Breaking the chain: the screen industry and disintermediation.
The world is richer than ever before. There are more consumers, spending more time and money and engaging with more content, than ever before. But the survival of the independent content producer remains the perennial struggle for project funding. Notwithstanding individual successes, a sustainable--unsubsidised--Australian screen-production industry seems unlikely to emerge any time soon.
But why is this? My article sets out to explain the current screen-industry value chain and demonstrate the economic benefits of disintermediation, which we seem to be missing. It argues that only a (radical) disruption of this value chain will change the status quo and that a unique opportunity to do this exists today. Finally, it explores whether investing a modest amount of extant public funding and political capital in building market-access infrastructure could address this issue and facilitate future content production in Australia.
The screen-industry value chain today
In the screen industry, the value chain comprises all the elements in the production process from the birth of the idea to the completed work that reaches the audience. The parties in this chain all add value to the work, and what they receive for that value, less the cost of their contribution, is the 'rent' they collect for their role in the process. The screen-industry value chain is often dynamic, with soft borders and various industry players contributing differently depending on the project and their particular strategy. Thus, it is no surprise that the dominant and most successful companies tend to have businesses occupying all but the riskiest positions in the value chain, giving them a superior level of control as they seek to maximise their rents.
The model I've outlined below is typical in the creation of a feature film--probably the most complex of the screen-industry value chains--but it equally applies to other forms of screen production. Although my focus will be on the value chain from completed production, it will be useful to first consider what forms of value are contributed in the chain's earlier stages, which I've outlined in the table below.
Now to turn to the steps in the value chain following production. Of the parties already involved, the producer will typically have charged a fee in the budget for their contribution to the value chain so far. In the independent production world, producers are also likely to have a contractual entitlement to the net profits derived from the distribution of the work worldwide--in the rare event that such proceeds are achieved, producers are effectively rewarded for their role in creating a successful work. The equity financier has contributed the funds (and ideally the cash flow) and, in exchange for taking this financial risk, will typically seek fees, interest, recoupment and a share of profits. Soft money (obtained from public sources) is often provided on less onerous terms.
STAGE VALUE CONTRIBUTED Creation The idea Selection The decision to take the project further (concept) Development The ability to transform the idea into reality. This is principally embodied by the script, but also extends to practicalities such as the budget and schedule and to marketing essentials such as talent. Selection The decision to go into production (or not). This (production) stage is often stepped or hurdle-driven, and for most independent producers a decision solely driven by the interest of financing sources (i.e. if you can raise the money, you'll do it). Financiers, who play a critical role in selection, add value after this stage by actually contributing the cash to fund the production. Production Converting the picture elements (script, talent, budget and schedule, etc.) into the completed product that is ready for distribution
Taking the work to the international market is the sales agent, who is valuable because of their ability to sell the project on behalf of producers and equity financiers to distributors. Sales agents typically charge a fee of 10-30 per cent of the total income they have generated (15 per cent is used in this article's model), and can also play a significant role in raising funds. They're usually not required in their home market, where producers can directly market the product to distributors and/or distribution channels.
The distributor in each market adds value by stimulating consumer demand and selling the completed work through various distribution channels, and typically invests in the marketing expense. Again, the fees they charge for this service vary and are usually determined by revenue source video/DVD sales, for example, are often done on a royalty basis. In my model, the following figures are used: a 25 per cent fee from the revenue derived from cinemas, a royalty of 35 per cent with respect to video sales, (1) and 35 per cent fee on video-on-emand (VOD) and pay--and free-television revenues. Distributors also recoup marketing and distribution expenses after the aforementioned fees are deducted, before paying the remainder over to the producer and equity financiers. A distributor will often provide a minimum guarantee (MG) against this revenue to secure the rights to distribute the work, which is also subsequently recouped (for simplicity, this model assumes that any MG paid is recouped).
To get the completed work from the market to the audience, it now goes through a series of distribution channels. The availability timing ('windows') for each distribution channel is carefully managed, as the distributor seeks to optimise the total amount of income collected. These distribution channels, the value they add and what they charge in exchange are illustrated in Figures 1-6.
So what does this all add up to? Let's imagine a successful, modestly budgeted (say, A$5 million) Australian film for adults, and assume that one million people see it in cinemas worldwide, one third of whom are from Australia (making it one of the top Australian films of that year). Let's say this success means the distributors recoup their marketing spend from the theatrical release (a very rare event). Let's also assume that DVD sales, VOD and television generate roughly the same levels of gross distribution income as one another. As we see in Figure 7, this amounts to around A$16.8 million in gross revenue at the distributor level--with sales agents and equity financiers receiving their respective share of fees. Every film varies, but in my experience this scenario is reasonable.
But what reward does the producer get for pulling off this quite decent success? Not much--and a little less than zero if the other parties financing the production recoup the full amount of their investments first.
Disintermediation and market forces
Disintermediation just means cutting out the middlemen; it is most often associated with the technological developments that facilitate such changes. Consider the impact of Amazon on bookshops and of Google on the yellow pages, newspaper listings, and other information curators and providers. The screen industry has long been seen by investors as a prime candidate for disintermediation. In the model we've just looked at, different players add value at each stage of the chain and consequently charge specific fees for their respective services. But is every player really needed?
Sales agents, distributors and distribution channels all function largely as intermediaries connecting consumers with content creators. The distributor plays a significant marketing role, creating consumer demand, although how this is achieved is changing fast and the distributor's role in this process could be challenged. (2) The cinema release adds a marketing dimension and also provides a unique physical (and, although technically increasingly matched in the home, a social) experience for the consumer. The television networks may argue that they play a curatorial role, but viewers seem to prefer making their own choices when given the opportunity (and are embracing data-sharing tools that enhance this).
The physical distribution service that originally drove the creation of these roles in the value chain has all but disappeared.
To provide this service today, networks just have to send the digital content file over and the audience just needs the right device to view the program on. These elements now exist largely independently of the usual industry players, so when you strip out the "theoretically redundant distribution role of the middlemen, what might the value chain look like? As we see in Figure 8, funds generated can go straight to equity financiers, minus the recouped expenditure on steps such as marketing and supply.
Market forces are pushing and pulling. In terms of demand (pulling), the audience's desire for on-demand consumption has arguably driven the industry from the start and is rapidly facilitated by technological developments today. Audiences want to watch what they want, when they want and how they want--and businesses will continue to find ways to better meet this demand. I would argue that this desire for real on-demand consumption drives piracy in the developed world today, even more than price.
But, over on the supply side, there is resistance--principally from the current distribution channels. These channels are often owned by the same conglomerates, which have huge investments in their operations and desperately want to maintain their price points and gatekeeper roles while they transition into true on-demand providers. These dominant players are not unaware nor idle, however. Audience responses and industry pressures are having an impact: release windows are changing, broadcasters are providing catch-up services, and personal video recorders and smart electronic program guides now exist to help consumers take control. These embody the big players' efforts to usurp the value that other players contribute to the chain--they have no interest in cannibalising their existing businesses. Although they are in competition with each other, these companies share the desire to protect their audience share --and this affects their behaviour. Although there are low entry barriers in creating content, there are high entry barriers to doing this successfully over time in today's market. Sometime regulators--for example, the French government, which exerts some control over release windows--are arguably even helping these big players preserve their positions.
Technology is an enabling force, with its ever-expanding array of large and small viewing screens and with broadband-access expansion. The huge growth in on-demand entertainment consumption in South Korea (3) provides an example of what fast and ubiquitous broadband access can do. But, for many Australians, the technology is experienced in fits and starts; it is an imperfect market force. Only when streaming a film from an unlimited media library has become as simple as flicking the switch on a television set will the real on-demand experience have truly arrived for most people.
For financiers, the risk relative to return needs to change only with respect to other investment opportunities. A shift in the risk profile of an investment does, however, shift power. Changing the likely profitability of a work through disintermediation will be good for content creators, and will be the major factor in enabling them to become content owners. But will this not increase supply (and competition for the audience) as well, as ever more creators and investors decide to try their chances? Certainly, the industry today has demonstrated its capacity to increase supply at a much greater rate than the increase in consumption--for instance, the exponential increase in content facilitated by the emergence of multichannel television did not align with the increase in audience numbers (and hours in the day allocated to TV viewing), which happened only incrementally.
There is also the 'long tail versus the blockbuster' debate, which was started by then WIRED editor-in-chief Chris Anderson in 20044 and countered by Harvard academic Anita Elberse in 2008. (5) Anderson argues that the disintermediation opportunity facilitated by the internet enables niche products, particularly media/entertainment content, to thrive. In contrast, Elberse contends that the digital world can, in fact, merely increase the dominance of blockbusters because positive feedback reinforces their popularity (i.e. word of mouth becomes even more effective at popularising blockbusters). The debate continues.
The screen-industry value chain is a complex, dynamic and only partly regulated ecosystem. Industry players compete to provide value to consumers and take the position of other players. These are the market forces that drive change but resist it at the same time. This is why, despite the demand and the technology, the disintermediation opportunity is not being seized quickly.
With the federal government cutting the Screen Australia budget and putting the ABC under pressure, I wonder if the time may be ripe for trying another approach to supporting the screen industry in Australia; diverting some funds from content supply and towards building 'market access' infrastructure. I'm not proposing an Australian version of Netflix but rather a simple digital shopfront for Australian screen content with all the functionality that is making Netflix so successful. It wouldn't be that expensive --indeed, it probably doesn't even need to be built, but could be rented from one of a number of existing companies (the struggling Australian-based Quickflix might embrace another revenue source). The key would be ensuring that this outlet has a bold presence on every mainstream media platform used by audiences while enabling content owners to innovate and share their products with audiences through whatever platform (the amazing distribution functionality of Australian start-up Spondo demonstrates how this can be done).
With some political courage, this presence could perhaps be achieved without a price, providing a solution that the federal government's Convergence Review (6) sought but didn't reach. Over time, content quotas may be traded for home-screen presence in accordance with weakening broadcasters and booming device manufacturers and social-media companies. Existing commercially successful (i.e. unsubsidised) Australian content may not need to access the service, but any publicly funded content could be obligatorily made available on it while remaining free to be on every other platform. Temporary window arrangements could be made with existing value-chain players as audiences transition and their patronage continues to be considered critical.
Most significantly, this service would act as a digital shopfront and warehouse while eschewing any curatorial or sales role thereby freeing content owners to work with marketeers to innovate, promote and price their wares as they see fit. Such an outlet would not need to acquire and control content, but merely act as a shiny new (virtual) bridge for Australian content creators to reach the audiences of the future. Ease of on-demand audience access, not exclusivity, is what's important.
This is an edited version of a talk presented at the Australian International Documentary Conference in Adelaide in March this year.
Adam Smith operates his own consultancy, providing strategy, management and deal-making advice to the screen industry. Prior to that, he spent over a decade at Warner Bros., where he served as a senior vice president in their international production division. He can be contacted on <firstname.lastname@example.org>
(1) Note: with a royalty, the distributor pays a percentage of income and retains the difference, after costs, as their effective fee. This can often equate to a direct fee on revenue of 50 per cent or more.
(2) Editor's note: Lauren Carroll Harris has written on the problems with Australian film distribution today and proposes some viable alternatives in this issue of Metro', see 'Window of Opportunity: The Future of Film Distribution in Australia', pp. 98-103.
(3) See, for example, Ben Fritz & Jeyup S Kwaak, 'Hollywood's New Screen Test', The Wall Street Journal, 24 June 2013, <http://online.wsj.com/news/articles/SB100014241278 87323836504578552521772173386>, accessed 23 July 2014.
(4) Chris Anderson, The Long Tail', WIRED, issue 12.10, October 2004, <http://archive.wired.com/ wired/archive/12.10/tail.html>, accessed 9 July 2014, Anderson further developed the theory in his book The Long Tail: Why the Future of Business Is Selling Less of More, Hyperion Books, New York, 2006.
(5) Anita Elberse, 'Should You Invest in the Long Tail?', Harvard Business Review, July 2008, <http://hbr.org/2008/07/should-you-invest-in-the-long-tail/ar/1>, accessed 9 July 2014. 6 Commonwealth of Australia, Convergence Review: Final Report, March 2012, available at <http://www.abc.net.au/mediawatch/ transcripts/1339_convergence.pdf>, accessed 6 August 2014.
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|Title Annotation:||INDUSTRY PERSPECTIVE|
|Date:||Mar 22, 2014|
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