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Equity Capital and New Ideas Change Media

At more than a century old, cinema is a mature business. Cash flow margins of its components tend to be at the low end of the spectrum for all media � which in recent history has been 20 percent for theaters and 15 percent for major movie studios. And the legacy movie production and distribution process is relatively capital intensive.

Despite those drawbacks, equity capital is pouring into the industry at an accelerated rate. For example, (George) Soros Strategic Partners bought the DreamWorks live-action film library for $900 million in March. In the past few years, the top three movie theater circuits were purchased by private equity funds.

"This volatile business, amazingly, never seems to be short of investment capital," notes Wade Holden, analyst with Kagan Research. "One big reason is that the major studios have a knack for turning every new technology that, at first glance, is threatening into a source of money. That goes back to the VCR and before that broadcast TV itself." Or put another way, it's true that they're often stubborn, out of touch with the public, and sometimes current-day technology illiterate -- but, eventually they always seem to stumble safely into the evolving marketplace.

Private equity funds find so-called "old media" such as film, broadcasting and cable TV compelling because of stable cash flow. Film profit margins may be a little low by high media-business standards, but are still higher than in other industrial sectors. P.E. funds are pools of capital from wealthy investors and deep pocket institutions used to buy assets outright or purchase sizeable stakes with some control.

Perhaps the most unexpected among recent round of P.E. film investments is the over $3 billion that co-finances current film slates of major movie studios. Seven P.E. funds are providing 20-50 percent of expenses from a pool of titles, and then take a slice of revenue after their studio partners charge a distribution fee.

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