It is about time for a #DigitalSingleMarket in #Europe

Europe is finally waking up and realizing that in order for the digital market to flourish, barriers need to be demolished. If European Union was created for the free circulation of men and goods, one cannot understand why it is not so in the digital space.

The plan to create a Digital Single Market within the 28 EU countries has been unveiled, with the goal of “bringing down barriers to unlock online opportunities”.

The three policy areas that have been identified by the Commission are:

  1. better online access to digital goods and services;
  2. an environment where digital networks and services can prosper;
  3. digital as a driver for growth.

The proposals, which will be on the agenda of the European Council meeting on June 25-26, have already attracted criticism: Robert Atkinson (@robatkinsonitif), President of Washington-based think tank the Information Technology and Innovation Foundation, says Europe would create an isolated market at the expense of the global digital economy, whereas Reed Hastings (@reedhastings), CEO of Netflix, says they are already solving the problem of making the content accessible worldwide at the same time commercially (source: The Hollywood Reporter).

However, the main point here is in fact creating an open and more fertile market that would also benefit the global digital economy, enhancing the circulation of content and therefore empowering the internal market for digital goods, including entertainment, and therefore giving consumers the possibility to choose from more than one content provider. This is what “open market” means. Creative Europe (formerly known as Media Programme) the programme for “supporting Europe’s cultural and creative sectors”, is already working in this direction since 1991, with a budget of €1.46 billion for the period 2014-2020.

Others, such as Randy Greenberg (@RandyGreenberg), Managing Director, Entertainment Content & Investment Strategy at The Greenberg Group and Instructor of Business of Entertainment at UCLA, as well as former SVP International Theatrical Marketing and Distribution at Universal Pictures, have argued that the immediate effect would be the end of the licensing territory by territory and a substantial drop in audiovisual content sales price because a handful of big buyers would emerge to dominate the Old Continent market and drive the smaller ones out of business, which will in turn cause content pricing to drop and ultimately overall revenue for the film and television industries to fall, not only in the digital market, but also in the traditional media and the theatrical distribution as a consequence.

True, it can be reasonably argued that the existence of more powerful buyers could ultimately drive content prices down for the Studios because of a diminished (or, better balanced) contractual power. However it could as well mean the opportunity for European content producers and distributors (as well as for digital startups) to benefit from a stronger internal market and flourish, starting from the digital space. Antitrust law enforcement will hopefully ensure that such power does not grow beyond control jeopardizing consumers.

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In addition, as explained by Andrus Ansip (@Ansip_EU), the European Commission’s vice president in charge of the digital single market, a borderless Europe would not mean an end to territorial licensing – selling the rights to a film in various territories on an exclusive basis — or windowing, the system whereby a movie is released in stages on different platforms, from cinemas, to VOD to television. “We do not want to change the system or principle of territoriality,” Ansip said. “We are in favor of the principle of territoriality, but I am not accepting absolute territorial exclusivity.” Furthermore, the planned measures would be nurturing cultural diversity – while opening new opportunities for creators and the content industry. At the end of the day, Europeans will still be very different within each member state, and therefore they will keep liking different kind of content from local producers and distributors.

According to the European Commission, tearing down regulatory walls and moving from 28 national markets to a single one of more than 500 million potential customers could contribute €415 billion per year to the European economy and create 3.8 million jobs.

All in all, it is reasonable to claim that such measures would enhance the circulation and monetization of digital content, should help European digital businesses to grow, balance the power of the Studios as well as of digital e-commerce giants such as Amazon and eBay that by the way already operate cross-borders enjoying the benefits of tax havens such as Ireland and Luxembourg. Finally, increasing the accessibility by eliminating geo-blocking and harmonizing copyright laws wold also have the incredibly positive effect of helping to fight piracy.

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Me and Earl and the Dying Girl, sleeper film for this Summer

Greg (Thomas Mann), a high school senior who is trying to blend in anonymously, avoids deeper relationships as a survival strategy for navigating the social minefield that is teenage life. He even describes his constant companion Earl (RJ Cyler), with whom he makes short film parodies of classic movies, as more of a ‘co-worker’ than a best friend. But when Greg’s mom (Connie Britton) insists he spend time with Rachel (Olivia Cooke) – a girl in his class who has just been diagnosed with cancer – he slowly discovers how worthwhile the true bonds of friendship can be.

Me & Earl & the Dying Girl is an upcoming American comedy-drama film, rated PG-13, directed by Alfonso Gomez-Rejon (Glee, American Horror Story) and written by Jesse Andrews, based on Andrews’ 2012 debut novel of the same name, which sold more than 7 million copies. It stars Thomas Mann, Olivia Cooke (Ouija) and Jon Bernthal (Fury, The Wolf of Wall Street, The Walking Dead) and premiered at the 2015 Sundance Film Festival to a standing ovation (http://variety.com/2015/film/festivals/sundance-film-review-me-and-earl-and-the-dying-girl-1201414455/). The production budget was about $5.6 million.

It won the U.S. Grand Jury Prize: Dramatic and the Audience Award for U.S. Drama at the festival. The film is scheduled to be released on June 12 by Fox Searchlight, which acquired the rights from Indian Paintbrush for about $8 million plus profit participation  winning the competition of many bidders including Focus Features, CBS Films, Lionsgate, A24, Miramax and TWC (http://www.hollywoodreporter.com/news/sundance-why-me-earl-dying-767545) and following a lot of media hype on the actual price tag (http://deadline.com/2015/01/me-and-earl-and-the-dying-girl-sundance-record-bidding-1201358903/).

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Fox Searchlight, one of the best for taking care of this kind of films (see also Little Miss Sunshine) will follow the path traced by 20th Century Fox last year with the phenomenon The Fault In Our Stars, released on June 6, grossing $124 million domestically and $182 million internationally. The basic strategy is to counterprogram a sci-fi big-budget blockbuster: it was Edge of Tomorrow last year, it will be Jurassic World this year, leveraging on amazing reviews and positive word-of-mouth on social media (the film has currently 100% fresh on Rotten Tomatoes, 8.3/10 on IMDb, 92/100 Metascore). It will start with a limited release but it is going to expand while consensus will grow and moviegoers will notice the quality of this little gem, which will hit the Summer market like a rain of sunshine after a rainstorm and gross at least $50 million domestically.

#CinemaCon2015 showcases great slates and stunning technologies

During the annual conference organized by the National Association of Theater Owners (NATO) and held at Caesar’s Palace in Las Vegas, the major Studios have as usual showcased their upcoming slates.

Not so usual however is the caliber and market potential of the movies, from Paramount‘s Summer 2015 star driven releases Mission: Impossible – Rogue Nation and Terminator Genisys presented directly by Arnold and Tom, to Warner Bros‘s big event movies such as Mad Max: Fury Road, San Andreas, Black Mass, Point Break, Entourage, and of course Batman v Superman: Dawn of Justice.

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Tom Cruise presents the new chapter of the Ethan Hunt’s saga.

From Disney‘s incredible 2015-2017 of epic hero driven slate including Avengers: Age of Ultron, Tomorrowland, Inside Out (screened in Dolby Vision), Ant-Man, Star Wars: Episode VII – The Force Awakens, Captain America: Civil War, Guardians of the Galaxy 2, and Doctor Strange, to Sony‘s filmmaker driven movies such as Xmas, Spectre, Pixels, Aloha, Money Monster, Hotel Transylvania 2.

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Preview screening of Inside Out, the new Pixar’s animation film, in Dolby Vision.

From Universal‘s franchise driven slate of films such as Ted 2, Pitch Perfect 2, Jurassic World, Minions, Fast and Furious 8, even with authorial additions such as Everest, Crimson Peak, Straight Outta Compton, and the new Illumination’s animation feature The Secret Life of Pets, to Fox‘s author driven and internationally oriented films such as Ridley Scott’s The Martian, Alejandro Gonzalez Inarritu’s The Revenant starring Leonardo Di Caprio, David O. Russel’s Joy, the new animation film The Peanuts Movie, and then Hitman Agent 47, Maze Runner: The Scorch Trials, Josh Trank’s Fantastic Four, Paul Feig’s Spy (also featured during the following party), Paper Towns.

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Paul Feig entertains the attendees of the Spy Party.

But CinemaCon means also the trade fair where hundreds of vendors showcase their products to the theater owners and film industry professionals: besides concessions and seating solutions, marketing and analytics tools and apps among which startups such as Dealflicks, Intensnet, Showtime Analytics and Peach Digital, make their way among established companies such as online ticketing/marketing providers Fandango and MovieTickets, POS providers RTS, NCR, Vista, and technology providers such as Imax, Barco, Cinemeccanica, Christie, 4DX, and Dolby, official sponsor this year with its new Vision system, based on wider color gamut and high dynamic range (HDR).

Also emerging as main point from panels discussions, one consideration needs to be made at this point: on one side the vendors and the real estate investors seem to be pushing toward building more and bigger theaters and upgrading technology turning theaters into high-end all entertainment venues for tenth-pole big event movies and richer audiences, on the other marketeers, filmmakers and distributors, together with smaller theater owners are wondering how to get teenagers back to be frequent moviegoers leveraging timely releasing and smart pricing strategies, an analysis that needs to take into account what is happening in the digital space – i.e. the shrinking windows and the increasingly common day-and-date releases. A lot of work has to be done in this respect and the different parts of the industry are responsible to seek win-win solutions, with the primary objective of protecting the moviegoing experience and ultimately making consumers happy, the one and only way to drive revenue up. For the film industry to thrive, no one should be left behind: many theater owners (the majority of attendees of CinemaCon, the ones outside the big chains) cannot keep the pace with continuous investments in technology while facing diminishing margins and lower attendance. New technologies are desirable only if the demand justifies the need of new investments: mature markets such as North America and Europe are struggling in this respect, whereas biggest part of the growth is coming from Asia, China in particular (see https://flixbiz.com/2015/03/12/global-box-office-inflated-by-chinese-wind-us-suffering/).

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The legendary Clint Eastwood interviewed by Stephen Galloway, THR.

CinemaCon was also the moment to honor the careers of great executives such as Fox’s Chief Jim Gianopoulos recipient of the Pioneer of the Year award, and Warner’s SVP Asia Distribution Erlina Surharjono recipient of the Passepartout Award, and to celebrate stars like Julianne Moore and legends like Clint Eastwood, recipient of the Fandango Fan Choice Award for Favorite Film of 2014 for the surprising results of American Sniper. In particular, the director told the audience about his working style and his incredible career, disclosing also some funny anecdotes – i.e. very few people know that Sergio Leone did not speak english and he did not speak Italian, but they could understand each other using the secret language of filmmaking.

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The 2015 Big Screen Achievement Awards.

The Big Screen Achievement Awards ended the 4-day convention with the bubbly and at times hilarious appearances of Alan Arkin – Lifetime Achievement Award, Elizabeth Banks – Breakthrough Filmmaker of the Year, Francis Lawrence – Director of the Year, Amy Schumer – Breakthrough Performer of the Year, again Paul Feig – Comedy Filmmaker of the Year, again Julianne Moore – CinemaCon Vanguard Award, Kevin Hart – Comedy Star of the Year, Rose Byrne – Female Star of the Year, Paul Rudd – Male Star of the Year.

There was also a final party sponsored by Coca-Cola at the Caesar’s Palace pool but that must stay outside of the chronicles because what happens in Vegas stays in Vegas!

Fancy a negative pickup?

Superman, The Empire Strikes Back, Never Say Never Again and Lone Survivor. What do these films have in common?

They were all financed and distributed according to a negative pickup arrangement. Even Terry Gilliam’s Brazil, a negative pickup for Universal Pictures produced by Arnon Milchan: in this particular case, the studio had creative disagreements with the director over choice of star, content, and duration, and failed to resolve these issues to its satisfaction, because the negative pickup had essentially granted Milchan final cut.

The negative pickup is a type of film financing arrangement, an interparty agreement in which the parties involved are bank, completion guarantor, producer, and distributor, usually bank financed with the collateral being a Distribution Agreement from a trusted and creditworthy Distributor or Studio then owning distribution rights upon delivery of a completed film negative by a stipulated date and in accordance with the terms of the agreement, where the pickup price shall include cost of budget (which has to include a completion bond which premium usually amounts 3-5% of the production budget and contingency), cost of interest, origination fee, bank and legal expenses.

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Superman (1978)

The Producer, having agreed to sell distribution rights for certain territories to a Distributor (or two, in the case of a split rights deal where one gets domestic and the other international rights) who has in turn agreed to pay on delivery within the Distribution Agreement, borrows funds for production to be repaid on delivery from a Bank within the Loan and Security Agreement, whereas a Completion Guarantor oversees production and has right of takeover within the Producer’s Agreement, and agrees to guarantee delivery per Distribution Agreement or repay the bank within the Completion Guarantee.

The interparty agreement defines effective delivery, inspection, quality control (usually 10-14 days), cure periods (usually 10 days) and arbitration procedures (a period of time that bears interest) as defined by IFTA if Distributor, Producer and Completion Guarantor argue over whether effective delivery has occurred or not, and thereby who repays the Bank, the Distributor if effective delivery has occurred or the Guarantor if it has not, and at that point the Guarantor owns the film. Therefore the Guarantor has both Preliminary (Production Analysis) and Balance of Requirements (Document Analysis) and reviews all the related documents before issuing the bond: the Guarantor does not like essential elements (e.g. stars), and also can stop enhancements (additional items added to production) and force the producer to pay from his own salary.

Pre-sales is a variation of negative pickup in which distribution rights are sold territory by territory resulting in multiple Distribution Agreements that are used as collateral for the loan, where there is usually a Minimum Guarantee plus revenue share arrangement for each primary territory (secondary territories are usually not accepted as collateral), an advance paid immediately and the rest upon delivery, there is usually one or more sales agents who get a 10% fee collectible once the bank has been paid back (so agents usually oversell till 120% to get their fees), unsold territories can be added up as collateral paying an extra interest on the gap and usually only if they are worth twice the financing gap and such gap does not exceed 20%.

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Brazil (1985)

A negative pickup arrangement reduces the downside risk for investors that the film does not find a distributor at all, perhaps because it is not as good as anticipated, from the studio’s point of view it is not taking much risk because if the negative is not delivered or delivered not exactly as agreed, then the studio has no obligation, and safer also for the producer because such requirements are purely contractual and not regarding artistic value of the work. Furthermore, the distributor does not share the risk that the film goes over budget, since a completion guarantee will have been provided, the producer may get a better deal from competing distributors upon a potentially good film, and it enhances foreign sales potential. However, the producer still has to obtain financing from sources other than the studio or distributor that is a bank or other investors; also, the arrangement embeds a risk/reward ratio in the sense that the more risk the producer assumes relative to the distributor, the better deal the producer will be able to negotiate, and is potentially less rewarding for the producer and less expensive and somehow speculative for the distributor, requiring complex transactions and high therefore high transaction costs, thus definitely belonging to producers with a proven track record, major and trusted distributors and a relatively small circle of qualified professionals and financiers.

Global box office inflated by Chinese wind, US suffering

According to the annual Theatrical Market Statistics Report for 2014 by the Motion Picture Association of America, Inc. (MPAA) released yesterday, the global box office increased by 1% to a new record of $36.4 billion. Domestic (U.S./Canada) dropped by 5% at $10.4 billion. The Asia Pacific region was up by 12% overall, whereas China’s total of $4.8 billion (first international market to exceed $4 billion) was up a huge 34%, which alone improved the combined global total. Latin America box office increased 2% (but is up 46% from 2010) to $3 billion, Europe, Middle East & Africa (EMEA) decreased 3% ($10.9 to $10.6 billion) from 2013, due to decreases in larger European markets such as Germany (-7%) and the U.K. (-1%).

Growth-of-Global-Box-Office

As far as the infrastructure, total cinema screens increased 6% worldwide in 2014 to over 142,000, due in large part to continued double digit growth in the Asia Pacific region (+15%) now accounting for more than 47.3 thousand screens against 43.2 in US/Canada, 40.4 in EMEA, 11.2 in Latin America. 90% of the world’s cinema screens are now digital, up 7 percentage points from 2013 (83%), 51% (47% in 2013) of which are 3D. In particular, in the US, the majority of screens (84%) are located at venues with 8 or more screens. The number of screens at venues with seven or fewer screens continued to decline, despite an overall increase in the number of screens.

Looking at moviegoing in the domestic market, what is particularly worrying is the drop of admissions: tickets sold (1.27 billion), and average tickets sold per person (3.7) both declined by 6% in 2014 in US and Canada, which is the lowest level in many decades, while the average cinema ticket price increased by only 4 cents (less than 1%) in 2014, less than the rate of inflation in the economy.

Going more in depth, 229.7 million people (68% of of the U.S./Canada population aged 2+, 52% female and 48% male) went to a movie at the cinema at least once in 2014 (“moviegoer”):

  • the typical moviegoer bought 5.5 tickets over the course of the year (down from 5.9 tickets in 2013);
  • frequent moviegoers (once a month or more) are 11% of the population but accounts for 51% of all tickets sold, a 1.2 million and 3% increase from 2013;
  • the number of frequent moviegoers increased (40-49 and 60+) or remained flat (50-59) among 40+ age groups, but fell or remained constant for younger age groups, including the largest frequent-moviegoing age groups (18-24 year olds and 25-39 year olds are 1.7 and 2.7 million less respectively within the last two years);
  • per capita attendance declined for all age groups under the age of 40, increased for 40-49 year olds (3.6) and 50-59 year olds (3.1), which also had their share of tickets sold at all times high and remained flat for 60+ year olds compared to 2013, even though the 12-17 year old age group (6.4) had the highest per capita attendance, followed by 18-24 year olds (6.2);
  • despite a decline in 2014, Hispanics especially continuing to oversample in tickets sold versus their proportion of the population, while Caucasian and Asian/Other frequent moviegoers increased in 2014 compared to 2013;
  • over two-thirds of all frequent moviegoers (73%) own at least four different types of key technology products, compared to 55% of the total adult population;
  • California and Texas had more moviegoers and the largest number of frequent moviegoers (5.9 and 4.1 million, respectively).

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Other key trends to keep in mind:

  • 3D is less appealing than ever but highest grossing films are released also in 3D. The percentage of the population who were 3D moviegoers in 2014 fell for all age groups, with larger declines for age groups below 40 years old and the format comprising 14% of the overall box office, however 9 of the top 10 and 15 of the top 25 films were released in 3D.
  • More theatrical releases. Films released in theaters by MPAA member studios increased for the first time in five years, reaching 136 in 2014, a +19% compared to 2013. Total films released and films by non-MPAA member studios also increased from 2013 (up to 707 or 7% and to 571 or 5%, respectively),  higher than any other year in the last decade.
  • PG-13 films comprised 14 of the top 25 films in release during 2014.
  • Total film produced for theatrical release with a budget of $1 million or higher were 481 (+6%), of which 110 (+4% were MPAA member studio films.
  • Among the top five grossing films in 2014, Guardians Of The Galaxy, Captain America: The Winter Solider, The Lego Movie (which earned 64% of box office revenue from Caucasian audiences) and Transformers: Age Of Extinction (which drew the most ethnically diverse audience) all attracted majority male audiences. The Hunger Games: Mockingjay Part 1 showed the strongest female attendance of the top 5 films, with 57% of the film’s box office revenue coming from women.

Let’s try to sum everything up.

Compared to the previous year, in 2014 the Asian gross box office increase has offset the decline in US/Canada and Europe resulting in a slight global overall growth. Furthermore, there are now more screens, more concentrated in multiplexes and more digital, and more films were released theatrically, despite domestically considerably less tickets were sold on average, to an older audience and the frequent moviegoers (who are also tech-savvy) now totally sustain the market purchasing the majority of the tickets. The highest grossing films are rated PG-13, released also in 3D and attracted male audiences mainly, deviating slightly from the general moviegoers population. Hispanics are more likely than any other ethnic group to purchase movie tickets, while California, Texas and Florida are the most receptive states.

All in all, it looks like the movie theater is becoming, partially due to competition from other forms of entertainment primarily digital VOD, something appealing to a narrower (32% of the population did not go to the movies at all) and older target population of frequent moviegoers, with more films being released in theaters for less time, while China’s growing appetite for American movies comes at a welcome time for the industry.

There is certainly at this point a need for US distributors and exhibitors to analyze these data carefully and come up with new concepts, strategies and business models for keeping up with the demands of their actual and potential moviegoers. Starting from understanding how to adapt to the digital challenge.