#RomaFF9 showcases new patterns of film distribution

The ninth edition of the Rome Film Festival is coming to an end having showcased some interesting new patterns of film marketing and distribution.

The film market named The Business Street has brought to Rome 811 professionals, of which 295 buyers, 104 world sales agents e 246 producers from 52 countries, with a 30% increase of international participants (35% more buyers and 14% more world sales agents). A very needed initiative for boosting the film business.

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Among the main happenings, the panel organized by Europa Distribution has been a unique occasion to discuss and dissect the new trends of digital distribution, focusing on how professionals in different territories implement and define different strategies to keep up with the pace of an industry that is in constant change. As consumers have drastically changed the way of watching films and have risen their expectations on availability of content, professionals have had to re-think their communication strategies and look for new ways to communicate with the audience. These new challenges have paved the way for innovative and creative marketing and distribution strategies, designed to increase the audience reach both in cinemas and across additional platforms.

Tim Grady, President of Adopt Films, has pointed out that ideally VOD shall come one week after theatrical, while everything needs to be curated, as there is so much content. He highlighted the importance of non-theatrical releases, even though, regarding day-and-date, distributors like IFC and Magnolia can easily do day-and-date because they own theaters, whereas others cannot unless they rent the theaters. As far as Netflix, he says it is a safety net for independents.

Somehow forced by the sluggish Italian market to have a different and more conservative approach is Stefano Massenzi, Head of Acquisitions and Business Affairs at Lucky Red. He says that local exhibitors want at least 15 weeks between theatrical and digital release and they would like to get a cut of VOD revenues in exchange for shortening the windows but distribution cannot agree upon the deal because it already pays advertising and VPF and that is enough.

Differently, Katie Ellen of the British Film Institute and Madeleine Probst of Watershed Cinema have pointed out that exhibitors must take risks if they want to flourish and work in synergy with VOD creating a halo effect for it, whereas Kobi Shely of Distrify has added that VOD helps understanding who the audiences are thanks to big data.

The VOD in Europe is growing and therefore digital distribution is by far the hottest topic to discuss at the moment.

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The conference Audiovisual market and regulation: an industry at crossroads, hosted by the Italian Presidency of the Council of the European Union and organised by the Directorate-General for Cinema of the Italian Ministry of Cultural Heritage and Activities and Tourism, has provided an opportunity to discuss the changes that need to be made to the European regulatory framework in the light of the changing scenario, paying particular attention to technological developments, the role of new players, future business models and the status of independent audiovisual producers.

It has been pointed out that the arrival of new players such as SVOD platforms is going to change the role of typical film producers, who are going to become crossmedia producers and experiment new forms of creativity. For instance, Netflix opens up new opportunities for local producers because they need to connect with local audiences.

It is also going to change the role of theaters, which will be the place for exceptional experiences and social gatherings, while pan-European day-and-date releases experiments show a low rate of cannibalization and increased availability of movies and global audience.

The main pros of digitization has been found to be new alternative production formats associated with lower costs, new alternative release and marketing strategies, larger consumption of audiovisual products, whereas cons may be piracy and changing consumption habits connected to a generally lower willingness to pay for quality content. The main trends observed in the audiovisual market in the latest five years show EU market share down from 20.7 to 15.4 percent, US market share up from 59 to 68.8 percent, and physical home video decline not compensated by digital.

Christoph Schneider, MD of Amazon Instant Video Germany added that free TV is benefiting from having previews on new digital non-linear services because this creates awareness, whereas YouTube’s representative underlined how they are opening up opportunities for the film industry through creating engagement, and BskyB’s Director of Policy and Public Affairs, David Wheeldon highlighted that they have been offering new online services in addition to the traditional ones and they have been very successful. Christopher J. Dodd, former US Senator and now CEO of MPAA has said that disruption is the opportunity as Netflix has invested $7B in feature production, while 50B films and 56B series were consumed digitally in a year, even though a better and more productive dialogue between content and tech providers is needed, and also search engines need to cooperate not driving traffic toward illegal services.

Many rules and regulations that apply to linear players do not apply currently to non-linear services: for instance, advertising and restrictions of audience, hate speech rules, promotion of european works. Authors want their cut of the pie and share risks and benefits as much as they are the production level. Both production and distribution will increasingly be driven by big data, but level of requirements are currently quantitatively different for linear and non-linear services.

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Meanwhile, the difference between broadcasters and non-linear services is fading, as some pay-TV distributors try to compete on the SVOD market: for instance, BSkyB with Sky Now, Canal Plus with Canal Infinity, HBO with HBO Go, CBS, and even smart TV producers such as Samsung and Sony push content to audiences, therefore acting by regulation as service providers, perhaps. Meanwhile, piracy and copyright are crucial issues to address. Most of the pay-TV distributors will look for deals with Netflix, but they will probably continue to provide their own transactional VOD service or third service.

AVMS (i.e. AudioVisual Media Services) that offer OTT services (e.g. Netflix) are covered by the directive because they exercise editorial responsibility over the content: the debate is whether the directive should also cover other internet gatekeepers such as Google. The art.13 of the directive imposes to promote European works on the platforms but it is not clear as of how to do it, therefore this is up to the member States (e.g. a section for European works, a section in the home page, financial obligations, or a percentage in the catalogue). Obligations are currently applied depending on where the service is based, not upon where it goes to (e.g. Netflix is based in Luxembourg).

The best method for promoting European works is considered to be marketing effort, whereas financial contribution to production funds makes sense, according to VOD operators, only if they get something in exchange such as exclusive licenses. Also, a question should be asked as if theaters do not have (at least not in every Country) quotas, why should VOD operators do? One thing is sure, there is a mandate from the European Union to foster creative industries, production, audience development.

It has also been acknowledged the positive effect of fiscal incentive schemes supporting film and audiovisual productions in Europe, such as tax shelters, rebates, tax credits, together with slate funding mechanisms both from the EU, the States and the Regional funds: in particular, there has been some movement away from a tax shelter model, which is less transparent and has historically seen abuse, even though it has the advantage to provide cash flow during production.

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The Italian Minister of Culture, Dario Franceschini has closed the conference saying that we need rules at the global level or the market will be easily dominated by global players that skip national or even continental regulations, that cultural exception is useful to protect national identities, that we need to improve the connection with audiences and the international circulation of works, because creative industry is the main strategic sector for Europe.

All in all, a flexible mindset is needed to operate profitably within the changing film industry, whereas a set of rules may help to guide the flow if there is clear evidence of necessity.

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Some painful after-hours for Netflix

Netflix (Nasdaq: NFLX) shares fell 26.4% to $330.00 in recent after-hours trading, offsetting the 22% rise in 2014. Wow.

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Reed Hastings, CEO of Netflix

Why?

  1. Subscribers. The Los Gatos, CA company released a Q3-2014 financial report showing that the company has grown to 53.1 million total members worldwide, but the addition of 3.02 million subscribers in the third quarter fell below the company’s previous prediction of 3.69 million. The reason for this is partially due to the price increase of $1 a month to $8.99 which “appeared to be offset for about two months by the large positive reception to season two of [its series] ‘Orange is the New Black.’” says Reed Hastings, CEO. This means their customer base is very sensible to price changes, and this limits their ability to increase investments importantly. Furthermore, the forecast was missed both regarding the US (980,000 vs. 1.33 million) and the international markets (2.04 million vs. 2.36 million).
  2. Financials. Netflix reported a profit of $59.3 million, or 96 cents a share, up from $32 million, or 52 cents a share, a year earlier. However, Netflix is only predicting earnings of 44 cents per share for the current quarter, which is far below the 91 cents per share that analysts had predicted, a 44% drop compared with last year’s fourth quarter, as losses in its international segment widen due to its aggressive European expansion. In September, Netflix launched in six additional European countries, including France and Germany, and this led to (narrower-than-expected) losses of $31 million in the international segment, even though they declare that the international markets it launched before this year—places like Canada, the Netherlands and countries in Latin America—are now collectively profitable. Besides marketing expenses and technology investments, Netflix’s costs are growing as it seeks to become a global service. Netflix’s streaming content obligations rose nearly 37% to $8.9 billion, driven by new content deals it entered in the quarter as part of its European expansion.Nevertheless, the company’s closely watched total streaming contribution margin rose to 18 percent from 10.4 percent a year ago, but Netflix also reported that it burned cash in the third quarter, to the tune of $74 million.
  3. Competition. Hours before Netflix released its latest financial report, Time Warner and HBO announced that the latter’s online streaming service, HBO Go, will be offered as a standalone option starting next year – something cord-cutters everywhere have been clamoring for in recent years. Netflix said it expects people to subscribe to both HBO and Netflix, since the two have different shows. It is “likely we both prosper as consumers move to Internet TV”, a market that has been growing consistently: nearly 45 percent of Americans stream television shows at least once a month – a figure that is expected to jump to 53 percent by 2018, according to eMarketer research, whereas Europe is also moving fast.  Netflix has grown to become the biggest stand-alone subscription programming service in the U.S., with 36.3 million paid members. HBO had 30.4 million at the end of the second quarter, according to SNL Kagan. While it has bigger profits than Netflix, HBO has been growing slower in terms of revenue. That is largely because HBO is a mature business while Netflix is still pursuing a costly global expansion. HBO’s operating income for the quarter ended in June was $548 million, while Netflix’s in the third quarter was $110 million. Mr. Hastings reiterated in the interview that the company plans to “take all of our profits and put them into international expansion” because “we see it as such a big opportunity.” The online content provider operates in about 50 countries.
  4. Bold announcements. Last but not least, a volatile market usually gets nervous and suspicious in front of bold announcements coming from a risky business. In fact, in the latest days the company announced a series of wave-making deals in the quarter, including a global licensing deal with Warner Bros. for the Fox series “Gotham.” The company also said it would back the sequel to Academy Award-winning “Crouching Tiger, Hidden Dragon” in a deal with Weinstein Co. allowing for Netflix to premiere the martial-arts movie on the same day it is released in select IMAX theaters world-wide, and causing the protests from many important theater owners. Netflix additionally struck a deal with comedian Adam Sandler to back four new feature films that will be exclusive to Netflix. And, in June, Netflix signed a deal with comedian Chelsea Handler to produce multiple stand-up specials for the site as well as a new online talk show. In addition, immediately after the HBO announcement, they said they will start streaming all 10 seasons of Friends, starting in January, and has also been rumored to be in the running for streaming rights to Seinfeld. Well, to an expert opinion, it may sound a little bit like they are trying to debunk the attention from the facts and figures.

All in all, the lesson here may be as follows: never raise expectations too high or the risk is a painful fall.

Disney and other majors enjoying tax relief schemes internationally

The act of centralizing productions is, more than ever, out-of-date. Better taking advantage of incentives and other opportunities given by globalization. Hollywood makes no exception to this trend, as studios have started moving out of their Californian facilities, also for big budget feature films, while the golden state is trying to get them back (FYI, California want Hollywood back).

According to an analysis by The Guardian, Disney has earned $272 million in production incentives from the U.K. government, which offers tax breaks for films shot in Britain by film production companies within the UK corporation tax net. Introduced in 2007, the Creative Sector Tax Relief scheme allows film projects with a budget greater than $32 million to claim back up to 25 percent (increased from 20 percent) of the first $32 million of qualifying UK expenditure, then up to 20 percent of their production costs. Qualifying films must pass a cultural test or be an official co-production, intended for theatrical release, and must spend 10 percent (reduced from 25 percent) of their budget in the U.K., with 70 percent of their labor costs going to European workers. Tax relief is available on qualifying UK production expenditure on the lower of either 80% of total core expenditure or the actual UK core expenditure incurred. Most importantly and differently from other systems, there is no cap on the amount which can be claimed.

Together with tax benefits, the Government is investing in specialized labor creation and production facilities such as Pinewood Shepperton studios, which recently received government approval for its long-delayed expansion plans worth $340 million. The “Pinewood Studios Development Framework” includes doubling the existing Pinewood Studios by adding a total of 100,000 square meters of new facilities, including studios and stages, workshops and production offices, to build another 10 stages and create 3,100 new jobs.

The past few years have seen the company ramp up its productions in the country, specifically at Pinewood Studios, which has welcomed the likes of Star Wars: Episode VII, Maleficent, Alice in Wonderland: Through the Looking Glass, Cinderella, Avengers: Age of Ultron and several other major titles from Disney’s Marvel, including recent Guardians of the Galaxy and upcoming Doctor Strange.

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Guardians of the Galaxy director James Gunn and character Rocket Raccoon .

Since 2007 Disney has spent a total of $2.3bn on film-making in the UK, including a significant chunk of the $250m production budget of the fourth Pirates of the Caribbean film, believed to be the most expensive in history, which grossed more than $1bn, according to industry analyst Box Office Mojo. Last year Disney’s UK film costs peaked at $531m, around 18% of the $3bn that the studio spent worldwide. The UK’s share was up from 11% in 2012.

Last year, it claimed back $81 million, believed to be the largest ever to a single studio, a third of which was accounted to Thor: The Dark World, another Marvel title shot in Pinewood. Disney has already spent more than $180 million on Star Wars: Episode VII and Avengers: Age of Ultron alone, according to the accounts.

Accounts released this year show that Disney has already spent more than $180m on the Star Wars and Avengers films alone. Other studios are also filming more in the UK. Warner Bros currently has three movies in production there, including one based on the 1960s television series The Man From Uncle, directed by UK director Guy Ritchie.

But some complain the tax relief can backfire as a boost to the British film industry. In November Edgar Wright, the director of British movies Hot Fuzz and The World’s End, said: “While the tax break is good for Hollywood films shooting here, it’s probably not that great for British films shooting in the UK. Some middle-to-low-budget films are going to find themselves without crew because all the American films are shooting here.” Well, we say people must adapt their habits and lives according to economic developments, this is why institutions like European Union were born, that is in order to ensure “free movement of goods, services, capital and persons”.

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Pinewood Shepperton studios near London, UK.

Other countries should follow a similar path as creative industry is a strategic sector for connecting cultures within the globalized market. The Italian government, for instance, recently boosted film tax credits available at 25% of qualifying production expenditures for international feature films, going from a cap of $6.7m per project to a cap at $13m per company, whereas the overall tax credit for the cinema and audiovisual industry will increase from $147m to $154m, both kicking in from 2015 and available to television and web content producers too.

“Netflix rhymes with Wet Chicks” for Sandler, means an opportunity for all

Any game changes and evolves, so players’ attitude, and laws and regulations need to evolve accordingly.

The primary game changer Netflix has just announced, right after declaring that the first day-and-date worldwide release of a blockbuster will happen soon, that they are going to produce and distribute as soon as 2015 four feature films starring Adam Sandler, therefore coining the term web film, which is a film meant specifically for online distribution.

Said Sandler: “When these fine people came to me with an offer to make four movies for them, I immediately said yes for one reason and one reason only: Netflix rhymes with ‘wet chicks.’ Let the streaming begin!”

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We’ve seen Netflix give TV a run for its money with a number of well-worth-watching original series, including House of Cards, starring Kevin Spacey, and prison-set dramedy Orange is the New Black. Now it seems the streaming video service has set its sights on the big screen… ish. And this means, for some, that they are continuing to thumb nose at theaters.

Well, probably. But first of all it means adding opportunities for talents. Ok, not everyone is Adam Sandler: the actor’s films, most of them comedies, have grossed more than $3 billion globally, and he is going to keep his agreement with Sony, while his films consistently rank among the most viewed by Netflix members, both in the U.S. and overseas. Therefore Netflix is prepared to pony up as much as the majors studios do for a Sandler film, which, on average, costs in the $80 million range. But this latest Netflix’s move is designing a new path, where theatrical release is not the only synonymous of artistic dignity anymore, where online distribution is not some kind of underground and neither alternative, but a perfectly viable and smart option.

Because, hey folks, not everyone can make it to the theater… right? Well, now not everyone wants to make it to the theater. Which will mean, in my opinion, that quality of theatrical releases is going to rise as there will be movies meant for the theater and others which will be better off with other types of distribution strategies. As a result, theater programmers will not be pushed by distributions to get packages of content, whereas will be able to select according to their specific audience. And audiences will be willing to pay a premium price for premium content and premium experiences. This is a win-win-win paradigm, just like it happens any time market opens up with new opportunities.

Furthermore, as said in the first paragraph, I believe also that laws and regulations related to funding production and distribution need an update. For instance, in Italy at the moment productions are eligible for tax benefits and public funding only if the film is meant priory for theatrical release and such benefits are assigned proportionally to previous year theatrical box office. Such provisions create a non-sense overcrowded line for accessing theaters even when strategic thinking would not suggest it, even for one week only or less, therefore saturating the market and lowering the quality.

Business models are changing, but theaters will be alive in 100 years for now because people need that kind of social gathering and they enjoy the magic, no doubts about it. They will increasingly be the destination for a premium or very customized experience, whereas new business models will get into the game because probably “being able to compete for consumers’ attention and dollars over the preciousness of access is a thing of the past” and so “people should have the opportunity to see it on a big screen if they want to, but if they want to watch it at home, they can stream it” as Netflix’s Ted Sarandos says, adding up to his concerns that “as theater owners try to strangle innovation and distribution, not only are they going to kill theaters, they might kill movies.” (video: Keynote Address | 2013 Film Independent Forum).

All in all, a more open discussion between the parts of the value chain is desirable in order to stay closer to customers needs and flourish in a fast changing market.

Day-and-date release, Bubble or Tiger?

The Weinstein Company planning worldwide day-and-date release on Netflix and IMAX theaters of Crouching Tiger, Hidden Dragon sequel is nothing new to the industry practice.

The first noticeable (because of the combination of a high-profile director and the backing of maverick billionaires Todd Wagner and Mark Cuban) example of such strategy was in 2006 when Magnolia Pictures released the Steven Soderbergh’s movie Bubble simultaneously to theaters and cable television channel HDNet Movies, whereas four days after they released the DVD. The well-wisher of the initiative was Mark Cuban, the outspoken Internet billionaire who also owns the NBA’s Dallas Mavericks, who used his network of art-house Landmark Theaters and digital television for giving the consumers the choice of how they wanted to watch a new film, even though receiving harsh criticism from Hollywood purists, windowing lovers, and being boycotted by the other theater chains who refused to screen the film.

Because of the limited release and the hardly marketable art-house nature of the movie, the experiment was a total flop as it only grossed $145,626 in the US, shown for four weeks in 32 theaters, and $116,340 internationally. Nevertheless, it definitely shook the conscience of the industry regarding windowing.

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Here is how Cuban responded to John Fithian, National Association of Theater Owners head:

With the release of Bubble on January 27th in theaters, on DVD and for 2 showings on HDNet Movies, there has been a ton of press and discussion about the future of the movie industry. The most extreme has come from John Fithian, who wins the award for the best ever imitation of Jack Valenti’s famous comparison of the VCR to the Boston Strangler when he was quoted in FastCompany as saying [Fithian] called Iger’s suggestion this summer a “death threat” against his members. Fithian says that “if [release] windows were eliminated, what you would have would be fewer movies, fewer total dollars for the industry, and less choice for the consumer.” He thinks movies would become little more than commodities and that hundreds or thousands of theaters would close. But he wasn’t done there. He said the same thing to USA Today: It’s the biggest threat to the viability of the cinema industry today,” John Fithian, president of the National Association of Theater Owners, said of the so-called “day and date” release strategy. How sad is it when the President of the National Assoc of Theater Owners doesnt think his members can create a better movie going experience than what we can see in our houses and apartments? Guess what John, I can whip up a mean steak, but I still like to go to restaurants. Because I enjoy it. I enjoy getting out of the house with family, friends, who ever.

How would he respond today to major theater chains announcing they will be boycotting the Netflix-IMAX release? Probably, in a very similar way, even though this time the “other” distributor is VOD and not television, and the rationale behind is a little different as no customer experience can be more different than the ones offered by IMAX and Netflix, and therefore we are talking about two tatally different products which cannot cannibalize their own sales.

In 2006, a typical film used to earn about half of its revenue from home video and only about 25% from theaters. The remainder coming from selling the film to cable and broadcast TV and other sources. Media companies were already aware they had to adapt to the changing demands of consumers and the rise of digital consumption.

By 2018 the biggest chunk of revenue for film consumption will come from electronic home video, growing by 114% to reach $45B globally, with this figure possibly being even bigger if we manage to fight piracy consistently, which includes shrinking windows for films that we can forecast not performing exceptionally theatrically and most of all with a relatively short product life-cycle. Generally, while large, event movies such as King Kong may work best on the big screen, simultaneous release could be beneficial for small, independent films that often struggle for an audience while blockbusters hog theater screens. But this really needs to be analyzed on a case-by-case basis.

The future of theatrical film distribution is unknown. Practices that might not have worked 5 years ago are commonplace today, such as movies opening via VOD weeks before they reach theaters, or enjoying day-and-date release structures to reach a wider audience. Probably it will depend on the ability to provide exceptional experiences to their audiences, and also on their openness to innovation. Including experiments like Warner’s Veronica Mars crowdfunded production followed by day-and-date release, for instance: AMC Theaters rented out 260 out of 270 screens for the limited “four-walling” release, where the theater gets paid a flat rental rate, the studio keeps 100 percent of the ticket sales and the theater does not violate the industry’s theatrical “window” policy, so the risk is very low and everyone is happy.

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It’s worth asking would this stance if this Netflix model is adopted by major studios. Not that this would occur in the next year or two. But let’s say, down the line, that the latest Marvel movie would be available on Netflix on the same day that you also could see it on an IMAX screen. Would they still refuse to carry an obvious moneymaker on principle? Is it worth for theaters to fight Netflix and other major VOD platforms as their worst enemies, or shall the industry converge on possible synergies and new strategies in order to maximize overall returns? 

The discussion is ongoing and is more interesting than ever. But #SmartMoviegoing is too powerful to be stopped and there is no industry that can survive without listening what their customers want and need, that is a fact. Therefore, a more flexible mindset is needed.