Revenue Models In The Motion Picture Industry And The Impact Of Digital Leak

You are required to complete a research project in which the student combines institutional knowledge, economic concepts, and data analysis to some aspect of the motion picture industry. The exact paper topic is your own choice, but it must be directly related to the movie business.

Traditional Revenue Model of Hollywood Films

In the year 2011 when Eastman Kodak Company filed for Bankruptcy under the provisions of chapter eleven, they were having a glorious history of more than 80 years backing them up. During this phase, they sold cameras, raw materials for the shooting, photo printing technology, and photo printing papers. They were enjoying a near monopoly in the market. Most of their products were the star products in the market. Kodak survived for more than 80 years in the market because they were the ultimate technology leaders. They invented new technologies and went for upward and backward integration of their services and allied products.

When we check the case of Casablanca, we find that it was a safe bet. It made money on its first run and since then it never looked back. It happened because of the brand building exercise of the Hollywood. During its first release, Casablanca was yet another film released in the theatres. Only after ten weeks, this film picked up with the word of mouth. The second time when they released a VHS version of the film, it was a celebrated film and a new generation of the viewers was ready to find an association with the film.

In the same league let's compare James Cameron's latest venture Avatar 2 with Kodak, Kodak became a household name after a struggle of three to four decades. The film Avatar, on the other hand, became a household name in just a few months. It was heavily promoted by the makers. In the terminology of marketing and pricing strategies. We can say that Avatar skimmed the market, it made an appearance, flashed itself and settled down. Kodak, on the other hand, penetrated the market where they moved ahead in a step by step fashion, made a formidable foundation for them and after spending good five to six decades as the leader of the market they finally collapsed (Mui, 2012).

In the era of 2020, as a brand name, Kodak has to start its journey from the scratch if they wish to make a comeback. Avatar as a brand name has its capital ready with it, when they will launch Avatar 2 in the future, a dedicated fan following will join the march right from the word go.

During the golden era of single-screen theatres, the films were enjoying a re-run based on the same principle. They were exclusive after the first release and in the absence of the telecast mediums, their second run was equally successful or fruitful. In the current scenario, the technology related barriers are over, anyone can see the pirated copy of a film on his smartphone without being caught. It also means that the Charisma of a film is intact but this digital leak is stealing the show. The concept of the re-run of a film exists but the makers and the producers of the film are not in a position to reap the benefits of these re-runs (Langford, 2009).

Impact of Digital Leak on the Industry

The arrival of internet libraries distilled this situation a fair deal, now a certain part of the revenue from the re-runs is finally reaching back to the producer and giving them this assurance that their properties (films) are a consistent source of income for them. In the terms of revenue model, the Hollywood film industry is in a fix right now. The big theatres are feeling the pangs of isolation because of the arrival of the internet platforms. The habits of the consumer are changing, now an average viewer is keen to entertain himself during the spare time, they are not keen to plan an entertainment activity, even if they are planning then they are seeking for some live options where they can participate more actively. Imagine a person traveling in a train and enjoying his favorite film on Netflix. Think about a person traveling in the economy class of Virgin Atlantic and enjoying a film on an in-flight entertainment channel (ANI, 2018). Both of these examples are good examples because the revenue is reaching to the producers. However, think about a person enjoying a pirated film in his smartphone while traveling in a cab or watching a pirated film on his tab while traveling in a Virgin Atlantic flight, in these cases the revenue is not reaching to the producers and this is the biggest problem that the Hollywood film industry is facing from last so many decades.

The stint of an average Hollywood film has swelled up in the terms of huge profits; however, it shrinks down in the terms of the days. Under this new development, we can see the emergence of theatre owners as the lions of the market share. This we can understand with the help of this revenue sharing chart of a regular Hollywood film.

Figure 2 The Revenue distribution Model of a Super Hero Based Hollywood film.

Let's understand this business of the profits and revenue sharing with the help of an example. Suppose a superhero film made on a budget of $200M racks in $800 M then how it will be distributed into the various fraternities associated with the business of the filmmaking. This model is validated for the first theatrical run of the film. As we can see in the current model, the theatre owners have the maximum share in the pie. There are two reasons behind it, first, most of the theatre owners are moving in a cartel, and a theatrical release brings back the maximum chunk of money in just three days or maybe in a week. The success of the film during the theatrical release also determines its price for the other medium like television rights and internet library rights.

Changing Consumer Habits and Their Effect on Revenue Distribution

During the era of the 1960's, there were two terms, the first term was "Idiot Box" and the second term was "Box Office." While referring to the Idiot Box they used to talk about TV software of their time. During that period the channels of the feedback were not strong enough and it was difficult to determine the success of a TV series. A film, on the other hand, was more vocal. The sales of the tickets at the box office were the biggest barometer for the success or failure. It was a free run for the films because other telecast mediums were not in sight. Later on, Television channels also started purchasing the film software. For the pricing of this software, their primary yardstick was the box office performance of the film (Bowless, 2014).

Box office success is still the right barometer of the success of a film. It is true that consumer habits connected to the Hollywood films are changing but at the same time, the charm of a theatrical release still exists because at the end of it is showbiz industry that we are dealing with.

In the current practices, the business of the film is confined to the first three days of the release, or we can say the first weekend of the release. Most of the producers want to release their films on a maximum number of the screens with the maximum number of the shows. We can compare this phenomenon with the principle that says "excessive supply creates its own demand." Film producers want to capture maximum numbers of the screen and cater to the movie going impulses of the regular viewers. 

This concept of the maximum exposure during the first weekend of the release also supports the film against the digital leak. Theatres are the ideal launching vehicles for the films because they set the pricing of the film for the other mediums (Faughender, 2018). However, the theatre owners are in a fix, they receive good business during the weekends. However, it becomes a dull affair during the weekdays which means that during four days in a week film theatres don’t have a substantial business to do. This gap of income during the first week or any given week can be contributed to the digital leak.

Figure 3 Film Piracy affected Big films a big deal. This representation presents the Data Low Budget (Under $ 1m), Mid Budget ( Under $10 M) and High Budget ( Above $ 10 M).

The Role of Theatrical Release in Box Office Success

Mid-budget films and high budget films are always under the threat of piracy or the digital leak. Small budget films have to recover the cost of approximately $1M, it is a small number considering the availability of the screens. Makers and distributors never feel the pressure. Most of the theatres are now working under UFO technology; this technology removed the barrier of carrying the physical prints of the film to every part of a country like the US. Now producers are in a position to release their films worldwide in a single stroke. Any film made over the budget of $10 M is always under pressure because under normal circumstances it only has three days to recover its production cost. The current distribution mechanism also gives an upper hand to theatre owners that are moving in a cartel. Digital leak or the piracy has fair chances to steal from the shows of big films. It also means that bigger the film, bigger the digital leak. Think about the concept of average return on the investments. It is true that filmmakers are skimming the market; however, while doing it they are investing heavily sometimes and playing in the zone of high risk and high gain.

When we have a look at the list of the top 10 science fiction films released between 2009 to 2011 then we find that James Cameron’s “Avatar” leads the tally with US$ 2,782, none of the films mentioned in this tally made it to the levels of US$ 1,500 at the box office. Since we are comparing the hit films we would also like to present the data of the box office collections of the film Titanic, released in 1997, Titanic made US$ 1874 at the box office (Mendolson, 2017).

Many box office experts believe that Avatar made its fortune and became a milestone because this film was catering to an experience which was available in the theatres only. When it comes to the theatre experience then “Titanic” also scores, The Titanic was a giant ship and viewers were keen to see this ship sinking on the big screen with state of the art sound effects (Andy, 2016). 

Both these films made it to the list of all-time hits because they fought against the digital leaks. Viewers were seeking for a genuine theatre experience and the same experience translated into money. After its successful run at the box office, Avatar went into oblivion because its performance on streaming channels or internet libraries was dismal. During the release of Avatar director James Cameron made a statement, he said that as a film Avatar is a leap into the next generation of the film viewing experience, where the viewers will enjoy the film with an additional dimension of the depth involved in the picture and audio quality (Andy, 2016). The film got delayed during its release because James Cameroon was looking for the more 3D screen where he can release the film. Finally, the film released on more than 2000, 3-D enabled screens (Fuster, 2018). The cost of the tickets was higher in comparison with the regular tickets, yet the viewers queued in front of the cinema halls and made it a success story.

The Emergence of Theatre Owners as Lions of Market Share

Unfortunately, Hollywood somehow failed to capitalize on this buzz for technology; we have never seen a film like Avatar after the Avatar. Films make money because they are a mass medium.  During the good old days of single-screen theatres sometimes more than 1000 spectators used to watch a film during a single show. Tickets were less pricey at that point in time because of the big number of the audiences the cost of the show was well shared (Andy, 2016). 

Watching a film inside a theatre was a giant experience at that point in time. Currently, we can check the dimensions of the direct and indirect competition in the industry. Theatres are battling it out against television and other mediums like big screen TV. Solution providers for the TV and internet sources are battling it out against the digital leak or the piracy. Director James Cameron is dedicated to launching the next generation of the theatre experience where he wants people to enjoy the films inside the theatres. Recently he announced the next edition of the Avatar; under this production endeavor, he will make four feature films on an estimated budget of $ 1 Billion (Colbert, 2018). It is believed that this time James Cameron is planning to launch” 3 D without glasses technology.”  It can be another leap for the technology and four films indicate that this time he will engage theatres for a longer period of the time. If this experiment works well then a new genre of film watching experience is waiting for the viewers to come.

During the era of the 50's and 60's, we saw the emergence of TV production houses that were dedicated to the production of the Television software. Trade experts considered it as a parallel line for the entertainment industry. It was the time when filmmakers took a big leap by introducing wide angle lenses and superior projection and sound technologies to combat this parallel line that was eating up their pie at the weekends. Now with the arrival of Netflix and Amazon, we can see the formation of a third parallel line. Until a few years ago, Internet streaming libraries were confined to the content produced for the Television and films. Now in the year 2017, they decided to draw a parallel line where they are now investing in some indigenous properties to flash on their own channels (Toy, 2018).

It might be a possibility that tomorrow internet channels might also feel the pang of the digital leak because now they own software which is exclusive in nature. Online streaming industry or internet libraries like Netflix, Amazon, and Youtube works on two types of revenue models, they earn money with the help of advertisement and monthly subscription fees of channels where viewers can get an access to film software at a single point. If you wish to understand the size of this industry then let’s give you a figure of the digital leak that they are going to suffer. Many trade pundits are sharing this opinion that when we will calculate the losses incurred due to unauthorized downloading of the films on P to P channels then this figure may touch a whopping amount of $ 50 Billion between the range of 2016 to 2022 (Clarke, 2017).

Revenue Distribution Model for a Superhero Film

Conclusion

On the note of culmination, we should try to try to see the entertainment industry from a holistic point of view. We can see four parallel lines running. First, we have Films running in theatres. On the second line, we have television productions where they are floating independent software and telecasting the films. On the third line, we can channel like Netflix, they are surviving because of the virtue that they are an advanced technology and a mass medium of convenience for the viewers. Finally, we have this fourth line where some unauthorized players are telecasting and distributing the software and eating the pie of the above three lines.

The case study of Casablanca, Avatar, and Kodak gives us a fruitful insight. Casablanca made it on all the levels because of its timing. During its first theatre run, it was the peak time of the single screen theatres. During its release as a VHS or DVD, it was the peak time for both the technology solutions. In spite of being a great film, Avatar failed in the Home Video circuit and the internet circuit because this film was designed for the theatre experience. Hollywood has a great potential to create big brands within no time. Films are thriving in an environment where they can skim the markets in the initial run and encash their success even after a period of time without many efforts. Internet libraries certainly have the potential to capture the magic of the films and other software on a consistent basis. They are adding the convenience of a better and easily accessible telecast medium in the pie of earnings.

This compilation of the facts also forces us to think about the pricing of the products. During the era of the 1930's and 40's, films were competing with live performers. It was a costly affair to join a play or a live concert at that point in time. Films added an economy into the operations and make it feasible for the masses where more than 1000 attendees were enjoying a single show and sharing the costs. Television marched ahead because it was a free medium and thriving on the advertisement revenues. Now internet libraries are also enjoying the same luxury of the pricing because they are either thriving on the advertisement revenues or they are charging a minuscule sum for the subscription of the library. Big films are suffering badly against the digital leak, this is an area which is preventing the growth of the industry because filmmakers are skeptical of the future of the big budget films. Adding an out of this world theatrical experience to the film is their best bet and players like James Cameron has all the good reasons to change the future of the films for the forthcoming generations. 

On the note of culmination, we can say that in the coming future a fragmented entertainment industry is on the cards where success stories like Casablanca may become a rarity. It will happen because all the streams of the filmmaking are now seeking for a separate revenue model, they are trying to create a parallel empire for themselves and not interested in the process of integrating the channels for revenue sharing.

Moving back to the case of Casablanca that made money on four occasions, we can clearly see that films have a great potential to make money once they acquire the status of being the bottle of an old wine. Net libraries are working on the same principle however the menace of the digital leak is not sparing them in a much-secured medium where tracing the digital footsteps and bringing a culprit under the book is a relatively easier task to perform.

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ANI. (2018). Top four platforms for entertainment on the go. The Indian Express, https://www.newindianexpress.com/lifestyle/tech/2018/mar/25/top-four-platforms-for-entertainment-on-the-go-1792340.html.

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Clarke, S. (2017). Piracy Set to Cost Streaming Players More Than $50 Billion, Study Says. Variety, https://variety.com/2017/tv/news/piracy-cost-streaming-players-over-50-billion-1202602184/.

Colbert, S. M. (2018). James Wan is Stealing James Cameron's Underwater Thunder. Screen Rant, https://screenrant.com/aquaman-avatar-james-wan-cameron-vfx/.

Faughender, R. (2018). Hollywood hopes for a rebound with a slew of summer blockbusters — including 'Solo: A Star Wars Story'. LA Times, https://www.latimes.com/business/hollywood/la-fi-ct-movie-projector-summer-box-office-20180522-story.html.

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Langford, B. (2009). Post-Classical Hollywood: Film Industry, Style, and Ideology since 1945. Edinburg: Edinburg University Press.

Mendolson, S. (2017). Box Office: Record-Crushing Run Of 'Titanic' Could Never Be Replicated Today. Forbes, https://www.forbes.com/sites/scottmendelson/2017/11/28/box-office-titanics-record-crushing-run-could-never-be-replicated-today/.

Mui, C. (2012). How Kodak Failed. Forbes, https://www.forbes.com/sites/chunkamui/2012/01/18/how-kodak-failed/#3e992db46f27.

Toy, S. (2018). Netflix stock slammed after earnings, as subscriber growth and revenue fall short. Market Watch, https://www.marketwatch.com/story/netflix-stock-slammed-after-second-quarter-subscriber-numbers-and-revenue-fall-short-2018-07-16.