Media and content

industries
Film industry case
A study for IPTS
Workshop: Economics of MCI
Sophie De Vinck & Sven Lindmark
Seville, 31 May 2011

Introduction
Background

Part of larger study on digital transformation of MCI sector

1 of 3 (5) case studies

Objectives

Analysis of the film industry

Main economic developments
Digitisation/Internet -> industry/value network
Implications for European competitiveness
Preliminary conclusions

Structure of the presentation

Background characteristics of the traditional industry

(value network, EU strengths and weaknesses)
Digital transformation of value network, opportunities and
challenges
Conclusions

The film sector: background

Crossroads of economic and cultural value
Economic characteristics

Prototype industry (high fixed/production costs, low

reproduction costs)
Competition (value) not reflected in price
Unpredictability of demand
Semi-public goods
-> Hit-driven (blockbuster),
-> Strategies of control, economies of scale and
scope, portfolio approach, versioning, stars,
genres, sequels
-> Copyright

The film sector: background

Hollywood and European film

Despite public support, European film industries
are fragmented

European film production levels on the rise

Number of feature films produced

source: European Audiovisual Observatory (2010). Yearbook 2010 Online Premium Service.

Public
support in
Europe

European audio-visual
(film, TV and other AV
works) support funds
(of more than
1million, excl. tax
incentives) - 2004
budgets
Source: Cambridge
Econometrics, 2008, p.
25

European market shares do not follow suit

Admissions in Europe by region of origin
Region

2006

2007

2008

2009

2010 (prov)

US

63.4%

62.6%

65.5%

66.9%

68.0%

European
lms

27.9%

28.1%

28.3%

26.8%

25.3%

EUR inc/US 5.6%

co-
producBons

7.5%

4.4%

4.0%

5.4%

Others

1.8%

1.8%

2.3%

1.3%

3.2%

source: European Audiovisual Observatory (2011). Focus 2011. World Film Market Trends. Strasbourg: EAO.

Cross-border circulation is problematic

Admissions in Europe (millions)
300.0

Total admisssions for EU produced films

250.0

200.0

Admissions on national market

150.0

Admissions in EU
outside national market

100.0

50.0

0.0
2001

2002

2003

2004

2005

2006

2007

2008

source: European Audiovisual Observatory (2010). Yearbook 2010 Online Premium Service.

Hollywood is common film culture in Europe and

beyond

Commission of the European Communities (2009). Commission staff working document. Accompanying document to the
proposal for a decision of the European Parliament and of the Council establishing an audio-visual cooperation programme with
third countries MEDIA Mundus. Impact assessment report (No. SEC (2009) 3098 final). Brussels: European Commission.

10 leading media groups based on AV-turnover

Rank Companies

Country Activities

Movie subsidiary
Sony Pictures,
PROD, DIS, VG, REC Columbia
PROD, DIS, TV, VID,
REC
Walt Disney Studios

30245

3 Time Warner US
News
4 Corporation
US
DirecTV Group
5 Inc.
US

PROD, DIS, TV, VID

Warner Bros.

22769

PROD, DIS, TV, VID

20th Century Fox

22699

TV

21565

6 Vivendi

FR

PROD, DIS, TV, VG

/
Canal + Group (Studio
Canal) (and 20% stake
in NBC Universal)

7 Nintendo

JP

VG

15474

8 NBC Universal US

TV, PROD, DIS

Universal Studios

15436

9 Viacom

US

TV, PROD, DIS

Paramount Pictures

13619

US

TV, RAD

10684

1 Sony

JP

2 Walt Disney

US

10 CBS Corp.

Source: Adapted from : European Audiovisual Observatory

2009

25482

17133

Film industry value network

Source: adapted from OECD

European strengths and weaknesses

Value network

Strengths

Weaknesses

- Lack of integrated majors

ProducBon

- Large and diverse

number of companies
and lms
- Auteur cinema
tradiBon

- Lack of selecBon and

development
- Low investment levels
- Lack of private funding
- Dependent on public support

DistribuBon

-Many lms distributed -Fragmented and concentrated

- Strong lm fesBval
market
tradiBon
- Lack of markeBng tools

ExhibiBon

- Large, mature and

varied consumpBon

-Theatrical and non-theatrical

dominated by Hollywood
- Lack of cross-border circulaBon

Production costs
Average budget per film 2008
Region

($M)

North America

22.96

Western Europe

6.13

All Europe

4.73

Far East

4.29

South America

2.86

C/E Europe

0.67

Asia

0.44
Source: Screen Digest (2009)

European strengths and weaknesses

Value network

Strengths

Weaknesses

- Lack of integrated majors

ProducBon

- Large and diverse

number of companies
and lms
- Auteur cinema
tradiBon

- Lack of selecBon and

development
- Low investment levels
- Lack of private funding
- Dependent on public support

DistribuBon

-Many lms distributed -Fragmented and concentrated

- Strong lm fesBval
market
tradiBon
- Lack of markeBng tools

ExhibiBon

- Large, mature and

varied consumpBon

-Theatrical and non-theatrical

dominated by Hollywood
- Lack of cross-border circulaBon

Release window system

Sequenced release
Different times at different
prices
Typically 6-9-12-24
Shortening (marketing and
piracy)

European strengths and weaknesses

Value network

Strengths

Weaknesses

- Lack of integrated majors

ProducBon

- Large and diverse

number of companies
and lms
- Auteur cinema
tradiBon

- Lack of selecBon and

development
- Low investment levels
- Lack of private funding
- Dependent on public support

DistribuBon

-Many lms distributed -Fragmented and concentrated

- Strong lm fesBval
market
tradiBon
- Lack of markeBng tools

ExhibiBon

- Large, mature and

varied consumpBon

-Theatrical and non-theatrical

dominated by Hollywood
- Lack of cross-border circulaBon

(Europe) catching up with the digital impact?

Digital as the latest in a series of innovations

Innovations affecting film product:

Sound
Colour
Widescreen
3D

Innovations affecting film commercialisation:

Television
Home video

Innovations often expanded the market

Worldwide revenues, USD Billion
60.0

50.0

40.0

18.7

18.1

16.9

16.1

16.2

30.0
15.5
TV (including Pay TV, PPV)

11.6
20.0

21.1

10.1

10.0

6.5

4.9

2.6
3.3

6.8

6.2

6.5

1980

1985

1990

1995

2000

2.2

0.0
1948

13.1

7.4

4.1
8.5

11.9

22.8

22.6

19.8

17.9

Video/DVD
Theatrical

8.7

8.1

7.0

8.2

8.8

2003

2004

2005

2006

2007

source: MPA and (Epstein, s.a.)

Digital as the latest in a series of innovations

Innovations affecting film product:

Sound
Colour
Widescreen
3D

Innovations affecting film commercialisation:

Television
Home video

Digital technologies affect all aspects of the film value

network

Digitisation
effects on
the film
value
network

Source: adapted from OECD

Elements and timeline of digitisation

1980s and 1990s

Sound production
Digital imaging (CGI computer generated imagery)
Jurassic Park and Toy Story (animation)

Editing
Digital cameras
Digital sounds systems (cinemas)
Home video DVD

2000s
Digital projectors and D-cinemas (replacing 35 mm reels), DCI
standards
3D revival
Digital Television, increased # channels, 2012 in EU
(Blue ray)
Internet retailing and rentailing
Digital distribution video on demand, streaming, Youtube etc.

Digitisation effects on the film value

network

The production process

The distribution and marketing of films
Film commercialisation:
Theatrical exhibition
Non-theatrical exhibition
Release window structure

Producing digitally
Cost-efficiencies and increased flexibility,
non-linear work processes
Audience interaction (e.g. crowd
sourcing) and finding content
Lower market entry barriers
Globalisation of production networks ?
BUT
Availability digital masters?
European industry slower in digitising than US
Digitisation of production archive?
Producer-distributor relationship
New players, incl. UGC and audience involvement

Digital distribution and marketing

Cost-savings and easier customisation (Sub-titlling, dubbing)
-> (trans-naBonal) distribuBon of European lms

Substantial cost-savings in reproduction and distribution (even for

off-line)
Online and viral marketing strategies
-> may alleviate European weakness in marketing

BUT
Hollywood benefits most from cost-savings? Reinforce
blockbusterisation?
How to get attention in a world of abundance? (Brand-names,
intergration, marketing even more important)
Role distributor reconfigured
New players specialised in online distribution and rights
management

Theatrical exhibition: digital cinema

Cost savings (mainly distributors), better quality,
programming flexibility
Flexible programming strategies opportunity for
exhibitors
BUT
Costly and difficult roll-out (chicken-and-egg problem)
Smaller exhibitors may disappear
Emergence of third parties to facilitate roll-out
Relationship distributor-exhibitor

Evolution of digital screens and sites in Europe

Digital screens
9,000
8,000
7,000
Africa and Middle East

6,000

Asia and Pacific

5,000

Europe

4,000

Latin America

3,000

North America

2,000
1,000
0
2004

2005

2006

2007

2008

2009

Source: European Audiovisual Observatory (2010). Yearbook 2010 Online Premium Service.

Transition driven partly by 3D

Source: Gunnarsson, 2010, The
outlook for Packaged Media.

Non-theatrical digital/on-line exhibition/consumption

Dematerialisation -> cost and time of delivery, time and place shifting,
linearity of consumption (?)

VoD model offers opportunities for growth

Opportunities of long tail
Cross-border circulation facilitated

BUT
Slow-down physical home entertainment (blu-ray) not compensated by VoD
revenues piracy
Continued dominance Hollywood films and US players
Multi-territory licensing not taken up by sector
New VoD players (Netflix, Apple, Microsoft, etc.)
Relations between theatrical and non-theatrical
Illegal marketplace

Online revenue small, but growing

Source: EAO 2010 yearbook

Online revenue small, but growing

Source: KEA European Affairs, & MINES ParisTech Cerna (2010). Multi-territory licensing of
audiovisual works in the European Union. Brussels: European Union.

Online film
started to gain some prominence in the mid 2000s when
Apple and other big Internet players (Netflix, Amazon,
Google) launched services, followed by Hulu (TV) 2008,
Epix 2009
Difficult to overview the European landscape
Increasing number of providers (200-400) providing
500-1000 services
Often nationally or regionally based
Variety of players
TV Broadcasters, distributors (operators), content
aggregators, content producers

Variety of modalities
Delivery platforms, delivery and payment models

Looking for business models

pay for films

download-to-own
(electronic sellthrough)
pay per stream
pay per download
subscription models
advertising-based
model
sharing model

free models

An online European single market?

100%
90%

12.2

12.01

11.6

80%
70%
60%

49.2

58.1
62.8

50%

Other
EU
US

40%

French

30%
20%

36.6
22.6

10%

30.3

0%
Theatrical

Video

VoD

Comparison of (consumption) market shares for films in theatrical, video and VoD (France, based on 2008 CNC data)
(KEA European Affairs & MINES ParisTech Cerna, 2010, p. 94)

Release windows under pressure

Shorter windows:
Piracy
Marketing effects for smaller titles reinforced by cumulative release

Against shorter windows:

Cannibalization effects
Hit and run character blockbuster strategies reinforced

Digital opportunities and challenges

Value network Opportuni@es

Challenges

ProducBon

- Stronger audience Bes

- Digital source masters availability
- Flexible and more cost-
- Back catalogue digiBsaBon
ecient producBon networks - Increased (global) compeBBon

DistribuBon

- Content customisaBon
- Cost-savings and exibility
- Online and viral markeBng

- Blockbuster-driven character of
distribuBon increased
- Dicult to draw a`enBon in a
world of abundance

ExhibiBon

- Flexibility and dierenBated

theatrical programming
- VoD potenBal
- Long tail
- Increased buzz for smaller
Btles in shorter release
window context

- Digital cinema roll-out

- Slow-down home entertainment
market
- Lack of strong pan-European VoD
players
- Online licensing problems
- Piracy

Conclusions

Hollywood majors dominate

Despite public support, European film industries
fragmented
Digitisation affecting the whole value network
Value network expanding and reconfiguring
Single market potential not taken up for now
Digital revenues do not offset non-digital losses
New power players are (again) based in US

Thank you!
Suggestions?