Chapter 644: Investment From the Opposite Shore

German regulations offered tax deductions for investments in the film industry without requiring projects to be shot locally or to employ local creative personnel, and the tax credits could be deferred.

German investors and Hollywood quickly exploited this tax loophole. Studios could sell a film's rights to a German company and then "lease" the film back at a price about ten percent lower than the sale price, allowing both sides to profit from the tax benefits.

However, the overseas pre-sales market began to decline after the turn of the century. In the 1990s, Hollywood film projects could secure up to sixty percent of their budgets through overseas pre-sales. By 2005, that figure had dropped to thirty percent or less. Coupled with the plugging of Germany's tax loophole, Hollywood began encountering financing difficulties and urgently needed new sources of capital.

Meanwhile, thanks to a sluggish stock market and low bank interest rates, Wall Street was flush with cash. A few super private equity funds had even emerged with fundraising scales exceeding ten billion dollars, and Wall Street's financial capital desperately needed new avenues for profit.

Hollywood's stable market performance caught their attention. Investors discovered that the industry's prospects were quite strong: between 1990 and 2000, America's total box office gross had increased by nearly sixty percent, while the overseas market experienced terrifying, explosive growth. Moreover, with the development of new technology, Hollywood films had broadened their revenue streams enough to offer substantial returns on investment.

Additionally, an analytical approach based on probability and statistical theory—the "Monte Carlo simulation"—was embraced and widely adopted by investment institutions. They found that portfolio theories applicable to the stock market could also work in the film industry; once a portfolio reached twenty to twenty-five film projects, the volatility of investment returns became relatively small.

As a result, Wall Street capital's "slate financing" projects for Hollywood films emerged.

Among these, two companies were the most prominent examples.

One was Paramount Pictures, with its infamous Melrose slate financing plan.

In 2003, spearheaded by Paramount's commercial operations vice president, Isaac Palmer, Merrill Lynch and others partnered with the studio to establish a private equity fund named Melrose. The plan was to inject massive amounts of capital into the films Paramount slated for production in 2004 and 2005.

However, Hollywood companies had countless tricks for dealing with outside capital. For Paramount, this slate financing plan was a success, but it was also a failure.

Paramount used various industry maneuvers to wipe out the majority of the profits from the slate financing projects, directly leading to the collapse of the partnership. Multiple Wall Street investors, including Merrill Lynch, sued Paramount Pictures in the Delaware Court of Chancery earlier this year. The lawsuit was bound to be a long and messy affair.

Although Paramount reaped significant profits in the short term and emerged victorious, they lost a crucial source of financing. This could even be considered the turning point where Paramount Pictures shifted from prosperity to decline.

The other example was Relativity Company.

In 2004, a young Wall Street investor named Ryan Kavanaugh founded Relativity Management Company, dedicating it to providing a conduit for Wall Street funds to enter Hollywood.

He constructed a model that predicted a film's probability of market success based on factors like its director, lead actors, genre, and release date. From 2005 to the present, Relativity Management Company had raised over two billion dollars to invest in the slate financing projects of major studios like Warner, Sony, and Universal, pushing Hollywood slate financing to its absolute peak.

A major source of financing for Transformers was Relativity Company. Duke had even met with Ryan Kavanaugh when he flew into Los Angeles; the man's investment in this project could reach up to a hundred million dollars.

Once the film generated revenue, Warner Brothers would first deduct a distribution agency fee of about ten percent. They would then subtract the costs for prints and advertising, along with Duke's cut and Hasbro Company's profit share. Only the remaining revenue would be divided with the fund according to its investment ratio.

According to the agreement between the two parties, the distributed revenue would not be limited to box office receipts; it also included income from home video distribution, television distribution, new media rights, and even franchise merchandising.

However, because funds generally had a limited lifespan and a Hollywood film required five to ten years to complete its full distribution cycle, the two parties wouldn't wait until all revenues were fully accounted for before making distributions.

After Transformers finished its theatrical run, both sides would estimate the income from subsequent profitability channels based on the box office revenue, then distribute payouts based on those projected figures.

To retain ownership of the film's rights and ensure the investment fund could exit in a timely manner, major studios like Warner Brothers would use the film's future earnings as collateral to secure a bank loan. This loan would be paid to the investment fund's management entity, which would take a certain dividend before distributing the returns to the investors.

Although the investment arrangements were rather complicated, given Duke's current status, he held the reins of the entire project firmly in his hands.

He was also following the trend and had established a film foundation through the Cayman Islands. The difference was that his film foundation had yet to invest in a single movie.

Duke's purpose in setting up this foundation wasn't to invest in films directly, but to prepare to be the bag holder.

For someone at Duke's level, combined with his prior knowledge, even if he couldn't guess the exact time it would erupt, it wasn't hard to see the signs of a looming financial storm.

This storm would deeply impact Hollywood and the slate financing plans primarily fueled by Wall Street funds.

Back during this era in his past life, Duke had already carved out some status on film crews on the opposite shore. His sights had naturally risen, leading him to pay attention to matters like this.

Following the 2008 financial crisis, Wall Street's slate financing in Hollywood plunged into jeopardy. Coupled with the fact that Hollywood companies practically ignored the rules when dealing with outside investors, Wall Street capital gradually distanced itself from the industry. It even led to situations where Spielberg had to approach Indian investors several times just to secure an injection of over two hundred million dollars for DreamWorks.

Those investment banks rushed to sell off their shares in film investment plans for thirty to fifty cents on the dollar, a fire sale that even spawned several companies specializing in acquiring such assets.

That was exactly what Duke's foundation was preparing to do.

He had ordered specific investigations into the matter. Among the films funded through slate financing, there was no shortage of highly renowned projects.

For example, the slate financing plan between Twentieth Century Fox and Dune Capital included Avatar and the new X-Men.

Walt Disney's projects included Alice in Wonderland and Pirates of the Caribbean 4.

If the financial storm broke out and his foundation could acquire those Wall Street shares for thirty to fifty cents on the dollar, the resulting profits would be staggering.

Of course, Duke and his team had been grinding in Hollywood for over fifteen years. He was an important figure in major film companies himself, so if the studios wanted to deal with him the same way they dealt with Wall Street, it wouldn't be nearly as easy.

Furthermore, the projects Duke had his eye on were absolutely not slate financing plans that only offered a cut of the box office revenue.

As early as 2005, Warner Brothers had statistics showing that box office profits from the films they produced and distributed accounted for less than fifteen percent of their total revenue. Meanwhile, the money they earned from television, cable, DVDs, VHS, and other home entertainment projects, along with various merchandise, made up the remaining eighty-five percent.

It had long been the industry consensus that Hollywood didn't rely on the box office to make money. Today's Hollywood was no longer a "Dream Factory." Essentially, it had turned into a service institution—an exchange clearinghouse based on copyrights and capital.

Duke had constantly kept his people focused on this front, knowing that the opportunity would be fleeting.

Once the economic crisis passed, it wouldn't be long before capital from emerging markets like India, the UAE, and the opposite shore of the Pacific Ocean cast their sights on Hollywood, causing slate financing projects to multiply once again.

In fact, capital from the opposite shore of the Pacific Ocean had already targeted Duke's new project. After all, his movies were virtually guaranteed to be super blockbusters over there.

"Duke, this is Mr. Wang from the China Film Group," Jamie Jensen said, introducing him inside the newly established Transformers studio at Warner Studios. "He visited the lot with a delegation last year."

"Hello, Director Rosenberg."

The other party proactively extended a hand. Duke gave it a firm but measured shake and greeted him, "Hello, Mr. Wang. Please, have a seat."

This was his director's office. It was piled with various materials related to Transformers, making it look slightly cluttered.

An assistant quickly tidied up and, as Duke and the other two took their seats on the sofa, brought in coffee.

"First, on behalf of the China Film Group, I would like to congratulate you, Director Rosenberg. The global box office for The Dark Knight has already exceeded 1.1 billion dollars," the middle-aged man surnamed Wang said in relatively fluent English. "The Dark Knight's domestic box office has also been excellent, reaching 385 million RMB. You are the most popular director."

Duke smiled politely. "Thank you."

As he spoke, his eyes flicked toward Jamie Jensen. He wasn't foolish enough to believe the man had flown all the way to Los Angeles just to say a few words of congratulations and express the adoration of the China Film Group and the fans on the opposite shore.

Mr. Wang seemed to want to beat around the bush a little more. Duke was already very unaccustomed to this way of doing business, but it wasn't his place to complain. After all, every country and region had its own distinct customs.

Jamie Jensen understood Duke's working habits and took the initiative to speak up. "The China Film Group, which Mr. Wang represents, is interested in investing in Transformers."

"I have no objections." Duke himself wasn't participating in the investment for this film, so he said, "I'll primarily defer to your judgment in this regard."

A trace of a smile appeared on Mr. Wang's face. Evidently, he had already reached a basic consensus with Warner Brothers, but if Duke didn't give the nod, the investment would definitely carry a great deal of uncertainty.

He glanced at Jamie Jensen and then said, "The China Film Group wishes to carry out more cooperation with Director Rosenberg..."