Soros Sells Back Film Rights to Viacom: Did I Get It Right?

Whenever I read a news summary of a transaction involving material IP assets, I try to understand the commercial and financial interests lying behind the deal. This is especially so in the motion picture business, where the artistic and financial aspects are particularly intertwined in ways that are not always clear to the outside observer. For that reason, the responsibility of the business press to present a full picture of the context in which it reports a material transaction is especially challenging.

Against that backdrop, I read with interest a report that first appeared on Bloomberg.com yesterday titled "Viacom Acquires Soros Stake in Films for $400 Million" here. [The report actually addressed two issues. The first was the Viacom-Soros deal, while the second described bidding for other film companies, namely MGM, Overture Films and the Miramax division of Disney. We will focus on the Viacom-Soros deal.] According to the report, "Viacom Inc. bought back a majority stake in the DreamWorks SKG film library from billionaire investor George Soros, taking on $400 million in debt to regain rights to movies such as “Gladiator.” The purchase of Soros’s 51 percent stake in 59 titles, including “Saving Private Ryan,” was completed on Feb. 8 ...."

Here is where the report gets a bit murky. It stated that Viacom had agreed in 2006 to sell to Soros the film library in a deal valued at $900 million, with Viacom retaining a 49% interest in the films. Soros, who received broadcast and home sales rights, agreed at the time to sell his stake back after five years. Viacom had sold the library in connection with its acquisition in 2006 of DreamWorks, the film house founded by the legendary Hollywood trio of Steven Spielberg, Jeffrey Katzenberg and David Geffen, for $1.6 billion. With the sale of the 51% interest to Soros, the net purchase price of DreamWorks at the time was approximately $600 million.

What's murky in the report are at least the following points:

1 What does it mean that Viacom retained a 49% interest in the films?
2. What does it mean that Soros received broadcast and home sales rights?
3. If the agreement was for Soros to sell back his interest in five years, i..e, in 2011,why did he do so now?

After doing a bit of internet digging on the subject, I found a March 16, 2006 AP item that appeared on nytimes.com. Entitled "Viacom to Sell DreamWorks Film Library", the AP report noted the following:

1. The buyers on behalf of Soros were Soros Strategic Partners and Dune Entertainment II. The Soros group would acquire the entire list of 59 DreamWorks live action films released until September 15, 2005.

2. The films would be distributed through an exclusive five-year distribution agreement with Paramount, which is owned by Viacom.

3. Viacom would retain "ownership" in music publishing and some other rights in connection with the film library, most notably sequel and merchandising rights.

So, if I understand this correctly, Viacom was at the time assured an income stream through distribution as well as exercising certain secondary rights in the library, while the Soros group would enjoy the benefits broadcasting and home entertainment.That leaves the question: Why did Soros sell back his 51% interest in the film library (there does not seem to be any question that the sell-back was within the legal ambit of the agreement)? Two comments that appeared in the news item above are relevant here.

The first appeared in the 2006 AP report here. There, Harold Vogel, a media analysis and author, observed that it was likely that the Soros Group intended to see the return on its investment through licensing fees for DVD's as well as cable and television broadcasting.
In this connection, Vogel observed that"[t]hey'll project how much each film can generate. The difficulty is, probably only the top 10 films generate 80 percent of the income."

The second observation appeared in the Bloomberg report of yesterday. As stated by David Davis, managing partner of Arpeggio Partners, "[l]ibrary values have clearly come down. And it's because of the decline in DVD sales in the industry."

A Drought in DVD Sales?

It we set the Vogel comment against that of Davis, we discern a sea-change in the underlying premise on which the transaction seems to have been based. In 2006, the bet was that the megahits in the library would provide the income stream projected for the deal. The emphasis was a bet on the quality of the movie contents, not on the platform(s) that would distribute the contents and generate the income. In 2010, the bet seems to have failed, but not for the reasons anticipated in 2006. Rather, there was a secular change in the efficacy of at least part of the distribution platforms themselves, namely DVD sales.

If I have understood this correctly, a misjudgment was made in 2006 regarding the commercial future of the DVD sales business. Whether this misjudgment was due to changing circumstances that could not have been foreseen at the time is an open question, at least for me.