Subject Module - Elective CIAKL II - Class 03

EUROPEAN COURSE IN ENTREPRENEURSHIP FOR THE CREATIVE INDUSTRIES

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DIGITAL CONVERGENCE


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Digital Convergence Sources:

Peter Bloore, “Re‐defining the Independent Film Value Chain”, 2009

OECD, “Remaking the Movies, digital content and the evolution of the film

and video industries”, 2008

Christina Kukenshoner et. Al, “Bollywood – Maharashtra and India’s Film

Cluster”, 2008

Financial Times, “Bollywood: To the next level”, October 28 2011

Financial Times, “Entertainment: Growing cultural clout mirrors country’s

rising economic status”, January 28 2010

A new independent film value chain model

Value chain and value system An industry value chain or system is a connected series

of activities, that combine to create and deliver a product (or value) to customers.

These activities could include research and development, manufacturing, packaging,

marketing, and distribution. A value chain represents those activities as carried out

within a single company, and a value system represents those activities being carried

out by a series of different businesses or freelancers, acting together to create and

deliver the product.

Delivering value “When a company competes in any industry, it performs a number of

discrete but interconnected value‐creating activities, such as operating a sales force,

fabricating a component, or delivering products, and these activities have points of

connection with the activities of suppliers, channels, and customers. The value chain is

a framework for identifying all these activities and analyzing how they affect both a

company's costs and the value delivered to buyers.”

Processes are merging “SCM (supply chain management) and CRM (customer

relationship management) are starting to merge, as end‐to‐end applications involving

customers, channels, and suppliers link orders to, for example, manufacturing,

procurement, and service delivery. Soon to be integrated is product development,

which has been largely separate.”

Studio and independent value chains In the US studio system a film is often

developed, produced, distributed and exploited without leaving a single integrated

company or consortium: a simple corporate value chain. This is also the case with a


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small number of international studio‐style companies.

However the independent

feature film production and distribution sector (the prevalent model outside America)

is a value system business, in that a feature film is not made and delivered to its final

audience by a single company. Instead there is a chain of companies, businesses, and

freelancers, all working on different elements of the production and exploitation

process, and adding value in different ways along the chain. Furthermore, once the

film is exploited, the money handed over by the consumer (whether it be in return for

a cinema ticket, DVD purchase or online download) is subject to various revenue

shares or commissions as it passes back through the chain, which then complicates the

revenue flow.

Film “value chain” This terminology has been selected as the title, whereas the term

“value system” would be more accurate to Porter’s original usage, since separate

companies and freelancers are involved. However, as we have seen, the choice of

“value chain” reflects current usage amongst academics and consultants in the media

sector.

Design Since Porter (1985) it has been conventional to show the value chain or value

system as a series of arrows or lines going from left to right, with the customer or end‐

user on the right. This is in keeping with the Western European approach to reading

and representations of the passage of time. Each segment of the chain as illustrated

shows a point where a value is added, usually where an investment is made in the film

or its exploitation.

The order of the listing of “players” in each segment Film finance and production is a

highly complex and collaborative process. The term “players” has been selected to be

able to include the range of private and public organisations and freelance individuals

involved. The players have been approximately listed in order of creative power and

influence, with the most powerful at the top. It enables the value chain to be read in

terms of creative value and influence, as well as financial value and investment. This

order of listing does not reflect their financial input, or their entitlement to levels of

income.

Development Development is the process of creating or acquiring (through an option)

the idea for a film, creating the screenplay (through many drafts), securing

development funding for the writer, and initiating the production financing process.

Development financing often comes from a different source to production financing

(and in Europe often involves public subsidy funds). The chain as a whole shows very

clearly the distance between the development process and the end consumer of the

film. As a result marketing departments and distributors very rarely influence the


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creation of the films they will eventually exploit. This separation can sometimes be said

to be one of the weaknesses of independent film‐making.

Financing and pre‐sales This is the stage where the film is financed, in the case of

independent film often involving a huge range of collaborating businesses, advisors

and investors. This is the most complex stage of the process, where the leadership and

negotiation qualities of the producer are most vital in ensuring that multiple

stakeholders have to be made to say “yes” simultaneously. In investment terms film is

perhaps the most expensive of all art forms (with the possible exception of

architecture), and each of the investors may bring with them business needs and

creative views that can massively affect the completed film. Pre‐sales refers to the

process where a film is sold, in advance of being made, to some territories in the

world, on the strength of the perceived value attached director and cast.

Production, shoot and post The segment where the film is shot and edited. Post

production includes the whole editing process, including the addition of computer

generated visual effects and music. The shoot is usually the point at which the director

is most powerful; however this can reduce during the edit and post production

process, since the financiers are concerned to protect their investments and get

involved in creative decisions. Often the director, financiers and producers are all

involved in approving the final edit (who has final sign off is often a closely fought

contractual issue).

International sales and licensing The point at which the completed film is then

licensed internationally to distributors in each country or group of countries (known as

territories). Those distributors pay to receive the film and have the rights to exploit it

over a specified period of time. Usually the distributors also agree to return a share of

the profits of the distribution of the film back to the original financiers of the film.

Therefore in the independent sector it is the distributor and not the producer of the

film that pays to market it to the final paying audience. In the studio system many

international sales are handled through automatic output deals or foreign distribution

is handled by a subsidiary of the studio.

International Distribution / Exhibition and Exploitation The process where the

distributor prepares for and delivers the segment of Exhibition and Exploitation in each

territory, sometimes selling on portions of the rights. The “windows” (or time‐sensitive

opportunities of different types of exploitation) could be listed as follows, in order of

value to the distributor (rather than the timing of exploitation, which is discussed later

in this paper): DVD and VHS sales / rental; Pay TV (satellite and cable); Cinema (a.k.a.

the Exhibitor); Free TV (PSB or Advertising); Video On Demand (VOD); and finally

Online download (rent or own). Due to changing business models, this order of value


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will probably soon change, especially as DVD sales decline to be replaced by online

download or VOD. Again the American studio system tries to keep as much control as

possible of this stage of the process.

Consumption / the consumer The consumer is the last segment, which is not always

usual practice in value chain diagrams. This is because the consumer is fulfilling two

key value‐related functions. The first is purchasing the product and allowing financial

value to return down the chain (customer consumption). The second, in a way no less

important, is that the long term “library” value and reputation of the film is highly

influenced by the response of both the general audience (box office figures and word

of mouth) and critical voices (including both formal “approved” media critics and

informal “unapproved” critics, for example on internet websites or bulletin boards.

Library Rights The film can be re‐exploited in two ways. Firstly, for the duration of the

distribution license, it can be re‐exploited by the distributor (for example a second

release of the DVD, perhaps in a collector’s edition). Secondly, once the distribution

license expires and the rights revert, the producer may then be able to sell (usually via

a sales agent) a further distribution license (to the same distributor or another one) for

another period. This is more often as a part of a package of films, rather than as an

individual property. A repeat theatrical release is rare, until a significant anniversary of

a classic is reached (say 10 or 20 years), however a re‐release onto a newly developed

technological format has become quite normal.

Risk Generally speaking the earlier (further to the left) you are in the chain (towards

development and production) the higher the potential risk for the capital investor, due

to the distance in the recoupment chain from the money paid by the consumer.

However in keeping with Porter’s original theory, the value chain diagram does not

attempt to actually show the flow of income and the recoupment corridor.


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Digital content and the evolution of the film and video

industries

Product characteristics and markets

The OECD area is the source of most of the value produced by the film and video

industry. Although film and video markets in countries such as India and China are

very large, their investments and revenues are still a very small fraction of the

world total. Most of the total value (up to 80%) is produced in only a few OECD

countries, led by English language productions.

During the past ten years, the number of cinema films produced per year in most

major OECD markets has shown no substantial prolonged increase although there

have been significant fluctuations in US production from year to year. In contrast,

there has been a marked increase in the number of cinema screens and in the

amount of postrelease activity, mainly DVDs and television‐based distribution. In


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particular, the number of titles available on DVD has surpassed the number of titles

that were available on video cassettes by a considerable margin.

Relative to all other media products, cinema and television entertainment requires

by far the highest amount of initial investment per unit, most of which is high risk.

Investors often adopt a venture capital model, financing a portfolio of productions,

of which only a few are expected to be successful. In the feature film segment,

average costs have soared over the past 20 years, driven largely by the

‘blockbuster’ phenomenon, where a large share of capital is invested in a small

number of productions. Average costs have risen across the board, but much of the

increase is in advertising and distribution, which now account for 30‐ 40% of total

costs for major studios.

The economic viability of the industry depends upon average rates of return from a

constantly diversifying portfolio of media and associated enterprises. This average

can be maintained only where there is sufficient variety and volume of output, but

also where the rate of production matches demand.

The market success of film and video products is closely tied to consumer

perceptions of quality, which is reflected in constantly escalating production

values. Products are not price‐sensitive, and price discounts tend not to encourage

greater consumption of items with lower production values.

Technology and market distinctions between cinema and television markets are

breaking down. Most film and video products now depend on a wide spectrum of

interrelated distribution channels, all of which are digitised or are increasingly

becoming digitised into a set of relatedmarkets: Cinema box office markets.

Television markets (incorporating cable, satellite and

broadcastsegments).Consumer markets (including home video sales and

rentals).Online markets (including video services, interactive television, and

wireless digital content).

Consumption of audio‐visual media and content tends to be cumulative rather

than substitutive. New media such as DVDs and home entertainment centres tend

to supplement and reinforce cinema and television consumption. Consumers who

attend the most cinema performances also tend to buy more DVDs and watch

more television. DVD and television release (mostly pay‐TV and VoD) have become

major profit sources, DVDs often earning 50% or more of total income.


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To this point in time, the online video download market has not developed as

quickly or as comprehensively as many had expected. Compared to DVDs and

television, downloading is not yet a substantial revenue stream for most film and

video products. Television (including broadcast, pay‐TV and VoD) is now

overwhelmingly the most competitive distribution media for all types of film and

video products, followed by DVD rentals and sales.

Much digital film and video content is distributed by e‐commerce, selling or renting

DVDs online.

Although existing legal download sites appear to be slow in achieving a substantial

market share, ‘social networks’ show many signs of developing the consumer

communities necessary to stimulate the online download market. Furthermore,

these social networks also promise to change the paradigm of online distribution

from basically a linear distribution process to a highly interactive environment.

Industry structure

The markets for media products in the OECD countries overall is characterised by

large, vertically integrated multinational conglomerates that own or have

substantial interests in a wide range of audio, visual and print media as well as in

communication networks of various kinds. A substantial portion of the Hollywood

production cluster is now owned by conglomerates and investors that are not

based in the US.

For most of the largest of these groups, film and video entertainment products

make up only about 25% of the product portfolio, and these businesses have

invested particularly heavily in networking activities ranging from cable television

networks to ISPs, portals and telecommunication undertakings, and increasingly in

Internet‐based businesses.

The film and video investment and production structure is now distributed

internationally. International contract and co‐production initiatives have increased

the value of domestic film and video output dramatically in several countries, most

notably the UK, Canada and New Zealand.

The value chain

The film and video value chain is already heavily digitised and dependent on high‐

speed Internet facilities. Most of the major production and postproduction

functions are computer‐dependent. The production of music, sound and special


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effects is almost entirely digital as is most of the animation process. Remaining

areas for digitisation are image capture in the cinema film segment and in parts of

the television feature segment along with distribution in the cinema segment.

The film and video value chain is highly complex because film and video

entertainment products are intermediate goods. Once a film or video has been

produced, various stakeholders invest and add value to it in various secondary and

tertiary markets. Some of this is related to exhibition and distribution, but others

exploit various spin‐offs ranging from merchandising and advertising to the

commercialisation of new technology.

The technology of film and video production and distribution has changed

substantively in the past 50 years but the basic value‐added structure of the

industry has remained intact. Although many digitized segments are now very

mature, they have not caused major alteration in the basic value‐added structure.

However, significant challenges to this structure are likely from the elimination of

remaining analogue bottlenecks, mostly concerning new digital image capture and

digital distribution, with digital cinema technologies likely to be extremely

significant.

Full digitisation of production and post‐production may have major effects on the

value chain: Greater integration of the production and post‐production segments.

Redefinition and possible relocation of the duplication function. Redefinition of the

distribution function. Closer integration of the cinema and television

environments. Creation of a new ‘communication’ value‐added segment geared to

exploiting new methods of interactive market research encompassing social

networks.

The cinema exhibition segment will eventually be converted to fully digitised

production and distribution. The added flexibility of digital cinema may expand the

range of products that are shown and enable market development that goes well

beyond the exhibition of conventional feature films.

Although digitisation of production and distribution has many cost advantages, the

digital environment will not necessarily lower overall costs. In particular, film and

video production will remain a human resource‐intensive enterprise, and

increasing skill and productivity levels may result in overall higher labour costs.

Digitisation provides opportunities for more undertakings in more countries to add

value to the film and video industries, i.e. by exploiting emerging specialist

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Subject Module - Elective CIAKL II - Class 03