Film Business Remains Strong -- But Different

It's Monday morning -- a holiday in the U.S. celebrating our Presidents.  For those of us in the film business, that means one more day for folks to see another film before heading back to another week of work.  This weekend's box office was topped by a star-packed film that critics hated.  "Valentine's Day" made almost $67 million in its first three days of release.  That is a huge number for a light romantic comedy that opened to a pretty negative buzz.  The lesson here is that apparently some stars still matter.  You can argue about whether folks were more interested in seeing Julia Roberts or Taylor & Taylor (or Jessica or Ashton or Bradley or George -- or because they know that Garry Marshall is a great director), but the crowds definitely came out for the stars.

This is actually good news.  From the standpoint of my business representing producers, my initial reaction is to flinch at anything that gives bargaining power to the talent.  But the truth is that we are all in this business together and I want the audience to love actors. I want writers to write great scripts, directors to make stunningly beautiful and poignant films, and actors to deliver performances that stir the hearts of millions.  That is the essence of what makes the film business so wonderful, and such a great business.

And it is apparently working.  Even the number 10 film in this week's box office derby did over $4 million at the box office.  The overall box office numbers were huge.  I was at the multiplex with my family yesterday and there were several films that were selling out shows in the middle of the day.  The film business is doing great.

So why is it still a little (actually, more than a little) difficult to get films into production?  Why is film finance money so tight?  Tax incentives are still lucrative and plentiful. The talent is still willing to work for reasonable guarantees (compared to past years).  Technology allows us to make really high quality pictures for a fraction of what it used to cost.  Costs are going down and sales are going up.  That sounds like a place that most investors would want to put their money.  So what's the problem?

The challenge (I never like to use the word "problem") is that the revenue streams are changing and no one knows what the new revenue structure really looks like.  The studios are moving towards shorter theatrical release windows to allow for earlier DVD releases.  Except everyone sees that the DVD (and soon the Blu-Ray disc, as well) is dying a relatively speedy death.  Hollywood Video is done and Blockbuster is following (but hoping to use its market power to arise as something new).

Within a very short time, consumers will be pushing a button on their remote and pulling a high definition, 3D version of a relatively recent film onto their living room big screen.  That scares a lot of people in the industry because they aren't sure how they continue to make big bucks from that model.  So, they aren't sure how much to spend on a film or how to make deals that won't make them cringe when they pull the contract out of the drawer five years from now.

It is a time for vision and courage, my friends.  It is in times of change that the opportunities are greatest.  It is possible to create assets today that will be bearing fruit for years to come.  And the key is recognizing the power of the long tail.

A copyright lasts for decades, but we have been trying to make all of our money back in the first weekend of release.  If we look at each film as a seed that is being planted (rather than a pinata that is bursting open while we scramble to grab the most candy as quickly as possible), we can build strong, profitable businesses.  Each picture needs to be nurtured and encouraged to find new audiences year after year.  And we need to connect with those audiences in new ways that make them eager to spend a few dollars to engage and continue those relationships.  It's still about stars and stories and beautiful sights and sounds, but let's not think of each new film as a one-night stand.  Let's take the time to form relationships with our audiences that will pay dividends over many years.

Many Entertainment Opportunities for 2010

Here we are on February 1. We are fully into 2010 -- past the time when we are wishing one another a happy new year.  We're getting down to business.  We're also past January, which is the month of trade shows and awards.  In the past 30 days, the Consumer Electronics industry had their big shindig in Las Vegas, the musical instrument business had it's major annual conference in L.A., the independent film business gathered in Park City, Golden Globes were awarded, Grammys were awarded, the DGA honored directors -- the list goes on.

So what do we know as a result and how does it help us?  Here's a short (and certainly not comprehensive) list:

1.  We know that 3D is a huge phenomenon.  Will it last?  Probably, but it remains to be seen.  In the meantime, Avatar is the biggest film ever in terms of box office dollars, and the CES show was all about 3D technology for the home.  At the Grammys last night, the audience wore their 3D glasses without shame.  The technology has emerged from the nerd closet and become a part of the ubiquitous mainstream.

This creates big opportunities to capitalize on this phenomenon.  Everything from cool 3D glasses for the home to 3D networks to low-cost 3D remakes of classic content.  There is a lot of money to be made in the next few years by riding the 3D wave.

2.  Distribution continues to decentralize.  There are a plethora of small, specialty content distributors coming alive and many of them will do well.  The music business has showed us that technology gives power back to the artists.  When you can reach your audience directly, you don't need to pay a huge premium to large companies for market access.  Bad news for the huge companies, but probably a net positive for the artists and the audience.  There is infinitely more music to choose from than 10 years ago, and there are more artists making a living.  They aren't getting rich, but many small, specialty artists are actually able to survive through their art.  That is very different than it used to be.

And the same phenomenon is coming to film.  The DVD is in its final cycle before it dies all together.  Blu-Rey is nice, but it will also eventually go away.  Filmmakers are creating quality content for a fraction of what it used to cost.  The artists are gaining access and control; it is the same pattern as seen in the music industry.  Make no mistake -- if you want to make a living as an independent producer, now is a very good time to be getting into it.  You may not make the gazillions enjoyed by the successful producers of the past couple of decades, but you will be able to live a nice life from your art.

3.  The world is becoming one market.  More than ever before, we are all gaining access to the world market.  -- and the world's money.  Companies all over the world (like Reliance, for example) are investing in U.S. content and companies.  And international sales of films and other content is becoming an increasingly important part of the overall financial picture, even for smaller films.  When something catches on, it doesn't stop at the coasts of North America.  It is as easy to find an online audience in England or Norway or Japan or even China as it is to reach people in Chicago or Denver.

Of course, the real challenge is still in finding business models that will work in this new environment.  Advertising dollars are big, but limited.  Online commerce is a better model, but the value of content online is clearly much lower than in a physical environment.  But it is also less expensive to create the content, so technology has delivered both the problem and the solution.  And for consumers, that means a lot more choice.  But with that choice, marketers face the challenge of rising above the din to find an audience.

That's enough for now.  It is enough to spin your head.  Suffice it to say that it is a completely new world and many people will continue to gain wealth in this new environment.  Keep your head up and look for the opportunities, and there is nothing to stop you from being among the new crop of winners.

Trends, Innovation and Money

In reading and tweeting on a few news items this morning, I was compelled to write a quick blog post.  I think I am restating the obvious, but sometimes it's good to remember simple lessons.  So, here it is:

If you want to make a lot of money in the entertainment business (or any other business), solve a real problem for a price that people are willing to pay.  That's what successful companies do.

What does that have to do with trends and innovation?  Every time the ground shifts in any industry, there are new rules and new issues to be solved.  Identifying those issues early and creating great solutions is the essence of opportunity.

No reason to belabor this point.  Here is the bottom line:

1.  Watch the trends.
2.  Understand how the industry is innovating and responding to those trends.
3.  Assess what new challenges will be created as a result.
4.  Devise brilliant, practical solutions to those new problems.

So, in our business, technology is driving tremendous changes in every area of the industry.  In an hour of creative, enlightened thought, any of you could probably think of ten problems that will need to be solved as a result.  Want to make a lot of money?  Start solving.

The Most Important Trend for Entertainment 2010

At this time of year, it's interesting and fun to think about where our industry is headed.  More specifically, what are the important trends in entertainment?  Which changes are most likely to impact those of us who don't work at NBC Universal?

We can talk about the various developments and what they might mean for the various sectors, but I think this coming year there is one single development that will be a game changer in almost every area of the business.  It is the convergence of the Internet with the home theater. 

Internet content has been moving closer to the living room for several years.  One major hurdle in that process has been the lack of enough bandwidth and speed to deliver large format HD content on a real time basis.  The combination of effective compression and faster networks has pretty much solved that problem.

Also, a truly effective and dominant solution for getting the digital content on to the TV screen had not yet emerged.  The TV manufacturers have taken matters into their own hands by integrating Internet inputs into the hardware architecture, and establishing alliances with content providers.  Problem solved.

So, for 2010 we will see the emergence of huge, sharp TV screens equipped with hardware and software that provides seamless access to everything on and off the 'Net.  We will be able to get endless amounts of full-sized HD content with surround sound at the push of a button.  Vevo, Netflix, Hulu and dozens of lesser known companies are poised to fill this newly minted content pipeline. 

And all of those TV sets boast at least a 120 Hz refresh rate, so they are 3D ready.  (In-Three and Reliance, Katzenberg, Cameron, and dozens of others are poised to feed dimensional content to consumers, both in theaters and at home.)

What's the business impact of this new technical capability?  It's quickly eliminating the DVD business.  It will be the final and fatal blow to the CD business.  It is putting pressure on theater owners to develop and deliver a superior experience.  It is already eliminating the "windows" strategy in the film distribution business.  It will give small film makers the ability to find their own audience (just like iTunes allowed independent music artists to find an audience).  It will create upheaval in the broadcast and cable businesses, forcing these companies to find better business models and deliver better programming. 

Virtually everything about our business will change when this final link is placed in the chain.  It is something that cannot be ignored; it must be embraced.  There is tremendous opportunity afoot for those who are poised to take advantage, and tremendous struggles for those who delay or resist.  My friends, the cheese is about to move in a big way.  If you have any doubt about whether I'm right, come to CES in Las Vegas next month and tell me what you see. 

The new horizon is now going to be solving the marketing problem.  It's hard enough to figure out what to watch with a couple hundred available channels.  How about when that number is infinity?  How do you decide what to watch when your choices are endless?  Whoever solves that problem stands to make a lot of money.  (Personally, I'm betting on Google.  They are really good at solving that type of problem.)

As always, I welcome your thoughts.

State Film Incentives and Smoking: An Email Exchange About Competing Policies

I had an excellent email exchange with Jonathan Polansky yesterday and today. Jonathan is a media consultant, anti-smoking advocate and the principal of Onbeyond, LLC , a media consultancy in Fairfax, California. His current project is on behalf of the University of California.

I am going to reprint our exchange for you because I think it raises some great issues. The essential topic is the conflict between state tax incentive support of films which can influence children and adolescents toward smoking, and how this conflicts with money that those same states are spending on anti-smoking education.

There is an underlying issue that is perhaps even more interesting -- when states facilitate film production through tax incentives, should the state be concerned with the content of the film? This raises a fascinating First Amendment issue -- if a state were to look at film content as a part of the basis for its funding decisions, would a refusal to fund a film on the basis of content constitute a form of unlawful prior restraint? How about issues of discrimination? If a state refuses to fund a film that is perceived as influencing children to smoke, how about refusing to fund films that include drinking or premarital sex or ...? Once you're on that train, where is the last stop?

State tax incentives as a communication control mechanism. Read my exchange with Jonathan before you decide. He makes some very good points. You may or may not agree with him, but the guy is an excellent communicator.

I would really love to get some comments on this issue. It adds an entirely new facet to the discussion of state film incentives.

Jonathan initiated our exchange with this email:

From: Jono Polansky [mailto:jono@onbeyond.com]
Sent: Sunday, November 08, 2009 1:37 PM
To: Roger Goff
Subject: Film incentives

Mr. Goff —

We noted your thoughtful post on the Iowa film incentive program — and what localities should think about before setting one up.

Whatever the job-creation value of film incentive programs, their indiscriminate funding mechanisms unexpectedly contribute to a serious public health challenge for states, according to a report to be released Tuesday, November 10, by University of California researchers.

Attached is a media advisory embargoed to 11/10. The full report can be downloaded, starting Tuesday, at http://escholarship.org/uc/item/8nc8422j.

We hope you find this of interest. Thanks for your consideration.

I replied as follows:

On Nov 8, 2009, at 2:41 PM, Roger Goff wrote:

Thanks for sending this, Jonathan. As long as you took the time to send it and write a nice note, I'll take a few minutes to respond.

Let me preface this by saying that I am 100% on your side on the broad issue. I am very much against smoking. I recognize that it does create huge health problems and places a financial burden on all of us. I also recognize that kids are subject to a variety of influences, media among them. Here's where I depart a bit.

There are a few points that occur to me.

1. As a parent, I feel it is my responsibility to educate my kids. There is no way that I can keep them from being exposed to a wide variety of negative influences, nor would I necessarily want to. If I shelter my children completely from the temptations and bad behaviors with which they will be confronted, I lose the opportunity to shape their response to those issues. I have gone out of my way to make sure that my kids understand how unhealthy and damaging smoking (and drinking and drugs and unprotected sex) are so that they respond negatively to it when they are confronted by it. I feel I can only protect them by engaging them in the issue, not by avoiding it. So, I see smoking in films as an opportunity to reinforce their values in that regard.

2. I think your statistics are unfairly misleading. Taking the entire amount that a state spends on making films which include smoking, and holding it up against amounts spent on programs specifically aimed at anti-smoking education, is not comparing apples with apples. This would be like drawing a parallel between a film which contains a moment of contextual sexual activity and pornography. The vast majority of the money spent to support film production had zero impact on children smoking. Putting that entire budget in the negative column is ludicrous and in my view undermines the credibility of your position. When you're going to cite studies, if you do it in an obviously biased manner, you add little to the legitimate discussion of the subject matter. And that's something that I say often to a number of people on a variety of topics, because it is something we see often in this day and age of massive public discourse through the Internet.

3. I don't think I believe that a kid who would otherwise be a non-smoker will change his or her behavior because he or she saw someone smoke in a film. Obviously, this goes to my first point, as well. Kids need to have good parents and education, as well as a positive self-image and belief in their future. If you can give kids all of those things, then a cigarette in a film will have no impact at all. And if you don't do those things for kids, then they will probably engage in self-destructive behavior whether they see it in a movie or not. Am I saying that it is completely inconsequential? No, not quite. I understand that sustained exposure to behaviors can legitimize those behaviors in the eyes of youth and adolescents. But I don't think it is nearly as powerful as you make it seem.

And I am not saying that I am against anti-smoking education, although I am probably a little bit of a Libertarian when it comes to states spending money to promote specific ideologies. With that said, I don't consider anti-smoking to be an ideology because it is pretty hard to legitimately take the other side of the issue. Anyone who is pro-smoking is an idiot. I guess I can understand people who hold the broad belief that everyone should be allowed to do whatever they want so long as it is not hurting anyone else, but I also completely understand the public health arguments against smoking. Ultimately, as I said at the top, I am 100% anti-smoking and I find it hard to take very seriously anyone who tries to argue in favor of it.

Bottom line, you and I are on the same side of the issue, but I think you are standing much further out on the plank than I am. I balance the issue against other things that I think are also important, such as the First Amendment and support of the economy and the arts. I'm sure you value those things as well, but we probably have a bit of disparity in our priorities.

Again, thanks for including me in your discussion, and thanks for reading my blog. It is nice to know that neither of us is screaming into the wind and that someone is listening, don't you think?

Best of luck,

Roger

Jonathan's excellent response:

From: Jono Polansky [mailto:jono@onbeyond.com]
Sent: Monday, November 09, 2009 11:05 AM
To: Roger Goff
Subject: Re: Film incentives

Thanks for your thoughtful response, Roger.

The evidence that exposure to on-screen smoking leads adolescents to smoke is conclusive. The full texts of numerous peer-reviewed studies supporting this conclusion can be found at http://www.smokefreemovies.ucsf.edu/godeeper/the_science.html, as can reviews of the research such as National Cancer Institute (2008). Rigorously controlled studies are the basis for the attributable risk used to estimate the impact of movie smoking on youth smoking prevalence.

Incidentally, the research evidence indicates that the children of non-smoking parents are at least as vulnerable to this recruitment channel as children of smoking parents. We all aim to influence our kids in the right direction. The problem is that other influences can be as strong or stronger.

The film industry is already grappling with the issue of smoking in kid-rated films — and no longer disputes the science. Major studios have largely eliminated smoking from G/PG films in the last couple of years (with trivial benefit to adolescents) and the majors have added anti-smoking PSAs to their youth-rated DVDs with smoking. The MPAA has also claimed to make smoking a consideration in ratings, but the record shows that it does not up-rate for smoking and avoids labeling smoking in most PG-13 movies opening wide. Pressure from state Attorneys General, Congress, and national health organizations has at least gotten the industry's attention.

As for your point about apples-to-apples, the investment that states make in film subsidies at this time directly conflict with the resources devoted to tobacco prevention. The report estimates that about 60 percent of the subsidy money is going to films with smoking imagery. That $830 million is about $100 million more than the states spend on all aspects of tobacco prevention. Because films with smoking account for about half of all new young smokers each year, indiscriminate state film subsidies of this scale significantly undercut the state interest in preventing kids from starting to smoke. Comparing the state spending on film subsidies and on tobacco prevention captures the budgetary emphasis placed on these two conflicting policies.

Perhaps a "consistent" libertarian would condemn the state film subsidies out of hand — and government anti-smoking programs along with them. For the rest of us, who want to see public resources used well, the wasteful conflict between these two programs begs for resolution.

The report does not advocate to end public film subsidies. We are proposing that these programs be amended to avoid subsidizing films with content that powerfully subverts another public good (and state policy priority): the prevention of youth smoking. If these film subsidies are economically justified, tweaks that protect young people from a public health danger that costs more lives than drunk driving, drug use, and criminal violence combined could assure the sustainability of these programs.

Given evidence that these film programs appear not to create jobs but merely shift them around from state to state, the broader public interest is probably best served by seeing if the $196 billion annual health costs from tobacco can be reduced, to a significant degree, merely by adjusting tax credit eligibility criteria in these programs. Based on 2008 data, three out of five domestic film projects would be completely unaffected by the eligibility change proposed in the report.

As the major studios and their parent companies have learned, the on-screen smoking issue is not going away. In part, this is because the film industry collaborated commercially with the tobacco industry to promote smoking and brands in at least six of the last eight decades. Those who back public film subsidies need to acknowledge this legacy, which the nation is still paying for, and recognize the continuing power of films to shape tobacco use. It is a problem. It can be fixed.

Thanks again for your consideration.

Best regards,

Jonathan Polansky

Consultant to University of California, San Francisco

Center for Tobacco Control Research and Education

jono@onbeyond.com

415-453-9369

Technology and The Collapse of Distribution Windows

An article in today's Variety details efforts by the MPAA to help its members gain the ability to broadcast first-run movies directly to consumer's homes. The article raises a few issues:

1. Apparently, approval from the FCC is needed for the MPAA members to use DRM protection on the broadcasts. Not surprisingly, the studios would be unwilling to give consumers access to broadcasts of first-run features without technology that prevents copying of the content.

2. Exhibitors are opposing the MPAA's efforts because there is a strong suspicion that the films would be broadcast during the first-run exhibition window. Exhibitors view this as a huge threat to their business. Logic dictates they are probably right.

3. A point not really addressed by the article is the impact of this action on the other distribution windows. Doesn't an early broadcast of the film essentially eliminate (or at least substantially devalue) the VOD, Cable and DVD windows?

It would seem that the studios are attempting to set up a model that eliminates as many middlemen as possible. Essentially, this goes back to the old days where the studios actually owned the theaters. They would make a movie and then have consumers pay the studio directly for the right to watch it.

The direct studio broadcast model being pursued by the MPAA is the digital-age version of studio-owned theaters. The studios can make a film and deliver it directly to consumers. However now consumers don't even have to leave their favorite chair to watch the film.

Here are some arguments on the studio side. Many knowledgeable people in our industry say that home viewing is not competitive with the theater experience. The superior size and quality of theater exhibition, together with the opportunity to get out of the house to do something fun, make going to the movies an "event." Plus, the social aspect of watching the film in a group of people definitely provides an energy that is impossible to duplicate in your living room. Bottom line -- many people will still go to theaters to see films, even if they can get the same film in their home.

Further, showing a film simultaneously to theater audiences and home audiences allows for a consolidation of marketing dollars. This means that the overall spend on advertising can be less, making it easier for the filmmakers and studios to make a profit. This ultimately should allow studios to release more pictures, giving consumers a wider range of attractive choices.

Further still, if studios can lower distribution costs by eliminating middlemen, this ultimately serves consumers. The essence of our economic system is to encourage business models which drive prices towards their natural bottom -- the real value of the product or service being provided.

However, when a single company controls the entire chain of a product or service, from development to delivery, it might have the ability to lower prices to consumers, but it has no economic motivation to do so. When it is not competing at any point in the process, it can charge whatever it wants. This is called a vertical monopoly and it is technically illegal. The argument could be made that direct delivery of content by studios is a violation of antitrust laws. (I'm not sure this is a winning argument, but it is an argument nonetheless.)

Certainly, if studios broadcast first-run features directly to consumers day-and-date with the theatrical release, it will have a huge impact on the current "windows" which are the essence of modern-day film distribution. I'm normally a proponent of change because I believe it often creates new opportunities as the old model dies. However, I'm not sure that's true in this case. Giving studios even more control over the delivery of film content does not seem to serve consumer interests. There are no new opportunities which will arise as a result -- unless someone has a really good idea for a way to use a bunch of empty movie theaters.