Investing in movies has always been viewed as a highly speculative venture resulting in far more bombs than blockbusters. That's why Maximilian Kogler, co-founder of Da Vinci Media Ventures, said he uses a "Moneyball for movies" approach in order to profit from independent films.
Independent movies from $2 million to $40 million in budget tend to make decent profits, according to Kogler. He said the average return for movies in this range since 1996 is about 11.5%, or what he refers to as beta.
"We apply a venture capital portfolio theory to it, which means we diversify into about 20 movies a year -- or beta -- and then we eliminate the ones that we think will not make money," said Kogler. "We don't try and pick winners, we get to beta and then we eliminate a disproportionate amount of losers because it's easier to do."
Kogler said he uses technology to trim those losers. Da Vinci employs a natural language processing technology to support its script-based algorithms, which are one part of a broader suite of due diligence tools the company uses for its film investments.
"While investors in other major asset classes employ various degrees of quantitative analysis, film investing has historically underemphasized analytics," said Kogler.
Theatrical box office grosses have remained fairly steady in the past decade even as online streaming and production companies like Netflix (NFLX) - Get Report and Amazon (AMZN) - Get Report are changing the overall movie distribution model. Kogler said this is an opportunity for investors, because it offers more avenues for revenue. Meanwhile, foreign box office grosses are soaring.
"International box office has gone from $10 billion 10 years ago to about $24 billion now," said Kogler. "China is going to outpace the U.S. in 2017, according to one study."
Kogler said his quantitative system will not be able to predict the Academy Award for best picture Sunday night. However, he did say that Oscar-winning directors tend to see their profitability go down after winning the award.
"Directors who get nominated, but do not win the award tend to do better at the box office on average," said Kogler.
Or in Wall Street parlance: Buy the nomination, sell the award.