Of "Back Catalog Value": A Few Words

In the wake of the Enron scandal Emmanuel Todd speculated that the performance of the U.S. economy, whose late '90s-era dynamism he found suspect, might soon be revealed to be a fraud as more such scandals emerged, leading to a downgrading of the American economy's size and political-economic weight so radical as to significantly contribute to the end of the country's international hegemony in short order. Of course, as we know a quarter of a century on there was no mass of new scandal of the kind he expected, and no such downgrading of the U.S. economy. Still, Todd was right about the American performance of the late '90s not being some new normal, that it was indeed smoke rather than fire, all as the episode brought new attention to the business world's reliance on accounting whose veracity was not beyond question--a concern which has not gone away and which may well have grown in an age in which, as we see with firms like Tesla (which in spite of its small share of the auto market, has a valuation higher than all the major auto makers combined on the basis of promises of an imminent revolution in self-driving that have long since lost all credibility), valuations are out of line with fundamentals in ways that make one wonder if a very serious "market correction" is not coming after all.

For my part I wonder about the extent to which this may be the case in Hollywood specifically. After all, consider how that business has fared for the last half decade. We saw the collapse of filmgoing globally in 2020, and then recover only very slowly, with gross revenues stabilizing about 30-40 percent below the pre-pandemic level in real terms in 2023-2024 in North America, and plausibly the rest of the world as well. The result has been the studios being out tens of billions of dollars in movie rentals alone compared with what they would have hoped to make over this time frame, all as they bore increased costs as a result of higher interest rates with all that implied for servicing the massive debt loads they had amassed mindlessly pursuing the fantasy of boundless streaming income, and the additional costs of delays in film production and release due to the pandemic and to the 2023 strikes. Especially given the number of times we have seen the budgets of big Marvel movies prove to have been far larger than the studios initially owned, one can easily picture the gap between income and outgo, and a studio's being "in the black," as greater than admitted by the generally boosterish media coverage.

Where the situation's alleviation is concerned it does not help that while a plausible response for Hollywood has been to retrench in deep and fundamental fashion by going for the targeted hits that seem most likely to pay off in the shrunken (and fragmented) new market than ye old tentpole they have stuck with their franchise-mindedness, , but otherwise doing the same old thing while excusing it with references to "back catalog value," as in "Yes, this sequel no one asked for will probably not make a profit, but it will shore up the continued value of the movies that came before it." There may be something in that--but likely not so much as they imply in an age in which older movies are probably less and less seen, simply lost in an ever more crowded marketplace and ever more ignored by the young. (Consider, for instance, the James Bond franchise and its "youth" problem. The name "James Bond" meaning so little to them reflects their not having looked at the older Bond movies, and the reboot's having failed to get them to do so, or captivate them on its own terms.)

Indeed, especially given that the numbers in question are particularly inaccessible to the general public one may well picture "back catalog value" as something easily overrated, the more in as so much of the means of realizing such value is "related-party trade" as multimedia companies' production divisions sell rights to their material to the same companies' streaming divisions. (Thus we see the streaming rights for some movie sold for $50 million. Correct value, undervalued, overvalued? It is very, very hard for anyone to say much about that without very detailed insider knowledge, all as the potentials for abuse are enormous, especially in the streaming age with its new and perhaps poorly understood metrics and valuations.) Such overrating is likely to have the same effect on industry finances as the overvaluing of any other financial asset--until reality catches up with the overvaluation, perhaps after a very, very large edifice has been built up on that shaky foundation. Of course, even if this is the case it may be that Hollywood, like so much of the rest of the economy, will "defy gravity" for a long time--but I do not rule out its realizing Todd's prediction in miniature, with the current frantic merger movement that has Paramount and Warner Bros. Discovery possibly being folded into bigger entities both testament to their vulnerability, and suggestive of how any shock could propagate more widely through the sector--and the broader economy.