Marking the end of an era with Daniel Craig in the role of the British spy, the release of the latest James Bond movie is interesting to analyse in terms of risk management and time. The premiere of No Time To Die was delayed multiple times, and we can imagine the impact it has had on the project’s profitability.
In a way, profitability is the Bond Girl of corporate finance: we calculate the value of a project by comparing the investment required on one side, and revenue streams on the other. However, given that income is spread out over time throughout the years of operation, we have to discount the net revenue from expenditure. After discounting these cash-flows, you get a project’s net present value (NPV).
And since no-one can predict the future accurately, we generally make multiple calculations, with different scenario parameters: expected sales, operating costs, unplanned expenses, and also, the discount rate for the calculation. However, when calculating these scenarios, project delays are regularly overlooked. And yet, the simple question “what if the project is six months late?” often has the most impact on its profitability.
In the case of this film, it was one of the first to experience the full impact of Covid-19. After being rescheduled so many times, the delay came to 23 months in total, 18 of which were for reasons related to the pandemic. According to The Hollywood Reporter, Metro Goldwyn Mayer would have lost up to $300 million of revenue on the film if it hadn’t postponed the release.
This raises two questions:
- The first, more pragmatic and short-term: was it worth postponing the film’s release by 22 months because of the pandemic?
- And the second, more philosophical: given the new risks (environmental, health-related, etc.) emerging on our planet, must we – and how can we – account for uncertainties as to delays when making investment decisions?
James Bond may say that Tomorrow Never Dies, but it’s clear that with our current need for resources, The World Is Not Enough.
If we calculate the net present value – admittedly alongside many simplifying hypotheses, given the lack of detailed figures – it shows that the choice to push back the release date was not too detrimental for the producers. As of early December 2021, according to the author’s calculations, the film had not yet broken even: it was $70-80 million short in discounted profits. However, a release in April 2020 would have led to a shortfall estimated at double that (i.e. $140 million loss in profits).
But profits are not sales. At present, once again based on my estimations, the film still needs $170 million in revenue to break even, versus $326 million if it had of come out in the middle of the pandemic – for a total cost of $800 million to be profitable (data: Wikipedia, damodaran.com; calculations: yours truly).
Although such amounts seem enormous, we can place trust in the charismatic spy at Her Majesty’s service: firstly, the movie is still being shown in cinemas, and secondly, it has not yet started to collect revenue from being broadcast on DVD, Blu-ray, streaming platforms and TV. According to a study from Deloitte Insights, theatre revenue represents the biggest revenue stream for a movie (46%), but if you add the future portion of video/DVD revenue (36%) and TV broadcasts (18%), there shouldn’t be too many worries about the blockbuster’s profitability.
In this difficult economic period, do we have to take our time?
Also in the news from early December, we can find another illustration of this: while Aston Martin (maker of James Bond’s favourite cars) just announced that it would be producing the DB5 immortalised in Goldfinger again and launching a special edition, the Aston Martin DB5 Junior, Jaguar, featured in the latest Bond movies (with baddies at the wheel), announced that it would not be releasing any new car models before 2025 in order to focus more effectively on developing its electric vehicles.
In this way, instead of adapting its current models progressively for an electric engine, Jaguar is betting on disruptive innovation: starting from scratch, pouring enormous investment into R&D, and giving itself four years to bring out new models that are truly new.
This raises questions, not only commercial – what will the dealerships sell over the next four years? What losses will there be? – but also strategic: will competitors like Aston Martin profit from these four years and capture market shares? How innovative will the future electric Jaguars have to be to make up for four years of absence from the market?
Not so easy to replace Aston Martin in the role of the hero’s car
In these two cases, a company decides to forgo immediate revenue to ensure greater revenue in the future. This is not a slowdown in activity, but rather a delay till tomorrow without an immediate payoff. In a world that has to adapt to economic and human sustainability issues, we will probably see this kind of decision more and more:
- On the one hand, companies will be faced with questions of technological disruption and transition risks – and it is not so easy to start over for a whole production process to make it greener, without completely halting machines or processes.
- On the other hand, extreme events (floods, health crises, energy or water supply shortages, etc.) are likely to happen more often than before, wreaking havoc on many companies’ operations and the revenue they can make in their respective markets. In financial jargon, the beta of companies in the entertainment sector (including movie studios) will probably increase.
In this way, time, which we usually consider as a continuous variable, could increasingly become a discrete variable, with considerations relating to stops and starts in projects replacing our former considerations of recession and growth. James Bond may say that Tomorrow Never Dies, but it’s clear that with our current need for resources, The World Is Not Enough.
This was originally posted in French on Christophe Thibierge’s blog.
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