THE BUSINESS OF MEDIA DISTRIBUTION, THIRD EDITION: MONETIZING FILM, TV, AND VIDEO CONTENT IN AN ONLINE WORLD

THE BUSINESS OF MEDIA DISTRIBUTION, THIRD EDITION:
MONETIZING FILM, TV, AND VIDEO CONTENT IN AN ONLINE WORLD BY JEFFREY C. ULIN
ONLINE SUPPLEMENTARY MATERIAL
Chapter Two: Intellectual Property Assets Enabling Distribution – p.18
Chapter Three: Financing Production – p.45
Chapter Four: Theatrical Distribution – p.55
Chapter Five: The (Non-Download, Non-Streaming) Home Video Business – p.73
Chapter Six: Television Distribution – p.145
Chapter Seven: Internet Streaming and On Demand Access – p.175
Chapter Eight: Ancillary Revenues – p.222
Chapter Nine: Marketing – p.245
Significant portions of the e-Resources included in this supplementary material are reproduced
without modification from the 2nd and 1st editions of this book. To the extent that markets or
concepts have materially changed over time, I have strived to address those changes and the
current landscape in the current (3rd) edition. By reproducing sections without change my goal, in
part, is to document/maintain a snapshot of key industry fundamentals that were at the time
critical to the ecosystem. For example, the video market has dramatically changed over the last
ten years, from a segment that represented nearly half of all motion picture studio revenues and
sustained a vibrant retail business (both for renting and purchasing videocassettes and later
DVDs), to a revenue stream that is a fraction of its peak, continues to decline, and is being
replaced by VOD options; accordingly, I deemphasized the discussion of the video market in the
3rd edition, but felt it is important to maintain access to an overview of the fundamentals of this
multi-billion dollar consumer retail market (including its roots, evolution, and economics).
Similarly, physical film prints are now an artifact, yet the economics of that pillar of the
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distribution chain remain instructive, as is the evolution of D-cinema in general. Accordingly, I
moved material sections here: from chronicling the videocassette market, D-Cinema growth, the
demise and underpinnings of studio joint ventures, and the fundamentals of TV syndication (and
barter) market, as well as describing the nature of calculating TV runs (free and pay),
understanding Internet AVOD roots (e.g., Hulu’s prior incarnation), grasping market fears and
factors of Online/VOD/Internet distribution, and delving into case studies of leaders that faltered
in adapting to changing market conditions.
Please apply a filter and perspective to these supplementary materials, some of which still
describe current elements but may have been moved given the nuanced detail (e.g., variations on
structuring types of profit participations), while others capture a snapshot of elements that may
have waned or in cases entirely disappeared. For markets/elements that may have disappeared,
been restructured, or are experiencing an ongoing decline, there are still interesting lessons to be
gleaned (management of a consumer product such as a DVD/videocassette on the retail shelf)—
especially as parallel elements or models may develop downstream.
CHAPTER ONE: Market Opportunity and Segmentation – The Diverse Role of Studios
and Networks
STUDIOS AS DEFINED BY RANGE OF PRODUCT — RANGE OF LABELS AND
RELATIONSHIPS
[The following material is reproduced from the 2nd Edition eResources without modification]
Range of Relationships
In addition to subsidiary film divisions that specialize in certain genres or budget ranges
or simply add volume, studios increase output via housekeeping deals with star producers and
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directors. Studios will create what are referred to as first look deals where they pay the over-
head of certain companies (e.g., funding offices on the studio lot) in return for a first option on
financing and distributing a pitched property.
These deals take all forms, but the most common are puts and first look deals.
Puts
Under a put arrangement, a producer or director may have the ability to force the
studio to finance and distribute a project, as long as certain defined specifications have been
met. These deals are rare: no one wants the obligation to blindly make a film, no matter who is
involved.
Puts are, accordingly, usually limited to joint equity arrangements in which a
filmmaker with a preset deal can invest in a project and force the studio to co -invest and
release the property. Even in this scenario there will be very specific hurdles to trigger release
including budget
parameters, on-time delivery, ratings, approvals over attached elements, etc. Under the deal
the parties will have pre-agreed key economic terms, such as: (1) the studio’s commitment to
pay for defined tiers of prints and advertising/media to release the film, (2) distribution fees,
(3) recoupment of production and release costs, (4) ownership, and (5) relative splits of profits
from defined revenue streams.
First Look Deals
Much more common than puts are first look deals. Under a first look deal, the same
lit- any of economic terms are agreed up front, so that the only issue the parties face is literally
whether to make the film, rather than what are the terms between them if the film is made.
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In many regards, a first look deal is the goal of every producer and director. What they
gain is financing to develop story ideas with studios covering a fixed portion of their overhead,
including in cases funding to hire writers. In essence, a first look deal pays the rent and allows
directors, producers, and writer–producers the freedom to create. As they say: It’s a good job
if you can get it.
What is required in return? In simple terms, a first look. In practice this means that
when a producer is ready to present a project to its studio partner/banker, he formally submits
and pitches the project. The studio then has a defined period of time to make up its mind
whether or not to accept the project. What needs to be submitted for the project is deal specific,
but the following items are often required:
A finished script
Visual development materials
Budget parameters, including costs to date and any other economic items that would
significantly influence the viability of the project (people are obviously cagey about
budgets and costs at this early stage)
Accepting the project has two consequences. First, it means that the producer cannot
present or even talk about the project to another party. Basically, it grants the studio an
exclusive, and with the exclusive absolute confidentiality of the project if it so chooses. Oddly,
as with many quirks of the media business, while confidentiality may be the better business
decision, studios and networks will frequently announce the acquisition of the project. Whether
this serves as mere bragging rights, or a conscious declaration to competitors that an exclusive
has been sewn up, is in the eye of the beholder.
The second consequence to accepting the project is that the studio triggers some of the
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pre-agreed economic terms. There may be a payment triggered to option the property, or a lar-
ger payment to outright acquire it. More important, the decision to accept the property cues it
up in the production pipeline as a commitment is made to further ready the property for
production. The property enters a nebulous area between script development and pre-
production and the parties then have a period to set the remaining elements. This could include:
More drafts of the script to get to a shooting script
Signing key talent including actors, a director, and line producer
New or additional visual development
Delivery of budgets
Commitment of financing if there are other parties involved
All of these items cost money with some costing millions of dollars. Accordingly, the decision
to accept the project, which is still not guaranteed to be made at this stage, is not a trivial elec-
tion. The idea that one would not sink this additional money into a project (remember, the studio
has likely sunk hundreds of thousands of dollars, if not millions of dollars, to develop the
property up to this juncture) if they did not want to produce it is true; however, no project in the
development pipeline is ever guaranteed to be made and Hollywood is filled with more projects
that almost got made than projects that the public has seen. Many pieces have to come together
before the magic greenlight, and even then a plug can be pulled.
In the end, when the studio accepts the project it controls its destiny and takes it off the
market — all things it wants, but all things for which it will pay dearly. For the producer (and
I will continue to use the term producer liberally here, for it could be a director or writer), it
means he is one step closer to the goal of filming the project and transforming an idea into a
movie or TV show; additionally, it means more funding can be secured.
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All of this supposes that the studio likes the submission: But what happens if they are
on the fence? Despite the studio sitting in the enviable seat as a buyer with lots of properties
from which to choose, the decision is a difficult one and different from many other supply
chain situations where purchasers tender a request-for-proposal and review the pros and cons of
sup- pliers’ bids. There are similarities in that issues of reliability, quality, relationship, and cost
will all be taken into account. However, because of the first look relationship on which the
decision is premised, many of these issues are already set and the decision comes down to two
fundamental questions: how much do I subjectively like the project, and what are the chances
that if I pass on it my competitor will produce it and make me look like a fool?
The second question is made more difficult because you are likely dealing with
someone either famous, or if not outright famous than likely highly regarded and well
connected; if that were not the case, there would be no first look relationship to begin with. The
threat of taking a
project across the street to a bitter rival and having the ability to actually produce it with them
is very real. Hollywood is littered with the lore of so-and-so passed on that project or he had the
courage/vision to get behind X. Careers are literally made and broken on these decisions.
Despite all of these complications and tough decisions, first look deals are still a staple of
Hollywood because studios want to make movies and they want first access to the people they
want to make them with. Paying for what amounts to a type of option on an exclusive has
therefore evolved as a hedged economic alternative. As the business has matured, and
individuals have gained more clout, it could now be prohibitively expensive to keep individuals
on the payroll. Gone are the Studio System days when stars literally worked for the studios and
were contracted to make a certain number of pictures.
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Accordingly, first look deals have evolved as a middle ground. For a price studios se-
cure access to ideas and talent, but gain flexibility by not actually committing to make any
picture or a specific number of pictures with an individual. Producers/talent have someone else
pay for what they want to do anyway (without a first look deal they would still be developing
properties, but on their own nickel), and maintain the freedom that if the studio is not keen on
the project they can take it across the street to a competitor because the first look deal creates
no barrier to getting the project made. From an economic standpoint, a first look deal is the
ultimate hedging of bets on both sides.
RANGE OF ACTIVITIES—DISTRIBUTION ENCOMPASSES MANY MARKETS
Format Variations
The following Figure 1.4 depicts what is arguably the peak of format variances, and assumes
a film that is:
initially released in theaters, in at least 35 markets around the world
released worldwide in the home-video market on DVD and VHS, and that consumers are
offered a range of formats, such as a letterbox version (a “widescreen” version that leaves
black on the top and bottom of the screen) and a “pan-and-scan” version that is reformatted
from the theatrical aspect ratio to fill up a traditional square television screen (note: VHS
releases and pan and-scan are largely phased out, but the analogy remains, as for example,
there will be Blu-ray and traditional DVD SKUs)
released into major pay TV markets worldwide (channels may have different specs)
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compressed for Internet/download and streaming viewing
requires miscellaneous other masters, with different specs, for ancillary markets such as
airlines
Historical Joint Ventures
Studio joint ventures grew in the 1980s with the globalization of the business. The number of
titles a studio released fell within a relatively static range, and even a significant percentage
increase in product still meant a finite number of major films (e.g., 20 or 30). What changed
dramatically was the importance of the international markets. In the early 1980s, the
international box office as a percentage of the worldwide box office was in the 40 percent range,
then grew to over a 50 percent share by the mid-1990s, by the mid-2000s had grown to more
than 60 percent,1 and by 2010 started to approach 70 percent (e.g., 68 percent in 2011; see Figure
1.7 and also Table 4.1 in Chapter 4). (Note: In 2010, foreign sales accounted for roughly 70
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percent of total receipts, both for industry and for the movie Avatar.).2
Demise of Historical Joint Ventures
When individual territories outside the United States started to represent the potential, and
then the actual, return of tens of millions of dollars, the studios needed to build an infrastructure
to manage and maximize the release of their products abroad. Moreover, this matured market by
market. First, the growth of the international theatrical market warranted the expansion. Shortly
thereafter, with the explosive growth of the videocassette market in the 1980s and 1990s,
including the 1990s expansion of major United States retailers such as Blockbuster to
international markets, studios needed to mirror theatrical expansion on the video side.
Distribution of videocassettes (now DVDs and Blu-rays) and of movies into theaters utilizes the
same underlying product and target consumers, but the similarities stop there; the differences of
marketing a live event in theaters versus manufacturing a consumer product required different
manufacturing, delivery, and marketing, and with it a different management infrastructure.
Three studios joined together to form United International Pictures, better known in the
industry by its abbreviation UIP. Headquartered in London, UIP was historically a joint venture
among Paramount Pictures, Universal Pictures, and MGM (MGM later dropped out, but the
volume of titles remained high as DreamWorks titles were put through the venture). The three
parties shared common overhead in the categories described above: general management,
finance, marketing, sales, and legal. Additional efficiencies were gained by sharing office space
and general sales and administrative budget cost lines.
What was not shared is perhaps more interesting—the parties shared costs, but did not share
revenues. A cost-sharing joint venture is a peculiar instrument of fierce competitors in the film
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community. Natural adversaries came together for two common goals: protection of intellectual
property and the need to establish sales and marketing beachheads around the globe for as little
overhead as possible. Both goals could be completely fulfilled without sharing revenues on a
per-product or aggregate basis; perhaps more importantly, the structure of the business likely
would not have permitted the sharing of revenues even if this was a common goal. Because each
film has many other parties tied to it, with complicated equity, rights, and financial participation
structures, it is unlikely that all the parties who would need to approve the sharing of such
revenues would ultimately agree to do so.
Why, for example, would Steven Spielberg and Universal all agree to share revenues on its
film Jurassic Park with Paramount or MGM? Similarly, why would Paramount Pictures and
Tom Cruise want to share revenues on Mission: Impossible with Universal? The simple answer
is they would not, and they do not. Every one of these parties, however, has a vested interest in
the films released under a structure that: (1) minimizes costs and therefore returns the greatest
cash flow; (2) protects the underlying intellectual property and minimizes forces such as piracy
that undermine the ability to sell the property and generate cash; and (3) maximizes the sales
opportunities.
Once this formula is established, it is relatively easy to replicate for other distribution
channels. UIP, for example, spun off a separate division for pay TV (UIP Pay TV), a market that
exploded in the early 1990s. The same theatrical partners joined forces to lower overhead and
distribute product into established and emerging pay TV markets worldwide.
Additionally, two of these partners, Paramount and Universal, teamed up for videocassette
distribution and formed CIC Video (where I once worked, based in UIP House in London). CIC,
similar to UIP and UIP Pay TV, set up branch operations throughout the world headquartered in
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the UK. Table 1.1 is a representative chart of countries served by direct subsidiary offices.
2nd Edition Table 1.1 Countries Served by Direct Subsidiary Offices/Territory
Australia Malaysia
Brazil Mexico
Japan United Kingdom
In addition to direct offices, the venture would service licensees in countless other territories.
These are examples of territories, which at least historically/initially, were typically managed by
studios as licensee markets: Argentina, Chile, Colombia, Czech Republic, Ecuador, Finland,
Greece, Hungary, Iceland, Indonesia, Israel, Philippines, Poland, Portugal, Singapore, Taiwan,
Thailand, Turkey, Uruguay, and Venezuela. (Note: This is not an exhaustive list.) Whether it
makes sense to operate a subsidiary office or even to license product into a territory at all
depends on factors including market maturity, economic conditions, size of the market, and the
status of piracy/intellectual property enforcement. Many of the largest developing markets,
which historically have been licensee territories throughout most of the span of the era of joint
ventures, including Russia, China, and India, have been transitioned by studios into direct
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operations. Russia serves as a prime example, as rapid economic growth propelled the theatrical
market from insignificant to among the top 10 worldwide markets in just a few years.
UIP and CIC, although among the longest lasting and most prominent joint ventures (UIP
was formed in 1981), are simply examples, and many other companies similarly joined forces in
distribution (e.g., CBS and Fox formed CBS/FOX Video, partnering to distribute product on
videocassette worldwide).
Demise of Historic Joint Ventures
None of UIP, CIC, UIP Pay TV, or CBS/FOX Video exists today in their grand joint-venture
forms. First, UIP Pay TV was disbanded in the mid 1990s, then the video venture CIC was
largely shuttered by 2000, and finally UIP’s theatrical breakup/reorganization was announced in
2005 and implemented in 2006 (though the partners still distribute via the venture in limited
territories). Why did this happen?
The answer is rooted partly in economics and partly in ego. The economic justification in
several instances was less compelling than when the ventures were convenient cost-sharing
vehicles enabling market entry and boosting clout with product supply. In the case of pay TV, for
example, the overhead necessary to run an organization was nominal when compared to a
theatrical or video division. Most countries only had one or two major pay TV broadcasters;
accordingly, the client base worldwide was well under 50, and the number of significant clients
was under 20.
This lower overhead base, coupled with growing pay TV revenues, made the decision
relatively easy. Additionally, given the limited stations/competition and the desire to own part of
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the broadcasting base, the studios started opportunistically launching joint or wholly owned local
pay TV networks. Over time, services such as Showtime in Australia or LAP TV in Latin
America, both of which are owned by a consortium of studios, became a common business
model. Fox was among…