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That’s not how movie financing works. If you’ve ever read about the politics and mechanics of the industry, it goes something like this (I’m oversimplifying a bit and some details may be a little inaccurate from what I remember):
A lot of rich people (and even ordinary people without their knowledge) finance movies.
In IB, there exists a specialty financing department called something like “TMT-DCM” which stands for “Telecom, Media & Technology,” Debt Capital Markets (DCM). A common goal of IB is to raise money for companies projects (this is a fairly standard function called “capital sourcing”).
Some movies are absolutely financed by rich people. The story of the dude that defrauded Malaysia and then used the money to party and fund 'The Wolf of Wall St' is pretty well known. But the reality is that this isn't that common. Rich people don’t have cash just sitting around. They’re rich because they own companies that are worth a lot of money.
Anyway, IB’s are commonly tasked with raising money for movies. I don't know who’s active today (and TBF it’s been about 15 years since I read about this), but Bank of America, Wells Fargo and JP Morgan were very active back in the middle of the 2000’s. The thing is IB’s don't really have money themselves, so they reach out to rich people and institutions (e.g. pension funds, insurance companies, endowments, foundations, also sometimes hedge funds, etc.) to invest. More normal people unknowingly have exposure to this than you might think.
This is where people go wrong in their thinking. Individual movies are very risky. So then why would people invest in a single movie? Well they actually don't, and this is where the magic happens. What happens is you go in and create a portfolio (which is substantially less risky than an individual film). The these deals are setup is that, say, 10 future movies were coming out for a studio in the next 18 months, and their total budget was estimated to be $600 million, with a mix consisting of few $100 million movies and several $30 million movies. The producers and the studio will then reach out to an IB. The bank will then say, "If the studio sources $100 million, we can get the other $500 million.” Alright. Deal.
The IB then creates an ABS (which is essentially a financial package that will contain all the money that these movies make over the course of their entire lives. That includes everything, box office, DVD’s, cable broadcasts, TV broadcasts, foreign broadcasts, airplane broadcast, you name it, they do it, or 'other' licensing like when a clip of a movie is featured in a commercial for a toothpaste advertisement. The ABS will have a lifespan of, say 10 years for instance, and will have a minimum return of 8% a year and a maximum of, 15% a year, which is all based on several inside and outside estimates of how the movies should perform. The IB then turns around and markets this security to rich people and institution's to invest. They give $X (up to $500 million) and get a percentage of the total return pool.
So then your movies start coming out. The ABS starts getting a chunk of the profits, and the terms for 'revenue' and 'profit' are very strictly defined. The debt agreements for these ABS’s can run like 300 pages long, with everything laid out in excruciating detail. The split will be something like 20% of the profit which goes to the studio / producer and 80% going back to the ABS. When the ABS hits its maximum return for a given year, the excess profit then goes back to the studio which is to incentivize them to keep distributing the films.
So the idea is that out of 10 movies, maybe 3 bomb, 5 do ‘alright’' (e.g. are profitable but not exactly raking in dough), and 2 are huge blockbusters. But the point here is that the 7 that do 'alright' or great more than pay for the ones that bombed with money left over.
Then after a while, say 5 years or so, all the movies come out and now we have a better picture of how all 10 did, and we can figure out how the investment did. But, there’s still 5 years left on the ABS. Usually there are call or put clauses in the contracts that allow either the investors to be made whole by forcing the studio to put back the ABS at a predetermined return (that’s the “put” and it’s used if the movies failed to perform) or the studio may have a “call” (which allows the studio to buy back the ABS at a predetermined price if the movies way overperform). But it’s also common that people just ride the ABS and collect the checks up to maturity and at the point of maturity, normally the residuals are auctioned and everyone gets a cut of the final distribution.
Incidentally, this scenario is how Netflix funds all of its content. The debt that Netflix issues is “backed” by the streaming rights and liquidation value of all its IP (movies / TV/ etc.). The only real difference is that instead of having a bunch of little boxes containing let’s just say 10 movies each, Netflix itself is just one giant box that holds everything. But the structure is more or less the same.
I don’t know how much any of this has changed in the years up to today, but this is how it used to work in the early 2000’s.
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