F ILMED E NTERTAINMENT Industry introduction and overview.

FILMED ENTERTAINMENT

Industry introduction and overview

Agenda• Who are the players?• How does a film or TV show get made?• How are films and TV shows distributed?

– Markets– Market & advertising a film– Theatrical distribution– Home entertainment– Television distribution– Licensing & merchandising

Agenda• Ultimates and cost amortization – overview• Participations – overview• Residuals – overview

WHO ARE THE PLAYERS?

The Studios (“Majors”)

Studio

Parent

Broadcast Television

Cable Television

Viacom

Universal Pictures, Focus

Features

NBC, Telemundo

Disney News Corp. Comcast Time Warner

20th Century Fox,

SearchlightWarner Bros.

Walt Disney, Buena Vista, Pixar, Marvel

Paramount

ABC FoxCBS broadcast assets spun off

Fox, Fox News, Fuel TV, National

Geographic, Speed, STAR,

Stats

Bravo, Chiller, CNBC, MSNBC, MUN2, Oxygen,

Sleuth. Syfy, USA, The Weather

Channel

ABC TV Network, Disney Channel, ESPN, SOAPNet,

ABC Family

BET, CMT, Comedy Central, Logo,

MTV, Nickelodeon, Spike, TV Land,

VH-1

Cartoon Network, Cinemax. CNN, HBO, HLN, TBS, TCM, TNT, TruTV

Sony

Columbia, Screen Gems, Sony Pictures,

TriStar

CW(joint venture

with CBS)

Bing; BitTorrent; CinemaNow; Dailymotion; Facebook; Google (including YouTube); iTunes; Joost; Kazaa; Morpheus; Napster; Netflix; Playstation 3; Qlipso; Twitter; Veoh; Vudu; Xbox 360; Yahoo! TV

New Media

GameShow Network (with Liberty Global)

Various international cable

stations

Addicting Games, Atom.com,

GameTrailers.com, Neopets,

ParentsConnect, Shockwave

Club Penguin, Disney Interactive

Media Group, Disney Online,

Hulu (JV)

AskMen.com; Hulu (JV), IGN

Entertainment, Milkround, The

Daily

Daily Candy, Fandango, Hulu

(JV), iVillage, Xfinity

Flixster, HBO Go, The Smoking Gun,

Warner Bros. Interactive

Entertainment

Crackle, Gracenote, Sony

Entertainment Network,

Station.com

Alternative New Media Distribution

Other playersMini-majors: Smaller companies that produce major motion pictures and may distribute their own filmsIndependents: Smaller companies that may produce films for others and rely on others (majors or mini-majors) to distribute their films

• Amblin Entertainment• DreamWorks Animation• DreamWorks Studios• Imagine• Lakeshore• Lions Gate Entertainment

(recently purchased Summit Entertainment)

• LucasFilm• MGM• New Regency• Overture Films• Relativity• Spyglass• Village Roadshow

Studio market share – 2012 vs 2011

Para-mount

19%

Warner

Bros.18%

Sony13%

Disney12%

Uni-versal12%

Fox11%

Others

15%

2011

Source: http://www.boxofficemojo.com/studio/?view=parent&view2=yearly&yr=2012&p=.htm and http://www.boxofficemojo.com/studio/?view=parent&view2=yearly&yr=2011&p=.htm

Disney18%

Sony15%

Uni-versal15%

Lions Gate*12%

Warner Bros.11%

Paramount9%

Fox9%

Others12%

2012 (thru 7/5/12)

* Includes Summit

What was the highest grossing film for 2011?

What was the highest grossing movie so far in 2012?What was the highest grossing movie in 2011?

Top films of 2012 – domestic vs int’l

Film (through July 5, 2012) WW gross ($M) US gross ($M) US vs Int’l

The Avengers $1,452 $611 42 / 58

The Hunger Games 678 404 60 / 40

Men in Black 3 602 172 29 / 71

Madagascar 3: Europe’s Most Wanted 454 196 43 / 57

The Amazing Spider-Man 342 140 41 / 59

Snow White and the Huntsman 339 150 44 / 56

Journey 2: The Mysterious Island 326 104 32 / 68

Dr. Seuss’ The Lorax 311 213 69 / 31

Wrath of the Titans 302 84 28 / 72

Prometheus 294 122 42 / 58

Source: http://www.boxofficemojo.com/yearly/chart/?yr=2012&p=.htm

Top films of 2011 – domestic vs int’lFilm WW gross ($M) US gross ($M) US vs Int’l

Harry Potter and the Deathly Hallows Part 2

$1,328 $381 29 / 71

Transformers: Dark of the Moon 1,123 352 31 / 69

Pirates of the Caribbean: On Stranger Tides

1,044 241 23 / 77

Twilight: Breaking Dawn Part 1 705 281 40 / 60

Mission: Impossible – Ghost Protocol 694 485 70 / 30

Fast Five 626 210 34 / 66

Hangover Part II 581 254 44 / 56

Cars 2 559 191 34 / 66

Sherlock Holmes: A Game of Shadows 544 187 34 / 66

Rise of the Planet of the Apes 482 177 37 / 63

Source: http://www.boxofficemojo.com/yearly/chart/?yr=2011&p=.htm

HOW DOES A FILM OR TV SHOW GET MADE?(THE PRODUCTION PROCESS)

Pre-production

Principal Photography

Development/ Packaging

Post-production

Script Development Crew Selection

Set Design Costume Design

Casting Location Scouting

Budget

Actors Producers

Directors WritersSoundstage Set ConstructionWardrobe Labor

Film Editing DubbingScoring Special EffectsTitles and Credits Soundtrack

ConceptsBooks, Screenplays

Rights

Film production: Direct production costs

Greenlighting

Pre-production

Principal Photography

Development/ Packaging

Post-production

Script Development Crew Selection

Set Design Costume Design

Casting Location Scouting

Budget

Actors Producers

Directors WritersSoundstage Set ConstructionWardrobe Labor

Film Editing DubbingScoring Special EffectsTitles and Credits Soundtrack

ConceptsBooks, Screenplays

Rights

Film production: Direct production costs

Greenlighting

Pre-production

Principal Photography

Development/ Packaging

Post-production

Script Development Crew Selection

Set Design Costume Design

Casting Location Scouting

Budget

Actors Producers

Directors WritersSoundstage Set ConstructionWardrobe Labor

Film Editing DubbingScoring Special EffectsTitles and Credits Soundtrack

ConceptsBooks, Screenplays

Rights

Film production: Direct production costs

Greenlighting

Pre-production

Principal Photography

Development/ Packaging

Post-production

Script Development Crew Selection

Set Design Costume Design

Casting Location Scouting

Budget

Actors Producers

Directors WritersSoundstage Set ConstructionWardrobe Labor

Film Editing DubbingScoring Special EffectsTitles and Credits Soundtrack

ConceptsBooks, Screenplays

Rights

Film production: Direct production costs

Greenlighting

Pre-production

Principal Photography

Development/ Packaging

Post-production

Script Development Crew Selection

Set Design Costume Design

Casting Location Scouting

Budget

Actors Producers

Directors WritersSoundstage Set ConstructionWardrobe Labor

Film Editing DubbingScoring Special EffectsTitles and Credits Soundtrack

ConceptsBooks, Screenplays

Rights

Film production: Direct production costs

Greenlighting

Television production life cycle

Concept SyndicationFull SeasonPilots

• 1-hour series (dramas)

• 30 min series (sit coms)

• TV Movies• Miniseries (8-12

hours)

• 30+ pilots ordered for the start of each TV season

• Introduce main themes and characters

• < 50% picked up for regular season

• Sold to network for distribution

• Typically 22 episodes/season (12 for cable series)

• Avg production costs vary depending on format/talent

• Episode fees increase 5-10% each year – higher if a hit

• 50-60% lose money during first few seasons

• Sold to TV stations and cable programmers

• At least 60 episodes

• Only 20% of new series make it to syndication

• Typically for certain number of runs within 3-5 year period

Film of TV production costs

Above the Line• Rights acquisition• Writers• Stars• Director• Producer

Below the Line • Crew• Set decoration / construction• Location• Hair/makeup• Camera / cinematography• Non-star talent

• “Negative costs”• Classified as “film inventory”, “production costs”, etc

Film or TV production costs - other

• Interest– Allocated to films based on current period spending– Beginning with principal photography through “answer print”

• Overhead– Allocated to films based on current period spending– Departments/individuals with “exclusive or significant” responsibility

for production– Beginning with principal photography through “answer print”

Cost minimization

• Forming partnerships with investors (non-film companies) to share risk

• Splitting production and marketing roles (co-productions)

• Sharing risk with key talent (participation agreements)

• Tax incentives – other countries or states

HOW ARE FILMS AND TV SHOWS DISTRIBUTED?

Film markets

• Theatrical• Home entertainment• Pay-per-view (PPV) / Video on

Demand (VOD)• Pay TV• Network / free TV• Syndicated TV• Merchandising / licensing

Dig

ital

Med

ia

(months)6 1812 30 36

Theatrical

Home Entertainment (DVD, Blu-ray)

Free TV (network & syndicated)

PPV/VOD

243 9 15 21 27 33

Pay TV

Current release windows of a filmLicensing and Merchandising

Digital Media

TV show markets

• Network• Cable• Home entertainment• Syndicated TV• New media D

igita

l M

edia

MARKETING AND ADVERTISING A FILM

Marketing and distribution costs

• aka “Prints & advertising” (P&A), “exploitation”

Prints – film prints that are made and sent to theaters for projection on screen

– $2,500 - $4,000 per print– 1,500 – 4,000 prints at initial release– Digital cheaper, but exhibitors slow to convert

Marketing and distribution costs

Advertising– Media: air time and print space costs

• TV and radio advertising time• Billboard, bus / bus stop space• Newspaper, magazine ads

– Basics: creative and promotion costs• Creation of advertising campaign• Printed materials (posters, standees)• Promotion (premieres, junkets)• Award show promotions• Trailers

THEATRICAL DISTRIBUTION

Box office trends – U.S./Canada

2003 2004 2005 2006 2007 2008 2009 2010 2011

$9.2 $9.3 $8.8 $9.1 $9.5 $9.4 $9.5 $8.4 $8.4

$- $- $- $0.1 $0.1 $0.2 $1.1 $2.2 $1.8

Box office gross ($B)

Non-3D 3D

Source: MPAA 2011 Theatrical Market Statistics

Theatrical – U.S.• Movie release pattern:

– Limited (less than 1,400 screens)– Wide (3,000+ screens)– Roll-out (platform)

• Release season– Summer (Memorial day weekend – August)– Holiday (generally November/December)

• Film rentals– Studios’ box office share – Negotiated settlement rates

Box office trends – International

2007 2008 2009 2010 2011

$16.6 $18.1 $18.8

$21.0 $22.4

Box office gross ($B)

Source: MPAA 2011 Theatrical Market Statistics

HOME ENTERTAINMENT

Home entertainment

• Sell-through• Rental• Revenue share• Correlation to box office success (“conversion

rates”)• Big box retailers vs independent retailers

(Walmart – loss leader model)

Home entertainment trends

2004 2005 2006 2007 2008 2009 2010 2011$0

$10

$20

$30

$40

$50

$60

$30.4 $31.8 $32.3 $32.9 $31.8 $28.0 $26.6 $25.6

$11.2$16.0 $15.3 $15.0 $14.4

$12.8 $11.9 $11.4

$41.6

$47.7 $47.6 $47.9 $46.1

$40.8$38.4 $37.0

Worldwide spend on physical home video ($B)

Sell-through Rental

Source: “Video intelligence,” Screen Digest, March 2012

What was the biggest selling DVD title in the past week?

TELEVISION DISTRIBUTION

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Television distribution - Films

• Pay-per-view (cable & satellite providers)• SVOD (cable, Netflix)• Pay TV (e.g. HBO, Showtime)• International TV (BBC, TF1)• Network TV (NBC, ABC)• Syndication / cable (TNT, USA, AMC)• Digital media (Netflix, Hulu, streaming,

downloads)

Television distribution – TV shows

• Network• International TV• Syndication• Cable• Internet

U.S. TV ratings“Share”

Share = .33 (2 out of 6 houses with TV sets on watching Jersey Shore)

2 homes watching

Jersey Shore

“Ratings”

Rating = .20 (2 out of 10 houses with TV sets are watching Jersey Shore)

Broadcast TV trends

Rank Program Network Rating/Share Viewers1 AMERICA’S GOT TALENT – TUE NBC 7.0 / 11 11,668

2 AMERICA’S GOT TALENT – WED NBC 6.4 / 11 10,662

3 AMERICA’S GOT TALENT – MON NBC 6.0 / 10 10,452

4 US OLYMPIC TRIALS – SUN 9PM NBC 5.9 / 10 10,021

5 60 MINUTES CBS 5.5 / 11 8,444

6 NCIS CBS 5.4 / 9 8,034

7 US OLYMPIC TRIALS – SUN 8PM NBC 4.8 / 9 7,886

8 US OLYMPIC TRIALS – FRI 9PM NBC 4.7 / 9 7,785

9 BIG BANG THEORY CBS 5.1 / 9 7,695

10 US OLYMPIC TRIALS – WED 8PM NBC 4.4 / 8 7,091

Top 10 Broadcast TV Shows – Week ending July 1, 2012

Source: http://tvbythenumbers.zap2it.com/2012/07/03/tv-ratings-broadcast-top-25-us-olympic-gymnastics-trials-americas-got-talent-top-week-41-viewing/140363/

Licensing and merchandising

• Contractually driven• May require minimum guarantee (MG) plus

overages (royalties)• Revenues dependent on statements received

from the licensees• Revenue recognition may be cash driven

ULTIMATES AND COST AMORTIZATION - OVERVIEW

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What is an ultimate?

• Management’s estimate of the “ultimate” gross profit of a film (accounting standards give 10 year limitation)

• Judgmental and high risk area

•Used to amortize capitalized film costs to cost of sales

Amortization calculation

• Year 1

• Year 2

Ultimate costs

Costs toamortize

Yr. 1 revenuesUltimate revenues

Ult costs to go

Costs toamortize

Yr. 2 revenues Ult revs to go

PARTICIPATIONS AND RESIDUALS

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Participations – overview

• Contingent compensation for creative talent (actors, writers, directors, producers)

• Expensed using IFF method (based on ultimates)• Amounts paid, if any, are based on contractually

agreed-upon formulas and cash received (not revenue recognized)

• Formulas vary depending on star power of talent (gross deal vs net deal)

RESIDUALS

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Residuals – Overview

• Additional compensation for “ancillary” markets (DVD, pay TV, cable, network TV, etc)

• Residuals based on percentage of gross revenues received by a distributor from ancillary markets

• Residuals for TV shows based on original salary paid during the production and are not paid on the initial airing of the show (only on “re-runs”)

• Union or “guild” specific• Payments made to individuals or to the guilds on behalf

of members

Residuals – Overview

• Pro-ration for filming outside the U.S.• Some states are “right-to-work” states (non-

union)• SAG/AFTRA applies no matter where actor works• Range from 12.5% - 20% of revenues generated

in ancillary markets• Fringe benefits (payroll tax, pension, health &

welfare benefits) can add another 25% surcharge to residual payments

CASE STUDY INTRODUCTION

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