Tag Archives: distribution platforms

Broken Windows

Fred Wilson wrote a piece on his blog today complaining about the film business’ distribution model. Fred wrote in part that:

denying customers the films they want, on the devices they want to watch them, when they want to watch them is not a great business model. . . . [Studio executives] insist that they need their windows. They argue they need to manage access to their films to extract every last dollar from the market. That just doesn’t make sense to me. If they went direct to their customers, offered their films at a reasonable price (say $5/view net to them), and if they made their films available day one everywhere in the world, I can’t see how they wouldn’t make more money.

While I have no allegiance to the current business model, I understand it. Producers of any new film hope to see it distributed in a number of distribution windows starting with an exclusive theatrical release and continuing through to wide release on multiple distribution platforms typically over the course of 12-18 months.

Wilson advocates simultaneous “streeting” across all distribution platforms. As technology improves, the lines of each traditional distribution window are blurring and will be replaced with something more akin to what Fred is advocating.

Even so, I can’t help thinking that audiences might lose something valuable in the process – maybe even movie theaters themselves. That would be ironic since movie execs sounded similar alarms when television was the disrupting technology in the 1950s. Then as now, movie theaters survived – but for how long?

What follows is most of what I wrote in response to Fred’s post with grammatical tweaking and references to other commenters omitted:

There are two . . . significant obstacles to simultaneously “streeting” movies across all distribution windows.

1. Movie theaters are a limited high-value distribution channel. There are only so many movie theaters and so many seats in those theaters. Only a small fraction of the movies produced each year get a theatrical release in the US. Foreign distributors look at a US theatrical release as a quality marker (this, despite the fact that international revenues generally account for 70% of a film’s budget). So a domestic theatrical in it of itself drives the value of foreign distribution rights up. This kicker in international revenues could not exist in its present form under a simultaneous street paradigm.

2. Allocation of marketing dollars. Movies and virtually every other product with novel elements have a distribution cycle, with demand for a well regarded/well marketed product highest at or near inception (e.g., the latest incarnation of any Apple product or Star Wars sequel). The costs of striking prints of the film – which are coming down as more theaters use digital projectors – and advertising (also called “P&A”) on a typical domestic release of a 1,000 screens or more are substantial. Studios/producers require millions in marketing dollars, sometimes in excess of the cost to make the movie, to theatrically release a movie in the United States.

The goal is to fill each and every seat of every screen in which the movie is shown to justify these marketing expenses (which, if successful, drives up the value of international revenues as noted above). That would not be possible if consumers had other, possibly more convenient choices that might dilute audience share at movie theaters. Although each exploitation window requires additional marketing spend, a successful US theatrical release can have a halo effect on subsequent windows (e.g., Titanic, the Twilight movies).

3. History of Industry Resistance to New Technologies. Lastly, the industry has always been hostile to new technologies. Silent movies were adverse to talkies which were against television which bristled to home video and so on to the present day.

The advent of on-demand viewing of movies in theatrical release is already part of an evolving theatrical release window. The industry needs time to adapt its model to the new demands of its audience. Change in the film business is inevitable even if it won’t come fast enough for the Fred Wilsons of the world.

The Film Industry Is In A Pickle

Pickle Magazine, a film industry publication based in India about all things Bollywood and now, Hollywood, recently asked producer and sales agent, Ron Lavery to interview me and ten others for its American Film Market edition. After reading all eleven interviews, it’s clear that none of us agree on what the long term and short term effects will be on the film business given the latest seismic shocks (and those to come) to the overall global economy. Here’s my take:

Lavery: How do you think the current economic situation will effect AFM business this year?

Me: The entertainment business, like most businesses runs on credit. Although there appears to be a credit thaw . . . if the financial environment gets worse or even if it continues to improve at its current pace, the credit freeze will definitely affect AFM business this year. With limited access to the credit markets, buyers will be less inclined to close deals and will have limited buying power in the short term. Over the longer term though – and I’ve already witnessed it first hand – private equity will step in to do more traditional debt financing (albeit at a premium) if the banks are unable to do so.

Lavery: Do you foresee any mergers between distribution companies?

Me: Yes. Although mergers are already a part of the overall trend towards the consolidation of the business, the current economic climate will only accelerate this process.

Lavery : Are there any news ways of financing films on the horizon?

Me: Over the last decade and longer, people have been and continue to try to build a better film financing business model as the economics of the film business shift. This process will likely [continue to] shift at a tectonic pace especially if credit remains tight, the costs of production continue to rise and equity sources dry up. With the Internet as a potentially new distribution platform with untested sources of revenue based on either a subscription model (which won’t work) and advertising (which might work if the revenues become more meaningful), Internet exploitation windows may become a more significant revenue source for producers and distributors.

This is especially true now that that the technology exists to “geo-filter” the exploitation of films on the Internet on a territory by territory basis.

Electronic sell-through of video units of films may increase the value of minimum guarantees since the Internet will allow producers to have greater access to mass markets for their films during the video exploitation window. In some cases, producers may be able to directly distribute their films without an actual distributor just as artists have in the music business, thereby saving on costs by eliminating the middleman.

What is even more interesting is that short films are rising in commercial appeal.

Long relegated to film festivals, new distribution opportunities have developed on the Internet and on mobile phone and Ipod technologies for shorts. As a consequence, producing shorts are good for business since they have lower budgets and can now attract marquee talent who view internet exploitation as a cutting edge business opportunity that provides potentially great exposure with minimal effort.

Lavery: Will the economic crisis effect government subsidies and tax credits?

Me: With the drop in income here in the United States (and a corresponding drop in tax revenues), each locality is looking for new ways to attract revenues, jobs and new industry to each of the States but [they are also] forced to contend with a corresponding drop in tax revenues by virtue of providing the tax subsidy itself.

Meanwhile India, the Middle East, Eastern Europe and China will continue to be appealing places to produce films which might not provide tax credits per se but . . . increase the potential bang for the buck.

Lavery: Any thoughts on the enormous impact Indian film companies seem to be having on American film companies?

Me: While the current economic climate is adversely affecting the global economy, India is viewed by many in the entertainment business as a potential source of new financing as opposed to talent. The good news for Indian film companies is that if India is the source of financing, then there might be increased leverage to utilize Indian talent in American films.

The other factor is the increased reliance on foreign sales of American films which right now hovers around 60-65% of the budget of the typical mainstream American film. This in turn requires . . . increased reliance on foreign talent in an effort to increase the appeal to foreign audiences.

Lavery: Any thoughts on Indian financing opportunities like the recent Spielberg-DreamWorks deal?

Me: The Spielberg-Reliance deal is viewed by many as the high water mark of Indian investment in film. The good news is that other film funds do not and will not require market capitalization to this extent. I expect the formation of several Indian and Asian based funds with more modest capitalization ranging from US$35 million to US$80million in the near term provided economic conditions do not seriously deteriorate.