By: Jack Miller

In the near future, producers, investment firms, and fans may benefit from the use of blockchain technology to fund movie production.

Only a small portion of the movies produced are profitable, a few blockbusters each year drive profitability. Because of this profit structure, movie producers often buy the rights to ideas producers think could become a great movie, but ultimately decide to not produce the movie for a variety of reasons, one of which is a lack of consumer demand.

This was almost the story for the successful Deadpool franchise. Producers developed the script, and 20th Century Fox filmed test scenes that were not released. However, 20th Century Fox decided to discontinue its investment in Deadpool and fans almost lost an opportunity to see Ryan Reynolds in this iconic role. Fortunately, an unknown source leaked the test scenes and fans were ecstatic. The overwhelming demand for the movie reawakened the production process. 20th Century Fox has since released Deadpool’s sequel. Deadpool was almost discontinued due to uncertainty in the movie market.

Does this information asymmetry have to be the demise of potentially successful movies?

Blockchain technology has the potential to surmount this information problem through movie finance. Since movie producers rely on a few blockbusters to bring its investment portfolio into profitability, producers must make decisions before they can  gauge demand. Blockchain can expand the movie finance markets, opening opportunities for ownership to fan bases in an inexpensive manner.

Consider a situation where a movie producer tokenizes a forty percent ownership interest in a movie using blockchain and then opens that equity to the market. More investment institutions would have an incentive to research demand for the movie when evaluating the investment opportunity, so more resources will be allocated outside of the production company toward measuring demand. Also, fans investing in the movie would have a stake in advertising and promoting the movie in addition to their own enjoyment. Since the production industry is relying more frequently on outside sources of revenue to achieve profitability, fan investment can also serve as a signal toward the success of alternative revenue streams in addition to movie ticket sales.

This type of investment opportunity was not feasible before blockchain technology was developed due to the transaction costs and the risks in owning stock. Similar to the real estate market, small investors could hold a small portion of a portfolio of real estate assets, but it was likely cost prohibitive to own a small share in one commercial building due to trading fees on major exchanges and liquidity issues. However, blockchain technology can directly help eliminate these costs and indirectly signal a movie’s profitability.

Blockchain helps eliminate some of these transaction costs by eliminating financial intermediaries without significantly increasing the credit risk of the investment. According to the Harvard Business Review, “Money, equities, bonds, titles, deeds, contracts, and virtually all other kinds of assets can be moved and stored securely, privately, and from peer to peer, because trust is established not by powerful intermediaries like banks and governments, but by network consensus, cryptography, collaboration, and clever code.” By tokenizing an asset with blockchain, trades can happen outside of regular trading hours and are verified by a network of users.

Similar to crowdfunding on a website like Kickstarter, blockchain technology would help people to invest in companies. However, movie investment would resemble something more akin to project finance than start-up investment. Generally, movie investment requires more funds than investment in a small start-up company typically associated with crowdfunding, and crowdfunding intermediaries charge fees to invest in companies. With the addition of block chain, movie companies can move these small-scale or large-scale investment opportunities in house, reducing investment offering costs by nearly double-digit percentage points. By shifting more of the investment upside to investors and companies, blockchain technology enhances crowdfunding in addition to larger investment opportunities for investors.  However, securities laws apply to blockchain securities, but regulation regarding blockchain and crowdfunding securities is still evolving.

With the technological innovation of blockchain, not only will transaction costs be reduced, but problems associated with information asymmetry are likely to be addressed in the process. Movie fans, financial investment firms, and movie producers should rejoice in this innovative addition to the fight against uncertainty in making movies, and attorneys should prepare for the shifting landscape of business finance and regulation surrounding blockchain.