Sylvester Stallone might be the perfect avatar for the past five decades of the movie business. In the mid-1970s, he maneuvered to write and star in Rocky, just as auteur filmmakers were taking over Hollywood and the modern blockbuster was being invented. Then, with the help of newly ascendant CAA and agent Ron Meyer, he got really rich in the ‘80s making action movies like Rambo that traveled internationally. One of Meyer’s first acts when he took over Universal/MCA in 1995 was to give his former client a $60 million, three-picture deal, with huge backend compensation—the richest ever at a time when movie stars absolutely ruled. Then, for the next 20 years, Stallone, like the rest of Hollywood, made millions simply by milking those franchises for sequels, spinoffs, and reboots—culminating with 2015’s Creed, the rare combination of a sequel, a spinoff and a reboot all in one movie.
Now he’s cashing out. Earlier this year, I’m told, Stallone quietly sold his remaining backends to Shamrock Capital Advisors for $43 million. (Stallone’s rep confirmed the Shamrock deal, which was previously unreported, and the price tag, but declined to comment further.)
Sly isn’t alone, of course. Once a week, it seems, an entertainer—usually a music star—trades the revenue stream from his or her life’s work for one of those Publisher’s Clearinghouse-sized novelty checks. Just last night, Billboard reported that Bruce Springsteen is selling his masters and publishing rights to Sony for more than $500 million. The cash-out conga line includes Bob Dylan, Paul Simon, Stevie Nicks, and Neil Young, but also younger acts like Shakira, Calvin Harris, Ryan Tedder, the Killers and many others. The buyers? In addition to the music companies, which are flush with streaming cash, about 15 private equity funds have sprung up to buy music rights—about twice as many as just a few years ago, music consultant Barry Massarsky told Vice earlier this year. That market is going absolutely nuts right now.
But it’s not just music. Film and TV revenue streams—“backends” or “points” in deal parlance, or “contingent compensation” if you want to get technical—are hot, too, both for talent who negotiated a piece of their projects and the owners of films and shows that generate long-tail revenue. There used to be only a few small players buying up these rights. Content Partners, the L.A. firm founded in 2006 with investors Mark Cuban and Todd Wagner, and now run by Steve Kram, Steve Blume and John Mass, once cornered that market. They’re still dominant, having gone from buying up the positions of failed movie slate investors, to film libraries, and ultimately to the talent’s participation in their films. But now investment firms like Shamrock, Vine, Domain Capital and Salem Partners are also very much in this business. That competition—plus increases in library values thanks to the streaming video wars, and the general market frothiness—is driving up prices.
Library rights and backends are slightly different, but they both amount to the right to collect revenue thrown off by aging movies and shows. I’m told that several big-ticket buyout deals have closed this year, and more are in the works. CP already owns rights associated with hundreds of movies and thousands of TV episodes, including the CSI franchise and 45 movies from Joe Roth’s Revolution Studios. Vine took over Luc Besson’s EuropaCorp library revenue when Besson had money problems. Producer Neal Moritz is said to be one of several A-level producers who has shopped a major deal for his participations. Stallone’s reps, I’m told, thought they’d get around $30 million—keep in mind, he’s already been paid tens of millions on these movies, some of which date back to the 70’s—but they found higher bidders when they shopped the deal.
It makes sense that this is happening. For certain talent, backends are like a Hollywood version of social security, a kind of forced savings. But they have downsides. The money owed by a studio is just sitting there. You can’t put it to work, you can’t diversify into Amazon stock or Bitcoin or whatever company Ryan Reynolds started this week, and the exact amount you collect is typically determined by a studio accounting department—which is out of your control and notoriously opaque. You can audit and sue, of course, but that’s a pain (and costly). Studios have taken advantage of that annoyance by trying to buy out backends themselves over the years, often at deep discounts from unsophisticated heirs. Damn vultures.
On the other hand, selling your backend to an investment firm gets you a little less than what you’re ultimately owed, but you get it today. Put the cash into this red-hot market, fund the lifestyle to which you’ve become accustomed, split with that producing partner you now despise but who shares your backend, make your divorce or estate planning easier. Get in front of the coming tax code changes. Keeping the studio honest becomes someone else’s problem.
For investors, backend and library revenue are model-able, meaning it’s possible to project out with somewhat reasonable accuracy what certain rights are worth. Here’s how it works: Investors do a “discounted cash flow analysis,” meaning they look at accounting statements or audits from the past—typically about five years’ worth—and then, using a modeling system (Blume at Content Partners was a pioneer here), a firm will project out for a certain period—usually 10 years, plus a “terminal value” that takes it into perpetuity—and then discount that to present value. You get a return rate, and hence a number that makes sense to pay the participant now. Pretty straightforward. As the market has gotten hotter, some participants have demanded less discount and more premium. But whatever the buyer pays is less than it predicts the revenue stream will ultimately generate.
After all, music or film assets have a “decay rate.” They generate a lot of money early on, then they decay in value, then there’s a long tail. The participant is along for the entirety of that downhill ride. With exceptions, of course. Few would have predicted that I Will Always Love You, a small hit in the 70s by Dolly Parton, would become one of the biggest songs of all time when re-recorded by Whitney Houston for The Bodyguard. Thankfully for Dolly (and the Moderna vaccine researchers), she hadn’t sold her publishing. But that’s the exception. Most songs, films, and television shows throw off revenue at a predictable clip, with the streaming money of today replacing the DVD cash of a decade or two ago. The difference these days is what you can do with the money now.
This model doesn’t make sense for everyone in Hollywood. And I get why more investors are interested in music. Songs generate revenue from a variety of sources—ASCAP/BMI royalties, streaming, sync licensing, etc. Digital distributors are thriving these days, and music is a gross business. You get pennies (or fractions thereof) per play, statements are easy to understand, and there are collection agencies to keep everyone in check. Film and TV profit definitions, by contrast, are famously complicated, a participant’s position in a revenue waterfall is tough to understand, the costs associated with movies and TV are much higher (and tougher to police). So fewer firms are interested.
But that’s changing. I think there is a recognition that Hollywood studios are really good at making and distributing content, and maximizing revenue through windowing that distribution. Becoming a participant in that core competency is alluring for investors, if the studio accounting can be policed without going broke on audits or litigation. This is different from the other big investment trend of private equity-backed business buyouts, like Blackstone’s purchase of Reese Witherspoon’s Hello Sunshine with Kevin Mayer and Tom Staggs. Those investors are buying operating businesses, which, in my opinion, are much less predictable. Assets like Sly Stallone’s Rocky participation and the Revolution library would make me much less nervous. But hey, I’m not Steve Schwarzman at Blackstone.
This booming market won’t last forever. At some point, the rise in prices will outpace the decay rate. But the larger lesson here is just how valuable these backends can end up becoming. Studios have been paying points on movies since at least the 1960s, and there are now several generations of stars, writers, producers and executives who are still being paid, sometimes very well, on old work, with sophisticated financial firms ready to write checks now for those revenue streams. What might Jerry Seinfeld or Chuck Lorre or Marta Kaufman get if they sold their backends (if they haven’t already)?
Think about that next time an agent brags about getting Netflix or Apple to pay a 10 percent premium on a quote to “buy out” a backend. The streamers have eliminated contingent pay, and there’s an argument to be made for Brad Pitt being able to do a lot more with $40 million from Apple now, rather than $20 million plus 20 percent, which could ultimately generate more money but over years and years. Still, it’s hard not to look with envy at someone like Stallone. This Shamrock deal is like a very rich cherry on top of an ice cream sundae of a career.
And that cherry tree might someday become extinct. But not for a while, at least. I asked a major player in the backend buyout space whether he fears a day when this business goes away completely. “I’m not getting my resume ready just yet,” he said.