Jason Blum's Production Model: One Reason Why It Is Scary To Comcast Shareholders

| About: Comcast Corporation (CMCSA)

Summary

Jason Blum has hit upon a great business model -- make movies economically based on marketable story concepts.

He has done well with the model, and Comcast's NBC Universal has a content deal with his company.

However, and most relevant to shareholders, the producer gives participation deals to talent, which may be giving too much money away.

I was watching the episode of CNBC's Binge series with Jason Blum. For perhaps the twelfth time, I was exposed to a dissertation of Blum's well-respected model for generating low-budget/high-return movie assets. It's the kind of thing one likes to hear repeatedly, like an oft-told story of adventure related by an uncle who was in any one of the numerous wars waged in the past, and in this current, century; there is a certain charm and symmetry to it, a particular species of wow-why-didn't-I-think-of-that. In short, the model works like this: put a strong concept together with a low budget - about $5 million, say - and back it with a serviceable celebrity presence that brings credibility to the project. Paying for the known thespian is achieved via giving the individual an attractive piece of the profits.

Blum is considered the Spielberg of slick scares, and for good reason. Anyone who has consumed some of his product will attest to his ability to pull together interesting stories and visuals; examples include The Purge, entries in the Paranormal Activity franchise, Ouija, and the Insidious series. He knows what he's doing.

Although he is considered a genius, it might be more accurate to say that Blum has been assiduous about sticking to a business plan. He says in the aforementioned CNBC series that one thing which has advantaged his Blumhouse Productions is the seeming fact that other media companies have not tried to replicate his method of financing popular features. This is mostly true, perhaps, but he certainly was not the inventor of the take-less-upfront school of filmmaking. That's been going on for years; it's his laser focus to keep to the script, and the notion of not playing the big-budget-bet game for the most part, that has served him well.

As with any model of the moment, perfection is still something that is always a step or two away, and this would be the source of its imperfection: giving points to stars. Public media companies are not required to disclose a cash-flow-contribution narrative of any content production, and Blumhouse Productions isn't even public besides, but I would be willing to guess that drawing up contracts that replace high upfront talent compensation with enhanced profit sharing tends to leave a little more money on the table than a studio would like.

Then again, it's a chicken/egg question: which should come first in a movie/episodic series, the content or the celebrity? Is a star director necessary for economic value? (If it is, don't tell the backers of The BFG.)

Why should anyone care about all this stuff? First and foremost, most of us are shareholders in the major media companies, whether through 401(k) mutual funds or actual shares. Secondly, building on that point, filmed-entertainment content is expense enough even on a below-the-line basis, and coupling that with the enormous risk the movie industry presents to investors, it then becomes clear that profit must be maximized. Certainly, Comcast (NASDAQ: CMCSA) shareholders should care: Blum agreed to a decade-long deal a couple years ago with NBCUniversal to populate the studio's various platforms with content.

It is with this background that I propose that Blum, while a smart individual who knows what he's doing and has established himself as a true, significant Hollywood heavyweight, is nevertheless not even close to genius level. He would be if he were able to figure out a way to eliminate giving up so much of the backend. According to this article, which also describes another deal with NBCUniversal, mentions that Blum's low-budget films, which cost an aggregated amount equal to $45 million, have grossed $1.4 billion (the piece doesn't state which films these stats refer to, but presumably the numbers are attached to Blum's company's output up until the date of publication). Although the total-budget versus total-gross is attractive, one must keep in mind that, again, that $1.4 billion, even after it has been reduced by the split with theaters, is reduced even further by the very contracts that enticed supposedly value-adding stars to take a chance on an economically-produced thriller.

In theory, that shouldn't be so difficult to retain profits: actors do not want to fund their own vehicles, and they claim to possess an almost ethereal enjoyment for their craft (as accurately captured with the somewhat cliché "don't tell anyone, but I'd be doing this for free").

Such reasoning, however, while arguably and elegantly logical, does not, in actuality, reflect the ongoing reality. Ethan Hawke, who starred in The Purge, probably wouldn't have agreed to his contract had it not been enhanced with Blum's famous offer of participation. Could any other compensation structure have been devised? Hard to say, I suppose, but one other aspect of Blum's overall method is to promise his talent that the shoot will be short; perhaps making an actor's commitment to one of Blumhouse's suspense spectacles would help in alleviating the need to share too much of the resultant spoils. Slotting someone in very briefly would enhance a fee that reflects a very small budget.

Here's another suggestion: use stars in multiple projects. Talent on the lower tiers appreciate knowing that their income will be steady, even if it is for a short period of time. Blumhouse could issue agreements with guarantees attached for several roles over the course of a year or two; this might include sequels, or it could simply be for new intellectual properties that will hopefully become low-budget franchises. It benefits both parties: the talent acquires some stability, while Blumhouse gets access to a skilled cast. Although the known stars used by the company are, well, known, appearing in several popular movies (assuming the formula remains popular) will nevertheless give a new boost to their stature, a positive profile-changer that could be monetized by charging other studios more for their services.

Alteration of the formula in terms of the value limits of the budget could also be studied. What if a small increase were introduced to the budgetary maximum? Taking the $5 million figure, could it conceivably be increased to $6 million, $6.5 million? Taking the surplus and allocating it toward the top-tier talent as a way of eliminating backend commitments would likely offer not only more control of the cash flow, but it would likely avoid sweetheart-deal litigation (this point would be especially instructive for major media conglomerates whose vertical integration oftentimes yields such problems). Netflix recently reportedly did this for a deal involving Will Smith and Max Landis.

Also, it is conceivable that concept and execution will simply have to carry the day. It is beyond debate that a project, whether of low/medium/high budget, which contains a Jennifer Lawrence will be more statistically likely to activate the demographical base that supports a Jennifer Lawrence. There is value to a name, but there is also risk, as research has suggested that expensive actors sometimes do nothing at all for the opening weekend. All of it can be credited to the ethereal, existential vagaries and randomness that is the movie business (we're not talking about selling foodstuffs or medical solutions, there is no guaranteed demand for a fourth Purge iteration). Having an irresistible concept that comments on current culture acted out by exceptionally talented unknown and/or not-as-well-known players would present a challenge to marketing teams, but as that science becomes increasingly sophisticated at exploiting low-cost social media platforms for purposes of selling content, and as streaming services and over-the-top conversions proliferate, both consumers and buyers of content may be willing to look past the credits and focus instead on the loglines and the synopses as they make their decisions on whether or not to give this story or that a chance.

Again, the interest I have in this subject is based on advocating for the shareholder, whether public or private. Too often, those who fund business models based in the entertainment industry are cast in the role of other people's money; they are not seen as an important factor in the manufacture of the product.

Jason Blum obviously knows what he's doing, but he could benefit from challenging himself to keep more money for his company. Someday it may be acquired by a media conglomerate like Comcast - he could get even more of a premium if he shows that he's smart enough to discover what I consider the Holy Grail of Hollywood: the elimination of profit participation. That is the true horror for shareholders.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CMCSA over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.