SEOUL -- In the past decade, South Korea has developed the most diverse and dynamic film finance sector in Asia, thanks to active government support and a vibrant local business community. Nonetheless, the sector has been known to take on a gold-rush mentality at times, and critics point to the high level of risk and lack of safeguards that characterize Korean film finance.
Currently the industry has four major sources of capital. The largest investors are local conglomerates such as CJ, Mediaplex and Lotte, which operate the nation's largest distributors and exhibition chains.
These vertically integrated chaebol have played a key role in the industry since the early 1990s, and this year, CJ Entertainment alone has pledged $86 million to majority finance 20-plus features.
As a group, however, venture capital companies have provided the biggest slice of the industry's finance. From 1998 to the end of 2005, 48 funds worth a combined $535 million were launched.
Indeed, South Korean advertising firm Wise Interactive and Germany-based services and technology company Contraco Ltd. are planning to launch Korea's first film fund to include foreign capital. Fund is expected to include $26.9 million in international capital raised by Contraco and an additional $16.1 million raised in Korea.
Typically operating for five to six years, the funds devote 50%-70% of their capital to financing a slate of films, with the remainder placed in stocks or other investments.
However, the key attraction is the participation of the government's Small Business Corp., which has agreed to take a heavier share of losses when funds underperform.
From 1998 to 2005, the SBC contributed $121 million to film funds. The government-funded Korean Film Council (Kofic) also invested $46 million over this time, although Kofic operates on an equal footing with other investors.
The other two key sources of finance are indirect stock market listings, which many observers blame for a production bubble in 2006; and major telcos and broadcasters pursuing ancillary rights.
No less than 19 listed firms own one or more film-related companies that went public through backdoor listings. As for ancillary rights, the explosion of new media in this country has stirred activity in a market where ancillary rights have recently counted for very little.
Particular hopes are being placed on next-generation VOD services delivered through IPTV.
Multiple sources of capital have made Korean filmmakers less dependent on bank loans, meaning that outside of international co-productions, few projects make use of completion bonds and the rigorous accounting they entail.
Specialists such as accountant Im Ho-cheon of E-Jung & Co. argue that the industry makes insufficient use of special purpose companies (SPCs) to structure the financing of individual films.
Doing so would streamline cash flow, improve transparency and offer greater protection from liabilities, he says, while under the current system, accounting becomes murky and a moral hazard develops because production companies are tempted to spread funds to other projects.
One of the first Korean films to make use of an SPC was Kang Je-gyu's "Tae Guk Gi: The Brotherhood of War" in 2004.
But the greatest concern is over the low profitability of most film investments.
The Korean film industry uniquely divides profits 6:4 between a film's investors and the production company. Because of historical reasons, local films also receive a lower percentage of theatrical receipts from exhibitors (5:5) than imported films do (6:4).
This system has been sustainable during Korean cinema's boom years, but any prolonged drop in local films' performance could lead to a collision between investors and their filmmaking partners.
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