1. DreamWorks Animation SKG Distribution: Review and
Recommendation by Loren K. Maxwell A Graduate Term Paper Submitted
for Partial Fulfillment of the Requirements ofthe Degree of Master
of Business Administration MKTG 781 Dr. Dwyer University of
Cincinnati April 11, 2012
2. DreamWorks Animation SKG Distribution Abstract DreamWorks
Animations current distribution agreement with Paramount expires
onDecember 31, 2012. Primarily at issue is the 8% distribution fee
Paramount currently chargesfor marketing and distribution services.
This study performs an analysis of the film industry,DreamWorks
Animation, and the case details, to include exploring the options
of 1) renewingwith Paramount, 2) securing an agreement with another
distributor, or 3) pursuing self-distribution, to reach several
conclusions and provide a recommendation. Absent information
concerning actual options DreamWorks Animation is pursuing or
hasbeen offered, the recommendation is for DreamWorks Animation to
secure an agreement with amajor distributor and to show a
particular interest in securing with Warner Bros., although it
isdoubtful an 8% distribution fee can realized again. For less than
the 8% distribution fee,Lionsgate might be considered, but at
greater risk. DreamWorks Animation should not
pursueself-distribution. ii
3. DreamWorks Animation SKG Distribution TABLE OF
CONTENTSABSTRACT iiLIST OF FIGURES viiLIST OF TABLES
viiINTRODUCTION 1 Statement of the Problem 1 Need for the Study 1
Research Question 2METHODOLOGY 3 Type of Study 3 Sources Utilized 3
Assumptions 5 Limitations 6 Key Terms 8INDUSTRY ANALYSIS 12
Conceptual Model of the Film Industry 12 The Film Industry 17
Hollywood Dominance 17 Producers, Distributors, and Exhibitors 18
The Role of the Distributor 18 The Producer and Distributor
Relationship 20 The Distributor and Exhibitor Relationship 22
iii
4. DreamWorks Animation SKG Distribution Sequencing and
Windowing 25 Profit Maximizing and Shifts 25 Piracy 32 Customer as
Ultimate Arbiter 33 Key Markets 34 Domestic Theatrical Market 34
International Theatrical Market 43 Domestic Post-Theatrical Market
45 International Post-Theatrical Market 48 The Digital Animation
Industry 50 Traditional versus Digital Animation 50 Family feature
Film Market 52 Digital Animation Studios 52COMPANY ANALYSIS 58
Overview 58 Revenues 58 Strategy 61 Franchises 61 International
Market 63 Portfolio 65 3-D 67 Strengths, Weaknesses, Opportunities,
and Threats 67 Strengths 67 iv
5. DreamWorks Animation SKG Distribution Weaknesses 69
Opportunities 71 Threats 72CASE ANALYSIS 74 DreamWorks
Animation-Paramount Distribution Agreement 74 Terms 74 Distribution
Fees 75 Marketing and Distribution Expenses 78 Portfolio Value of
DreamWorks Animation 79 Recent Developments 83 Dispute over
Distribution Fee 83 Paramounts Portfolio 84 DreamWorks Animation
Exploring Option 86 Analysts Insights 87 Overview of Distribution
Options 88 Requirements 88 Options 91 Renew with Paramount 91
Secure an Agreement with a Different Distributor 93 Pursue
Self-Distribute 99 Conclusions 102 DreamWorks Animation Must
Mitigate Risk from Its Lack of Diversification 102 v
6. DreamWorks Animation SKG Distribution The Number of
Potential Distributors is Limited 103 The Bargaining Power for
Distribution Fees Has Shifted 103RECOMMENDATION 105REFERENCES
106APPENDICES 121APPENDIX A-MAJOR AND MINI-MAJOR STUDIOS, 1995-2012
122APPENDIX B- MAJOR AND MINI-MAJOR STUDIOS, 2009-2011 124APPENDIX
C-DIGITALLY ANIMATED FAMILY FEATURE FILMS 126APPENDIX D-PERFORMANCE
OF DIGITALLY ANIMATED FILMSCOMPARED TO TRADITIONALLY ANIMATED FILMS
SINCE 1995 130APPENDIX E-DREAMWORKS ANIMATION ANNUAL REVENUES
BYFILM 133APPENDIX F-CONCISE GLOSSARY FOR DREAMWORKSANIMATION SKG
DISTRIBUTION STUDY 136 vi
7. DreamWorks Animation SKG Distribution LIST OF FIGURESFigure
Page1 Simple conceptual model of the film industry showing
production, distribution,and exhibition. 132 Simple conceptual
model of the film industry with different markets. 143 Conceptual
model of film industry 154 Comparison of Top Tier Digital Animation
Studios; Adjusted Worldwide Grossin Millions against Metascore 555
Comparison of Digital Animation Studio Tiers; Adjusted Worldwide
Gross inMillions against Metascore 56 vii
8. DreamWorks Animation SKG Distribution LIST OF TABLESTable
Page1 Consumer Price Index, 1995-2012 102 Major theatrical
exhibition chains 243 Shrinking Window Between Theatrical Release
and Post-Theatrical Release 274 Approximate cost of film viewing
per person-hour, 2010 415 Comparison of Substitute Products,
1995-2011 426 Worldwide Theatrical Gross in Billions, 1995-2011 447
Domestic Home Video Gross in Billions, 1999-2010 488 European Home
Video Gross in Billions, 1999-2010 499 Japanese Home Video Gross in
Billions, 1999-2010 4910 Growth of Digitally Animated Films and the
Decline of Traditionally AnimatedFilms, 1995-2012 5111 Digital
Animation Studios 5412 Digital Animation Film Studios at the Oscars
5713 DreamWorks Animation DVD Sales, Ranked by of Adjusted Domestic
Gross inMillions of Accounted for DVD Sales, 2007-2012 5914 Digital
Animation Studio DVD Sales, Ranked by of Adjusted Domestic Gross
inMillions of Accounted for DVD Sales, 2007-2012 6015 DreamWorks
Animation Franchise Films, 2006-2012 6416 Upcoming DreamWorks
Animation Releases 6617 Domestic and Worldwide Growth of 3-D,
2005-2011 6718 Paramount Theatrical Distribution Fee in Millions
Per DreamWorks AnimationFilm 76 viii
9. DreamWorks Animation SKG Distribution19 Estimated DreamWorks
Animation Worldwide Revenue in Millions Per Film 7720 Estimated
Paramount Distribution Fee by Film 7821 Average Production and
Marketing Costs in Millions for MPAA Films, 2001-2007 7022
Paramount Distributed Films With $100 Million or More Adjusted
DomesticGross Released Since 2006 8123 DreamWorks Animation
Compared to Paramount Releases in Millions from2006-2012 8224 The
Weinstein Companys Top Films in Adjusted Worldwide
TheatricalRevenue in Millions 9625 Lionsgate Top Films in Adjusted
Worldwide Theatrical Revenue in Millions 98 ix
10. DREAMWORKS ANIMATION SKG DISTRIBUTION INTRODUCTION
Statement of the Problem DreamWorks Animation is the largest
animation studio in the world and has released atotal of 23 feature
films since 1998 (DreamWorks Animation SKG, 2012b). Beginning in
2006,DreamWorks Animation films have been distributed by Paramount
Pictures, a subsidiary ofViacom, under an agreement that expires on
December 31, 2012 (DreamWorks Animation SKG,2012b). Although
Paramount offered to extend the terms for an additional year,
DreamWorksAnimation rejected the offer (Frtiz, 2011a) to explore
more favorable distribution options.Currently, the three most
likely scenarios will be to either 1) renew an agreement
withParamount, 2) secure another studio to distribute DreamWorks
Animation films, or 3) pursueself-distribution. Need for the Study
The film industry is highly fractured, dynamic, and complex, with
distribution holding akey position between the production and
exhibition of films. As competing producers vie for ashare of an
increasingly crowded market, a misstep in the distribution of a
film can be disastrous.This is especially true for an independent
producer releasing a limited number of films targetedat a limited
audience and with a small film library to balance the risk of
losing millions of dollarsin production costs on an underperforming
theatrical release. Even a successful release canrealize much less
than its full potential if distribution is handled poorly. 1
11. DREAMWORKS ANIMATION SKG DISTRIBUTION Research Question
This study analyzes the film industry, DreamWorks Animation, and,
to the extentinformation is available, the specific case of the
expiring DreamWorks Animation andParamount distribution agreement,
and makes a recommendation in favor of one of the threeoptions
DreamWorks Animation is considering. 2
12. DREAMWORKS ANIMATION SKG DISTRIBUTION METHODOLOGY Type of
Study This study to determine how DreamWorks Animation should
distribute their films isqualitative using the grounded theory
method. This method was chosen because of the lack ofquantitative
data and the consideration of intangible benefits and costs of the
case. The industry analysis focuses primarily on 1995 forward, the
period starting with the firsttheatrical release of a digitally
animated feature film, with an increasing emphasis on morerecent
years. The company analysis focuses primarily on 2006 forward, the
period starting withDreamWorks Animations current agreement with
Paramount Pictures for distribution, againwith an increasing
emphasis on more recent years. The case analysis focuses primarily
on theagreement between DreamWorks Animation and Paramount and the
events surrounding thepotential to either renew the distribution
agreement with Paramount, secure another distributor,or pursue
self-distribution, again with an increasing emphasis on more recent
years. In all threeanalyses, particular weight is given to data
that is determined to have a significant impact on thefuture of the
industry or company. Older data is examined where appropriate.
Sources Utilized For this study, a variety of books, periodicals,
electronic databases, internet websites,industry reports, press
releases, and filings with the U.S. Securities and Exchange
Commissionwere considered. Topics investigated for this study were
the film industry, DreamWorks 3
13. DREAMWORKS ANIMATION SKG DISTRIBUTIONAnimation, and the
current distribution agreement between DreamWorks Animation
andParamount. For the particular workings of the film industry, the
most useful sources were the textbooks Entertainment industry
economics by Vogel (2011) and The business of media distributionby
Ulin (2010). Aside from the film industry, both explored the
business of creative industries ingeneral and should be considered
seminal works on the subject. Similarly, The movie businessbook,
third edition, edited by Squire (2004) was useful for an overview
of the film industry,although some chapters were already dated
given the advances in distribution technology in theperiod since
its publication. Industry trade organizations, specifically the
Motion Picture Association of America(MPAA), the National
Association of Theater Owners (NATO), the Digital Entertainment
Group(DEG), the Digital Entertainment Group-Europe (DEGE), and the
International Video Federation(IVF), were referenced for current
numbers on industry economics and current topics in theirrespective
areas. Also used in the analysis of the film industry were several
industry publicationssuch as The Hollywood Reporter, Deadline, and
The Wrap, business publications such asBusiness Week, Forbes, and
Fortune, general news publications such as USA Today, Los
AngelesTimes, and New York Times, and news sites such as CNN. Also,
several academic treatments ofthe film industry were found,
primarily relating to such subjects as the timing of releases and
thestructure of contracts between producers and distributors and
between distributors and exhibitors.Finally, Box Office Mojo
(www.boxofficemojo.com) and The Numbers (www.the-numbers.com) were
referenced concerning all domestic and international theatrical
revenues forfilms while Metacritic (www.metacritic.com) and Rotten
Tomatoes (www.rottentomatoes.com)were considered for all critical
reviews of films. 4
14. DREAMWORKS ANIMATION SKG DISTRIBUTION DreamWorks Animation
filings with the U.S. Securities and Exchange Commission andtheir
related earnings conference call transcripts were considered the
primary source for allinformation concerning DreamWorks Animation
as well as any press releases from the company.Also useful were
several investor sites such as Seeking Alpha (www.seekingalpha.com)
andMotley Fool (www.fool.com), as was an exceptional analysis of
DreamWorks Animation byAndrew August (2011) at Frogs Kiss
(www.frogskiss.com). Concerning the distribution agreement with
Paramount, DreamWorks Animation filingsand related earnings
conference call transcripts were again considered the primary
source for allinformation. Additionally, industry publications such
as The Hollywood Reporter, Deadline, andThe Wrap proved invaluable
when examining the most recent updates, as were various generalnews
publications, in particular the Los Angeles Times. Finally,
DreamWorks Animation Investor Relations was contracted for
additionalinformation on both the company and the specifics of the
agreement with Paramount. The reply,while polite, referred to the
public information available in SEC filings and press releases.
Assumptions This study makes the assumption all firms are profit
maximizing, meaning their decisionswill be consistent with the sole
goal of maximizing economic profits (Nicholson and Snyder,2011).
This is assumed to be particularly true of public companies, such
as DreamWorksAnimation and Paramounts parent Viacom. Additionally,
for this study, the assumption isextended to trade associations,
such as the Motion Picture Association of America. Althoughtrade
associations are not necessarily directly driven by profits, they
seek to advance the business 5
15. DREAMWORKS ANIMATION SKG DISTRIBUTIONinterest of their
members, which are assumed to be profit maximizing firms. Although
in truthpersonal and professional relations undoubtedly impact
business decisions, this simplifyingassumption effectively excludes
from consideration a sizeable volume of salacious
informationpertaining to DreamWorks Animation CEO Jeffrey
Katzenbergs relationship with the majorstudios, specifically his
contentious departure from Disney in 1994 (Borden, 2009), and
torecently reported acrimony toward Brad Grey, chairman and CEO of
Paramount (Masters,2011b). Additionally, in instances lacking any
other information, it was assumed domestictheatrical revenue would
suffice as a measure of success for a particular film,
producer,distributor, or exhibitor. Many sources have noted a
strong correlation between the domestictheatrical market and
subsequent markets, although the correlation is to varying degrees
and arange of other market and film-specific factors . . . can have
a significant impact on a filmsperformance in the international
theatrical market as well as in the worldwide homeentertainment and
television markets (DreamWorks Animation SKG, 2012). Limitations As
with any study, limitations due to incomplete or imperfect
information are inherent.Each known limitation is reviewed with a
short comment about the mitigation strategy for thelimitation.
Although the sources utilized proved invaluable, unavailable were
the undoubtedlyinnumerable discussions and arrangements which
occurred outside of the attention of the media.No assumption is
made concerning information not reported through the media.
Additionally, 6
16. DREAMWORKS ANIMATION SKG DISTRIBUTIONmost contemporary
sources, especially the trade publications, often report industry
rumors whichmay or may not surface later as verified fact. For this
study, rumors are identified as such andheavier consideration is
given to information reported as fact. A useful source of
information was investment oriented sites, however, it is noted
herethat the purpose of investment reporting is to inform actual or
potential stock investors on thevalue of a particular stock
relative to the condition of the market as opposed to an
objectiveanalysis concerning the financial wellbeing of a company.
Speculative reporting is the norm asis the exploration of different
scenarios and their perceived impact on a companys stock price.In
short, investment reporting often centers on a companys stock as
opposed to the companyproper. As a pertinent example, the lack of
specific public statements by DreamWorksAnimation concerning their
distribution options creates uncertainty in the stock market and
thusimpacts the stock price, although this does not necessarily
equate to DreamWorks Animationlacking distribution options and
suffering an actual threat to their future revenue. For this
study,all such discussions centering on a companys stock price were
not factored although relevantinformation might have been collected
and used. Another limitation in investment reporting is the
frequent use of unreferenced estimates,making it difficult to
determine their validity and reliability. This uncertainty in the
estimates isfurther compounded by the speculative nature of
investment reporting. In all such cases, aneffort was made to
validate an estimate with an outside source or to use it in
conjunction with anoutside source that contained a similar
estimate. Similarly, although DreamWorks Animations filings proved
to be an exceptional sourceof information, it is also noted that
its primary purpose is to report to investors rather than beused
for a business analysis. Although the purposes overlap, they are
not exactly equivalent. As 7
17. DREAMWORKS ANIMATION SKG DISTRIBUTIONa result, language in
filings and associated earning calls is often neutral and
purposefully vagueto be mindful of the ramifications on the
companys stock price. The use of these reports andtheir associated
earnings calls were limited to non-controversial information (i.e.,
the overviewof the business as provided in Item 1 of the Form 10-K)
and for the first source for anyinformation concerning DreamWorks
Animation. Another limitation is the surprising lack of public data
concerning certain relevantmarkets, specifically large segments of
the international theatrical market, particularly China andIndia,
and much of the post-theatrical market. Figures for VHS, DVD, and
Blu-ray sales andrentals for specific films are woefully incomplete
or unavailable, especially prior to 2006.Similarly, there seems to
be no source for comprehensive data on digital distribution, such
assales and rentals through iTunes or Netflix. However, as noted
above, it is assumed the domestictheatrical market is well
correlated to subsequent markets, albeit to varying
degrees(DreamWorks Animation SKG, 2012b). Finally, and perhaps most
limiting for this particular study, is the lack of information
foractual distribution proposals and options that DreamWorks
Animation may be weighing in lightof the imminent expiration of
their agreement with Paramount. As a result, the recommendationof
this study is of necessity fairly generic and does not and cannot
endorse a particular optionwith any specification. If given
complete and perfect information, it is quite possible an
entirelydifferent conclusion would have been arrived at other than
the recommendation presented. Key Terms Several key terms specific
to this study are used that warrant the early exploration of their
8
18. DREAMWORKS ANIMATION SKG DISTRIBUTIONdefinitions to prevent
confusion. A concise glossary is provided in Appendix F. Due to a
variety of production methods and occasionally a mixture of
productionmethods, such as a film combining live and animated
elements, for this study a digitallyanimated film specifically
refers to any film whose Genre is identified as Animation Computer
by Box Office Mojo and excluding any whose Genre is also
indentified asAnimation Motion Capture by Box Office Mojo or whose
Production Method was identifiedas Animation/Live Action by The
Numbers. A traditionally animated film refers to any filmwhose
Production Method is listed as Hand Animation by The Numbers while
a stop motionanimated film refers to any film whose Production
Method is listed as Stop-Motion Animationby The Numbers. Also, the
scope of the release can be relevant to distinguish films that are
meant tocompete on a national scale. Although some studies consider
a film to have a wide release if itplays on 600 screens
concurrently, for this study a feature film refers to any film
shown on 2,000or more screens in domestic theaters as reported by
either Box Office Mojo or The Numbers. Also, films tend to target
different audiences, which are often seen in their ratings and
thegenre they take place in. For this study, a family film is any
film rated G or PG by theMotion Picture Association of America and
classified in the Adventure or Comedy Genre byThe Numbers. This
study uses key terms cumulatively, such as discussing digitally
animated familyfeature films, which have all the above
characteristics. All DreamWorks Animation releases areeither
digitally animated family feature films, traditionally animated
family feature films, orstop-motion animated family feature films.
Occasionally, the use of inflation adjusted dollar amount is
helpful or necessary for 9
19. DREAMWORKS ANIMATION SKG DISTRIBUTIONcomparisons. In such
cases, this study will refer to those amounts as adjusted. Adjusted
dollarshave been calculated to their 2010 equivalents using the
Consumer Price Index from the U.S.Department of Labor Bureau of
Labor Statistic according to Table 1. Table 1 Consumer Price Index,
1995-2012 Year CPI Year CPI Year CPI 1995 1.4308 2001 1.2319 2007
1.0517 1996 1.3898 2002 1.2121 2008 1.0128 1997 1.3586 2003 1.1851
2009 1.0164 1998 1.3378 2004 1.1543 2010 1.0000 1999 1.3089 2005
1.1165 2011 0.9694 2000 1.2663 2006 1.0816 2012 0.9506 Of note is
that this method differs significantly from the method used by the
website TheNumbers, which uses the ratio of the average ticket
price for different years to perform theirinflation adjusted
calculations. For this study, The Numbers method is considered
inferior tousing the Consumer Price Index. Using adjusted dollars
for worldwide theatrical revenue, it is possible to reasonably
groupanimation studios that have exceeded specific thresholds. For
this study, a top tier digitalanimation studio is any studio that
has realized worldwide adjusted theatrical revenue of over
$1billion for digitally animated family feature films. As of April
10, 2012, four studios have metthis criterion: DreamWorks
Animation, Disneys Pixar, Foxs Blue Sky Studios, and
DisneyAnimation Studios. A middle tier digital animation studio is
any studio that is not a top tierstudio, but has released at least
one digitally animated family feature film that realizedworldwide
adjusted theatrical revenue of $200 million or higher. As of April
10, 2012, fourstudios have met this criterion: Universals
Illumination Entertainment, Animal Logic, IndustrialLight &
Magic, and Sony Pictures ImageWorks. The top tier digital animation
studios and 10
20. DREAMWORKS ANIMATION SKG DISTRIBUTIONmiddle tier digital
animation studios are considered the major digital animation
studios. Finally,a bottom tier digital animation studio is any
studio that is not a top or middle tier studio, but hasreleased at
least one digitally animated family feature film. As of April 10,
2012, fifteen studioshave met this criterion. Additionally, the
film industry has several tiers of distributors as well. Vogel
(2011)defines a major studio as a company with an important and
long standing presence in bothproduction and distribution with
substantial library assets and some studio production
facilities.For this study, a major studio can be quantitatively
identified as a distributor who captures 10%or more of the total
adjusted domestic theatrical gross. As of April 10, 2012, there
were sixmajor studios: Disney, Fox, Paramount, Sony, Universal, and
Warner Bros. Also, a second tierof distributors are normally
identified as well, commonly referred to as the mini-majors.
Ulin(2010) defines a mini-major studio as a company that is
independent, can offer broaddistribution, and consistently produces
and releases a range of product, but is largelydistinguished from a
major by distribution capacity. For this study, a mini-major studio
can bequantitatively identified as a distributor who captures more
than 1% but less than 10% of thetotal adjusted domestic theatrical
gross. As of April 10, 2012, there were two mini-majorstudios:
Lionsgate and The Weinstein Company, although MGM is identified as
a previous mini-major studio. 11
21. DREAMWORKS ANIMATION SKG DISTRIBUTION INDUSTRY ANALYSIS
Theres no business like show business Irving Berlin Conceptual
Model of the Film Industry Few industries capture the interest of
the public like show business. It is commonlybelieved to be a
mythical realm worthy of the stories it produces, where powerful
mogulsexecute cutthroat deals and bold Machiavellian maneuvers,
where its famous citizens teeterperilously between luxurious excess
and ruinous scandal, and where the small town girl navelybelieves
she is only one wish upon a star from avoiding the boulevard of
broken dreams. Anyother industry can seem pedestrian by comparison.
In truth, though, the everyday minutia of the film industry is
perhaps much more prosaicthan Hollywood itself might admit.
Agreements are settled perhaps more often in conferencerooms and
occasionally court rooms by businessmen and lawyers as opposed to
in smokybackrooms by anonymous power brokers and their lackeys.
This is not to say, however, the film industry is the same as the
petroleum industry or thefishing industry. The film industry is one
of the creative industries, which are characterized byseveral
economic properties (Caves, 2000): - Creative industries are driven
by new and unique products and are therefore subject to highly
uncertain demand. - Creative workers care greatly about what they
produce as opposed to workers in other industries whose labor tends
to be primarily functional and standardized. 12
22. DREAMWORKS ANIMATION SKG DISTRIBUTION - Many creative
ventures, such as films and live performances, require workers with
diverse and specialized skills. - Creative products tend to be
differentiated both vertically and horizontally. - Creative
products can differ in many small ways for an infinite variety. -
Many creative ventures require close temporal coordination by all
contributing elements. - Royalties and rents are often collected in
small lump sums over long periods of time. In addition to examining
the economic properties for a creative industry, the film
industrycan be further explored through the development of a
conceptual model with three distinctcomponents as the foundation:
production, distribution, and exhibition, as illustrated in Figure
1.Production refers to all the activities required to produce one
copy of a film, while distributionrefers to all the activities
related to marketing and delivery of a film to exhibitors, and
exhibitionrefers to activities performed to permit the consumption
of the film (Eliashberg, Elberse, andLeenders, 2006). Figure 1
Simple conceptual model of the film industry showing production,
distribution, and exhibition. The next step in the development of
the conceptual model is to consider the two generalmarkets for
theatrical release: the domestic market, which is the United
States, Canada, PuertoRico, and Guam (Glossary of movie business
terms, n.d.), and the international market, whichis all markets
outside the domestic market (Glossary of movie business terms,
n.d.). These 13
23. DREAMWORKS ANIMATION SKG DISTRIBUTIONcombine to form the
worldwide market (Glossary of movie business terms, n.d.). As
illustrated in Figure 2, release into the international market can
be further segmented,in this case into the notional regions of
Region 1 and Region 2. This segmentation is typicallyalong national
boundaries. Also shown in Figure 2 is the ability of the producer
to dividedistribution rights among more than one distributor, in
this specific instance using the samedistributor for the domestic
market and Region 1 but a different distributor for Region 2.
Notshown is that a producer can also use multiple distributors for
the same market if the distributionrights are parceled out in such
a manner.Figure 2 Simple conceptual model of the film industry with
different markets. In this notional example, Region 1 will begin
exhibition slightly after the domesticmarket and slightly before
Region 2. As well, the film will be exhibited for extended time
inRegion 1 as compared to Region 2 and the domestic market. This
represents sequencing into thevarious markets as well as windowing
the length of the exhibition. If no other window overlaps,as is the
case with the first portion of the domestic theatrical release, the
exhibiting window isconsidered to have exclusivity, from an
exhibitors standpoint the most desirable characteristic ofany
windows (Ulin, 2010). With the next iteration of the conceptual
model in Figure 3, film distribution begins to 14
24. DREAMWORKS ANIMATION SKG DISTRIBUTIONbecome exponentially
more complex with the introduction of post theatrical
markets,particularly with the multitude of exhibition methods
available. For simplicity, only twonotional exhibition methods are
shown for the post theatrical, but home video (VHS, DVD,
andBlu-ray), pay per view television, cable television, network
television, syndication, video-on-demand, etc., represent but a few
of the exhibition methods currently available in a rapidlygrowing
market.Figure 3 Conceptual model of film industry In addition to
the relationships and concepts discussed above, the expansion of
theconceptual model introduces a distributor who utilizes another
distributor, specifically where thedomestic theatrical distributor
uses another distributor to penetrate the Region 1 market for
15
25. DREAMWORKS ANIMATION SKG DISTRIBUTIONNotional Exhibition
Method 1. This could be due to any number of reasons, such as the
sub-distributor having familiarity in Region 1 or perhaps
familiarity in Notional Exhibition Method 1or perhaps even
exclusive ability to utilize Notional Exhibition Method 1 in Region
1 due tolegal or technological constraints. An example might be
cable television with a monopoly inRegion 1. Also depicted is
additional production prior to distribution into Region 1 for
NotionalExhibition Method 2. International markets often require
additional production, such assubtitling or dubbing (Eliashberg,
Elberse, and Leenders, 2006) or editing for controversialcontent.
Given the vast number of international markets and exhibition
methods, the number ofversions for a film can easily reach 150
(Ulin, 2010). However, almost any market offers thepotential for
additional production, such as special features in DVDs and
Blu-rays. In reality,each market and exhibition method combination
would most likely be touched by additionalproduction beyond the
making of a film as would the same market and exhibition method in
alater window, such as releasing an anniversary edition DVD of a
film 10 years after it hadalready been through a typical sequencing
and window cycle. Even within the same market,exhibition method,
and window, a film can benefit from additional production if it
cansignificantly differentiate the exhibition for the consumer,
such as a theatrical release of a film inboth 2-D and 3-D. Even a
casual review of film industry trade publications demonstrates the
aboveconceptual model is elementary, especially when compared to
the overwhelming number ofproducers, distributors, and exhibitors,
the dizzying number of markets and their individualnuances, and the
manifold and increasing number of exhibition methods cycling
through thevarious stages of their product life cycle. Proper
sequencing and windowing of a film, the key to 16
26. DREAMWORKS ANIMATION SKG DISTRIBUTIONprofit maximizing, can
become immensely complex with a vast number of competing
interestsfrom producers, distributors, and exhibitors. The key
components, relationships, and conceptsillustrated in the
conceptual model will be referenced in the remainder of the study.
The Film Industry Hollywood Dominance A prerequisite to fully
understanding the film industry is the appreciation of the
historicdominance Hollywood-based studios have enjoyed in
practically every significant market(Vogel, 2011). From the
beginning, domestic filmmakers held several early advantages
overtheir European rivals, namely 1) the worlds largest domestic
market characterized by a diverseimmigrate culture, 2) a
well-developed industrial organization as compared to the
largelyartisanal production and distribution systems abroad, and 3)
an appealing ideology of optimismand a practice of producing happy
endings in contrast to the often stark and morose fade-outscommon
in early foreign films (Trumpbour, 2002). Additionally, this
dominance is unlikely toend soon due to 1) the public good/joint
consumption nature of films, where the consumption byone consumer
does not reduce or detract from the consumption by another, 2) the
greateropportunity to amortize films in the post theatrical market
across a relatively large populationwith a strong breadth and depth
of exhibition methods, and 3) a minimized cultural discount onthe
product through the use of English, the second most popular
language in the world and usedby the majority of speakers residing
in the wealthiest nations (Vogel, 2011). Other reasons citedfor
this dominance include historical happenstance, technological
innovation, availability of 17
27. DREAMWORKS ANIMATION SKG DISTRIBUTIONcapital, application
of marketing prowess, and culture (Vogel, 2011). Because the United
States has long been the dominant exporter of film and
televisionprogramming, the net trade balance for these products has
been at least $4 billion per year(Vogel, 2011) with an $11.9
billion surplus in 2009, which accounted for 8% of the total
U.S.private sector trade surplus in services (MPAA, 2011).
Interestingly, as with any industry with astrong trade surplus, the
film industry is subject to fluctuations in the strength of the
dollar in theworld economy (Aft, 2004). A weak dollar, where
revenue collected in foreign currenciesequates to more dollars, can
help offset production costs originally incurred in dollars
(Aft,2004). Conversely, a strong dollar tends to hurt the film
industry (Aft, 2004). Producers, Distributors, and Exhibitors Role
of the Distributor Prior to 1948, the larger companies in the film
industry, referred to as studios, generallycontrolled all three
stages of production, distribution, and exhibition (Fellman, 2004).
Under thissystem, studios often utilized the real estate value of
their theater locations as collateral tofinance the production
costs of films (Vogel, 2011). However, in a landmark
decisionconcerning vertical integration antitrust cases, the
studios divested themselves of theaterownership under a consent
decree in U.S. v. Paramount Pictures, Inc., dismantling the
oldHollywood studio system and ushering in the modern era of the
film industry (Ulin, 2010).Now, absent the ability to finance
production through theater locations and lacking the ability
tocontrol exhibition, distributors became more selective about the
films they risked production 18
28. DREAMWORKS ANIMATION SKG DISTRIBUTIONcosts on, in turn
becoming the pivotal players that controlled the flow of content to
consumers(Vogel, 2011). In short, the major studios evolved into
distribution operations, where buyingintellectual properties,
hiring movie stars, and financing films is to some extent simply a
pretextto owning and controlling distribution rights (Ulin, 2010).
Filmmaking as a commercial venture is a highly risky proposition,
where most majorfilms do no better than break even with extreme
deviations in both directions (Vogel, 2011) andthe few highly
successful films must pay for the many underperforming ones (Vogel,
2011). Thetop 20 grossing films in any year will account for around
40% of the years revenues and 10% ofthe films will generate 50% of
the revenue (Vogel, 2011). In terms of profits, the prospect iseven
bleaker, where an estimated 5% of films generate 80% of theatrical
exhibition profits(Vogel, 2011). For a studio to be successful, a
highly successful film often requires anapproximately 20% return
simply to offset losses from other films (Ulin, 2010), not to
mentionthe many films abandoned during or perpetually stuck in
production (Ulin, 2010). To a large degree, distributors can be
properly viewed as managers of a specializeportfolio consisting of
films (Ulin, 2010). A simple application of modern portfolio
theorywould drive studios to adjust and mitigate risk exposure
through diversification by balancing amix of high-, medium-, and
low-budget films in their yearly releases (Vogel, 2011).
Accordingto data compiled from The Numbers, the six major studios
averaged between around 23 and 42releases annually from 1995 to
2012. Statistically, more films ensure consistent deviations
inrevenue and profits, and therefore temper risk, but it is also
noted films graduating throughproduction are not truly random
samples, but rather selected based on their potential
forprofitability, stacking the deck considerably in favor of the
distributor (Ulin, 2010).Additionally, films that become
unprofitable during production can either be abandoned or 19
29. DREAMWORKS ANIMATION SKG DISTRIBUTIONreprioritized to
improve its chances (Ulin, 2010). As a final consideration for
distributorportfolios, film libraries can also be considered as a
low risk source of profit (Vogel, 2011),although their
effectiveness can be subject to price erosion (Ulin, 2010). Major
studios have historically accounted for approximately 90% of
domestic theatricalrevenue (Vogel, 2011). Using data compiled from
the Numbers, Appendix A shows majorstudios received 89.4% of the
domestic theatrical revenue from 1995 to 2012 although they
onlyreleased 35.2% of the films. As perhaps evidence of a growing
independent movement madepossible by decreasing production and
distribution costs, Appendix B shows major studios onlyaccounted
for 26.7% of film releases from 2009 to 2011. However, they still
managed to take ina disproportionate 85.0% of domestic theatrical
revenue. The Producer and Distributor Relationship Intuitively, the
relationship between producer and distributor seems contentious
bynature. After investing perhaps years of work, millions of
dollars, and buckets of sweat equityinto a project over which they
most likely enjoyed absolute authority, the great culmination of
aproducers effort is to essentially hand over a completed film to a
distributor just as it is ready forconsumption (Ulin, 2010). This
poses significant risk to a producer who wants as manyopportunities
as possible to guarantee the success of a film, although, under the
portfolio model,a distributor may be ready to quickly abandon an
underperforming film in favor of divertingmarketing and
distribution resources to another (Ulin, 2010). Although producers
are generallygreatly concerned with the quality of their creative
work (Caves, 2000), from the distributorsportfolio perspective,
producers are little more than efficient sources for developing
content for 20
30. DREAMWORKS ANIMATION SKG DISTRIBUTIONthe portfolio (Ulin,
2010). As such, the producers power in the relationship comes
directly fromthe films distribution rights. Because a film is
intellectual property, and therefore infinitely indivisible, a
filmscopyright owner could parcel off each discreet distribution
right to a different distributor (Ulin,2010). Typically it would
benefit the producer to do so in order to reduce or eliminate
cross-collateralization of the revenues, where revenues from one
territory are used to offset losses fromanother (Blume, 2004). By
limiting cross-collateralization, a loss is compartmentalized and
doesnot impact the potential for revenues in other distribution
avenues (Vogel, 2011). Thissignificantly shifts the risk to the
distributor, and as such, distributors are naturally reluctant
toseparate these rights unless other arrangements for compensation
can be made (Vogel, 2011). Producer and distributor agreements
essentially boil down to the specification of theallocation of
revenue streams, to include specifying distribution fees, ownership
rights, andadvertising and marketing commitments, along with
details concerning account statementpreparation and audits (Vogel,
2011). Also commonly structured into producer and
distributoragreements is the degree of creative control, which
normally serves to mitigate risk on the part ofthe distributor,
especially if the distributor is serving as a financier for all or
part of a film. Forexample, a step deal provides funding in steps
that allow the financier the ability to advanceadditional funds
contingent on predetermined conditions (Vogel, 2011). These
predeterminedconditions typically involve one of the essential
ingredients of a production: screenplay, director,producer,
principle cast, and budget (Vogel, 2011), such as the financier
approving the draft of ascreenplay or requiring the producer to
secure certain casting choices. When financing on the part of a
distributor is involved, distribution fees are commonly30% for
domestic theatrical release, 40% for international distribution and
television syndication, 21
31. DREAMWORKS ANIMATION SKG DISTRIBUTIONand 15% for other
distribution avenues (Vogel, 2011). With a high barrier to entry
for majordomestic distribution operations (approximately $70
million per year in operating costs in anindustry offering
substantial risk), distribution fees are not especially sensitive
to bargainingpressures, although notable exceptions do exist
(Vogel, 2011). For producers who can finance from other sources and
essentially deliver a completedfilm, distribution fees as low as
between 12.5% and 17.5% can be realized (Vogel, 2011). Forexample,
after the success of Toy Story, Pixar negotiated a seven-year,
five-film agreement withDisney for a 12.5% distribution fee
(Burrows, 1998b). Also, although rare, a limited number ofwealthy
and powerful producers who can shoulder all the risk and
self-financing for a film cansecure even lower distribution fees if
the films likelihood for success is particularly high (Ulin,2010).
Following the success of Iron Man, Marvel Entertainment negotiated
an 8% distributionfee with Paramount for its Marvel Cinematic
Universe franchise of films (Vogel, 2011). GeorgeLucas was able to
negotiate a distribution fee of just 6% with Fox for the second
Star Warstrilogy (Vogel, 2011). Currently, DreamWorks Animations
agreement with Paramount is for an8% distribution fee (DreamWorks
Animation, 2011). From the perspective of any particular film,
distribution fees may generally be regardedas profit (Vogel, 2011).
However, from a distributors portfolio perspective, profit from
anyparticular film is first used to offset unrecovered distribution
costs from other films (Vogel,2011). The Distributor and Exhibitor
Relationship The relationship between a distributor and a
particular exhibitor depends heavily on 22
32. DREAMWORKS ANIMATION SKG DISTRIBUTIONwhere the exhibitor
sits in the sequencing and windowing of films and where the
exhibitionmethod is at in its product life cycle. Contracts can
take a variety of shapes, but termsnecessarily specify the details
of the exhibition rights, to include length of the exhibition
windowas well as time and territorial exclusivity and perhaps, at
least in the case of theatrical exhibition,conditions such as
auditorium size (Vogel, 2011). Although there are many variations,
conventional contracts between distributors andtheatrical
exhibitors call for a sliding percentage of the revenue after
allowances for theexhibitors expenses, referred to as the nut,
which consists of items such as rent and utilities(Vogel, 2011).
The nut is negotiated in advanced and is normally higher for
theaters with betterlocations and larger and newer facilities
(Vogel, 2011) and is often understood or assumed toactually be
higher than true theater expenses (Vogel, 2011). In the first week,
after the nut issubtracted, revenues are typically split with 90%
going to the distributor and 10 % to theexhibitor (Vogel, 2011).
Generally, every two weeks the split is adjusted in favor of
theexhibitor by 10% (Vogel, 2011). Over the life of a theatrical
exhibition, distributors normally receive about half of
revenuewhile theaters retain the other half (Vogel, 2011).
DreamWorks Animation reports theaters passbetween 49% and 56% of
domestic theatrical revenues to Paramount (DreamWorks AnimationSKG,
2012b). Although the amounts are roughly equal over the life of a
theatrical release, filmstypically experience a strong opening and
then fade over time (Ulin, 2011) and the slidingpercentage
agreement is structured to allow the distributor the fastest
recuperation of distributionand marketing expenses (Vogel, 2011).
Of note, the most significant source of profit for exhibitors is
concession stand sales,whose profit margins on individual items
often exceed 50% and can reach up to 90% on items 23
33. DREAMWORKS ANIMATION SKG DISTRIBUTIONsuch as popcorn
(Vogel, 2011). In fact, concession sales for some theaters account
for 90% ofprofit (Vogel, 2011) and are often the difference in in a
theaters economic viability (Lowe,1983). Historically, revenue from
concessions, which can account for approximately a third oftotal
exhibitor revenues (Vogel, 2011), has been unsuccessfully targeted
by producers anddistributors alike, but over time has come to be
considered sacrosanct for the exhibitor (Ulin,2010). This reliance
on concession revenue drives theater owners to be almost
single-mindedlyfocused on traffic (Ulin, 2010). Table 2 Major
theatrical exhibition chains Circuit Screens Sites Average Regal
Entertainment Group 6777 548 12.4 AMC Entertainment. Inc. 5336 378
14.1 Cinemark USA, Inc. 3825 293 13.1 Carmike Cinemas, Inc. 2268
242 9.4 Cineplex Entertainment LP 1347 130 10.4 Rave Motion
Pictures 936 62 15.1 Marcus Theatres Corp. 668 54 12.4 Hollywood
Theaters 546 49 11.1 National Amusements 450 34 13.2 Harkins
Theatres 429 30 14.3 Other 16,651 4,122 4.0 Total 39,233 5,942 6.6
Source: NATO, as of June 24, 2010 Table 2 shows that the top six
domestic theater chains control 52.2% of all screens and27.8% of
all theater sites (NATO, 2010), however, due to their tendency to
control the bestlocations and most modern screens, the top one
third of all screens account for an estimated 75%of domestic
theatrical revenue while the top six exhibitors account for at
least 80% of the totaldomestic theatrical revenue (Vogel, 2011).
24
34. DREAMWORKS ANIMATION SKG DISTRIBUTION Sequencing and
Windowing Profit Maximizing and Shifts Distribution is the art of
maximizing profit by choreographing exhibition rights
throughsequencing and windowing against the challenge of waiting
for the consumptive verdict on theexperienced good (Ulin, 2010).
The ability to maximize the return on the whole assumes
onedistributor enjoys autonomous control of all distribution rights
to set sequencing and windows(Ulin, 2010). As a general principle,
films are normally distributed to the market generating the
highestmarginal revenue over the least amount of time and then
cascading down in order of marginalrevenue contribution (Vogel,
2011). However, distributors are not necessarily looking tomaximize
the revenues for each particular exhibition method, but rather to
maximize revenuesoverall (Vogel, 2011), so considerations such as
the extent to which one exhibition method addsto the total audience
or eliminates consumers from other exhibition methods and the rate
ofdeclining viewer interest are factored (Owen and Wildman, 1992).
As an example of onerevenue source diminishing while overall
revenues increase, television networks have abandonedthe practice
of aggressive bidding for films with the rise of cable television,
which tend to paymore than network television (Vogel, 2011). For
the most part, the greatest marginal revenue perunit time is
generated from the theatrical release, which also tends to generate
the greatestamount of interest in subsequent exhibition methods
(Vogel, 2011) As an insight to distribution decisions, Ulin (2010)
provides Ulins Rule, stating:Content value is optimized by
exploiting the factors of 1) time, 2) repeat consumptions, 3)
25
35. DREAMWORKS ANIMATION SKG DISTRIBUTIONexclusivity, and 4)
differential pricing in a pattern taking into account external
market conditionand the interplay of the factors among each other.
An example of the interplay between thesefour factors is the
standard practice of driving repeat consumption of the same product
bycreating exclusive windows for different exhibition methods at
differentiated prices (Ulin, 2010).Ulin (2010) argues Ulins Rule
allows distributors to maximize the lifetime value of a singlepiece
of intellectual property. The standard sequencing by distributors
starts with the theatrical release and is followedby pay-per-view
television, packaged media (VHS, DVD, and Blu-ray),
video-on-demand, paytelevision (premium cable channels), and
network television (Ulin, 2010). However, theincreasing variety of
exhibition methods creates more competition between exhibition
methodsand drives an acceleration and compression of windows (Ulin,
2010). As a result, every segmentbecomes fearful of cannibalization
of revenues from a different segment and the greatest powerof any
window becomes exclusivity, a true rarity aside from the initial
theatrical release (Ulin,2010). Against the pressure to shift
windows, distributors become the arbiter between exhibitorsthrough
the control of exhibition rights, including first rights and
exclusivity rights (Vogel,2011). This potentially creates great
conflict between distributors and exhibitors sincedistributors make
sequencing and window decisions centered on maximizing revenue
fordistributors vice exhibitors (Vogel, 2011). Among the pressures
on windows is the large amount of capital required to produce
anddistribute films. Oversized production budgets, high interest
rates, and substantial marketingcosts drive distributors to select
sequencing and window strategies to bring the largest return tothe
distributor over the shortest amount of time, driving earlier
openings of all windows in thedesire for faster recoupment (Vogel,
2011). Specifically, As post theatrical markets such as 26
36. DREAMWORKS ANIMATION SKG DISTRIBUTIONpackaged media,
pay-per-view, and video-on-demand services are capable of
generating highermarginal revenues over a shorter period of time,
distributors can significantly decrease the timeto recoup their
investments by reducing the period between release windows between
thetheatrical and post theatrical markets (Eliashberg, Elberse, and
Leenders, 2006), and continuallydid so from 1998 to 2008 as shown
in Table 3. This tightening of windows additionally savesmarketing
money for the distributor and opens the exhibition earlier to
revenue from customerswho would not have gone to the theatrical
release anyway (Ulin, 2010). However, these shorterexhibition
windows in theaters has a disproportionate negative impact on
theater owners underthe traditional sliding percentage agreement
since theaters reap more benefit the longer a filmplays (Ulin,
2010). Table 3 Shrinking Window Between Theatrical Release and
Post- Theatrical Release Year Average Time Between Release Windows
Days 1998 5 months, 22 days 172 1999 5 months, 18 days 168 2000 5
months, 16 days 166 2001 5 months, 12 days 162 2002 5 months, 8
days 158 2003 4 months, 27 days 147 2004 4 months, 20 days 140 2005
4 months, 18 days 138 2006 4 months, 11 days 131 2007 4 months, 19
days 139 2008 4 months, 10 days 130 Source: NATO memo, December 12,
2008, RE: Average Video Announcement and Video Release Windows,
from Ulin (2010) Some support an even more aggressive collapsing of
windows into the post theatricalmarket. Stating distributors are
simply not maximizing the profit potential of a film, BTIGResearch
analyst Richard Greenfield called for distributors to permanently
collapse windows as 27
37. DREAMWORKS ANIMATION SKG DISTRIBUTIONthe new Hollywood
business model (Chacksfield, 2012), asserting distributors should
bepushing the release windows to four weeks instead of four months
(Gruenwedel, 2012a),undoubtedly to the delight of many exhibitors
and to the chagrin of many others. Additionally, the impact of
advancing technology on sequencing and windowing cannotbe
overstated, particularly advances in distribution and storage,
which has lead to the posttheatrical market to eclipse the
theatrical market in terms of revenue (Vogel, 2011). In 1986,
forthe first time distributors earned more revenue from the post
theatrical market than in thetheatrical market and forever changed
the fundamental structure and marketing strategies (Vogel,2011). No
longer restricted to bulky prints and costly projectors, feature
films can now beconsumed on televisions, computers, tablets,
handheld gaming devices, smart phones, and evenlarge, high-quality
screens in home theaters for enthusiasts aiming to capture the
traditionaltheater experience but with added convenience and
comfort. Additionally, consumers can accessan impressive array of
films from network and cable television, packaged media such as
DVDsand Blu-Rays, video-on-demand services, and websites. As Yves
Caillaud, Senior VP of WarnerHome Video and Digital Distribution
and Chairman of the Digital Entertainment Group-Europe,observed,
Consumers really are spoiled by choice (DEGE, 2011). Jim Hedges,
CFO of ABC,observed Historically, viewers consumed television on
the big three networks when it wasprogrammed by a network executive
. . . Today consumers are programming their ownnetworks by using
the many options available to them (Ulin, 2010). This unprecedented
abundance of viewing options has reshaped the economic structure
ofthe film industry as distributors attempt to maximize profits as
newer exhibition methodscompete with as well as complement existing
methods (Vogel, 2011). There have been more 28
38. DREAMWORKS ANIMATION SKG DISTRIBUTIONwindow shifts in the
last 5 years than in the previous 25 years (Ulin, 2010). The
challenge fordistributors is to combine new and old exhibition
methods as they come into conflict, typicallydone by slowing
adoption of new methods as executives struggle to find a balance
between theconflicting methods that does not shrink the overall pie
(Ulin, 2010). Typically, however,sequencing will shift in favor of
technologies that can realize the marginal revenue contributionat
the fastest rates (Vogel, 2011). Unquestionably the largest change
in recent years, and perhaps in the entire history ofintellectual
property distribution, is the advent of digital distribution,
allowing users to choosefrom thousands of films, television shows,
and other digital content and begin viewingpractically instantly
(DEG, 2008b). One-third of homes in the United States stream
videos(Gruenwedel, 2012b) and Netflix alone accounts for an eye
popping 32.7% of all domesticinternet traffic from 6 to 10 p.m.
(Wasserman, 2011). Digital has also encouraged distributors to
adopt second screen strategies to providecustomers with
opportunities to enjoy their favorite content . . . between a wide
range ofproducts than can share content, including televisions,
tablets, smart phones, PCs and gamedevices (DEG, 2012a) as,
according Thomas Gewecke, president of Warner Bros.
DigitalDistribution, consumers expect to have easy access to their
content, whenever and whereverthey want (Prange, 2012). Computers
accounted for only 45% of Netflix traffic while gamingconsoles,
set-top boxes, smart TVs, and mobile devices continue to grow in
popularity(Wasserman, 2011). Additionally, research shows most
people under 30 already utilize theircomputers and mobile devices
as primary sources of consuming content (Ulin, 2010) while
aseparate study found that over 25% of video watching occurs away
from the TV (Gruenwedel,2012b). 29
39. DREAMWORKS ANIMATION SKG DISTRIBUTION To this end, five of
the six major studios (excluding Disney) plus mini-major
Lionsgatesupport the digital UltraViolet format, which allows a
single household to create an account forsix family members to
access their films and TV shows, and later music, books, and other
digitalcontent, from retailers, cablers, and streaming services on
up to 12 registered devices coveringmost of the hardware on the
market (Hollywood studios announce support for UltraVioletformat,
2011). Three streams are possible at a single time and content can
be downloaded andtransferred onto physical media, like recordable
DVDs, SD cards, and flash memory drives(Graset, 2011). In an effort
to balance old exhibition methods against the new without
erodingthe overall total, UltraViolet-enabled Blu-Ray discs have
been introduced as distributors clearlytry to maintain value in
packaged media (Adams and Cryan, 2012). When windows do overlap,
the competition between exhibition methods and the drive tosustain
consumer interest in a particular film has lead to a wide variety
of developments designedto enhance consumer experience as a method
to differentiate between overlapping windows.Perhaps the first of
these to be widely used has been the special features included in
DVDs.Additional and alternate scenes, extended, uncut, or unrated
versions, audio commentaries,behind the scenes vignettes, outtakes,
gag reels, crew and cast interviews, and more have allbecome
standard fare, and all are possibilities that were not available or
practical in the theatricalrelease or in preceding home
entertainment formats. When the DVD format was launched in1997, the
formats superior sound and visual quality were considered its
selling point over VHS,but after a short time special features were
being hailed by an impressive chorus of homeentertainment industry
experts (Arnold, 2000). Buena Vista [now Walt Disney Studios
HomeEntertainment] President Bob Chapek stated the DVD format
affords us [the opportunity] tomake it an all-new entertainment
experience . . . beyond watching the movie. DVD allows you 30
40. DREAMWORKS ANIMATION SKG DISTRIBUTIONto reinvent the
product echoed Mike Dunn, Executive VP of Fox Home Entertainment.
Consideration for the DVD special features is even worked into the
production of the filmitself (Arnold, 2000). Now, there is great
cooperation between the video and theatricalproduction departments
in getting materials really early, said Marshall Forster, Senior
Sales VPfor Columbia TriStar Home Video. And the additional effort
put into special features has paid off. Artisan Sales andMarketing
President Jeff Fink noted a significant upside in sales compared to
what we wouldhave done if the product had been brought out on VHS
only, while Craig Kornblau, President ofUniversal Studios Home
Video, asserted special features are an absolute requirement to do
bignumbers on DVD. By all accounts, special features were
successfully utilized as a method tocompliment revenues from
theatrical exhibitions. Interestingly, special features also serve
as an excellent example to highlight the oppositeside of film
distribution competition as well. By 2010, when distributors felt
rentals werecarving too much out of DVD and Blu-Ray sales, special
features were being removed fromrented media and consumers who went
to view the special features were met with a messagestating This
disc is intended for rental purposes and only includes the feature
film. Own it onBlu-ray or DVD to view these bonus features and
complete your movie watching experience(Studios Crippling Netflix
Rental Discs, 2010). This example also illustrates the power
ofdistributors to favor one exhibition method over another in an
effort to maximize their overallprofit, even if at the expense of a
specific exhibitors profit. As a final note, pragmatic financial
concerns often find their way into distributionsequencing and
window decisions, such as when different divisions within the same
distributioncompany compete or when quarterly and annual
performance reports are due (Ulin, 2010). One 31
41. DREAMWORKS ANIMATION SKG DISTRIBUTIONexample is Paramounts
decision to delay the release of Shutter Island to February 2010
insteadof releasing in late 2009 (Waxman, 2011). Since studios book
the cost of a film in the year ofrelease, a late December release
where the full brunt of the cost is accounted for with
littleopportunity available to realize any revenue can wreak havoc
from a bookkeeping perspective(Waxman, 2011). Piracy Although a
thorough discussion is well outside the scope of this study, piracy
can be seena separate window of release (Eliashberg, Elberse, and
Leenders, 2006), the essence of which isearlier or at least
simultaneous access and lower prices (Ulin, 2010). While the
greatestsuccesses of the internet are often tied to free and
ubiquitous access to information (Ulin, 2010),the ad hoc
watch-for-free-everywhere-now structure of piracy undeniably
threatens distributors(Ulin, 2010). The complete size of the
problem is debatable. In an oft cited study by the MPAA,Siwek
estimates $20.5 billion are lost to the U.S. economy due to film
piracy with an additional$37.5 billion lost to music and software
(MPAA, 2011a). However, as Raustiala and Sprigman(2012) point out,
not all downloads amount to lost revenue, especially in instances
where thepirated copy would not have been purchased anyway.
Additionally, Sanchez (2012) widelycriticizes the methodology Siwek
uses and references a study specifically performed by
L.E.K.Consulting for the MPAA which estimates losses from piracy at
$6.1 billion, the majority ofwhich was copied DVDs with $2.3
billion attributed to the internet going as far back as 2005(Ulin,
2010). However, in a comprehensive study of how piracy impacts are
estimated, the U.S. 32
42. DREAMWORKS ANIMATION SKG DISTRIBUTIONGovernment
Accountability Office determined that the economy wide impact of
counterfeitingand piracy on the film industry is unknown (United
States Government Accountability Office,2010). However, although
the exact extent of the problem is difficult to determine,
nonethelessthe U.S. Government Accountability Office study
concluded piracy is a sizeable problem,which affects consumer
behavior and firms incentives to innovate. Even absent fully
reliablestatistics on illegal downloads versus legal purchases,
most agree legal watching is simply afraction of overall internet
viewing (Ulin, 2010). The Pirate Bay, only one of many such sites,
isthe 76th most trafficked website in the world (MPAA, 2011b) and a
2011 study estimates anamazing 23.8% of all non-pornographic
internet traffic was related to copyright infringement(Envisional,
2011). Regardless of the exact size, however, the impact of piracy
can be seen in the distributiondecisions surrounding sequencing and
windows. Simultaneous global release is often used tothwart
unauthorized copying (Vogel, 2011) and online piracy is considered
as the largest threatto legitimate digital distribution (Cooper,
2012). Customer as Ultimate Arbiter Ultimately, however, the
sequencing and windowing of exhibition methods is up to
theconsumer, who will determine which exhibition methods survive
and whether entertainmentrevenues will expand or contract (Ulin,
2010). In discussing the balance between DVD sales andonline
adoption, DreamWorks Animation CEO Katzenberg cautioned We must not
undercutour bread and butter [the consumer] . . . The consumer
decided when the VHS was obsolete . . . 33
43. DREAMWORKS ANIMATION SKG DISTRIBUTIONNot the hardware
manufacturers, not retail, not us (Ulin, 2010). Key Markets
Domestic Theatrical Market Initial performance of the domestic
theatrical release overshadows and largely determinessuccess in all
subsequent markets, both in terms of what the film can command from
posttheatrical exhibitors (Vogel, 2011) and also due to the media
attention surrounding theatricalreleases that drive awareness that
can be amortized over the life of the film and can driveconsumption
for months and even years (Ulin, 2010). As one industry insider
described,Theatrical exhibition is the major factor in persuading
the public what they want to see, even ifthat public never sets
foot in a motion picture theater. And how well and how long a
pictureplays in theaters has everything to do with its value in
other markets (Daniels, Leedy, and Sills,1988) due to a combination
of advertising, media attention, and word-of-mouth
(Eliashberg,Elberse, and Leenders, 2006). In more muted language
perhaps suitable for public filings,DreamWorks Animation (2012b)
recognizes that films that achieve success in the
domestictheatrical release tend to experience success in the home
entertainment and internationaltheatrical markets, although still
simultaneously cautioning investors that domestic
theatricalperformance is not the only factor influencing a films
success in subsequent markets. However,it is typical that a film
deemed a theatrical failure is a failure, but a film deemed a
theatricalsuccess is a cascade of success (August, 2011).
Strangely, the domestic theatrical release has remained as relevant
as ever, if not 34
44. DREAMWORKS ANIMATION SKG DISTRIBUTIONincreasingly so. In
other industries, traditional outlets are typically overtaken by
newer channelsof distribution and the traditional outlet dwindles
in importance and may even vanish entirely(Ulin, 2010). In the film
industry, however, the domestic theatrical release has become
evenmore important to the success of a film in later distribution
channels (Ulin, 2010). However, in spite of its importance, a
theatrical release will seldom recoup theinvestment in a film and
can be properly seen as a loss leader that creates awareness of the
filmfor subsequent windows (Ulin, 2010). Approximately 80% of films
do not recover even printingand advertising costs during the
domestic theatrical release (Friedman, 2004). Most distributorsare
reconciled to lose money at this stage and are not necessarily
deciding to pull the film off thebasis of continued theatrical
revenue but rather on the opportunity costs of not showing
otherfilms combined with continued marketing costs (Ulin, 2010). As
an example, in 2004 the six major studios combined for a $2.2
billion loss on $7.4billion in domestic theatrical revenues,
spending $1.30 in expenses for every dollar in revenue(Epstein,
2005). However, considering the domestic theatrical release is but
the first triggeramong release windows (Ulin, 2010) and domestic
theatrical revenue is but simply the revenuefrom domestic
theatrical exhibitions (Ulin, 2010), the post theatrical market has
become theprimary source of profit (Vogel, 2011). Again using 2004
as an example, DVDs brought a profitof $13.95 billion from $20.9
billion in revenue and television realized a $15.9 billion profit
from$17.7 billion in revenue, for a total profit of $27.65 billion
from the 59.5 billion in revenueamong the six major studios from
domestic theatrical, DVD, and television markets combined(Epstein,
2005). As important as the domestic theatrical release is, the
performance of a film is difficult topredict because of each films
uniqueness and the complex and dynamic environment it enters
35
45. DREAMWORKS ANIMATION SKG DISTRIBUTIONinto (Vogel, 2011).
William Goldman, Oscar-winning screenwriter, famously described
thecorrelation between a developed idea and commercial success as
Nobody knows anything(Ulin, 2010). As such, a films initial value
as part of the distributors portfolio is grounded insubjectivity
(Ulin, 2010). However, certain external factors do tend to
influence performance, such as ticket prices,running times, season,
weather, the number and quality of theaters, number of seats,
andcompeting releases (Vogel, 2011). The only overwhelming
predictor of a films success is thenumber of screens it plays on
(Elberse and Eliashberg, 2003), placing distributors in a position
tocourt exhibitors for the valuable resource through the convincing
use of marketing and well-known movie stars and directors (Ulin,
2010). Of the domestic theatrical release window, the opening
weekend is largely the barometerfor judging a films success and the
release is typically the most heavily marketed (Ulin, 2010).Given
the importance of a strong domestic theatrical performance, a
successful opening weekendcan fuel downstream markets that generate
revenues for years (Ulin, 2010). In general, drop off from the
opening weekend is approximately 50% and a film thatdrops off
significantly more than expected, such as 60% to 70%, may be
perceived to have notbeen well received and can be in trouble
(Ulin, 2010). This opening weekend decay patternresults in
distributors crafting aggressive marketing campaigns for what is
essentially is a filmsone shot at a successful release (Vogel,
2011). However, the bigger the opening week thesteeper the decay
will likely be upfront (Ulin, 2010). Additionally, a more
sophisticated decaymay be built utilizing other factors such as
holiday weekends, but nonetheless week to weekperformance is still
measured as the deviation from the expected decay (Ulin, 2010).
Unfortunately for an underperforming film, screens will be
allocated to other films, 36
46. DREAMWORKS ANIMATION SKG DISTRIBUTIONmaking a second
weekend rebound a rarity (Ulin, 2010). Compounding the issue is
that aftertens of millions have been spent to convey a specific
marketing message to audiences, it isvirtually impossible to
recover after a weak opening, both because of the compromised
messageand because the distributor will mostly likely prefer to
spend valuable marketing money on filmsstill considered viable
(Friedman, 2004). Compiling information from The Numbers, of the
137 films initially released on or afterJanuary 1, 1995 that
grossed over $200 million domestically in adjusted dollars, $9.9
billion ofthe $39.8 billion grossed in total came on opening
weekends, or 24.9% of a films total domesticrevenue. Family films
showed virtually the same pattern, grossing $2.8 billion out of
$11.7billion on opening weekends, or 24.2%. However, this trend
appears to be creeping upward, aseven large films are tending to
have only one or two weeks of strong theatrical performance
asopposed to more evenly distributed performance over longer weeks
as was previouslyexperienced (Vogel, 2011). Of the 27 films
initially released in 2009 to 2011 that grossed over$200 million
domestically adjusted dollars, $2.3 billion of $8.0 billion (28.2%)
in total domesticrevenue was realized on opening weekend. Of the 7
films that met this criterion in 2011, $676million out of $1,869
million came on opening weekend, or 36.2%. As a result, selecting
release dates for films has become critical, partially because of
thefilms opening weekend revenue and also because financial
agreements with theaters give thedistributors a greater percentage
of the revenue during the first weeks of release (Trying toenhance
new films prospects, 1991). Barry Reardon, President of
Distribution at WarnerBrothers, cautions If you dont pick the right
release date, you can destroy a movie (Trying toenhance new films
prospects, 1991). DreamWorks Animation (2012b) considers
thescheduling of optimal release dates as critical to success.
37
47. DREAMWORKS ANIMATION SKG DISTRIBUTION There are a number of
outside factors than can impact a films release date, which
caneither be programmed in advance, such as the Olympics or
national elections, or news events,such as wars or natural
disasters (Ulin, 2010). Additionally, these outside factors offer
additionalcompetition for precious media space as well, making it
more difficult and expensive to market afilm that consumers have an
increased chance of opting out of anyway (Ulin, 2010). Distributors
can also improve a films chances by selecting a release date during
a peakweekend or peak season. Using data from 1969 to 1984, Murphy
(1984) identified eight peakweekends for domestic theater
attendance: Presidents Day, Easter, Memorial Day,Independence Day,
Midsummer, Labor Day, Thanksgiving, and Christmas/New Years and
Einav(2007) found essentially the same results using data from 1985
to 1999. Memorial Day,Independence Day, Thanksgiving, and Christmas
weekends have been identified as prime realestate (Ulin, 2010) with
the summer being the peak season, where from 1983 to 1992
between35% and 41% of the entire years revenue occurred during the
summer months, averaging 37.8%(Vogel, 2011). This concept is
generally extended into the international market, although thepeak
dates can vary from country to country due to different holidays,
school schedules, andother competing activities (Vogel, 2011).
However, peak weekends are no secret to distributors and now a film
with two or threerelatively clear weeks is rare (Ulin, 2010).
Competition from within the film industry originatesfrom three
sources: 1) competition from films being release from the same
distributor, 2)competition from films targeting the same
demographic or in the same genre, and 3) genericcompetition from
other films being released (Ulin, 2010). As a result, distributors
arecontinuously evaluating competitor films that open immediately
before, during, and immediatelyafter a release (Ulin, 2010).
DreamWorks Animation (2012b) pays particular attention to 38
48. DREAMWORKS ANIMATION SKG DISTRIBUTIONexpected release dates
of other films produced by other animation studios, although
attention ispaid to expected release dates of live-action and other
event films vying for the same broadaudience appeal. In part
cooperative and part competitive behavior, studios claim release
datesearly to ward off potential competitors by commonly mapping
out peak weekends years inadvance (Ulin, 2010). For example, the
date for Harry Potter and the Sorcerers Stone wasadvertised three
years in advance (Fellman, 2004). Distributors face an interesting
strugglebetween attempting to capture as much revenue as possible
during peak release periods whilesimultaneously avoiding
competition for audiences (Krider and Weinberg, 1998). In the midst
ofmultiple event films during the summer of 1995, film executives
explained the unexpectedlyoverall weak domestic theatrical
performance as the failure to properly de-conflict popular films,as
too many expensive movies stacked too close together at the
beginning of the season . . .[resulted in] one big movie [being]
cannibalized by the next one (For movies, its the dogdays, 1995).
At least one interesting example of competition for release dates
involved DreamWorksAnimation and Pixar. In 1994, Pixars Creative
Chief John Lassiter pitched the idea for an ant-themed film to
Disney executives, which at the time included Jeffrey Katzenberg
(Fleeman,1998). Katzenberg left Disney soon after and co-founded
DreamWorks SKG with directorSteven Spielberg and record executive
David Geffen (DreamWorks SKG Studios, n.d.) and,coincidentally or
not, almost immediately began work on another ant-themed film
appropriatelylabeled Antz (Burrows, 1998a). When Pixars A Bugs Life
was scheduled to open on November25, 1998, directly opposite of
DreamWorks Animation traditionally animated Prince of
Egypt,Katzenberg reportedly offered to cancel the development of
Antz if Pixar would agree to movethe release date of A Bugs Life.
When Steve Jobs, then-CEO of Pixar, declined (Burrows, 39
49. DREAMWORKS ANIMATION SKG DISTRIBUTION1998b), Kat