a good casting, effective PR and marketing and low production costs within a short period of times, the cycle of producing one film is compensated. In fact, investors could enter and exit at any given point of the production cycle and at any given level of investment. Investors may want to invest in licensing or rights acquisition of the films or perhaps invest in the film distribution companies. 

For instance, the existence of Beverley Hills' based film equity players like Lakeshore, +Relativity Media , Endgame Entertainment and +Participant Media offer venues for high net worth investors the flexibility in investment and of course the tax. In majority, they don't have a direct background from entertainment or media. Lakeshore's Tom Rosenberg is coming from real estate background. But his ability to treat film as another investment, has convinced JP Morgan Chase to provide the financing facility.  

7. Numerous exit strategies
Similarly, investors may like the flexibility they have especially with numerous exit strategies. The common exits that I had known are including fixed ROI on capital supplied, sale of equity in the movie, complete sale of the rights and minimum ROI and dividends until the contract expired. Having said that, I figure that the arrangement could be more complex with the several parties involved in one single project. 

For cautious and conservative investors, they prefer a fixed ROI on capital after repayment. The investors normally would agree with the fixed percentage on the equity capital. After meeting the target revenue, for example, the original capital plus the percentage will be paid immediately. If the investors prefer a steady income or dividend, they might want to consider a minimum ROI arrangement. They would receive a series of repayment like shareholder dividends over a film's life cycle. For how long? Usually until it becomes commercially not viable anymore. 

8. Film insurance policies
Yes! Insuring film does exist. But probably a foreign concept in South East Asia region. Big studios insure their films from the start until completion. In the UK, film insurance is a compulsory. The basic should cover accidents on the production sets, death, physical loss and damage of equipment. Insurance policies will cover from the injury of an actor or stuntman to the lose of ability of filming due to the force majeure or weather, to say the least. 

The insurance or the completion bond is also 'risk minimization' tool that the big studios need to ensure the director or the main star to complete the film within the said budget and schedule. If they failed to meet the requirement, the studio could replace the director or the main actor. Normally, this process is rigidly carried out before the start rolling. The commitment of director and actors are the 'insurance' policies. Most of the time, we heard about the original role was offered to somebody but was replaced right before the shooting started. Before +Viggo Mortensen settled as 'Aragorn', the role was offered to Nicolas Cage, Vin Diesel and Russell Crowe. Imagine that. 

In light of TV shows, the insurance policies might contribute to the departure of Charlie Sheen from Two and a Half Men. Just maybe.

Insurance policies, nevertheless, do help investors to minimise risk should unfavourable circumstances took place. However, it is not something that insurance companies in the Asian region would have in their product lines. Perhaps I should start one. 

The Secret of why you should invest in film...

This is an uneasy post for me to objectively justify something is so subjective and yet could offer a good alternative investment. Largely in the States and Europe, investors treat films like other investment. Of course, calculating Return-On-Investment (ROI) is possible. But does it guarantee a hit? Well, you need to go further down the road to finally say it is a hit.  

Normally, investment in entertainment could offer a great personal satisfaction. With considerably high risk and high returns, investors need to be more diligent and precise in identifying the level of investment that they could tolerate. 

1. Possible High Return-on-Investment
For a record, there are not particular factors that could determine whether the film would hit  the box office. However, in the past, many would consider genre, the credibility of the director, budget, the lead actors and the type of contract may influence the success rate. Insofar, I could not say whether there is a set of valuation model that could help in finding the potential winner. 

The truth is, usually, those factors are applicable to films produced by major studios. Independent films are rather more difficult to single out or even to establish the potential success rate. For example, a low-budget film like ' My Big Fat Greek Wedding' was produced  for $5 million has gross return worldwide of $369 million. Of course, exceptionally, the film wrecks the valuation model. Similarly, 'The Blair Witch Project' and ' +Paranormal Activity ' which cost $300,000 and $15,000 respectively, gave a phenomenal $141 million and $191 million. Do the math.

2. Risk Minimisation is possible
Investing through dedicated mutual funds offer a good medium to minimise risk participating in the film project. Mutual funds draw the investment from various sources and professionally managed in which normally would spread across a range of companies at different level of investment. Essentially, diversification in segmenting investment minimise the potential downside risk as well as the upside of returns. 

Major studios historically financed their own films through licensing deals. But until recently, they are also raising funds via investment banks as well as private equity firms. Some investment banks even have a dedicated team to cover investment portfolio in entertainment and media. You can refer to some well-known private equity firms such as Hal Vogel Capital Management, Noci Pictures Entertainment in Los Angeles, Ingenious Media in London. 


3. Diversified Investment Levels
It is not practical for a single investor to place significant cash in one film project. Then, majority tend to believe that only large investors and established studios or production houses have a cut to participate in the entertainment industry. The reality is, mutual funds offer the opportunity to invest at various level. With a larger pool of capital, you might be able to be a part of major studios film making. In a more mature market like in the States or Europe, investors may be presented to own the distribution, syndication and licensing deals in which could offer a steady income on annual basis. 

4. Long term play
Investment in film offers a reasonable long term play. The licensing deals, royalty on rights, syndication to television and merchandising usually may proceed more than 15 years or longer. On paper, the forecast favours to generate about 200% from theatrical revenues plus television syndication that widely available 3 years after release. Sometimes, they prefer to use 'Auxiliary Streams' in which royalty fees and rights are earned through media spin-offs, advertising, technology spin-off, film and TV library, product placement and merchandise.

In reference to merchandising, films like Spiderman, Batman and Teenage Mutant Ninja Turtles are bagging more than $135 million domestically for the past decade. Think about 'Transformers'. Marvel Comic and DC Comic's superheroes. Haim Saban's +Mighty Morphin Power Rangers. Ultraman and many more. Don't forget about movie franchises like +James Bond 007, +Mission Impossible, Indiana Jones, Terminator, The Bourne Identity. Many investors are sitting on the distribution deals, nevertheless. 

5. Tax incentives
Undoubtedly, tax incentives for films industry are quite appealing. In the States, investors can utilise the tax credits provided at the state, federal and international level. Definitely, it is an efficient tool to upset risk, nevertheless. The tax relief, for instance, of British films with a total core expenditure of £20 million or less, the film production company can claim payable cash rebate of up to 25% of UK qualifying film production expenditure. Check UK Film Council for more details.

In Malaysia, government provide incentives for film industry in term of pioneer status and investment tax allowance. The latter provide allowance up to 60% on the additional qualifying capital expenditure. The allowance can be offset against 70% of the statutory income. What is more, government introduced a production incentive that will cover up to 30% of TV program and feature film budgets.

In conclusion, investment in films could also offer a considerable return to investor. Perhaps, investors especially in South East Asia should realise and start treating films as another venue of investment. The bottom line is the key reasons to invest in films like diversification, long term play and tax incentives are almost similar to other types of investment. Thus, never underestimate the potential of investment in films.  A sound financial structuring, tax efficiencies and industry streams optimisation can make a significant difference. 

The Essential of Investment in Entertainment: Investors?

In my previous posting, Investing in entertainment: A Myth, I shared my takes on investment in entertainment in Malaysia. The grants or soft investment provided the government, in my opinion, probably would be a good start. However, to label them as the main mode to spur the industry perhaps would be too soon. 

I think it is about time to have venture capitalists and private equity firms to step into the multi-billion entertainment industry. They should be able to identify suitable investee companies whose entertainment related projects meet their investment strategy. 

Despite the introduction of Bank Simpanan Nasional's Creative Investment Loan and MyCreative Ventures, they do not fit the functions played by venture capitalists and private equity firms. In fact, the inception of such modes is not widely available to private investors, high net worth individuals or even general public to assess uncapped upside potential growth in the industry. The circulation is still in the disbursement mode.  

On the same note, two weeks ago, I met several venture capital firms weighing up on the feasibility to set up a dedicated fund to invest in media or perhaps telecoms as well. The discussion is still on going especially in relation to investment criteria, business model and fund structure that general public might be interested in. 

In essence, media sector will include film production, live entertainment (concerts), television production, general media investment, cinema, advertising & marketing services, broadcasting, enabling technologies, fashion, online media, music and outdoor advertising.

Ideally, the fund structure should offer a minimum investment, say RM10,000 that suitable for personal and private investors. The fund should be invested in unquoted companies or private companies in the Asia region. Normally, the realisations of investment in entertainment may reach up to 3 to 3.5 years in which the investors will not have access to their capital from the date of application. 

At this stage, I would not too keen on, not against, crowd funding platforms especially that based in South East Asia or Asia region. Wujudkan, Patungan.net, PitchIn, 8squirrels, ToGather.asia, Firecracker and Spark Facility, ArtisteConnect.com, +嘖嘖 zeczec, Nboon.com and ZaoZao. Although crowd funding platforms offer specific projects like ZaoZao on indie fashion start up in Hong Kong, the essence of social and philanthropic is not yet a trend, unfortunately.