Is Blockchain Film Business 2.0? Part 3

From the inception of the film industry in Los Angeles, it has been dominated by major power brokers namely, studios, distributors lawyers and or agencies. This traditional film business model has created an environment that is far from perfect. Many issues are clear and obvious including the many numerous legal, agent and financial middlemen; lack of transparency and trust; piracy; violations of intellectual property rights; inefficient and lengthy procedures for payment of funds and a general concern of credibility in all aspects of the film industry.

The investment in films has also suffered from similar concerns and issues within the traditional film power structure and it has created very little opportunity for the general public to participate in the development, production and distribution of new film content. The following are interesting areas of discussion.

Dubious Accounting

The Hollywood accounting establishment and its accounting methods and procedures have been notorious for being vague, ambiguous, unclear and far from transparent. The goal is to enable a truly fair, hack proof system for making films.

Blockchain can change that narrative by digitally enabling, verifying and enforcing the content and terms of film contracts and transactions without the need for third party intervention. The use of smart contract can digitize all and every clause, term and conditions associated with specific agreements, and once executed, will be stored on the decentralized ledger. This ledger will be fully transparent and secure without unauthorized changes. Creating clarity, efficiency and transparency.

Restricted Entry

The film industry has been controlled by power brokers that have ensured limited access to the film creation process of investing. The viewing public as such have had little access to the creation of content, its investment or its profits.

NFT’s

Blockchain allows the ability to create NFT’s (Non Fungible Token). An NFT is a digital asset that can represent real-world assets such as artwork, music, film and other creative content. Understand that a ‘fungible’ asset means they can be traded or exchanged for one another.

They’re also equal in value in that one dollar is always worth another dollar and one Bitcoin is always equal to another Bitcoin These NFT’s can be bought and sold online, frequently with cryptocurrency and are generally encoded with the same underlying software as cryptocurrency and usually are one of a kind and have unique identifying codes.

Payments

The ability to use smart contracts and the immediacy of all transactions, allows the payment of funds and the sharing of revenue based on contracts to be automatic with no intermediaries required. A Fully automated, transparent business model without the need for any third party participation.

Rights Ownership

Rights management over film content has been a major issue of contention for decades. Who owns the film? This technology can digitize every element of intellectual property into the master database. Intellectual Property Rights can then be tracked in detail on every transaction for every IP across the globe and be fully available for checking and verification. Blockchain technology allows copyright owners to keep track of every single digital asset as it has its own encrypted file, whether it be a script, artwork, or a digital video file.

Investment into Film?

Individuals can and do invest into film and film content in a number of ways:

• Direct Investment: Invest in an individual film production.
• Film company shares: An indirect method of investing in the film industry is to purchase shares in Hollywood companies.
• Crowdfunding: Utilize the crowdfunding platform to participate in helping fund film content.
• Movie Tokens: The tokenization of assets is democratizing investment into the film industry. Tokens may represent financial content or products sharing future profits. Certain film companies are using blockchain to allow the public to vote on movies they think should go into production and be financed by the public film community and distribute movie tokens to participants and provide proof of ownership to the NFTs created for a film.

It is important to understand some basic definitions in this world of new potential film funding models:

What is currency?

Currency is any form of money. The U.S. dollar is a currency. Most countries have their own currency. All of these currencies offer paper banknotes and metal coins. Collectively these are called fiat currencies.

What is Cryptocurrency?

Cryptocurrency is digital money. Unlike all of the fiat currencies (government paper money), cryptocurrency does not utilize paper notes or coins. There is no physical thing called a bitcoin.

• Cryptocurrency is transacted entirely on an encrypted network. Cryptocurrencies are not available in the form of physical paper money or coins because all transactions on the network are electronic.
• Furthermore, cryptocurrencies utilize the ledger technology called blockchain.

Tokenization

Tokenization is the conversion of physical or virtual assets into digital units that can be bought and sold. Tokenization eliminates territorial barriers and intermediaries while enabling fractional ownership of assets, which opens the market to small investors. Almost any asset can be tokenized including film and video content. These cryptocurrencies are ideal for the tokenization of unique assets, such as real estate and intellectual property

Tokenization is the process of converting a real-world, physical asset into a digital token. This token represents a tradable asset which is run on a blockchain network.

With tokenization, digital tokens can be used to represent shares in a company, ownership of real estate, or stake in a film investment. These tokens can then be traded on cryptocurrency exchanges. One of the benefits of tokenization is that it reduces the difficulties of creating, buying, and selling securities.

New markets are opened up to a wider base of investors with potential increases in liquidity. Tokenization also increases speed of transactions and the use of smart contracts reduces the administrative burden associated with the buying and selling process.

There are two main types of crypto tokens namely utility tokens and security tokens.

Utility tokens are also known as user tokens or app coins. Utility tokens represent a form of value that can be redeemed in the future. These tokens do not derive their value from any external asset. Companies create them for a specific purpose. You can’t trade them on an exchange.

Security tokens are digital assets representing legal ownership of an asset that can be bought and resold. They are typically distributed to investors through a security token offering (STO). Security tokens could represent a share in a company or an investment in a film project.

Tokenization utilizes smart contracts. These contracts act as agreements between parties on a blockchain. In the case of tokenization, a smart contract enables a person to purchase your token and receive shares of your property by eliminating intermediaries and other go-betweens.

NFT (Non-fungible token)

Fungibility refers to the ability to exchange an asset for another of the same kind of equal value. Fiat currencies (government paper money) are fungible assets. Fungible tokens essentially are tokens you could easily exchange for one another. They hold inherent value, and you can easily swap one token for another in the open market without running into a dispute over their value.

Non fungible means they are unique, indivisible and not interchageble …. Unlike paper currency.

A Non-fungible token is a type of cryptocurrency token that represents a unique asset. Each token is unique therefore they are not mutually interchangeable. These tokens represent real-world items, like cars, physical assets or intellectual property.

The three main characteristics of non-fungible tokens are:

• Each one is unique
• They are not interchangeable
• They are non-divisible.

Cryptocurrency?

Cryptocurrency, digital financial assets, are designed to be bought, sold and used to purchase assets and services via the internet. Unlike traditional currencies issued by governments, these assets exist only as entries in the blockchain technology created in 2008 for the first crypto asset, Bitcoin.

A cryptocurrency is a secure digital currency that is used within a blockchain to pay for transactions and actual assets. These are digital coins and as such are digital representations of value. Bitcoin is an example of a cryptocurrency. Computers (nodes) on the peer-to-peer network process transactions carried out within the blockchain are rewarded with a set number of digital coins for a given task (like creating a new block). These computers are ‘mining’ the cryptocurrency.

It’s important to understand that you can use the functions of a blockchain system without being a miner and you don’t necessarily need to own cryptocurrency. Cryptocurrencies can be exchanged for real money so that money can enter or exit a blockchain system in dollars. The digital currency is exchanged for real money by a traditional payment processing company.

Security Tokens

Tokenization is a process of converting an asset into its digital form and managing it on a blockchain platform. These tokens, known as security tokens, represent the underlying asset and procure their inherent value from it.

Film Funding

Raising finance to produce a film can and often does involve many parties and entities resulting in numerous financial relationships some of which could include:

• Copyright holders
• Equity investors
• Banks and Funding bodies
• Grant entities
• State and Local authorities / tax incentive entities
• Film Commissions
• Unions, Guilds and trades
• Talent/Actors

This film business has a defined flow of funds and revenue that is stipulated in the various legal/ contracted documents all parties sign and shall adhere to. Each of the entities listed above (equity investors, tax incentives etc.) all have stipulations regarding the types and amounts of funds available and what is required to trigger said funds and in addition they all have rules and conditions that are triggered when revenue is generated by the final product. Utilizing smart contracts and the knowledge of decentralization, security, transparency and automatic transactions based on the terms and conditions of the digitized contracts and agreements, blockchain changes the business landscape of film financing and revenue collection.

The Blockchain technology allows two key obligations required in rights collection to be met:

1) Secure and timely payment based on a pre-agreed revenue split and reporting. Blockchain processes this in real time because there is no intermediary.

2) Transparent and accurate reporting. With blockchain all transactions are executed automatically and recorded in real time.

New Financing/Business Models

Film companies can use the blockchain technology to allow an innovative business model to finance film projects

Cryptocurrency and digital tokens can be connected to a blockchain and in so doing offer some entirely new opportunities with regards to fundraising of for a film production. Producers have access to new sources of revenue and the public can invest in projects that are not necessarily available to them through traditional funding models.

Tokens can represent an ownership interest in a project. Tokens are defined and regulated by financial regulators as securities and known as security tokens. Tokens can be designed entirely by their issuing body and become part of the valuation via a smart contract. The smart contract defines the terms and rules of a transaction, its acquisition, use, performance, and disposal of a token created within the blockchain. A token can be exchanged based on a rate that generally depends on supply and demand. Their value is established at the outset of the project. This value moves and changes based on the popularity and results of the project.

These tokens have unique digitized identifiers for each asset or film content. These tokens can be tracked and databases created for any and all assets. A blockchain using the unique token digitizing would track each authorized use or sale of content that is clearly identified, determine its value and facilitate monetization via cryptocurrency.

What is unique with blockchain is its ability to offer is a new distribution channel within the blockchain itself. Film producers and content creators or whoever owns the rights to a film, can see the benefits of transparency and immutability of blockchain technology to determine who has the rights to view and distribute their film product (intellectual property) but also aid in diminishing piracy.

Film Funding Using Tokens

The process of tokenizing a film’s equity into security tokens and manage it on a blockchain network for film funding, has its own risks and benefits.

Benefits:

• Enhanced Liquidity: Equity shares of a film are uncommon on the open market and are mostly illiquid assets. Tokenization of intellectual property enables the creation of security tokens and allows investors to buy and sell film assests on exchange platforms. This process will allow an investor to gain instant liquidity from selling film rights over a secure blockchain platform.
• Split Ownership: Tokenization enables the fractional or partial ownership of film rights. Film assets can be easily divided into multiple security tokens through the use of smart contracts. Investors of all sizes and capabilities will be able make an investment in the film industry. Blockchain will allow these new investors to have full transparency to their investments, revenues and profits via the network
• Real-time Markets: Tokenization via blockchain technology enables the creation of an international market to buy or trade film tokens. Any investor can buy a specific film token prior to its release and sell it at any time during the life of the film asset.
• Middlemen: With the use of smart contracts the transfer of ownership of the film asset will be easy and secure. The blockchain ledger keeps a record of each individual share and permanently stores it in the network database. Ownership for each and every film asset / token can be traced to its origin with complete transparency and accuracy. All films transactions of every type is stored on a transparent and totally secure ledger which in turn makes the process of Hollywood accounting easier and efficient.

Risks:

• Commercial Success: Commercial success of a film that has utilized tokenization option still depends on the viewer and the quality of the product in the marketplace.
• Regulations: Blockchain technology is very new. Cryptocurrencies still present general concerns to the public. Tokenizing a film project as a financial product needs to be regulated and approved before it can be adopted in the general market.
• Security: Blockchain technology and smart contract systems require secure platforms that provide the level of safeguards investors will require. It has to be hackproof to gain the publics acceptance.
• Practicality: The process of tokenizing film property assets, production studios or licensing rights is complex and numerous obstacles. These may include high costs, scalability, legal complexity, and more. Certainly, the lack of desire to enact such a technology by the traditional film power brokers may prove to be the biggest hurdle

Blockchain technology via decentralization, smart contracts and tokenization may bring a revolutionary change to the film industry and its funding. Certainly, the concept of more audience control over media content and increased ownership of film rights that can be divided and traded on secure platforms is a new horizon. More investors at all levels could open up new sources of funds and new avenues of distribution.

About John Rodsett

With over thirty years experience in the film industry, both with my own independent film company and with a major studio (20th Century Fox), my expertise and experience in the film business is long and far reaching.I have been involved in all areas of the independent film business including film financing, development, production, film packaging, domestic and international distribution, marketing, sales, acquisitions and much more. I have worked on over 200+ independent feature films sold globally and executive produced many independent films plus I have executive produced and distributed a number of acclaimed documentary productions.

My independent film company, based in Los Angeles, was formed at an opportune time — the start of video boom that went around the world from the mid 1980’s through to the mid/late 1990’s. For over a decade, I was executive producing, financing, film packaging and distributing many low budget independent films all around the world,I was also employed by 20th Century Fox at the studios in Los Angeles and I participated in the release of the feature films “Alien” and “9 to 5”. And also was actively involved in the TV series “MASH”. Soon after Fox, I was a VP at the Olympic Games in Los Angeles. For the last few years I have been teaching entertainment marketing and business at the University of Miami and the University of Washington, as a full time/part time adjunct professor.

My website : https://johnrodsett.com/

Previous Stage 32 Blogs by John:

Is Blockchain Film Business 2.0?

Is Blockchain Film Business 2.0?: Part 2

5 Steps to a Successful Film Marketing Strategy

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