that a director does not have a business value because 1. he is a person, not a business, and 2. he can't sell his talent or earnings capability because it is intangible. For example, a doctor can capture some of his/her reputation by selling the practice, the business that to some extent embodies the intangible capital built up over years of practice. But, a director can't.

That may only be a description of the present state of human capital markets more than anything else. It is a decision that should make movie people happy and more likely to marry and divorce casually.

But, it turns out that, like most directors, McTiernan could have sold his earnings ability. He had exclusively contracted with his lend out company. So, he did have a company to sell and it owned his exclusive services. To my knowledge, no lend out company has ever been sold, so there are no data upon which to calculate its value. But, if the lend out company had a binding contract for a future flow of services from McTiernan, then its value would, indeed, capitalize the present value of that future flow.

That was my approach to the theory of McTiernan's human capital value, but it was not used by the lower court and so did not come to the attention of the Court of Appeals. I applied an options pricing model to McTiernan's lend out company. But I could not use the Black-Scholes options pricing model because it assumes a normal distribution and my research shows clearly that the distribution of movie grosses or director pay is not normal, nor is it log-normal. So, I used a stable options pricing formula to value the lend out company.

But, there is a bigger issue; that of performers financing the training and lean years and capturing their often huge future earnings capabilities. Forming a company that holds exclusive rights to a performer's services is one way a performer can capture the value of his/her future earnings. Imagine the Tom Cruise Company has an exclusive contract on his future performances and to the compensation flowing therefrom. It pays the actor some fixed or variable amount that can reduce or eliminate the vast uncertainty of his, usually revenue-contingent, future compensation. The actor can adjust his/her pay in just about any way by selling shares to the lend-out company that captures the variable receipts of the actor's future performances. The capital market assumes and prices the risk.

Training and education can be financed this way as well. So, the lend out company is a way around the difficulties of financing education and experience for many people who are in the creative arts or professional sports. Ah, if I had just a piece of the Jim Carrey lend out company back when he was a character on In Living Color.

It turns out that the studio system did just this. Each studio had the exclusive services of the actor, director, or writer and paid them a more or less steady income that was divorced from the risks of the outcomes of her/his movies. The studio assumed much of the risk, which could be sold to investors and spread through the capital market. Although many studios were privately owned by a small group of investors, they too could spread the risk by producing a portfolio ofmovies. Indirectly, this permitted the artists to reap the rewards of diversification over the movies and even careers of the other artists in the studio. An artist trust fund something like this now exists; they hold title to the tangible works though, so it is a bit easier than the lend out company idea.

· The Movie Business

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Posted by: Serg at June 5, 2006 7:04 AM

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