Interview with CEO Pt 2 – Exchange Requirements

John Blank

Chief Equity Strategist
Zacks

Economist for TV networks
(such as CNBC)

Interview Transcript

Ross Cooper, CEO
Modern Cinema Group, Inc.

With
John Blank

October 2017
Part Two

Exchange Requirements

 

 

Ross Cooper

CEO
Modern Cinema Group, Inc.

(Ticker Symbol:MOCI)

 

 

Interview Transcript: ( Part2)

John Ross, thanks for coming back for part two of our interview.
Ross It’s always great to see you.
John In the first interview, we talked about launching the first-of-its kind media “futures” exchange where movies, TV series and games are financed and distributed by way of a “futures” exchange.
Ross Right.
John So does Modern Cinema Group aspire to be a movie studio?   Maybe the next Warner Bros?
Ross In a traditional sense, the answer is no. We’re not setup to promote a studio brand. We’re more of an apparatus that can be effectively used by people looking to make and distribute popular media titles. I’m a lot more comfortable thinking about our company as a set of tools rather than a studio. Studios are constantly promoting their brand as we see with Disney, Fox, or even Lions Gate. In fact, we’re closer to a bank than a studio. People don’t think of the projects Bank of America finances, they think of Bank of America as a place to get a loan.
John But you develop, finance and ultimately distribute media titles, right?
Ross Right. We do all of these things by way of our exchange.
John I understand what you’re saying about not promoting a studio brand, but what are other issues that keep you from being a studio?
Ross The single biggest issue is… we do no vetting of material. We like to think of ourselves as being similar to the popular movie Moneyball. Maybe we’re Movieball.
John Please explain.
Ross Over the last 30 years economists and social scientists have been able to better understand what humans do best, what crowds do best, and what computers do best.
John Are you referring to Daniel Kanneman and Amos Tversky?   Danny was a Nobel Prize winner in economics?
Ross Yes. Exactly.   And other well-known economists not to mention the Freakonomics guys. These researchers have tested and validated numerous conditions regarding decision making.

One of my favorite examples is when 100 x-rays were sent to a number of doctors asking them to assess each x-ray. After the doctors handed the x-rays back with their assessments, the same x-rays were re-labeled and sent back to the same doctors.

The result?

The assessments were very different. The doctors often contradicted themselves. It’s not that any single doctor is either good or bad. It’s that all doctors are human, and humans are susceptible to outside influences.   (It’s a sunny day; it’s a cloudy day. Good things are happening; bad things are happening.)

Although we like to think we are not easily swayed when it comes to our chosen professions, we now know that we are very much swayed by external factors, and recent research has confirmed this.   If you remember the Moneyball, the Oakland A’s started winning when the experts were relegated to the sidelines and analytics were used to pick the players and their positions.

John So what does this mean for Modern Cinema Group?
Ross It means we do virtually no vetting of projects. We don’t make decisions based on how a project will promote our brand. We do not make decisions based on favors owed to high-profile individuals. We don’t make decisions based on award consideration. You would not come to us to “pitch” your project (although we’d love to hear the pitch for the fun of it).
John Then how do you decide which projects to list on the exchange?
Ross If our minimum criteria for a project are met, we start the process no matter what the project is. Our answer is YES to everything that meets our minimum criteria.
John So what are the minimum criteria?
Ross The answer is divided into three parts as follows

  • A producer must come to us with a “package”; I’ll explain the required elements of a “package” in a few minutes.
  • The project must not violate any regional compliance or censorship requirements (if distribution is expected in those regions).
  • The project is designed to be profitable; it’s not about someone’s artistic sensibilities.

A producer must come to us with a “package”; I’ll explain the required elements of a “package” in a few minutes

The project must not violate any regional compliance or censorship requirements (if distribution is expected in those regions).

The project is designed to be profitable; it’s not about someone’s artistic sensibilities.

John So you wouldn’t be interested in an art film even if it might win an Academy Award?
Ross No. Awards are great. Don’t get me wrong. But most likely a project that makes a statement rather than fills a commercial void would fail the various benchmarks we require throughout our processes.

It’s important to mention that we also have one crowd-funding component and two auctions within our process flow. If we find little or no interest in the crowd funding initiative or the two auctions, then we will most likely refuse the project for lack of interest

Other than that, if a project is properly “packaged” and enough people or advertisers are willing to pay for it, then the project will be listed on our exchange.

John What if you truly hate the subject matter?
Ross If the title is commercially viable and we still hate it, then maybe we’re wrong. Or maybe we don’t understand it. Maybe it’s based on a popular YouTube Channel that has millions of loyal followers; it’s something we just don’t get. But it has huge revenue potential none the less.   Then it’s a project that should be listed on our exchange. This is where we take out the emotional vetting process. If the analytics say yes, but our emotions say no, we do it anyway.
John So if you can check all the boxes, you’ll list the media title on the exchange, no matter what?
Ross Yes.   This is why we are different from traditional studios. They will spend a great deal of time, resources and energy defining their slate for a given year. In comparison, we check boxes.
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John You mentioned a crowd funding component and two auctions.   Can you tell me more about this?
Ross Yes. Let’s start with the crowd funding component. To begin, it’s not crowd funding in traditional sense. It’s more of an opportunity for small producers and investors to involve themselves in the project with a feeling that they’re close to the action. With the existing crowd funding media web sites, people can review various projects and make small donations if they want to show their support.   In some cases they may get their money back, however this is most likely a rare occurrence. For the most part, people are being philanthropic so they can help a film maker, and maybe get a copy of the finished product. We are not like this at all.

In our crowd funding model, we offer the following

  • A refund if the project does not move forward
  • An early position in the revenue waterfall, so losses are minimized and profits are much more likely
  • Certificates, plaques, statuettes, posters, t-shirts and other materials (you’re a co-producer!)
  • The possibility of a day on the set and pictures with the talent
  • Invitation to regional premiers and “red carpet” events
  • Your name in the credits
  • Up-to-date information about the progress of the project

And more…

The idea is to find a place for fans who want to be involved as co-producers and at a level that allows them to participate in the process.

John What if they only have $100?
Ross 50 bucks, 100 bucks or more. Then you’re a co-producer; we want to make our crowd funders feel they are very much a part of the process.

However, if there is no activity from our crowd funding initiatives, then it’s a bad sign. This may suggest the project has little commercial value. If we believe the project is not commercially viable, we may disqualify the project from being listed on the exchange.

John You’re then like Jerry McGuire, “Show me the money, right”?
Ross Right. “Show me the money” is exactly what we’re trying to do with our crowd funding initiative and the two auctions. We have to see demonstrable commercial interest in the project. This is what we substitute for the traditional vetting process. We believe this is more in-line with current trends in social economics.   It’s our Movieball approach at work.
John What if a producer encourages his friends and family to engage in your crowd funding opportunity? At that point you won’t be sure if there’s legitimate commercial interest.
Ross Even if the producer whips-up interest from among friends and family members, it’s still interest. We would encourage producers to do everything in their power to demonstrate interest at any time during this process. If you have a big family and lots of friends, all the better.   For some, they may have big social media followings. This can help also.
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John So, tell me about your auctions.
Ross Sure. As I mentioned, we have two of them before we list “futures” contracts on our exchange.   The first auction is for world-wide exclusivity. We need the producer’s explicit permission for this. We’re targeting Netflix, Amazon, HBO, Showtime and others.   Maybe some Western European platforms as well. If we have the producer’s permission, the project may be sold to the highest bidder (assuming there are bidders for the project).

The second auction is the sale of exclusive distribution rights in important territories around the world. Some of these territories being Germany, UK, Japan, France, Latin America and even North America.

John Okay.   But regarding your second auction for individual territories, isn’t it true that people won’t know if they like a title until it’s finished? Wouldn’t they prefer to bid for a completed movie or TV show?
Ross Or games.
John Thanks.   Or games?

Ross

Yes, video games have much the same production and financing issues as movies do, and they also have the potential for massive profits.   Sometimes much larger than movies.

But to your point about the second auction, not when equity is involved. It’s like anything else. You’d prefer to investment at the earliest opportunity. It’s similar to real estate or anything else when equity is involved. You’d like to get in early. Otherwise the opportunity to make significant profits are gone. Once a title is complete, you would pay established market rates and hope to make a small profit at best. Imagine getting in early for the “Blair Witch Project”.   Although these are far and few between, it demonstrates the potential for profits when equity can be purchased within the earlier stages.

It’s important to note, however that if the territorial auctions are disappointing, this may be grounds to disqualify the project.   Once again, instead of vetting, we’re going to gauge interest. We must see some demonstrable signs of interest.

John That makes sense. Let’s close this session with the elements of a “package” as you mentioned earlier.
Ross Sure.
John Please walk me through your required criteria.
Ross Our criteria will be subject to change as we list more and more titles and evaluate the outcomes, but for now the deal points look like this

Each project to be considered by Modern Cinema Group must have

  • An Executive Producer
  • A finished screenplay or book; possibly an original story full written
  • A business plan
  • A defined genre
  • Some type of trailer (even a producer making a short “pitch”)
  • An attached Director (or Director Candidates)
  • Attached Lead Actors (or Actor candidates)
  • Comparable Media Titles (or “Comps”)
  • Any sources of co-financing (as the exchange only takes 50% of the production financing)
John Okay.   You want the project “packaged” as tightly as possible when producers come to the exchange.
Ross Right.   We don’t want a verbal explanation of green men invading planet earth. We can’t do anything with that. Also, we expect to work mostly with professionals who would have everything “packaged” anyway.
John You mentioned Modern Cinema Group provides 50% of the financing for a project? Not more than 50%?
Ross Right now it’s only 50%, however this might change in the future.   The remaining 50% is not as hard as the first 50%, however. That’s the part that producers need most. When they have 50% of a multi-million dollar budget secured, it’s much easier to get the additional money when it’s needed.
John We’re running out of time, but let’s continue with our next interview sometime soon.
Ross Great! I’d love to.
John I’d like to step through the process flow for the exchange step by step, all the way until settlement and distribution. Can we do that?
Ross Yes! I’m happy to walk you through the entire end-to-end process.
John great! Thanks Ross.
Ross Thanks!
 
  About John Blank

John Blank, Zacks Chief Equity Strategist, writes frequently, nationally and internationally. He has lately become an expert on publicly traded stocks, and serves as the editor of the daily Zacks Large Cap Trader newsletter and previously, on the International Trader. He re-publishes industry articles for Modern Trader magazine too; and opines on monthly macro and top-down investment strategy, and forecasts for global financial markets — for Zacks Premium and Zacks.com. These reports can also be found on Fidelity.com.

In this role, he jointly advises the investment management arm, termed Zacks Investment Management (ZIM). This group manages over $5 billion in assets. He writes their Zacks Stock Market Outlook report. John appears frequently on national TV to discuss individual equities, stock markets and the global economy, mostly with CNBC. At a TV studio near his home in Venice, CA, he shares televised views, drawing on Zacks latest Top-down Investment Strategy & Asset Allocation report, the Global Macro Consensus, a U.S. Economics outlook, and the latest CIO Survey insights.

John earned his PhD. in economics from M.I.T. and has a B.A. with honors and distinction in Mathematics for the Social Sciences from Northwestern University.